Political Economy Factor of East Asian FTAs - Research Paper Example

 Political Economy Factor of East Asian FTAs Abstract: The global economy has altered considerably during quite a few decades and these alterations are deeply based on the cross-border trade among nations. These alterations lead nations to the creation of new Regional Blocs. Nations belonging to specific regional bloc encourages free flow of capital, inexpensive labor and other products, so as to reinforce their economy by signing Free Trade Agreements (FTAs). The main reason of signing FTA is to augment their cross-border trade by decreasing taxes on their exports and imports so that customers can acquire products at the cheaper price. This paper provides an impression of recent developments in the procedure of Asian economic assimilation. East Asia had long been a “white stain" or "an unfilled box" in the topography of growing worldwide regionalism. Since the end of 1990s, however, the region has appeared as the most dynamic area, in terms of number of FTAs wrapped up. At present, over thirty FTAs have been concluded between the nations in East Asia. Reckoning the number of FTAs concluded with nations outside the area together, East Asia is accountable for nearly 30 per cent of FTAs informed to the WTO in the period of 2001-2005. Given the significant and rationally successful proposals for integration in other parts of the globe, for instance, the EU and NAFTA, academics and politicians have dedicated their concentration on the possibilities of both intensifying and widening economic association in the East Asian region. This paper contends that regional assimilation in East Asia is at least as reliant on economic collaboration and positive response from external partner nations and regions as it is on domestic economic consequences. Accordingly it is debated that regional integration as outcome of economic assimilation in East Asia is principally dependent on broadening economic collaboration. The main principle of this paper is to provide a factor analysis of bilateral and inter-regional trade of the East Asian countries. How opening up of a trade leads to development of an economy is the subject matter, which will be discussed in this study. Chapter I: Introduction: One of the most interesting topics in International Political Economy domain might be the discussion about regional economic integration within globalization trend. With the development of transportation and means of communication, world economy has been rapidly integrated. And like many research results are shown, as time goes by, the volume of trade in the world also has been drastically increased. This growth of trade was rapid especially after some major organization such as GATT and WTO. Meanwhile, some interesting features of world economy have been appeared on the surface, which is called ‘Regionalism’. In this side of view, one of the noteworthy trends of recent increasing trade is called ‘block economy’. Generally, it is easy to think that Globalization and Regionalization are mutually exclusive each other. Because of Multilateralism, or Globalization of world economy, often assumes rapid transnational integration, but regionalism represents exclusive tendency to other group of countries. When it comes to Regionalism, East Asian region has been turned over other regions up to recently. However, it has been changed as time passes by. With the global trend of liberalization and regionalism, which represented by the successful integration and expansion of EU, East Asian region seems swiftly absorbed into the trend of regionalism. Moreover, take into account the importance of US in that region, promoting NAFTA led by the US, which showed the abandonment of multilateralism of US was pregnant for East Asian countries. That is why US was a great supporter of multilateral agreement, US’s turn over had provoked East Asian region to switch to regional based approach. The East Asian regionalism or economic cooperation is tending to the opposite from other countries. In East Asia, thriving FTA is similar to any other region after the failure of Doha Development Agenda, but there are some special characteristics that can be distinguished from Western hemisphere. Those are the ratio of bilateral and transnational FTAs are particularly higher than other economy blocs. If this is one of the particularities that can show East Asian political economy well, it needs to be researched closely. But the studies about East Asia and East Asian regionalism show backwardness from its scope of study to the depth of studies. When taken into account East Asia’s importance of world economy, it seems that previous study about East Asia is attaching too much importance on its analysis as a developmental state. They are far from current trade form of East Asia. It has been lightened by Western view. When World Bank’s report pointed out, East Asian countries shares its special experience can be called ‘Asian Way’ of development, which are totally different from Western style of economic development. However, East Asia also has its gravity purely as its economy size and peculiar characters with reference to regionalism. Indeed, East Asian countries has numerous and dynamic characteristics that can attract scholars’ interest. East Asian region is one of the largest economy blocks, which include Japan, China and Korea. According to WTO, it occupies 2.6 trillion dollar market and 1.9 billion population of the world economy. These figures directly show the relative importance East Asian has. And when remind again the fact that thriving regionalism is one of the most important features of world economy with globalisation, which cannot be neglected, current debate, is extremely confined. We can find this fact in history of debate on the region. Main discourse about East Asia before 1990s was based on the confidence of miraculous economic development. They see East Asian community only as an alternative development model, which has been developed with the concept of East Asian identity. Conclusively, it seems that it is time to request a new point of view on East Asia’s regionalism. Even though it is true that for a long time, East Asian region was a remote region of ‘regionalism’, we can find origin of East Asian regionalism since several decades ago. There were many efforts toward economic integration in the region. For example, ASEAN’s attempt toward economic integration had started in 1960s when there was only little movement of regionalism. However, as we may know, its progress is lagged behind Western hemisphere such as EU and North American countries nowadays. This may represents fragmentally the possible need of new approach toward this region. Moreover, the volume of trade within the region has been increased with globalization, and functional cooperation has been promoted regardless of policy or politics, study about East Asia did not developed. And after financial crisis which was broken out in 1997, East Asian countries faced the need to find a common reaction to prevent another possible crisis (Webber 2001), the study could not follow this. There are no systematic analyses, which can figure out current ‘new’ type of economic cooperation, or I called, East Asian FTAs. In a word, confined references about regionalism in East Asia which are mostly taking narrow-minded point of view from Western hemisphere are wanting in ability. This paper observes the rise of the new regionalism in East Asia and the altering stature of the regional economy that has been one of the drivers encouraging the same (regionalism). Here we may look at the extent and nature of regional trade and economic movement and how both offer grounds for giving new precedence to East Asian regional collaboration. It takes into account Japan’s altering role in the regional economy, and how that has prompted specific kinds of policy proposal (such as adoption of bilateral free trade agreements (FTAs) as a way forward with trade strategy) aimed at closer East Asian regional economic and political associations. Simultaneously it has been remarked that many of the attributes of the East Asian economy that caused Japanese policymakers to avoid such initiatives in the past have not essentially changed. The challenges in policy proposal and real economic and political condition have led to some unexpected policy reactions and results and to some bewilderment in policy strategies aimed at promoting East Asian collaboration. By contrasting most researchers’ tendency of regarding East Asian characteristics ‘as given’, this paper shall try to figure the reason of making different type of economic cooperation, FTAs in East Asia by factor analysis. This essay briefly consists of three main parts. The first part will be focused on theoretical domain that frame study related to East Asian economic cooperation. Although last debate cannot explain current trend of FTA in the region, it definitely is affecting recent debate theoretically and practically. This part will include literature reviews of major debate such as between regionalism and new regionalism, and between multilateralism and regionalism. The second part shall briefly explain the history of East Asian cooperation and shall find general account for its stagnation of late regionalism. Besides, global FTA trend and Asia’s current situation will be veiled out. As mentioned, the time frame would be mainly after financial crisis in 1997. And the last part of body, which is highlight of this paper, shall be a factor analysis of current East Asian FTA. This part will be consisting of three parts again. In this chapter, this paper shall answer to the three main questions I found. Those are “Why FTA?”, “Why Bilateral?” and “Why Extra-regional?” By answering these questions, true factors affect to form current East Asian FTA will be analyzed. For each question will be classified again to ‘economic factors’ and ‘political factors’. That’s why even though FTA can be classified into economic realm, but at the same time, political factors are closely connected into every step. Because this shows FTA cannot be understood separately with only one side of them. The paper will finish with conclusion by wrapping up my researches. Chapter II 2.1 Dominant Studies of East Asian Economic cooperation The present age of globalization has been persuading countries across the world to adopt a more global 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. East Asian nations, in fact, have become watchful with their individual proposals of regionalism since they were influenced by the financial crisis of 1997-98. The drift of growing worldwide regionalism over the last 6 decades is illustrated in the following diagram. (Hoon, July 2006, p.45) 2.2: 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 arisen 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. 2.3. 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 latecomers 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 3.1: 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 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 has 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 dynamic 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) 3.2: 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 six 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, 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, North East 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 plurilateral 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 Japan. All these five East Asian countries concluded around 86 percent of total East Asian FTAs by the middle of 2007. 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. Chapter IV: Factor analysis (the reasons of making ‘bilateral’ and ‘extra-regional’ FTAs) 4.1: General account Political reasons along with economic ones dominate the outcome of current trend of FTAs in East Asia. In recent times, the East Asian nations have started to analyze for economic collaboration. The East Asian nations have made it possible for economic cooperation by jointly collaborating with US market. The region has been known for its high industrial productivity, deposits of natural resources and progresses in economic development. This has enabled the possibility of greater economic profit from regional economic amalgamation such as an East Asian free trade agreement. Attempts have been taken by U.S., China and Japan to improve economic relations1. Thus, FTAs are a mixture of economy and politics. That is why the goal and the effect of FTA are purely economical in most cases, but the trigger and motivation of it is mostly political. Indeed, every FTA necessarily contains political process between countries and inside of participant countries. It is true that even FTAs among the countries which have high degree of common economic background and system, it always need a process of negotiation and political decision within and without the country. It has been observed that China’s preference for agreements in trade is of inferior quality. It does not require much of new liberalizations. The nation is motivated by political factors rather than economic factors2. Most of the East Asian nations including China are already providing a substitute to U.S. leadership of the global trading structure. The emphasis is given on low-quality FTAs motivated largely by political factors. The commencement of such leadership has been provided after the failure of the Doha Round that has been dishonored by the present WTO-based multilateral system. Most of the Asians, especially China, are sticking to the principles of monetary regime which is an alternative to flexible exchange rate system so as to avoid decline in their external surpluses. These nations have adopted active currency management system3. The addition of China and Japan in the same forum of ASEAN + 3 is of prime importance for high-level political discourse. China participated in this discourse at the initiation of Korea. This was an intense political resolution, much more than an economic policy approach. The global political atmosphere has altered considerably since September 11, 2001 and after the emergence of partnership of China and U.S. in the war on terrorism. However, the political underlying principle in Beijing for promoting East Asian collaboration within the structure of ASEAN + 3 remains tightly intact4. The political authority of both the WTO and IMF is under severe challenge. The United States and the European countries, which were formed in the immediate repercussion of World War II, have conventionally controlled both. Both of them were slow enough to adjust with the drastic changes in the global economic power. In the WTO, Japan occasionally takes part in the de facto steering commission of 6 or 7 major nations. However, China has appealed for its “new member” position and has declined that responsibility. Other Asian countries are not mainly involved in this committee5. 4.2 Factor analysis (Answer 1): 4.21: Why FTA? As mentioned above, FTA is the first step towards economic integration. This means that promoting FTA has more possibility of leading towards successful cooperation between countries. There will be no reason of its existence, if FTA does not have any economic or political benefits. East Asia has long enjoyed a market-forced growth of trade and FDI. The exports of this area rose from 14 per cent of the total world’s exports in 1980 to 27 per cent in 2007, whereas imports grew from 15 per cent to 24 per cent between 1980 to 2007. FDI inflows into East Asia increased from 7 per cent of the entire global FDI flows in 1980 to 13 per cent in 2006, whilst East Asian FDI outflows amplified from 5 per cent to 12 per cent over the same time period. Intra-regional emphasis on trade and FDI activities also augmented during the same time span6. a) Economic Factors: i. General account There are general accounts about why FTA is promoted in East Asia. Most of them are closely related to economic reasons. One of the most famous theories that explain the benefit of trade is David Ricardo’s Comparative advantage. Many MNCs establish labor-intensive assembly function in East Asian developing economies, where hard-working, low-wage labor is profusely available. It has been observed that many East Asian economies had high allocation of textiles, garments, and other consumer goods. These productions tend to necessitate labor-intensive know-how. These findings seem to reflect that a majority of East Asian economies have a comparative advantage in labor-intensive goods and labor-intensive systems7. Trade theory usually describes trade by comparisons that are done internationally: A country exports a product for which its own comparative cost of production is less in comparison to the rest of the world8. Japan accounts for a slightly larger share of exports of labor-intensive products than rest of the world. However, from Japan’s viewpoint, Korea is a major provider of labor-intensive products (about 22 per cent of imports from Korea in 1995 and 1996) in comparison to the imports from rest of the world (about 12.5 per cent). In the cases of both Taiwan and Korea, however, there is a sharp decline in the allocation of labor-intensive products in exports to Japan mainly since 1994. Hence, the real pattern of bilateral trade between Japan and Korea appears to be uniting with the general comparative advantage system of the two nations9. FTA is key method to enlarge market and promote trade; the effect of comparative advantage is relevant to this case in general. Because after FTA, each country will produce which they have comparative advantage against another, gains from trade shall be maximized. The U.S. economy is also more reliant on imports from East Asia. In machinery trade with high profitability, mainly trade of IT-associated products, East Asia benefits from a very large allocation of the whole U.S. imports10. East Asia’s Share of the Total U.S. Imports, 2000 (%) Total Imports Machinery (Electric) (General) (IT) Japan 11.7 19.6 16.3 17.7 12.7 China 4.3 3.4 5.0 4.0 4.8 NIES 11.8 15.1 21.4 20.0 28.2 ASEAN 4.5 5.4 10.2 6.3 12.1 Total 32.3 43.4 52.8 48.0 62.8 (Yoshizaki, n.d., p.9) Another benefit of promoting FTA is an attraction of Foreign Direct Investment (FDI) to the region. Liberalization of FDI policies have been done by the FTA partner nations through the use of FTAs. Stipulations on FDI in FTAs are intended to provide investors of the contracting parties more allowances in doing businesses11. When compared to Custom Union, FTA has many economic benefits. Not only because ‘Indirect trade deflection effect’ which explains creating custom income, but also FTA enables more trade even with non-participant countries. Moreover, with FTA, participant countries can keep independent trade policy such as different tariff and this makes flexible reactions against possible potential financial crisis12. ii. FTA as RTA (Regional Trade Agreement) The emergence of a scheme for a Japan-Korea free trade agreement (FTA) in 1998 was considered to be a remarkable development not only in the perspective of relations between those two nations but also in indicating a dramatic shift by Japan and Korea away from their longstanding abhorrence to contribution in preferential trade agreements (PTAs). The dramatic shift of these two nations was consequently underlined when each nation moved independently to open cooperation for FTAs with chosen partners13. Establishing an FTA or RTA is believed to create economic advantages through two main conduits: 1) competition and scale outcomes; and 2) trade and location outcomes. Unification with an FTA will bring about economic growth by means of enhanced specialization, better trade, or a nation’s addition in an international value chain14. If one goes by the metric of level of trade, Asian countries might not meet the criteria to be a successful RTA. In reality because of this low intra-province trade aspect, creating an RTA in Asia would bring about more trade distraction than trade formation. Trade creation takes place when well-organized producer of one nation shift the less resourceful producers of another member nation within Free Trade Area. Alternatively, trade diversion causes dislocation of well-organized producers outside Free Trade Area, which leads to loss of market share to less competent producers within FTA. Increased transaction costs for businesses are often unavoidable results of RTAs for nations with multiple associations. Such contracts may damage the institutional ability of governments when caught up in parallel conciliations at multilateral, provincial and bilateral standards. These contracts might reduce the political pressure for more wide-ranging liberalizations, since benefits in new markets by the export industry might by now be moderately satisfied15. Policy-makers have a wide range of potential or devices of trade policy such as tariffs, export subsidies, non-tariff limitations and others. Establishment of regional trade agreements (RTA) is an extra mechanism that policy-makers can apply to control international trade. There is a range of RTAs (free trade region, customs unification, common market and economic union). In a free trade area (FTA) member nations abolish tariffs and other trade obstacles among themselves and keep individual tariffs with the third nations16. iii. Trade policy paradigm shift Korea has planned to actively follow FTAs with its main trading associates in response to the global spread of regionalism. In selecting potential FTA partners, Korea carefully takes into account all the crucial aspects such as economic advantages, political and diplomatic deliberations, and domestic limitations which include the vulnerability of the agricultural sector. Moreover, Korea has also optimistically considered promoting an FTA17. Japan has been one of the most important successors of the multilateral trading structure throughout its post-war economic development. The trade policy of Japan has been based on the General Agreements on Tariff and Trade (GATT), its beneficiary the WTO, and the values of unconditional most favored nations (MFN) treatment. Moreover, Japan has not taken part in any preferential regional trade agreement (PTA) and disapproved other nations’ moves toward regional economic unification even after the mid-1980s, when many regional initiatives became efficacious. Japanese disapproved due to several reasons. First, for several years Japan and the Asia-Pacific region had the benefit of higher economic development rates than other regions and therefore did not feel the urge to capture markets through discriminatory economic unification contracts. Improving trade, investment and business channels resulted in augmented economic interdependence in East Asia. Market forces initiated economic unification without agreements” in the area and Asian nations began to have faith in a regional economic dynamism that was free of legal structures. Moreover, the diverse, and sometimes contradictory, developmental levels and political regimes in East Asia make it tough for the provinces to come together under an integrated legal structure. Hence, according to Tokyo, East Asian economic unification agreements seemed impractical. Secondly, Tokyo did not have a major role in framing the post-World War II global trading structure. Tokyo has had problems liberalizing agricultural trade, especially rice. It was widely presupposed that Japan could not actually conclude a RTA in agreement with Article 24 of the GATT. Tokyo’s exceptional devotion to GATT and the WTO could even be inferred as a negative attitude toward liberalization. In January 2001, Japan took a drastic step by commencing negotiations with Singapore. This does not, however, indicate a total policy move to one of ardently utilizing regional economic unification in addition to the WTO to enhance the household and external business surroundings. Instead, the Japan-Singapore Economic Agreement for a New Age Partnership (JSEPA) is just an investigation in the entire procedure of a policy paradigm shift. Japan needs to overcome many confrontations in order to strongly establish new strategies and ensure their application. The immediate concern was the degree to which Japan can liberalize agriculture, forestry and fisheries trade. Even though these industries constitute only a part of Japan’s economy, those have taken on an asymmetric weight within Japan’s entire trade policy. Unless Japan can considerably decrease tariffs on components in these crucial sectors, any FTA except the one with Singapore will face difficulties with GATT Article 24 criteria to cover considerably all the trades. Tokyo has to evaluate the costs related with an incapability to conclude FTAs and compare it with the advantages obtained from protecting sensitive components. Focusing on liberalization will not be able to solve any problem. Tokyo needs to make decision about its overall aim for the agricultural sector. It should think whether it can formulate a set of agricultural approaches that boosts feasible agricultural business18. The table below demonstrates how the intra-regional trade ratio for each area has altered in these 10 years. It clearly designates that the East Asian nations have become more inter-reliant in the region. (Source: Yoshizaki, T, n.d., p. 8) iv. Threat of exclusion /Promote bargaining power in the world economy / Domino effect In November 2002, ASEAN and China signed the contract on Comprehensive Economic Cooperation, which predicted establishment of an ASEAN-China Free Trade Area within ten years. China’s ‘early harvest’ liberalization steps were settled bilaterally, beginning with Thailand19. Since the mid-1990s, Richard Baldwin has been the principal supporter of the view that FTAs are force-driving extensive trade liberalization. Baldwin argues that FTAs will promote liberalization in East Asia by decreasing trade limitations and shifting the equilibrium of political forces within Asian countries toward free trade. The risk of exclusion is answer to Baldwin’s domino theory of regionalism. For instance, the expenses of not having an FTA with Japan augment as more contender nations ink such agreements. As more and more FTAs are signed, the governments of barred nations are expected to face more and more pressure from their exporters. In turn, the effectual implementation of FTAs will cause trade liberalization that will be liable to raise the number and strength of exporters while deteriorating import-contending firms, the key challengers of free trade. Thus, FTAs should help force further liberalization especially at the multilateral level20. These ‘domino effects’ of FTAs in East Asia were present mainly because of FTA’s restricted nature and major gains accrued, such as tariff abolitions at the cost of the third parties. Corporations of non-FTA partners would be in disadvantageous situation while competing with other firms from FTA associates, whose products have the benefit of tariff-free privileges, leading to the formation of a trade diversion effect21. b.) Political factors: i. Strengthen alliance with participant On June 30, 2007, the U.S.-South Korean Free Trade Agreement (KORUS FTA) was signed by the United States and South Korea. The cooperation leading to the FTA covered an extensive range of subject matters, including numerous crucial issues — autos, farming, trade remedies, etc. that have bothered the U.S.-South Korean trading association for decades and these subjects are mirrored in the final content of the contract. The United States and South Korea carried out the negotiations of FTA with a high level of political hazard for both nations. The U.S.-South Korean alliance continues to be very tough. The United States and South Korea have been allies while the United States interfered on the Korean Peninsula in 1950 and fought to keep away a North Korean invasion of South Korea. More than 33,000 U.S. troops were murdered and more than 100,000 were injured during the three-year clash. However, the alliance also has revealed indications of fraying. Some witnesses contend that the FTA would help to reinforce the alliance. U.S.-South Korean trade resistances have lessened over the last decade. Nearly 50 per cent of political leaders have been compelled to provide higher precedence to foreign policy and public security concerns. United States and South Korea have progressively used the multilateral argument settlement instrument of the WTO and other forum to deal with bilateral trade difficulties. In addition, South Korea has initiated a number of modifications to unwrap its economy to foreign competition and22 venture that have tackled some of the U.S. grievances. Yet, although apprehensions have reduced, several long-standing, deep-seated dissimilarities in trade and investment associations have stayed below the surface23. An FTA may be observed as a way to reassert the significance of a serious foreign policy and nationalized security alliance by increasing differences that have brought about the U.S.-South Korean alliance to fight recently. For instance, the Bush government and South Korean leaders have disagreed over how to supervise associations with North Korea. Particularly, South Korea’s “sunshine policy” of highlighting bilateral settlement with North Korea usually has implied that Seoul has not sustained U.S. political and rhetorical attempts to force North Korea, particularly on North Korea’s nuclear weapons agendas. The relocation of U.S. troops in South Korea has also created some resistance between the two allies24. Despite these growing questions about the usefulness of the alliance to Seoul, many disagree that an FTA will offer a counterbalance to help in equilibrating areas of dissimilarity and providing a new foundation for the alliance25. ii. Economic sovereignty In spite of economic heterogeneity and variety, the provincial economies have found the superseding benefit of economic incorporation and its institutionalization to overshadow the costs. Heterogeneity or diversity is not the eventual hindrance to regional financial collaboration, but political determination is more vital Pertaining to the issue of economic sovereignty, the provincial economies are progressively realizing that their economies are highly mutually dependent so that closer economic strategy cooperation is predictable26. The actual document that is approved as the free trade agreement between South Korea and the United States has few segments, which proved to be detrimental for Korea. The United States established for itself exact channels to permit it to interfere in domestic policy through a variety of enduring committees. It appeared that Korea has handed over all the gains from the contract as well as its economic sovereignty to U.S. in lure of acquiring the treaty. A typical instance would be the composition of the Committee on Trade Remedies. Its task was promoting collaboration between agencies, exchanging facts, improving educational programs, and tackling anti-dumping and countervailing duties. Some sections of the treaty reflect some kind of specific demands for U.S.A. Alternatively, these features of these segments hurt Korean sovereignty. The document would facilitate for an extreme level of American interference in the area of textiles. Korea are supposed to supply the U.S. with the names and contact addresses of Korean textile and clothing producers and executives, the accurate type of production machinery employed, the characteristics of pre-processing substances providers, and the name and contact information of their clients in the U.S. U.S. would be able to make unexpected visits to Korean corporations. Korea has permitted imports of beef with bone chips and even genetically modified organisms. On paper, it seems as if Korea has surrendered fifty per cent of its right to settle on national strategy on pharmaceuticals and examination and quarantine over to the Americans. Korea has surrendered most of what was presumed to be gained and lost the sovereignty over its economy. The question of how well the contract serves the public interest and whether the nation would gain in real economic terms needed further assessment. It is also important to know whether Korea will be competent enough to declare its sovereignty over economic issues during policy-making or during trade disagreements27. iii. Domestic politics Current Korean’s experience- Korea’s FTA cooperation with Chile, Japan and U.S. assures us that China-Japan-Korea FTA are not political, artistic, economic and historical limitations subsisting in East Asia, but the domestic restraints, namely domestic politics stalking from fierce political response28. In contradiction to the experiences of European Union (EU) and North American Free Trade Agreement (NAFTA), the economic unification in East Asia comprises of more controversial and complex nature of global constraints29. Korea along with several South East Asian nations has been placed under the economic domain of Japan following the World War II. However, rivalry increased between China and Japan after China’s adoption of global economic system and opening up its trade since 1980s. The problem faced by Japan is that all the long-run trends were in favor of China considering it to be leader. Eventually, the North Korean issues on missiles and nuclear examination could discourage the economic cooperation in this area. Diversifications in economic scale and stage of economic growth, hegemony game between Japan and China, North Korea’s nuclear matters are all the key constraints of China-Japan-Korea FTA. However, apart from these issues, domestic politics is a major issue. Putnam contends that negotiation of FTA is a kind of two-stage game. On one hand, Level I is to negotiate with foreign trade associates and to initiate a provisional30 agreement. In this stage, diplomacy plays a crucial role. Conversely, Level II game is to bargain domestically with several groups of constituencies. In this second stage, domestic politics plays a vital role. According to Putnam model, the domestic politics in the second stage depend on the four factors: 1. Nature of bargaining issues 2. Responses of household constituencies 3. Politicization of the problems 4. Political leadership The nature of bargaining issue is associated with the benefits of the constituencies which are either heterogeneous or homogenous. It becomes easier for the government to carry out domestic policies when the interests are considered to be homogenous. For instance, if both North and South Korea desire to have a peace treaty, then everybody will be welcoming it. Thus, it becomes easy for the government to execute such a plan. On the other hand, if the interests are heterogeneous, then it becomes difficult for the government to carry out any plan. Domestic politics becomes too complex and difficult to tackle with. There arises huge divergence between the winning group and the losing group. Heterogeneity in FTA implies that decreasing import-contending industries will be severely affected in the opening up of trade whereas the globally competitive industries would be capable of gaining from greater admittance to its associate’s market. The political response to domestic constituencies could be either symmetrical or asymmetrical. Symmetric political reactions indicate that all entitled constituencies will comparatively participate in stage-two game. Domestic politics is not too complicated for a government as even if the opponent parties or pressure groups react aggressively due to market opening, the government will be politically sustained31. Political reaction is supposed to be asymmetrical after incorporation of FTA. Generally, the overall expenditure of FTA is highly focused in the losing groups whereas the gains are scarcely allocated among large winning groups, such as, the customers. Due to this reason, the losing groups tend to show severe political response. On the other hand, the winning groups continue to remain quiet and try to “free-ride” on the advantages of FTA by getting rid of their political apprehensions. The domestic politics in the stage-two game fluctuates with the politicization of the problems. Politicization triggers those politicians and groups who are less bothered about the negotiation costs. Specifically the marginal groups like purchaser groups and the Non Governmental Organizations (NGOs) who are neither winners nor losers are influenced to exercise political manipulation by collaborating with the losing groups. This successively deteriorates the level-two game. The government is inadequately placed to tackle the political reaction of the losing groups while encountering an upcoming election. In such a situation, it will be complicated to anticipate strong political control in level-two game32. (Answer 2): 4.22: Why Bilateral? Bilateral agreement refers to agreement only between two nations. To understand the propositions of a variety of policies, we compare equilibrium consequences when bilateral agreements are permitted and when they are not permitted. The most astounding outcome of this study is that not permitting bilateral agreements can cause more security and lower world interests. Whether bilateral agreements are an aid or an obstruction to the realization of free trade becomes a question of evaluating the consequence of forbidding bilateral agreements. Bilateral agreements permit trading blocks to combine and essentially get bigger for the intentions of trade policy. In an economy two minor trading blocks apply the threat of customs unification to wedge the third larger trading block from making use of tariffs. In equilibrium, this hazard is not executed and free trade is the outcome. In the second economy, the primary endowment formation is such that in equilibrium two trading blocks convene and take advantage of the third, thus blocking free trade. Hence, permitting trading blocks does have the prospect to obstruct free trade, but it also has the probability to permit smaller blocks to productively oppose larger ones and in some situations can actually make possible for the achievement of free trade. This proposes that any proposed policy to disallow or limit bilateral agreements should be framed to embrace these potential consequences33. a) Economic Factors: The current chase of bilateral and regional trade agreements manifested most remarkably during the conclusion of NAFTA and the further declining of trade obstacles in Europe raises query about the perception of this approach to trade liberalization. Governments have declared that bilateral free trade cooperation are well-matched with the aim of multilateral trade liberalization but others have inquired whether bilateral trade arrangements will finally lead to extensive liberalization34. Recently, the desire for retaining regional economic advantages, through reinforcing communal and economic collaboration in the region, has become more and more vital in Asia. So the procedure of signing bilateral FTA has been further driven forward. Now the signed FTA just in East Asia incorporate Singapore-New Zealand (2004), Japan-Singapore (2002), South Korea-Chile (2002), Singapore-Australia (2003), Singapore-Jordan (2003), Singapore-America (2003)35, Thailand-Australia (2004), Japan-Mexico (2004), and etc. The characteristics of bilateral FTA in Asia incorporate: not only the nations adjacent each other and with similar phase of economic expansion, but also the nations across different provinces and in different phases of economic growth, have signed FTA; simultaneously, the amount of FTA with far-reaching cooperative relationships in dissimilar areas such as financial system, community, culture and so on is escalating. Rising bilateral FTAs, which will play a main role in driving the economic and trade association among Asian nations forward, are crucially balancing to international multilateral trade instrument36. Japanese Prime Minister Junichiro Koizumi’s visit to Singapore in January 2002 accompanied a new era in Japan’s global trade policy. Koizumi and his Singaporean complement, Goh Chok Tong, signed the Japan–Singapore Economic Partnership Agreement (JSEPA). This was the initial bilateral Free Trade Agreement (FTA) signed by Asian nations that provided not only for the abolition of tariffs, but also for other steps including the liberalization of venture rules, the synchronization of37 competition policies, and the mutual recognition of standards. This was also Japan’s first FTA38. Singapore anticipated the JSEPA to fetch more direct gains to bilateral economic associations with Japan. Japan is the second largest economy in the world, and there is an inflicting presence of Japanese corporations in Singapore. Major Japanese producers such as Sony, Panasonic, Hitachi or Nippon Electric Corporation (NEC) have established their operational headquarters in Singapore, creating strong and long financial and business networks. A FTA with Japan was thus recognized as reinforcing these business ties and economic associations through the formalization of those de facto wide-ranging, deep business, and economic connections. For instance, the JSEPA aids Japan-based firms by means of national treatment in Singapore, and permits those firms to freely relocate funds connected to investment in and out of Singapore. Since the 1980s, Japan has constantly been one of Singapore’s top three trading associates. In 1999, when the design of a JSEPA was still silent, Japan was Singapore’s 3rd largest trading associate, having12 percent contribution to Singapore’s total products trade. On average, it comprised of about 20 per cent of Singapore’s total imports. In fact, Japan is the 2nd largest investor in Singapore’s industrialized sector, but Singapore’s ventures in Japan have been comparatively low. i. Endowed resources and trade structure Because of the difference in distribution of endowed resources, which determine comparative advantage of one country, only bilateral approach made economic cooperation possible in East Asia. This generates comparative advantage of each country, and creates different types of production style. At the centre of these differences, there is Japan. Relatively, Japan possesses developed technology, but the others do not. Moreover, while Japan produces mainly component product, Korea and especially China produce assembly product. This can be specified by ‘Factor endowment’. According to Factor endowment theorem by Heckscher-Ohlin, when trade is made between two countries, the uneven production factors within the country define export and import of industry or trade structure. As a result of that, only specialized industry will be promoted in participant country and this provokes inequality of domestic economy. Because trade structure generates many risks, to promote multilateral agreement in East Asia could be hard. Rather, they prefer bilateral way, for FTA between more than two countries is difficult. Obtaining natural resources is of serious importance for Japan, because it is poorly bestowed with natural resources, and the significance of this issue is rapidly growing as largely populated nations, China and India, have been engrossing tremendous quantities of natural resources39. ii The benefit of first pre-occupation and industry distribution The propagation of bilateral and regional preferential or free trade agreements (PTAs/ FTAs) since the 1980s is an occurrence described as the “new regionalism”. As on 15th September 2008, 222 regional trade agreements had been informed to WTO and were enforced, with nearly 400 scheduled to be realized by 2010. Many Pacific Rim nations have been particularly dynamic in the new regionalism including China, which has appeared from its earlier preoccupation with WTO attainment and is looking to attain further gains from regional agreements. With continuing problems at the multilateral stage, Asia-Pacific bilateralism and regional assimilation may well become an even more significant avenue for continuing trade cooperation in the region40. Some nations seek bilateral or regional FTAs to reinforce domestic policy modifications and to avert any future turnarounds of the current trade strategies. For instance, this reason was a central preoccupation on the Mexican side when bargaining the North American Free Trade Agreement (NAFTA). Given the importance of trade to Singapore’s endurance and success, these FTAs could also be aimed to serve as a safeguard against any future governments taking acts that may unenthusiastically impact its position within Asia41. Due to the formation of East Asian Community (EAC), exports of agricultural goods, food, and beverages augment on a large scale, but imports of heavy and chemical industries amplify on a large scale. Imports of light industry goods such as textiles and leather also augment on a large scale.42. iii. Diversity within the level of institutionalization There is a predicament between the extensive coverage and the sovereignty. As broader coverage is asked for, assimilation will have to go beyond the WTO coverage, including several service trades, finance, IT, Intellectual Property Right (IPR), and human resource exchange. However, as it widens, institutionalization may become even harder. Financial liberalization and collaboration, for instance, need an urbane legal paradigm, good performance, transparency, effectual supervision, as well as strict observation within the region43. The level of institutionalization, which obtains enforcement commitment, will also manipulate the centripetal force. The predicament between the coverage and sovereignty stands in the way of having comparatively segmented coverage. In the reality, it is not assured how the associates will be willing to grant on these coverage issue, while being less optimistic in WTO negotiation but more so in provincial negotiations44. iv. Disparity of development & widespread natural resources (possibility of complementary cooperation) Socio-economic inequality matters when it builds socio-economic elimination. Thus, it is vital to form a series of dynamics in the socio-economic layer through building and reinforcing linkages. Structural reform, ability building and anti-fraud activities can be good strategy measures for linkage-building, as they can provide a useful means for providing equal chances, enhancing the abilities of marginalized people, and establishing good supremacy45. China has experienced drastic amendments over the past 30 years in terms of income inequality as well as economic enlargement: inequality widened both among rural and urban regions and between coastal regions and interior ones, even as absolute poverty has been declining at an unparalleled speed46. The Japanese government focuses on policy responses to the aging inhabitants, low-fertility rate and youth joblessness, based on the above-mentioned assessment of inequality in Japan. Much focus has been laid on the spheres of childcare, which support the female involvement rate47. The newly formed multi-sectoral “No Deal: Movement against Unequal Free Trade Agreements” strategies puts forward the JPEPA issue from a dissimilar angle. It aims to widen the social argument on the deal to incorporate its more extensive aspects, such as the locking-in of Philippine underdevelopment, the lasting interest of Filipinos in a financial system that provides them enough livelihoods, the exploitation of the nation’s labor and natural resources by Japanese companies, and Japanese hegemonic objectives for East Asia48. b. Political factors: i. The legacy of the cold war (fragile bilateral Alliances) Since the end of the cold war, unipolar politics controlled by the United States has been the array of the day. In East Asia, the United States is the leading power, its defense expenditure being greater than that of the other great authorities combined49. The success of ASEAN, too, appears to have derived more from its attempts to stay out of the cold war and shun big power competition. Even within ASEAN, bilateral rather than multilateral collaboration is growing, particularly in terms of sharing intellect on terrorism, although a few organized and collective attempts are made through ASEAN structures50. A bipolar arrangement with only the United States and Japan facing China would be unproductive, because it would compel other regional authorities to choose between two competing poles. Stability in East Asia will rest on the excellence of U.S.-Japan-China associations51. ii. Distrust toward multilateralism (WTO/APEC) The strategy of "peaceful rise" is based on embracing globalization as a part of the solution to China's expansion imperatives. It depends both on China's household economy and the global marketplace to maintain and fuel economic enlargement. To achieve the objective of "peaceful rise", China has refashioned its international relations. Rather than continuing to proceed like a distressed victim, China now seeks to be a liable great power and is acting progressively like one. Whereas China used to disbelieve multilateralism for fear that multilateral organizations could be used to limit or punish it, now Chinese officials recognize that intensely engaging these organizations assists to promote the nation's trade and security welfare and limit American authority52. (Answer 3): 4.23: Why extra-regional? a) Economic Factors: Regional assimilation has the prospect to encourage intra and extra regional FDI flows and economic development in individual nations of the region. Extra-regional FDI may also be influenced by the preferential trade requirements of the RTAs in dissimilar ways. First, RTAs may elevate the fear of future safety for external investors, alluring them to venture inside the region and earn the position of being insiders. Second, RTAs increase the market size of individual nations by decreasing tariffs and thus conquer the drawbacks of small economies. It may therefore become gainful for an extra-regional investor to have admission to a larger market. Third, decrease of non-tariff barricades within an RTA may offer an incentive to extra-regional investors to establish operations inside the region53. Greater regional collaboration in FDI will not only help intra-regional investment but also extra-regional venture by stimulating effectiveness and enlargement, and establishing investor-confidence. This, in turn, has the ability to transform the dynamic comparative benefits of these economies54. The powerful economy of Japan registered a drop of 0.4 per cent in its GDP in 2001 and is anticipated to register a drop of 0.4 per cent in 200255. Japan handled to climb out of a year long depression in the second quarter, but its economy continues to be weak. Joblessness and apprehension over falling wages intimidate to undermine any revival. The jobless rate has increased to a record 5.7 per cent56. Japan’s welfare augments by $318.1 billion (4.90 per cent of GNP) and U.S. welfare augments by $244.2 billion (2.69 per cent of GNP) after the complete removal of (post-Uruguay Round) APEC bilateral tariffs and services obstructions augments global interests by $824.2 billion. The main U.S. employment amplifies are in agriculture, food, beverages, and tobacco, and wood & wood products57. b) Political factors China and Japan has gained the upper hand in defining the regional integration process. The core interest of China is to consolidate economic growth to shore up domestic political control and to increase its international prestige. To achieve this, the Chinese government has incorporated more business interests in its foreign economic policy, has intensified its participation in regional institutions, and has pursued functional assimilation. Japan’s major concern has been to check Chinese power through a ‘sandwich’ policy: negotiating bilateral FTAs with Southeast Asian nations and proposing a supra-regional and more inclusive ASEAN + 6 FTA. On the other hand, Japan’s more benevolent cooperation systems – such as the Asia broadband program and the rice reserve system – created meager outcomes due to the lack of adequate resources. Japan’s regional integration strategy has consequently been one of ‘naive liberalism’ (with breakdown in the IT and agricultural spheres) and ‘fragmented realism’58. 4.24: Different stands of China, Japan and Korea China is moving with poise into bilateral trade contracts with numerous nations, mainly in the Asia-Pacific region. It has so far closed 14 FTAs including those with ASEAN (2002), Hong Kong (2002), Macau (2003), Thailand (2003), Niger (2005), Chile (2006), Pakistan (2006), New Zealand (2008), Peru (2008) and Singapore (2008). China is at present in FTA negotiations with Australia, Pakistan, the Southern Africa Customs Union, the Gulf Cooperation Council, Iceland, Norway and Costa Rica. Further down the sphere there is talk of ultimate negotiations with Japan, India, Taiwan and South Korea59. Until recently, Japan emphasized on its bilateral negotiating schedule with a few nations around the Pacific. Major contracts have been signed with Singapore (2002), Malaysia (2004), Mexico (2004), Philippines (2006), Indonesia (2007), Chile (2007), Thailand (2007), ASEAN as a whole (2008) and Vietnam (2008). In mid-2006, Tokyo declared the start of FTA talks with Brunei and these were absorbed in 2007. Japan’s contracts with both Brunei and Indonesia are exclusive because they promise Tokyo access to oil and gas supplies60. The government of South Korea is chasing negotiations for a number of bilateral free trade and investment contracts. Korean social movements have been channelizing in opposition to these ever since the Korea-Chile FTA was suggested. So far, South Korea has signed contracts with Chile (2004), EFTA (2004), Singapore (2005), ASEAN (2007) and the US (2007, but not ratified)61. Chapter V Prospect of FTAs in East Asia and Recommendations With the rapid expansion of regional assimilation worldwide led by the US and EU, the Korean government altered its traditional policy direction based on Multilateralism toward regionalism apprehending the likelihood that the nation might be excluded from the world-wide drifts of preferential market opening. Based on the consideration that the involvement in the preferential trade agreement is an unavoidable and urgently needed policy instruments for foreign market access and sustainable development, the Korean government has actively followed FTA arrangements, and lately, Korea-Chile FTA was triggered off since April 2004. At present, Korea-Japan and Korea- Singapore FTA are under concession. At the initial juncture of Korean government’s attempts for FTA formation, the basic policy proposition could be referred as the maximization of the number of FTA contracts. To strengthen the regional liberalization procedure, governments must also complete essential domestic developments to place their individual economies on a competitive footing. While many Asian administrations have connected or come together in such competitive attempts, other countries need to reinforce them. However, administrations have to address socio-economic insinuations of regional liberalization. ASEAN needs to be fully feasible as a regional economic space. The regional market is still closed to the U.S. economy with its assistant pitfalls of being reliant on one party. ASEAN will not only decrease economic reliance on one nation but also provide rich vicinity for all member states62. To conquer political and non-economic impediments, East Asian nations need to intensify mutual consideration at all stages, from top leaders to young individuals, to increase the consciousness of the significance of regional market and regional political and social constancy. Leaders’ gatherings should be held at least once a year to enhance their mutual understanding. Repeated television-conferences can be applied to complement face-to-face conferences. Policy makers, who are accountable to devise policies, should set up close communication associations. Bureaucrats, businessmen, academics, learners, and others should also augment their exchange. In order to assist such exchange, the establishment of structures such as student exchange programs is effectual. Such programs can be established independently but they would be more successful if they are organized under bilateral and plurilateral FTAs before accomplishing EAFTA. Finally, East Asian nations should not look upon completing East Asia FTAs (EAFTA), but they should consider it as a step toward accomplishing worldwide free trade under the WTO. This is very vital as EAFTA has adverse impacts on non-associates such as the U.S., the EU and other nations. To evade an EAFTA becoming a faltering bloc for international free trade, East Asian nations should make every attempt to encourage multilateral trade negotiations under the WTO and set up FTAs with nations outside East Asia63. Chapter VI Conclusion It is true that the propagation of FTAs in East Asia may produce the ‘spaghetti-bowl’ effect since each FTA affiliation may have idiosyncratic content, varying in rules and responsibilities, and a tangle of policies of origin may deflect and alter trade. Yet the conventional trade creation/diversion argument over FTAs is neither simple nor inclusive especially given that many nations have followed FTAs because of more political and deliberate considerations64. There has been division of labor between China, Korea and Japan in the East Asian region. That is to say, Japan and Korea export to China venture goods, fractions and industrial raw materials, whereas China exports to the world manufactured final goods consisting mostly of electronics. Exports of textiles and leather from Vietnam augment extraordinarily, and China loses its global competitiveness in this domain. Due to these consequences in trade, EAC will cause China to alter its industrial arrangement in the direction of developing agriculture and food processing industries, lowering textile industries, developing electronics industries, declining other heavy-chemical industries, and developing other light manufacturing industries. China is the dynamic player in the sphere of FTA. However, only two of its FTAs, with Hong Kong and Macao, have been realized. If China administers to successfully realize FTAs with liberalization of important goods and services, the contracts would give a strong thrust to regional liberalization. Despite the political obstructions, booming Asian intraregional trade proposes there are strong reasons for greater strategy coordination. The FTA procedure embraced with some eagerness in Asia and other continents65. The main positive consequence of FTAs is an augmentation of non-associates’ exports to that of associates because of improved economic growth and the trade adjustment of members. The higher economic enlargement is mainly due to amplification in economic transactions. Stronger rivalry and a decrease of the transaction costs by the coordination of rules and consistency of specifications amongst associates can be achieved through the formation of FTAs. Trade modification described as the diversification of import sources led by altered trade patterns after combination becomes better as the economic enlargement of associates becomes higher and trade associations between members and non-members are harmonized66. Our first main finding here is that trade flows were not considerably influenced in the years following the signing of the AFTA contract in 1993. One possible clarification for the decrease in trade formation immediately subsequent to1993 was the appearance of credible competition for market allocation from the new industrial and exporting authorities of China, South American and Eastern Europe. Likewise other regional trade agreements such as the EU and NAFTA and associated contracts between these groups and nations in Eastern Europe, the Middle East and North Africa may have displayed their own results of trade diversion. In East Asia, it appears that an FTA is used as a political device to set regional order rather than to guarantee economic affluence in the region. If so, it is evidently China that is taking the lead at this point. Japan’s approach to an FTA undoubtedly has an edge. China, which has been increasing so rapidly, appears to be more lucrative as a market and to have stronger political negotiating power. East Asian nations will benefit considerably from the development of EAFTA, as it would support economic expansion by promoting foreign trade and foreign direct investment (FDI). For Japan, which has been undergoing a long recession, FTA with East Asian nations, whose economic expansion potential is enormous, will provide considerable benefits, as it facilitates Japan to have closer economic association with these nations. Moreover, EAFTA would support domestic structural development such as improvements in agriculture sector and labor market thus contributing to the revival of the Japanese economy. The same debates can be applied to other East Asian nations. In spite of these anticipated benefits from the establishment of EAFTA, various impediments do exist. To overcome structural modification problem inflicted on non-competitive sectors by FTA, the nations should implement planned trade liberalization in sensitive regions as a part of FTA contract. GATT/WTO permits the associates of FTA to take 10 years to complete FTA. East Asian nations should use the inhalation space to aid structural adjustment through suitable adjustment strategies. For instance, potentially impacted personnel should be provided financial, technical and other kinds of support so that they can develop their quality of human resources. If such agenda is successful, trade liberalization through FTA can be trailed smoothly to bring about the advantages for all the nations. Indeed, the required assistance should be given by the associates as a part of economic aid programs under EAFTA67. Japan and other East Asian nation's FTA approach emphasizes on East Asia. East Asia is believed to be a high-growth area in economic language, so it is advantageous for Japan and other East Asian nations to be closely associated with such a region. Another strategy is to have an inclusive framework, which includes the coordination of systems such as technical principles, antitrust policies, etc. One purpose of having FTAs is to have a region where the firms of these East Asian nations can act upon their activities comparatively freely. In conclusion, FTAs have possible benefits and should therefore be accepted. Alternatively, FTAs by nature are prejudiced arrangements that have negative effects on non-members. In order to tackle with these negative effects, nations have to make major attempts in successfully accomplishing trade liberalization at other stages, such as the WTO and APEC. Finally, to develop the quality of FTAs, not only for developed nations but also for developing nations, it is important for the WTO to take up debates to develop the WTO set of laws68. East Asian nations must try to figure out FTAs of high excellence. Especially, given the dimension of economies and the extent of their economic development, a Japan-Korea FTA is significant. It has set the high standards for other East Asian FTAs, including comprehensive components, permitting great market admittance for goods and services, with easy rules of origin and an accession section. It has been approached taking into account that it will be open to other East Asian markets and that it could serve as an outline for other East Asian FTAs. The governments of Japan and Korea will be tempted to compromise with the quality of FTA owing to the constant pressure from the well-developed interest groups. The alternative could be the broadening of the negotiation phase, which could deteriorate the impetus for their bilateral FTA. In this regard, again, East Asian nations can make the most of the external aspects. Worldwide drifts such as broadening and intensifying regional economic assimilation in Europe and the Americas, on the one hand, and enduring active search of aggressive FTA policies by nations including Chile, Mexico, Australia, New Zealand and the United States can also be employed. It can be anticipated that East Asians overcome their domestic politics with the assistance of both their internal FTA rivalry and the increasing outside rivalry69. Further research and study would have been possible in paper. Statistical analysis could be carried out in this study. Due to unavailability of adequate data, statistical analysis would not have been possible. More emphasis has also been given only to Japan, Korea and China. Other East Asian nation’s development and progress have not been talked elaborately in this paper. References: 1. Cheong, I, 2005. “Evaluation of recent progress of FTAs in EAST ASIA – A Korean Perspective”. East Asian Economic Regionalism. 2. 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