Designing an East Asian FTA.

(From Journal of Japanese Trade & Industry (JJTI))

Byline: Zhang Yunling

New Economic Convergence East Asian economic convergence is increasing. This process, started by a "flying-geese model," is being led by Japan. It has helped to build up a "vertical" chain through capital flow, technological transfer and the supply of manufacturing parts, formulating a high level intra-regional integration based on market exchange. Until the mid-1990s, intra-regional trade in East Asia was as high as 50%. The financial crisis of 1997 changed the environment and structure of East Asian economic growth and integration. As a result, intra-regional economic activities slowed down. But following the recovery of the economies, East Asian intra-regional trade has been strengthening again. This trend has become even more evident since the intra-regional exports of East Asia have risen faster than exports to the rest of the world. Exports by these economies to East Asia contributed two-thirds of their total export increase in 2002. This intra-regional trade is increasingly based on the exchange of parts, components and other intermediate products, reflecting the development of intricate intra-regional production networks, in which production processes are subdivided among many different countries. (1) Foreign direct investment (FDI) flow plays a key role in creating this network. The network based on the exchange of trade and capital will have a profound impact on East Asian economic development since it will create a kind of "parallel development." This is different from the traditional vertical and hierarchical transfer of technology. (2) This FDI-driven supply chain has created diverse and vibrant local industries around the East Asian region. The further supply chains are decomposed and extended geographically, the faster and more profuse will be the proliferation of new enterprises. (3) However, compared with other regions, East Asia is late in forging regional trade arrangements (RTA) and other institutional establishments. East Asian market-based integration shows its vulnerability. The new initiative for regional cooperation will certainly help to enhance and facilitate the further integration of the East Asian region.

East Asian RTAs East Asian RTAs are currently being developed in a multi-layered process. They include both sub-regional agreements, like the ASEAN Free Trade Area (AFTA), the China-ASEAN free trade agreement (FTA) and bilateral (Japan-Singapore) arrangements. The question is how to consolidate all these different efforts into an integrated process.

East Asian market liberalization used to be based on a mostly multilateral approach. Real RTAs only appeared by the early 1990s when ASEAN launched its AFTA in 1992. Japan and South Korea began with a proposal for a bilateral FTA in 1999. Since then, several other initiatives have been made. Japan and Singapore concluded their negotiations and signed an agreement for a closer economic partnership (CEP) in early 2002 and China signed a framework document for a CEP in late 2002. Japan and ASEAN signed an economic partnership document in the same year. China, Japan and South Korea issued a declaration for economic cooperation in 2003.

The concern is how to move from the current multi-layered efforts into an integrated process, and finally toward an East Asian FTA (EAFTA). There may be three options: YEN Option 1: To encourage the three "10 plus one" (ASEAN plus China, ASEAN plus South Korea and ASEAN plus Japan) FTA formula and merge the three into one EAFTA at a later date.

YEN Option 2: North East Asian countries develop their own FTA and then integrate this with an AFTA to form an EAFTA.