East Asian Economic Cooperation - Dissertation Example

 East Asian Economic Cooperation The present age of globalization has been persuading countries across the world to adopt a more globalized view in respect of building economic cooperation. Over time it is becoming increasingly difficult for a country to prosper by remaining isolated from the rest of the world. In the era of globalization, it is generally expected from a country that it would move out of regional blocks and become a part of an international economic community. WTO asks its member states to be a part of multilateral trade agreements rather than confining themselves to regional trading blocs. (Gowa and Mansfield, 1993) A number of existing studies on economic cooperation of East Asian countries, however, provided some contrasting findings. A number of scholars have examined the pattern of trade agreements that the East countries have entered into. This chapter will discuss what these studies have found out regarding the nature of economic cooperation in East Asia and its ongoing trend. After World War II, the open multilateral trading system became the major factor behind the rapid economic progress throughout the world. East Asian countries also entered into multilateral trade agreements. Particularly in Hong Kong, Korea, Singapore etc, there occurred dramatic increase in exports in absolute terms as well as in terms of percentage of GNP. Since the early 1980s, however, preferential trading arrangements (PTAs) began to significantly affecting world trade. The wave of preferential trade in the form of regional trade agreements first hit Europe and America. East Asian countries, however, have started to enter into RTAs at a rapid pace since 1997, when the entire Asian economy was hit by a serious financial crisis. Now there exists a great debate over whether regionalism is undermining the principle of multilateral trade which was approved by the WTO. A number of literatures have put their focus on examining the on trading pattern of East Asia. In the context of the current issue of the dissertation, it is very necessary to find out the trading pattern in the region under consideration before analyzing the factors that have played major role in the emergence of such pattern. II- 1. Regionalism vs. New Regionalism: Regionalism is not a new concept in the field of economic cooperation among countries. In fact, regional trading blocks have existed in different part of the world for so many years. But the pace at which regionalism has been rising has never been as fast as it had in last one or two decades. Particularly East Asia has experienced a rapid rise in regional trading blocks against the backdrop of continuously increasing trend of globalization throughout the world. This new development in the area of regionalism is mainly known as new regionalism. (Baldwin, 2006) Regionalism is generally defined as a formal economic cooperation among a group of countries belonging to a particular region. Through such cooperation the member states of a regional block try to facilitate or enhance regional integration among them. In recent years a number of studies have documents significant increase in regional trade agreements among East Asian nations. A number of new developments have taken place in regional trading agreements. These new developments have given rise to a new trend, commonly known as the new regionalism. In fact prior to 1997, there was no single RTA in East Asia. But after entering into the new millennium East Asian economic are placing more stress on building regional blocks along with being a part of WTO and other big trading blocks which do not have any regional tag behind it. However, this status of the East Asia is changing quite rapidly. Today most of the East Asian economies have become a part of at lEast one RTA. (Gilson, 2007) As explained by Lloyed (2002) in his research paper, the new trend of regionalism in East Asia is an extension of the regionalism that existed during nineteen eighties as well as the early ninety nineties. Lloyed and others identified two major features of the regionalism that existed during 1980s and early 1990s as follows: First, provisions of a large number of agreements on regional co-operations that took place during this period had extended beyond the conventional coverage of trading in goods and services. Traditional any economic cooperation is mainly based on agreements on trades in goods and services within the countries that are member to the cooperation. But the wave of regionalism that arose in 1980s came with a new feature. At that period regionalism was not confined to mere agreements of goods and services, but it extended to incorporate several other economical issues like financial assistance, technology transfer and so on. Most of the regional trading agreements that were completed during this period were mainly in the areas of free trade. In fat, at this period, regional trading blocks were strictly following the norms proposed by WTO in order to enhance the pace of globalization. The new trend of regionalism commonly known as new regionalism that has arisen in late 1990s, particularly after 1997, however, has brought with itself some new features. (Gowa, 1994) A number of new developments that have taken place in the post 1997 period in the area of regionalism in the East Asia are as follows: Most of the trade agreements under new regionalism include a number of nations which had never been a part of a free trade region or some custom union. For example, for the first time countries like China, Korea, Japan etc. have entered into RTAs in this period. (Rajan, 2005) In the era of new regionalism a large number of countries have become members of more than one RTA. (Gilbert, Scollay and Bora. 2001) In a number of cases, agreements have become cross regional in the sense that the member states belong to more than one geographic region. For example, in this era Korea has entered into a bilateral trade agreement with Chile which is a South American country. (Henning, 2002) Many of the new agreements of economic cooperation in East Asia are bilateral in nature. Bilateral trade agreements have also emerged with a unique feature in this age of new regionalism. In is now increasingly been found that very often one party to a bilateral agreement is itself an RTA by nature. For example, there has arose a trend where regional trading blocks like ASEAN, APEC etc. are entering into trade agreement with a single nation. (Thomas, 2001; Rajan, 2005) Compared to regionalism, new regional has adopted a more global outlook where cross regional trade agreements are also taking place. A number of factors have played major role behind the rapid movement from regionalism to new regionalism in East Asia. A number of Studies have documented those factors. According to Eichengreen (2001), the primary motivational factor behind new regionalism in the Eats Asia was the increasing concern over reducing the level of risks associated with unstable exchange rate and financial contagion whose adverse effects became quite clear at the time of Asian Crisis. This crisis resulted in a huge depreciation in the currencies of Asian economies. In an earlier study conducted by Kaminsky and Reinhart (1999) it had been shown that when currency problem is associated with serious financial problems then it results in huge loss in output. Thus the researchers were of the opinion that the Asian financial crisis had played a major role in propelling these nations to look for various alternatives for monetary cooperation. But another interesting thing that these studies pointed out is that because of interdependence among the countries in this region in the area of economic affairs most of them started to move towards building regional cooperation. Another important factor was increasing interest among business houses in obtaining prudential access to those foreign markets which were imperfectly competitive in nature and which were in need of establishment of some formal form as being first movers in these markets there were huge chances to reap significant benefits. II-2. Multilateralism vs. Regionalism: For a long time, the framework of multilateralism as proposed by WTO was the main approach that most of the countries including East Asian economies used to follows in order to move towards FTAs. But in recent times in many areas across the globe focus has been shifted towards bilateralism or plurilateralism in case of making free trade arrangements. Although multilateralism has lost its significance to some extent, many western countries are placing increasing stress on legalizing multilateralism by the WTO. There has been huge debate regarding which should be the ideal trading arrangement for a country in the age of increasing globalization. East Asian economies are late comers in their movement towards free trade agreements compared to the European, American and even African countries. But the interesting thing to note as mentioned earlier is that since 1990s, the East Asian economies has experienced significant rise in FTA activities. But in recent years, a number of East Asian countries have entered to plurilateral or bilateral trade agreement as part of their FTA activities. For example, in recent times Japan has entered into a number of bilateral agreements on economic cooperation with a number of countries including Mexico, Malaysia, Australia, Singapore, India and so on. (Dent, 2005; Montiel, 2004) In case of most of the multilateral trade arrangements, agreements are used to be made among countries which belong to different regions. But in case of bilateralism and plurilateralism a regional preference exists very strongly. Given the economic interdependence of the countries, very often East Asian economies show a tendency of signing agreements with the countries that belong to East Asia only. (Dent, 2005) Bilateral agreements generally refer to those agreements which are signed between two nations. On the other hand, plurilateral agreements refer to those free trade agreements that can take several forms like agreements between two nations, or agreements between one country and one particular trading block or two different trading blocks. A major feature of plurilateral trade agreements that took place in recent times in East Asia is that in most of the cases one or both parties of the agreements are regional trading blocks. These types of agreements clearly show increasing nature of regionalism in FTAs in East Asia. (Dent, 2005) Looking at the current trend of trade agreements as discussed in the existing literatures, it seems that regionalism has replaced multilateralism in East Asia. It implies that when WTO has been constantly putting its stress on multilateral trade mechanism in order to boost up the process of globalization, East Asian economies are pursuing the trend of regionalism, which in turn implies disintegration of economies in regional blocks. So scholars are debating on whether the current trend is against the process of globalization. As found in the existing literatures, East Asian countries are shifting from multilateral trade towards bilateral trade. While some scholars like Dent (2005), Montiel (2004), Thomas (2001), Rajan (2005) etc are considering it as a trend which has been undermining WTO principle, in a study conducted by Asian Development Bank, regionalism has been considered to be an engine of multilateralism in Eats Asia. According to this paper if East Asian countries increasingly enter into bilateral trade agreements then the consequences will be the same that multilateralism is expected to exert, and hence the process of globalization will not be hampered. (ADB, 2008) Chapter III Diachronies and current situation III-1. Historical background To understand current trend FTA trend in East Asia, it is required to have some in depth knowledge regarding historical background of FTAs in East Asia as building trading blocks is not a completely new phenomenon in East Asia. At present the FTA trend is East Asia is recognized as new regionalism. Given the nature of current trend as discussed in brief in the last chapter, it would be quite interesting to look at the history of economic cooperation in East Asia region, the obstacles that the region had faced in forming successful cooperation etc. (Park, 2006) History of Economic cooperation in East Asia Region: Asia occupies a very vital place in the world economy. In the early nineteenth century Asia accounted for almost 70 percent of world population and around 60 percent of total world income measured by using the year of 1990 as the base year for calculating purchasing power parity (Agarwala, 2002). However, after the Second World War the economic situation of Asia including the region of East Asia deteriorated sharply. The Asian economy, however, started to revive since nineteen eighties. In 1995, the share of Asian economy to World economy rose to almost 34 percent. The East Asian Economy also started to perform well from the same period. Most of this growth in economy was led by increasing economic cooperation with other countries. Volume of trade and inflow of FDIs towards Asian economies including East Asian economies started to increase sharply, particularly since 1990s. However, one major characteristics of economic cooperation’s that Asian economies built at that time was that in most of the cases they built corporation with non Asian economies. Although in most of the other parts of the world regionalism was rising at a rapid pace, not very significant initiatives were undertaken by Asian economies. This kind of economic cooperation was also very common in East Asia also. In the last two or three decades East Asian economies emerged as major exporters to US and European countries, while very little trades, particularly bilateral trades, were conducted among the nations which belong to the region of East Asia. At present there exists a number of regional trading groups in East Asia, but in prior to 1990s and even in early 1990s this trend was not very common. (Kawai and Wignaraja, n.d.; Park, I. 2006; Eichengreen and Bayoumi, 1996) ASEAN is the first regional trading block in Asia which includes ten East Asian Countries. Apart from having 10 ASEAN Economies, East Asia also includes some of the major Asian economies China, Japan, Korea, PRC, Hong Kong and Taipai China. All these countries have been very actively involved in international trade since long. But these nations did not take many initiatives to built regional trading blocks in eighties as well as in 1990s although their western counter parts have started to participate in the process of regionalism since 1990s, even prior to that in many cases. However, in the twenty first century all these countries have entered in to the era of new regionalism that has intensified the process of regionalism in the area of economic cooperation. (Cheong, 2002) Brief General account for its stagnation(obstacles to successful cooperation) While the wave of new form of economic cooperation, regionalism, has hit the rest of the world as early as 1990s, the process of regional economic block building started lately in East Asia. It was only the first decade of twenty first century which has observed some serious initiatives by East Asian countries in building regional economic cooperation with other East Asian countries. Actually a number of factors have acted as some important obstacles in building successful economic cooperation in East Asia. (Kawai and Wignaraja, n.d.) The first and foremost obstacle in the way of forming successful economic cooperation is immense opposition from non competitive economic sectors which has played a very crucial role in slowing down the process of FTA formation for a number of East Asian countries like China, Japan, Korea etc.. The non competitive sectors of East Asian economies have actually threatened by the fact that increasing economic association and trade will bring in huge competition for then and reduce their market share drastically. Apart from economic obstacles, East Asian countries also face some non economic obstacles. For example, one obstacle exists in the political front. In East Asian countries different political systems exist. For example, while a large number of states have adopted a democratic political set up, authoritarian regime exists in countries like China and Myanmar. On the other hand, a number of nations have formed security alliance with US, some countries like China is still recognized by other East Asian nations as a great threat to their alliance with the US. All these factors have been responsible for slowing down the process of economic cooperation in East Asia. (Lee, 2008 )  Global FTA trend and East Asia: Economic cooperation has been considered to be an important factor for growth. But the form of economic cooperation keeps changing from time to time. Earlier multilateral trade agreements were considered to be the most efficient form of liberalization. However, over time bilateral or sub regional RTAs (regional trade agreement) or FTAs (free trade agreements) have become the most common form of economic cooperation in most of the part of the world. Since, 1990s, the process of multilateral trade liberalization actually came to a halt and regional trade block building along with FTAs got a new boost. Economists insist on the point that FTAs formations are very important in moving towards liberalization of global trade. Very often economists consider FTAs as complement to the initiatives taken by WTO to intensify the process of trade liberalization throughout the world. Realizing the importance of FTAs in the process of globalization, significant efforts have been started to be taken since 1990s in most of the part of the world. By the middle of the year 2000, more than two hundred RTAs were formed in the world. The FTA that have been built in post 1990s have some unique features which differentiate them from the traditional FTAs that existed in 1960s or 1970s. Earlier the benefits of FTAs used to be confined to the areas of trade only, whereas now potential benefits of FTA can be realized in other areas also. FTAs now have dynamis effects, for example they are now playing crucial role in the creation of new businesses through enhancing productivity and creating price depreciation. One of the major feature of the new global FTA trend is that FTAs have started to include not only elimination of tariff or other non tariff barriers to trade, but also several types of agreements on tax relates issues, investments, custom measures, recognition of standard of products etc. (Cheong, 2002; RIS, 2004) Now as far as FTAs trend in East Asia in Concerned, East Asian economies have made a late entry into the new age of FTAs. East Asian countries took longer time to realize the importance of potential benefits of new form of FTAs than other nations. Not only that, but also while rest of the world started to form FTAs through moving towards the process of regionalism, East Asian Economies were still lagging far behind in the process of building regional or sub regional trading blocks. However, since late 1990s, East Asian economies have also started to engage in the process of building new form of economic cooperation, i.e. regionalism. (Cheong, 2002)  III-2. Current situation  In recent years, East Asia has been experiencing a sudden expansion in the programs of regional economic cooperation. The expansion has been taking place at a very rapid pace. These regional operations have no longer been confined to cooperation in the areas of trades of goods and services. Today, regional economic cooperation in East Asia has been extended in the areas of finance, information technology, and so on. Most of these cooperations have been taking place under the framework of ASEAN+3 (Korea, Japan and China). Although the process of regionalism is still at its first stage, several free trade agreements have pursued actively by a number of East Asian countries mainly through bilateral and pluri-lateral trade agreements. As mentioned earlier, until recently East Asian economies were not very active in forming RTAs that incorporate FTAs and custom unions. In fact ASEAN free trade region, commonly known to as AFTA, was the only important FTA in East Asia until Singapore and Japan entered into a free trade agreement known as JSEPA in the year of 2002. AFTA was set up with Sis member nations of ASEAN in 1992. These countries were Indonesia, Malaysia, Singapore, Brunei, Thailand and the Philippines.( Hill, 2004) Four other ASEAN countries joined AFTA in late 1990s. These nations were Myanmar, Vietnam, Laos and Cambodia. (Austria, 2003; Mehta, 2002; Mukherji, 2004) In recent years ASEAN has started to take several initiatives to form FTAs with other non ASEAN countries. One of such initiatives that have gathered wide attention was the free trade agreement between ASEAN and China. This agreement was signed in Novenmer, 2004. (Foot, 1998) Initially this negotiation only included trades in goods, but later both of the parties to the agreement agreed to negotiate in the areas of trade in services and investments also. In 2005, ASEAN also undertook some serious measures to initiate free trade negotiations with Japan and Korea. Not only that some ASEAN countries have started to form bilateral trade agreements in recent times. for example, in recent years Singapore has enacted a number of free trade agreements with countries like Japan, Australia, New Zealand, the USA etc. Thailand is also undertaking several efforts to form FTAs with USA, Japan etc. among other ASEAN members Malaysia and The Philippines have signed free trade agreements with Japan in 2004. (Jeon, 2008; Bayoumi, Eichengreen and Mauro, 2000; Bayoumi, and Paolo, 1999; World Bank, 2004) An interesting observation will come out if one compares the amount of efforts that have been put forward by South East Asian Countries and North East Asian nations. Although, there has been huge interest in forming FTAs, NorthEast Asian nations have so far enacted fewer FTAs compared to SouthEast Asian economies. However, China, Japan and Korea have started to give serious attention in this area as the new wave of regionalism has hit the region of East Asia. Hence, NorthEast Asian countries are also showing great interest in building RTAs through bilateral or pluri-lateral trading agreements with other East Asian and non-Asian countries. (Plummer, 2007 Although, it was only the first decade of the twenty first century which observed significant rise in FTAs in East Asia, the efforts of forming RTAs/FTAs in East Asia has been started to be undertaken immediately after the Asian financial crisis in 1997. To provide a boost to FTA formation and regionalization of economic cooperation, the leaders of East Asian countries met at the Leader’s Summit held in 1998 and agreed on setting up EAVG (East Asia Vision Group in 1998 and EASG (East Asian Study Group) in 2002. The motive behind forming such regional groups was to study long term effects of economic cooperation. EAVG recommended East Asian leaders to form an East Asia regional FTA. At that time it was politically difficult to set up such a FTA, but this recommendation has never lost its important to East Asian leader. At present a joint expert group has been created to examine the feasibility of forming such a FTA in East Asia. (Bergsten, and Park, 2002; The sudden and rapid increase in FTAs in East Asia has driven by a number of factors. These factors are as follows: Expansion of RTAs including formation of FTAs and custom unions at a very fast pace in other parts of the world has provided huge impetus to East Asian economies in forming FTAs in order to maintain their export markets under fierce global competition. Excerpt of East Asian economies, the number of FTAs increased rapidly in 1990s, particularly after mid-1990s around the globe. All these made East Asian economies realize the needs of establishing their own FTAs. (Takatoshi, 2003; Kawasaki, 2003; Park, 2002; Under the WTO, the process of multilateral trade liberalization was progressing at a very slow pace which in turn led to formation of FTA in most of the part of the world including East Asia. Realizing the benefits of trade liberalization, the East Asian economies were searching for alternative options to multilateral trade and ultimately found bilateral and pluri-lateral trade agreements to be the most effective way of realizing the benefits of trade liberalization at a rapid pace. One important thing worth to be mentioned here is that a large number of countries including East Asian economies found the GATT/WTO rules and regulations inadequate in dealing with newly formed international economic activities like trade of services, inter-country labor mobility, foreign direct investments and many others. Simple measures of elimination of tariff and non tariff barriers were not enough to facilitate these new economic activities. (Park, 2002) East Asian countries have also started to look at FTAs as one of the most efficient way of promoting deregulations as well as structural reforms in the domestic front. (Phuvanatnaranubala, 2003) After the financial crisis hit Asia in 1997, the leaders of Asian economies have started to increasingly found regional cooperation like FTAs as an effective measure to avoid another such crisis in future. FTAs are also recognized as major driver of regional growth. (Medalla and Lazaro; 2004; Park, Y. C. and Park., 2003) Finally, some political factors also contributed in recent surge of FTAs formation in East Asia. China and Japan now compete with each other to become the leader in East Asia. This rivalry has made them interested in utilizing FTAs as the tool for strengthening their relationship with other East Asian countries. (Kumar, 2001) At present, the rapid growth in FTAs in the form of bilateral trade agreement or pluri-lateral trade agreements which are in turn intensifying the process of regionalism in East Asia are mainly being driven by Singapore, Korea, PRC, Thailand and Jaoan. All these five East Asian countries concluded around 86 percent of total East Asian FTAs by the middle of 2007. As of the middle of 2007, Japan, PRC, Korea, Singapore, Thailand , Malaysia, Indonesia, Philippines, Brunei, Vietnam, Myanmar, Laos, Cambodia concluded seven, seven, six, thirteen, eight, five, four, four, five, three, three, five, and three, respectively, FTAs. In most of the cases, each of these ASEAN+3 countries have signed FTAs with other ASEAN+3 countries, while on some occasion these free trade agreements were signed with some outside nations also. (ADB Institute, 2007) Given the current trend of FTAs in East Asia, it seems that in recent times this region has intensified the process of regionalism though formation of a large number of FTAs. Although, East Asian economies have started to participate in the process of this new form of economic cooperation, i.e. regionalism lately compared to the rest of the world, they have made a rapid progress in this front and in coming years the new wave of regionalism is expected to be intensified by larger extent than before. References: 1. Thomas, N. 2001. “ASEAN+3: Community building in East Asia?” Journal of International And Area Studies, Volume 8, Number 2, 2001, pp.1-19  2. R.S. Rajan, “Trade Liberalisation and the New Regionalism in the Asia-pacific: Taking Stock of Recent Events.” International Relations of the Asia-Pacific Volume 5, 2005, pp.217-233  3. 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Available at http://www.adb.org/Documents/Papers/Regional-Economic-Integration/WP14-East-Asian-FTA.pdf [accessed on 26th August, 2009].     Read More