Some Thought on the Economic Integration in East Asia

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December 18, 2005

 

1. Effort for Integration

Since about 1980, there has been unprecedented trend and effort for regional and global integration throughout the world. In East Asia,  ASEAN established its linkage with three countries ,China, Japan and Korea in the form of “ASEAN plus Three Summit Meting” The ASEAN +3 established ASEM in 2002 with a view to strengthen economic cooperation between East Asia and EU.

Under the auspice of ASEAN+ 3, Chang Mai Central Bank Swap Agreement was concluded at the time of Asian financial crisis in 1997, creating a network of bilateral swap and repurchase among member countries to help prevent another financial crisis from occurring Finance ministers of 13 countries in East Asia regularly meet and have agreed to set up Asia Bond Fund.

In the area of trade ASEAN and the three countries are busy in either concluding or negotiating FTA  not only with regional countries but also with countries outside the region including Mexico, Chile, Australia, EFTA, and the United States.

In addition to the aforementioned initiatives, there have been a number of proposals in the air. Asian Monetary Fund was aired by Japan a few years ago but was opposed by the United States. The proposal for a Northeast Asian Development Bank has been attracting an increasing attention from the academic community, governments, and international financial institutions. East Asia Monetary Union or East Asian Single Currency scheme has also been talked about frequently in international forums. The Philippine President proposed formation of East Asian Free Trade Area, while Northeast Asia Free Trade was aired in Korea and Japan.

All these phenomenon are significantly pointing to greater and deeper economic integration in East Asia. Since I am affiliated with Korea International Trade Association, I may focus my discussion on the Issue of FTA.

 

2. Proliferation of FTA

The proliferation of FTA in East Asia may be attributed to the general recognition of the benefit that can be derived from the trade liberalization. The World Bank study shows that “24 developing countries that increased their integration into the world economy over two decades ending in the late 1990s achieved higher growth in incomes, longer life expectancy and better schooling.” Another study on the effect of the AFTA concluded that trade creation occurred under the AFTA. However, what is to be noted here is that trade creation within ASEAN is much smaller than the trade creation with the outside world. The enormous difference is attributed to the exploitation of the “wider differences in the sources of international comparative advantage between the ASEAN countries and their international trade partners, especially the major industrial countries.”

What is significant in AFTA finding is that trade liberalization on broader basis brings about greater benefit to individual countries involved than that of marrow confine of participating countries. This raises question as to the relative merit of bilateral, regional or global integration. Advocates of bilateral preferential deals regard them as a way of reducing barriers, deepening political ties among participants and promoting a successful conclusion of the Doha round in the World Trade Organization. On the other hand, proponents of pure multilateralism fear such agreements will generate much trade diversion, risk new political clashes between the insiders and outsiders of the FTA and undermine both Doha and the WTO itself.

Mr. Bergsten of IIE in Washington is of the opinion that “the history teaches us that regional discrimination, as in the 1930s, can have devastating political as well as economic consequences. More recently however, preferential and multilateral liberalization have proved to be necessary complements. The postwar process of trade negotiations shows a steady ratcheting-up of liberalization between regional and global initiatives.”  Robert Zoellick, US trade representative, went as far as to say that "competitive liberalization"—bilateral, regional and global—will place pressure on non-members of individual free trade agreements either to join the group itself or to conclude broader agreement.

At any rate, there must be some compelling reason why many countries prefer to conclude bilateral rather than multilateral FTA. One reason is that WTO is perceived by East Asian nations as not able to accommodate country specific needs, both economic and political, dominated by the interest of North America and the EU.  In fact the global trading system since the Uruguay Round failed to maintain momentum of liberalization in the absence of strong leadership, as was well illustrated in the tragic event of WTO ministerial meeting in Seattle in 1999. 

At any rate it will be unfortunate if the bilateral FTA tends to undermine the merit of the global trade liberalization. In this regard, the principle of “open regionalism”, touted by APEC, should be respected in the bilateral dealings. One report argues that a "good" WTO agreement could produce about $290-520 billion in income gains to both rich and poor countries, lifting an additional 144 million people out of poverty by 2015.

3, Barriers

Although East Asian countries are looking for an institutional identity and vying for regional cooperative institution of their own, there are many barriers to overcome. In the economic side, there is huge disparity between rich and poor countries. Per-capita income of East Asian countries varies between about $300 to $30,000. Without rich countries extend massive economic aid to poor countries regional solidarity may not be attained. 

Political rivalries limit economic cooperation between countries with historical antipathy stemming from past wars. Frequently renewed antagonism arises from such episode as alleged distortion of historical fact about Japanese invasion and atrocity committed to Korea and China in the last century. There are territorial issues between Japan and Russia and between other countries in the Southeast Asia. The territorial divisions between Chinese mainland and Taiwan and between two Koreas are major source of uncertainty in the regional security. In particular the nuclear ploy in North Korea is common concern for all countries in East Asia. China, Vietnam, and Myanmar want to maintain authoritarian rule, complicating relations with democratic countries in the region who traditionally maintain good relation with the United States. Recently China and Japan are viewed as competing for leadership in the region.

Fortunately however, history provides an answer to the problem. European geopolitical history has been even more complex than that of East Asia, and the antagonism and rivalries between countries was no less intense than in East Asia. For example the relation between France and Germany was as bloody as that of China and Japan. Yet deep seated political animosities have been overcome through integration, leading to the establishment of European Union. Another example is found in East Asia. Korea was colonized by Japan for 36 years until her defeat in the World War II ended in 1945. But the two countries today enjoy renewed friendship and close cooperation because of continuation of economic interaction and growing interdependence. In short, the lesson of the history is that close economic integration between countries and regions make future wars almost impossible.

In this regard the geo-political as well as economic role of the United States remain essential in maintaining stability in East Asia. The unilateralism of the U.S. today is seen as one of the major concerns not only for East Asian but also European countries. Yet, it is true that the U.S in the past played a vital role of power balancing in East Asia against the communist bloc, providing, at the same time, a wide market to Asian countries for economic development. The U.S. role may be redefined in the context of the changing condition in East Asia today, but the need for power balancing role of the U.S. is not likely to change in the years ahead. East Asian countries, in my view, should seek to establish a regional collective security framework including the United States- some thing like Northeast Asia Security Organization (NASO) as a counterpart of NATO in Europe.

East Asia also is required to redefine its role in the world economy. Today its total output approximates that of Europe and North America; It’s trade with the rest of the world is as large as that of other blocs, Its monetary reserves are far larger than theirs. This implies the need for reviewing the legitimate role of East Asia in the world economic affairs Currently East Asia is under-represented in most of the international institutions. Mr. Burgsten pointed out that “Japanese Quota in IMF and World Bank is one third of western quota. China is only 11th in the quota line up. European hold six seats on the IMF’s Executive Board while East Asian hold only three.” This situation should be remedied so that East Asia can play a proper role commensurate with its economic progress.

At the same time, East Asia has greater obligation to shoulder as a responsible partner of the other two economic blocs –North America and EU- in the world. In particular, East Asian countries should play a constructive role to bring the Doha Agenda of the WTO to a successful conclusion. I agree with the view that the Doha Agenda has the potential to speed up growth, raise incomes, and reduce poverty, and all countries have an interest in its success.  I am hoping that rich countries reduce border protection and subsidies in Agriculture, and reduce protection on manufactures. Low-income countries need a help from industrialized countries to reduce reliance on trade preferences and increase competitive exports.

4. Three Advices

East Asia is now seeking its own identity and regional institution of its own to meet new challenges in the age of globalization. In this regard I may offer some personal advice. First, we may consider the possibility of restructuring [ASEAN plus Three] into a substantial regional body. We would like to see a strong regional institution in place to lead the region toward closer cooperation and deeper integration. Viewed in this light, the name of the current arrangement somewhat sounds unnatural, because the “three” in fact is the major body in East Asia in terms of economic size and its impact on the world economy. Moreover there is a widely held view that ASEAN need to go beyond its current configuration centered on trade.  In line with Prime Minister Mahathir’s suggestion of East Asian Economic Group (or Caucus), we may restructure ASEAN+ 3 into a single unified entity consistent with the goal of greater economic integration in East Asia.

Secondly, it has been common experience that political leaders love to propose a new institution largely from their political motivation. But they pay relatively little attention to the actual working and performance of the institutions once they are created. So there is a criticism that some institutions in East Asia have become ineffectual, directionless and unable to solve regional problem To quote an observation, “APEC is seen to be weakening as an economic forum. In addition, there are numerous other forums, task forces, committees, and working group that are often referred to as ‘talk shops’ and are attributed with little real accomplishments.” This is a warning that whatever institution we may contemplate, it must be well structured and effective in attaining its goal.

Finally, in the age of globalization we have to follow global norm in such areas as banking reform and corporate governance and labor-management relation There is criticism regarding the manner of economic management in our region. For example, an independent study observed that most of East Asian countries including Korea are not attractive to investors because the cost of doing business there is higher than necessary because of labor disputes, excessive bureaucratic red tape and lack of transparency in business management.

 In closing let me congratulate once again the inauguration of the East Asia Forum with the hoped that it will take up the various issues I have touched upon for further discussions and find ways and means of expanding and deepening regional integration in East Asia.

Thank you for your attention.