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Policy Update 037

The U.S., China, and Japan in an Integrating East Asia
(Contribution to the Brookings Northeast Asia Commentary)

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MUNAKATA Naoko

MUNAKATA Naoko

Consulting Fellow
Visiting Scholar, The Sigur Center for Asian Studies, The George Washington University
Director, Policy Planning, Multilateral Trade System Department, List of Officials of Trade Policy Bureau, Ministy of Economy, Trade and Industry, METI

see other activities by this Fellow

Abstract

  • There is no concrete vision of the eventual architecture of institutional economic integration in East Asia, much less a roadmap to get there, with various initiatives being pursued concurrently in a multi-layered fashion. The ASEAN-China Free Trade Agreement, which has just marked its near-completion at the beginning of 2010, will not by itself determine the future course of economic integration in the region.
  • To demonstrate leadership in Asian economic integration, the United States should lead regional economies to a system of higher economic efficiency, while taking Asian reality into account and showing flexibility where necessary.
  • In order to reduce the margin of discrimination of the FTAs in East Asia which the United States is not party to, and to mitigate the ensuing trade distortion, an early conclusion of the WTO Doha Round is by far the most effective policy remedy and would definitely be in the U.S. interest.

1. Introduction

The economic crisis since the fall of 2008 has helped increase Asia’s presence in the global economy. Emerging Asia (China, India, Indonesia, Malaysia, Thailand, Vietnam, the Philippines, etc.) has led the recovery from the current global depression, with impressive real GDP growth of 6.2 percent in 2009 against sluggish global growth of -1.1 percent.*1

The main driver of Asian economic growth since World War II has been the expansion of exports to destinations outside the region. The current crisis, however, has shown that the world can no longer depend on American consumers purchasing the products of Asian manufacturers for economic growth. Asia’s big challenge is to expand demand within the region so as to help rectify global imbalances. Regional economic integration*2 has a key role to play here.

Two events on January 1 this year each marked a step forward in this respect. One is mutual elimination of tariffs on essentially all items among the six countries (Brunei, Indonesia, Malaysia, Philippines, Singapore, and Thailand) out of the ten parties to the ASEAN Free Trade Area (AFTA),*3 in accordance with the leaders’ agreement of 1999.*4 The other is the elimination of tariffs between China and the ASEAN 6 (the same six countries as above) on the so-called “normal track” items of the ASEAN-China Free Trade Agreement (ACFTA) signed in 2004.*5 The AFTA, established in 1992, has deepened its integration step by step. Based on this progress, ASEAN has been advancing FTA negotiations with countries outside the group. The ACFTA spearheaded these external moves and is impressive in size, and therefore commands particular attention.

2. Overview and Evaluation of the ACFTA

China and ASEAN agreed to establish the ACFTA within 10 years at a leaders’ meeting in November 2001.*6 In 2002, the leaders of China and all ten ASEAN nations*7 signed the ASEAN-China Framework Agreement on Comprehensive Economic Cooperation,*8 which laid down the basic principles of the liberalization of trade in goods and services, an investment treaty, and so on. Based on this agreement, the elimination of tariffs on agricultural products started from January 2004 as an early harvest package.

As for the liberalization of trade in non-agricultural goods, the Agreement on Trade in Goods of the Framework Agreement on Comprehensive Economic Co-operation between the ASEAN and China*9 was signed in November 2004, and tariffs have been reduced since July 2005. The items on the liberalization schedule are divided into two groups: “normal” track items and “sensitive” track items. The countries are also separated into China and the ASEAN 6 on one hand and the newer ASEAN Member States on the other. For the normal track items, China and the ASEAN 6 are to eliminate tariffs in principle by January 1, 2010, and the newer states will follow by 2015. On sensitive items, the parties committed themselves to lower the duties to 0-5% by 2018 (by 2020 for the newer states) and on highly sensitive items to below 50% by 2015 (by 2018 for the newer states). There is an upper limit to the number of items to be included in each category.

The elimination of tariffs on the normal track items between China and the ASEAN6 at the beginning of this year marked the completion of most of the ACFTA. The actual impact of this FTA on the regional economy can be measured only after the duty abolition takes effect on the ground. According to simulations by experts from China and the ASEAN countries in October 2001, however, the ACFTA is expected to expand China’s economy by 0.27 percent and ASEAN’s by 0.86 percent while reducing Japan’s real GDP by 0.09 percent and the United States’s by 0.04 percent.*10 Thailand’s Chulalongkorn University estimated in a 2004 study*11 that real GDP in ASEAN would increase by 0.38 percent and that of China by 0.30 percent, whereas Japanese real GDP would decrease by 0.02 percent. Generally speaking, the FTA has two effects on extra-regional trade: trade creation (expanding it through stimulating regional economies) and trade diversion (reducing it through giving preference to intra-regional products). The two estimates suggest that trade creation by the ACFTA with respect to the United States and Japan would not surpass the treaty’s trade diversion effects on them.

Turning to the ACFTA’s coverage, important manufacturing products—such as cars, motorcycles, electric household appliances like refrigerators and color televisions, and other various machineries—are designated as sensitive track items and are exempt from tariff elimination. A reciprocity principle further limits its coverage to items that each of the two countries involved in bilateral trade has listed on a normal track.*12 There are limits to items each party can designate as sensitive; their number has to be 400 or less and their combined import value must be less than 10% of that nation’s total imports. The ACFTA has the distinction of being a pioneer agreement (the first FTA between ASEAN as a whole and a non-ASEAN state) in which China and ASEAN pursued the maximum they could agree on at the time of conclusion, taking into account their respective sensitivities. The impact of the agreement, however, is restrained by the number of goods exempted from tariff elimination, the trade of which is expected to increase in the future with the rise of the middle class.

3. The ACFTA in Today’s Institutional Economic Integration in Asia

In East Asia, it was at the end of the 1990's, much later than in Europe and North America, that free trade agreements began to be utilized. (With respect to the evolution of the regionalism in the area, please refer to Naoko Munakata, Transforming East Asia: The Evolution of Regional Economic Integration, (2006), Brookings Institution Press, in particular Chapter 6 thereof, “New Assumptions about Regionalism” for a background on the policy changes in East Asian countries triggered by the 1997-1998 Asian financial crisis.)

Since then, FTAs in various configurations have been actively studied, negotiated, and concluded in the region. With the ASEAN-India FTA signed in August 2009, FTAs between ASEAN and all six non-ASEAN members of the East Asia Summit have been concluded.*13

As for multi-party FTAs in East Asia, the Japan-China-Korea FTA, the ASEAN+3 FTA, the ASEAN+6 FTA, the Trans-Pacific Partnership (TPP) Agreement, and the Free Trade Area of the Asia-Pacific (FTAAP) are being considered.*14 With government-level studies just about to be launched, the Japan-China-Korea, ASEAN+3, and ASEAN+6 FTAs have no definite timeframes for conclusion. The FTAAP is discussed within APEC, but ways to realize it are yet to be determined. In contrast, the TPP Agreement among eight countries, including the United States, Singapore, and Australia, is set to make a step towards realization ahead of the other initiatives, with a meeting scheduled in March this year to prepare the ground for negotiations. The Obama administration notified Congress of the government’s intention to participate in the TPP negotiations on December 14, 2009, and proposed a policy that the U.S. would aim at a high-standard trade agreement with a focus on the protection of the environment and workers’ rights.*15

There are also proposals for a regional community which goes beyond economic integration, such as the East Asian Community by Prime Minister Hatoyama of Japan,*16 and the Asia Pacific community (APc) by Prime Minister Rudd of Australia.*17 Both need further elaboration.

Thus, a number of bilateral FTAs, multi-party FTAs, and regional communities are simultaneously being considered or implemented. At present, however, there is no concrete vision of the eventual architecture of institutional economic integration in East Asia, much less a roadmap to get there. Although the ACFTA has spearheaded efforts of regional trade liberalization, it is just one of the five ASEAN+1 FTAs (including the AANZ FTA between ASEAN and both Australia and New Zealand) now concluded, with much room for further liberalization, as described above. The ACFTA by itself will not determine the future course of economic integration in the region.

The only consensus that exists about a future scenario is to move various initiatives forward in parallel. The underlying thinking is that, rather than to push for a premature and possibly ill-fitting agreement, the best move is to keep various initiatives alive in a multi-layered manner and decide, on the basis of actual developments, which framework should carry which function.

4. Challenges and Opportunities for Japan, China, and the United States

It is uncertain when and how each initiative for regional integration will be realized, and if accomplished, how much it will promote structural changes in the Asian economy. By overcoming the following challenges, Japan, China, and the United States could help shape Asian economic integration so that it will be better equipped to revitalize the world economy as a whole.

Japan should overcome difficulties in sensitive sectors and embark on a strategy to make the country more open so that it can participate in high-standard FTAs including the TPP. The Hatoyama administration advocates a policy of growing with Asia. Japan hosts APEC in 2010, a unique opportunity to map out its growth strategy and that of the APEC.

China could play a greater role in regional trade and investment liberalization by pushing forward the liberalization of the items that are expected to be in greater demand by its middle class in the future, and improving the quality of the ACFTA. While the ACFTA mainly deals with tariffs, non-tariff barriers will become more important. Dispelling trade partners’ suspicions that China is trying to utilize its unique domestic standards for promoting indigenous industries would form a basis on which China could exercise leadership in designing the institutions of Asian economic integration. Furthermore, China could take the initiative in redressing global demand-supply imbalances by steadily expanding consumption by its middle class, not through a temporary pump-priming but through a lasting social safety net.

In an Asian policy speech in Tokyo in November 2009,*18 President Obama proposed a policy of correcting U.S. over-consumption, focusing on exports, and, as a prerequisite, reinforcing U.S. engagement in the Asia-Pacific, the center for growth. The TPP is one of the tools for this. The United States could demonstrate leadership in economic integration in this region by spearheading high-standard FTAs. The pursuit of high-standard agreements, including the protection of the environment and labor rights as suggested in its policy of TPP negotiations, may not be readily accepted by Asian countries with diverse levels of economic development, but the United States should lead Asian economies to a system of higher economic efficiency, while taking Asian reality into account and showing flexibility as needed.

On January 12, this year, there was another welcome development. Secretary of State Clinton elaborated U.S. policy towards regional architecture in a speech in Hawaii*19. It sent a strong message that the United States is, and will continue to be, committed to Asia. She urged the Asia-Pacific nations to “decide which will be the defining regional institutions” that “will best protect and promote our collective future.” Eventually, they will do so. It may take some time, however. Institution building in a region as diverse as Asia requires patience as well as flexibility.

At least for now, economic integration in East Asia is proceeding without U.S. participation. The TPP does not include Japan and China at the moment. Trade liberalization at a global level is necessary to reduce the margin of discrimination of the FTAs that individual economies may not be party to, and to ease the ensuing trade distortion. Although negotiations are stalled at present, an early conclusion of the WTO Doha Round, is by far the most effective policy remedy, and would definitely be in the interests of the United States.

January 18, 2010

Notes

  1. IMF, World Economic Outlook (October 2009)
  2. There are two types of regional economic integration. One is de facto economic integration (where the share of intra-regional trade increases) induced by market forces-a process called regionalization. The other is institutional economic integration or regionalism-meaning the pursuit of economic integration through intergovernmental institutions such as free trade agreements (FTAs).
  3. Press Release of the ASEAN Secretariat, “ASEAN-6 Achieves Zero Tariffs” (December 31, 2009)
  4. Chairman’s Press Statement on ASEAN 3rd Informal Summit (November 28, 1999)
  5. Agreement on Trade in Goods of the Framework Agreement on Comprehensive Economic Co-operation between the Association of Southeast Asian Nations and the People’s Republic of China (November 29, 2004)
  6. Press Statement by the Chairman of the 7th ASEAN Summit and the Three ASEAN + 1 Summits (November 6, 2001)
  7. The ASEAN 6 as well as Burma, Cambodia, Laos, and Vietnam.
  8. Framework Agreement on Comprehensive Economic Co-Operation Between ASEAN and the People’s Republic of China (November 5, 2002)
  9. See n. 4.
  10. ASEAN-China Expert Group on Economic Cooperation, “Forging Closer ASEAN-China Economic Relations in the Twenty-first Century” (2001), p.152
  11. Suthiphand Chrawat and Sothitorn Mallikamas, “The Potential Outcomes of China-ASEAN FTA” in China and Southeast Asia, edited by Ho Khai Leong and Samuel C. Y. Ku (2005), pp.80-107
  12. Article 3(1)(e) of the Protocol to Amend The Agreement on Trade in Goods of The Framework Agreement on Comprehensive Economic Co-operation Between The ASEAN and The People’s Republic of China
  13. The six non-ASEAN members of the EAS are Australia, China, India, Japan, the Republic of Korea, and New Zealand.
  14. Par.19 of the Chairman’s Statement of the 4th East Asia Summit (October 25, 2009); par.13 of the Chairman’s Statement of the 12th ASEAN Plus Three Summit (October 24, 2009); and the Statement of the 17th APEC Economic Leaders’ Meeting,“Sustaining Growth, Connecting the Region” (November 15, 2009)
  15. Trans-Pacific Partnership Announcement by the United Stated Trade Representative (December 14, 2009)
  16. “Address by H.E. Dr. Yukio Hatoyama, Prime Minister of JAPAN at the Sixty-Fourth Session of the General Assembly of the United Nations” (September 24, 2009)
  17. Address by the Prime Minister Kevin Rudd to the Asia Society AustralAsia Centre, “It’s time to build an Asia Pacific Community” (June 4, 2008)
  18. “Remarks by President Barack Obama at Suntory Hall” (November 14, 2009)
  19. Hillary Rodham Clinton, Secretary of State, "Remarks on Regional Architecture in Asia: Principles and Priorities," Imin Center-Jefferson Hall, Honolulu, Hawaii (January 12, 2010)

The article was contributed to U.S. think tank, the Brookings Institution on January 17, 2010.
Original text: http://www.brookings.edu/opinions/2010/0113_asia_trade_munakata.aspx

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