Regional Integration in the Asia-Pacific:

Implications for US Policy

 

written_testimonies before the U.S.-China Economic and Security Review Commission

“China as an Emerging Regional and Technology Power:

Implications for U.S. Economic and Security Interests”

 

February 12-13, 2004

 

Richard Feinberg and Stephan Haggard

Graduate School of International Relations and Pacific Studies

University of California, San Diego

 

 

A significant development in the trade policy of the Asia-Pacific is the proliferation of preferential trade agreements. The new wave of bilateral and regional agreements is particularly striking because of the participation of the three largest Asian economies: Japan, Korea and China.  Following a brief overview of recent developments, we addresses three questions:

 

·         Three points emerge from the analysis:

·These agreements must be understood in the context of the rapid development of cross-border production networks in which American firms are key players. American firms stand to gain from agreements that appear on the surface to be “intra-Asian.”

·The United States needs to be concerned about the potential for discrimination in these agreements. But the incentives for countries to pursue “closed” strategies is offset by continuing reliance throughout the region on the American market and foreign investment.

·In the absence of movement in the WTO and APEC, and as a guarantee that regional agreements do not exclude the United States, the US should continue to pursue its regional strategy with willing partners. This strategy is only likely to work, however, if the content of these agreements is genuinely reciprocal and not overloaded with extraneous issues.

·Over the longer run, the WTO and APEC remain useful instruments for disciplining these agreements and assuring they do not turn in a discriminatory direction.

The Turn toward Regionalism in the Asia-Pacific

            Growing intra-regional trade in East Asia has been driven largely by robust economic growth, unilateral economic reforms, and market forces. Cross-border production networks led by American, Japanese and Chinese multinationals have played a major role in this regard. Formal intergovernmental agreements have been of distinctly secondary importance. By contrast to Europe or the Western Hemisphere, Asia has been slow to develop intra-regional institutions.   

 

In the last five years, however, Asia has seen a rush to regionalism. AThe history of recent trade initiatives in the Asia-Pacific is complex and need not be recounted in detail; an overview of the most important recent tradesome agreements in the Asia Pacific and their current status is contained in Appendix Table 1. 

T As can be seen, these initiatives evolved around five distinct geographical axes:

·         In Northeast Asia, Korea and Japan have initiated negotiations on a free trade agreement, raising the question of whether a wider sub-regional arrangement might evolve.

·         Korea, Japan and other countries have sought negotiations with pivotal Latin American countries, motivated in part by an interest in gaining access to the North American Free Trade Area (NAFTA) and/or the prospective Free Trade Area of the Americas (FTAA).

·         China, Korea and Japan have entered negotiations with Southeast Asian countries, both as a group through the Association of East Asian Nations (ASEAN) and with individual countries. By far the most important initiatives along these lines are the The China-ASEAN Free Trade Agreement is the most advanced of these initiatives., but Japan and Korea have taken initiatives in this regard as well.

·         Asian countries collectively, though the Asia-Europe Meeting (ASEM), and bilaterally have pursued trade agreements with the European Union (EU) and the European Free Trade Area (EFTA).

·         Finally, the United States has ratifiedcompleted a Free Trade Agreement (n FTA) with Singapore, entered into negotiations with Australia and Thailand, and proposed a broader Enterprise for ASEAN Initiative (IEA) laterin our conclusion.

Precursors to the new Asian regionalism can be found in the Australia-New Zealand Closer Economic Relations Trade Agreement (1983) and the Association of Southeast Asian Nations Free Trade Area (AFTA, 1992). But the new wave of regionalism was set off by Singapore, Japan, and Korea, three countries that had long maintained a strong principled commitment to multilateralism. Singapore negotiated a bilateral FTA with New Zealand in 1999 (effective 2001) that included not only trade in goods and services but investment and government procurement as well. Japan’s first bilateral agreement was reached with Singapore in January 2002 and went into effect in November (the Japan-Singapore Economic Partnership Agreement, JSEPA). N; notably, . tThis agreement largely excluded the contentiousdid not involve the more complicated negotiations over agricultural issues that were to hamper subsequent Japanese efforts inwith respect to Southeast Asia, but it did include a national treatment provision with respect to investment. Japan has subsequently pursued negotiations with Mexico and Chile, two pivotal Latin American countries. Korea’s first FTA was with Chile. Finalized in February 2003, ratification has been delayed because of resistance from farmers, but it is likely to be passed by the Korean National Assembly soon.

In Far more important for Northeast Asia, an FTA between Japan and Korea would be a major development.n economic cooperation would be the negotiation of a Korea-Japan agreement or a broader Northeast Asian arrangement. A joint study group on a Korea-Japan FTA concluded almost two years of preparatory work in October 2003, and negotiations are now beginning in earnest with the stated intention of reaching a final agreement by 2005. Wider regional integration in Northeast Asia appears unlikely to develop in the near term. stalled, since To date, however, Tthe Chinese have not shown an interest in negotiating an FTA with either of the other major powers in Northeast Asia, despite the rapid market-driven growth of trade, investment and other forms of economic cooperation between China and Korea in particular. The Chineseis stance could change pending a successful settlement of the North Korean nuclear issue, but at present a formal Northeast Asian economic agreement seems an unlikely prospect.

AThe complex web of negotiations has emerged between Northeast and Southeast Asia have proven more significant. As early as 1998, Kim Dae Jung and the ASEAN Secretariat advanced the idea of forming an East Asian FTA consisting of the “ASEAN+3” or APT: ASEAN plus China, Japan and Korea. In 1999, the ASEAN+3 issued a Joint Statement on East Asian Cooperation that committed the group—albeit vaguely—to a dialogue on economic, political and social issues. These ideas were surprisingly similar in scope—although not identical in spirit--to a 1990 proposal by former Malaysian Prime Minister Mahathir for an East Asian Economic Grouping (EAEG) that self-consciously excluded the United States.

The prospects for region-wideal economic cooperation along these lines were pre-empted, however, by Zhu Rongji’s surprising proposal in November 2000 for a China-ASEAN FTA, which, depending on the precise timing of concessions, would grant Southeast Asian countries preferential access to the China market as China’s WTO concessions are phased in. It took two full years to finalize a framework agreement, and final negotiations on a number of components of the agreement remain to be finalized. ASEAN caution has been drivencame partly from continuing by anxietiesconcern about China’s growing economic and geopolitical influence in the region, particularly with respect to ASEAN’s newest members (Vietnam, Myanmar, Laos and Cambodia), and by resistancepartly from business sectors vulnerable to Chinese competition, and partly from concerns about the effects (Steph – what effects?) of such an agreement on ASEAN’s newest members (Vietnam, Myanmar, Laos and Cambodia). Nonetheless, the framework agreement signed in November 2002 had a number of striking features:

·         The agreement covers not only trade in goods, but trade in services and investment as well.

·         The agreement htmires to conform with Article XXIV of the GATT/WTO which requires that FTAs free “substantially all” trade. The very concessions that China made in the context of its WTO accession negotiations with the United States had the unintended consequence of positioning it to make substantial offers in its negotiations with ASEAN, for example on agriculture.

·         China offered a number of “sweeteners” in order to allay ASEAN concerns, including an “early harvest” provision granting a quick reduction of tariffs on a number of items as well as preferential treatment of the new, least- developed ASEAN members.

·The agreement htmires to conform with Article XXIV of the GATT/WTO which requires that FTAs free “substantially all” trade. This ambition was no doubt made possible by the fact that the Chinese had already made substantial concessions with respect to agriculture in their WTO accession negotiations.

The Chinese initiative was a setback for Japan and Korea. Japan was quick to respond with initiatives of its own in the form of a proposed Closer Economic Partnership (CEP) with ASEAN that would cover not only trade and investment but also science, technology, education, and tourism. Korea was somewhat more circumspect, also signaling its intent to negotiate a framework agreement but admitting that agriculture posed a challenge to a bull-blown FTA. As Japan’s proposals these multilateral efforts(Steph – whicwound through expert group meetings in 2003, Tokyo Japan also initiated discussions with the Philippines and Thailand, suggesting that its Japan’s framework approach did not preclude the pursuit of bilateral agreements; it is quite likely that Korea will pursue this strategy as well.

Finally, brief mention should be made of the prospects for what might be called “Greater China” agreements. In June 2003, China and Hong Kong reached a Closer Economic Partnership Agreement (CEPA) that put zero tariffs on 270 products meeting rules of origin requirements, opened 17 service sectors to investment by Hong Kong firms, and promised cooperation on measures to facilitate trade and investment. Taiwan quickly rejected the suggestion that the CEPA provided a model framework for cross-Straits economic relations, which have boomed despite the absence of any legal framework. But the announcement of the China-ASEAN initiative pushed Taiwan to form its own task force on FTAs, focusing on the United States, Japan, Singapore, and New Zealand, and producing a first, “test run” FTA with Panama.

 

Motives and Causes

To what do we owe this floodspate of initiatives? The motivationsreasons are clearly multiple, but we focus here on three: economic complementarities, including not only trade but investment; “strategic” motives associated with the slowing of progress in other trade bodies; and wider geo-political interests.

T

The EconomicDimension

Steph – repeat point about rapidly Despite rapidly rising intra-regional trade flows, .tNevertheless, The economic motives behind a number of the proposed for intra-Asian regional agreements are not as straightforward as they may appear not self-evident. The Chinese and Japanese economies are at very different levels of development, and thus highly complementary. Yet regional initiatives have not occurred along these lines, but rather among economies that appear, at least on the surface, to have more competitive export structures, such as Korea and Japan or China and ASEAN.  Analysts from ASEAN have continually expressed concern that China’s dynamism will push it out of third-country export markets and pose a direct challenge to production and jobs at home.

Yet the ASEAN countries have continued to gain market share in the US in critical sectors such as IT even as China has as well. Moreover, the very rapid growth of the China market has exerted a particular pull on the more advanced economies of the region—Hong Kong, Korea, Taiwan and Singapore—for which China now accounts for roughly 20 percent of exports see Figure 1). The opportunities for Hong Kong and Taiwan are particularly great, and are likely to deepen. China’s share of exports from other ASEAN countries starts from a very much lower base, but has grown steadily. As we have noted, the Although China has a $120 billion bilateral trade surplus with the US, it runs substantial deficits with its neighbors, including Taiwan ($40 billion); Korea ($24 billion), Japan ($15 billion), Malaysia ($8 billion) and Thailand ($5 billion).  Most of the deficits with China’s neighbors consist of semi-finished goods and components, and some share of them can be attributed to the exports of American multinationals from their Asian locations.

 

 

 

Equally important are the opportunities that such agreements might yield with respect to investment and the further development of cross-border production networks. ROur research on the hard disk drive industry in Southeast Asia carried out at UCSD shows the close links between trade and investment. American firms in this industry maintained their competitiveness vis-à-vis Japanese and Korean producers by developing cross-border production networks linking facilities in Singapore, Malaysia, Thailand and China. Similarly, Hong Kong, Taiwan and Singapore all expect that bilateral and regional agreements with China will provide advantages to them as investors in their own right, as valuable sites for third-party investors, and as potential recipients of outbound Chinese investment in the future. The Japan-Singapore Economic Partnership Agreement contained a national treatment clause and Singapore has openly advertised its belief that the China-ASEAN FTA will create incentive for firms both inside and outside ASEAN to invest there to serve the China market. The potential for outbound Chinese investment is already visible in Hong Kong, and the China-ASEAN FTA will help make ASEAN an attractive site for such investment in the future.

The Economic Strategyegic Dimension

In addition to the economic benefits, Asian countries have been fairly straightforward about what might be called the “economic strategy”ic (Steph – I’m concerned about the use of the term “strategic” which I realize is so used in trade theory but in foreign policy circles would normally refer to geo-politics/security. How about we use “trade strategy”?) dimension of their pursuit of regional and bilateral arrangements.

·         The pursuit of more narrow regional and bilateral agreements is also a response to the fact that more encompassing regional efforts through APEC have not lived up to their promise. After the agreement in 1994 to negotiate a region-wide free trade and investment area and the success in brokering a broader liberalization in the information technology sector, APEC sufferedunderwent a steady loss of momentum and focus. A number of APEC members resisted further liberalization in the wake of difficult Uruguay Round obligations, but tThe absence of clear leadership was clearly a factorof this deterioration., Uunderneath this weakening of APEC whichlie domestic political changes in key states including Australia (the return to conservative government in 1996), Japan (the stagnationproblems of the 1990s and the objectionsfailure to ratify commitment to the 1997 Early Voluntary Sectoral Liberalization initiative), the United States (the waning interest in multilateralism in the late Clinton and Bush years and thedomestic divisions over trade policy and the rising preoccupation with security issues), and China (preoccupation with negotiating and implementingthe far bolder initiatives undertaken as a result of WTO accession).

Political and Geostrategic Motives

            In addition to these economic motives, a number of recent agreements are embedded in broader diplomatic initiatives. The Japan-Korea initiative reflects a welcome political rapprochement between those two countries. Taiwan’s interest in FTAs is tied to its ongoing efforts to break out of its political isolation. Japan’s initiatives toward ASEAN were clearly a response to China’s initiativeaggressiveness. These political motives are important to keep in mind because they suggest that some of these initiatives may have weak economic underpinnings and bases of support and are thus likely face difficulties in negotiation and implementation; we.  W should not assume that these initiatives will necessarily bear fruit.    

            Beijing’s proposal of an FTA with ASEAN marks the culmination of an on-again, off-again effort in the post-Tiananmen period to improve relations with its Southern periphery. ASEAN’s response to Beijing’s crackdown was notably muted, especially in comparison to the American and European reactions. But Southeast Asia has had a number of security concerns about China, including its push to develop force projection capabilities, its behavior across the Taiwan Straits in the mid-1990s, and its ambitions in the South China Sea. Over the 1990s, China began to participate in multilateral processes and extended assistance, however modest, during the Asian financial crisis of 1997-98.  (A couple of sentences) China-ASEAN trade and investment relations, as we have noted, are still relatively small, but Southeast Asian countries share with China a number of concerns about U.S. trade policy, such as the view that trade should remain distinct from political, human rights and labor concerns, or that these policy linkagesquestions contain a risk of provided an opportunity for disguised protection. Perhaps not surprisingly then, ASEAN’s response to Beijing’s crackdown (Steph – 1989?) was notably muted, especially in comparison to the American and European reactions.

 

Implications and Policy Response

Liberal cCritics of FTAs and bilateralism have always argued that they are fundamentally discriminatory and introduce unnecessary complexity into trade and investment relations through the introduction of rules that are not common across cases. Technical elements of such agreements, including particularly rules of origins and phase-in provisions, make it difficult to gauge their consequences. In Asia, there is concern that such agreements could spell the rise of institutions that exclude the United States and could be a prelude to political alliances that are inimical to US geostrategic interests. Of particular concern is the prospect that China would play the role that Japan was once thought to play in the region: the dynamic leader of a regional bloc that would ultimately use its economic clout for political and geostrategic ends adverse to US interests.

We share some of these concerns, but generally find them exaggerated. First, it is important not to confuse the rhetoric of new agreements with reality. It is one thing to proclaim intentions to negotiate or to sign framework agreements; it is quite another to negotiatenegotiate details and implement them, particularly among such diverse and in many cases historically hostile countries. The 1994 APEC initiative for a regional FTA is salutary in this regard; the “spirit of Bogor” proved ephemeral, and lacking in convictionshort-lived. Few of the many agreements that have been negotiated to date (Steph – specify which we have in mind) have been “difficult” in the sense of forcing hard choices on the signatories, as for example, the NAFTA did in North America.  Those that have, such as the ASEAN Free Trade Agreement, have made been forced to make concessions to political reality and have adopted a “two-tier” approach in which derogations have been allowed for some countries and sectors(Steph – explain). A number of regional initiatives, such as the Korea-Chile agreement, (Steph – again, specify) have already run afoul of domestic resistance.

Second, it is important to underscore that to the extent that such agreements do succeed, US firms and their suppliers stand to be direct and immediate beneficiaries. US firms have maintained or even regained their competitiveness in a number of crucial high-technology sectors by acting as “lead managers” in cross-border production networks that span the Asia-Pacific region. Crucial to the effectiveness of these networks are liberal investment rules, free trade, and a smoothly functioning logistics infrastructure. Continuing liberalization within Asia facilitates the development of these cross-border production networks, which have been crucial for US competitiveness in Asia over the last decade.

ThirdSecond, to the extent that these agreements succeed, they can may well we think that they have a number of salutary effects for the United Statesserve broader US interests in liberalization and economic reform in Asia. As we have seen in Mexico, strong regional agreements can serve to support domestic reformers and lock in broader liberalizing initiatives. By exposing countries gradually to the requirements of global competition, they are driven to adopt world-class standards in areas as diverse as information technology, environmental protection and transportation security.  In this indirect manner, FTAs canand can thus be supportive, rather than undermining, of multilateralism.

Moreover, trade and investment liberalization may accelerate political liberalization, as arguably has been the case in Mexico.  Certainly, by exposing countries to the winds of globalization and the requirements of global competition, they are driven to adopt world-class standards, in areas as diverse as information technology, environmental protection and transportation security.

Third, it is also important to underscoreunderline that American US firms and their suppliers stand to be important beneficiaries of anthis intra-Asian liberalization process. American US firms have maintained or even regained their competitiveness in a number of crucial high-technology sectors by acting as “lead managers” in cross-border production networks that span the Asia-Pacific region. Crucial to the effectiveness of these networks are liberal investment rules, free trade, and a smoothly functioning logistics infrastructure. Continuing liberalization within Asia facilitates the development of these cross-border production networks, which have been crucial for American US competitiveness in Asia over the last decade (see Naughton, this commission).

Finally, aAs Figure 1 shows, trans-Pacific trade continues to be extremely important for the Asia-Pacific. Current macroeconomic policy dictates that the United States will run large trade deficits and borrow extensively abroad; at the present, those trade deficits and foreign financing are concentrated to an important degree in the Asia-Pacific.  StillAs As the largest market in the region, however, the United States also exerts a strong pull on Asian exporters.; Tthis pull provides the United States with leverage in the region and simultaneously deters agreements that put that relationship in jeopardy.

Despite these considerations, iIt is only prudent that the United States have a political and economic strategy towards Asia that shows our continuing commitment to the region and guarantees that those agreements that are reached are not discriminatory in nature.

The WTO and APEC are, in theory, ideal instruments for exercising discipline on such agreements. Unfortunately,But eEfforts in this direction in both organizations are currently stalled, but should not be abandoned., and as we saw prior to the conclusion of the Uruguay Round, a vigorous regional strategy can be a spur to concluding multilateral agreements..

But multilateral efforts are not incompatible with regional ones. The Bush administration has already madede the concept of “competitive liberalization” through FTAs a the central organizing conceptan explicit component of US trade policy. Singapore and Chile were first in line, negotiations have been completed with Central America andbut talksdiscussions are now underway or are to commence shortly with Australia, Bahrain, the Dominican Republic, Colombia, Peru, Morocco, Central America South Africa and its neighbors, and and the Association of Southeast Asian NationsThailand. In these negotiations, the US has argued for agreements that go beyond trade to include the full panoply of new issues that are of interest to American multinationals: services, investment protection, intellectual property rights, e-commerce and digital piracy. The US has also sought to incorporate its domestic social agenda – particularly labour rights and environmental protection – into FTAs.

[Richard; I have worked off your bullets, but they were a bit general; see what you think of this…]

We believe that theis competitive liberalization strategy is broadly justified, as a means of pushing spurring regional and ultimately global liberalizationcompetitive liberalization, showing US regional commitment to the Asia Pacific and neutralizing the discriminatory components of intra-regional efforts. For such a strategy to be successful, however, several further considerations are necessary.

·            Focus aggressively and persistently on enforcement and monitoring of existing agreements, including China’s WTO commitments, to ensure their credibility and to increase US access and exports to the region.

·         The erosion of the Congressional consensus behind free trade poses a threat to further trade policy liberalization of any kind.  The Executive Branch needs to rebuild a wide bi-partisan base that recognizes US economic, political and geo-strategic interests in FTAs. This will require, among other things, that the broader public come to view trade agreements as being fair and equitable, and as promoting trade and investment patterns that spread the benefits of globalization more equally both at home and abroad.

·         An important component of such a strategy is to focus aggressively and persistently on enforcement and monitoring of existing agreements, including China’s WTO commitments, to ensure their credibility and to increase US access and exports to the region

·Build bi-partisan support for such efforts in Congress by working with consortia of firms to alleviate concerns about human rights and labor practices. (Richard: sell your shtick)

·Focus aggressively on enforcement and monitoring of existing agreements, including China’s WTO commitments, since these establish an important floor underneath other regional agreements.

 

 
 
 
Conclusions and Recommendations

 

·         Asia is at an early stage in negotiating and implementing regional trade agreements. We should not confuse proclamations of intentions with assured outcomes.  Many of the announced FTA initiatives may never mature.

·         However, the US should be concerned about the potential for distortions and discrimination inherent in preferential trading agreements.

·         In the continued absence of significant trade and investment liberalization in the World Trade Organization (WTO) and the Asia Pacific Economic Cooperation (APEC) forum, as a guarantee that regional agreements do not exclude the United States, and to maintain a US economic and geopolitical presence in the Asia Pacific, the US should continue to pursue its own regional FTA strategy with willing and carefully selected partners. The US should avoid a panic-driven proliferation of FTAs of questionable economic depth or political value.

·         Over the longer run, the US should strive to make the WTO and APEC into instruments for disciplining regional trading agreements, to minimize their discriminatory nature and to render them as consistent as possible with global norms.


 Appendix Table 1

Select Preferential Trade Agreements in the Asia-Pacific

(Status as of February 2004)

 

 

Country/Grouping          Partner/partners            Status

 

ASEAN                        ASEAN                        Proposed Common Market

China                            Framework Agreement signed 2002

                                    EU                               Trans-Regional EU-ASEAN Trade Initiative,

                                                                        2003

                                    Japan                            Framework Agreement signed 2003

                                    Korea                           Proposed

                                    United States                Enterprise for ASEAN Initiative, 2002

 

China                            ASEAN                        Framework Agreement signed 2002

                                    Hong Kong                   Closer Economic Partnership Agreement, 2003

                                    Malaysia                       Under negotiation

                                    Singapore                      Under negotiation

 

Japan                            ASEAN                        Framework Agreement signed 2003

                                    Korea                           Under negotiation

                                    Mexico                         Under negotiation

                                    The Philippines              Under negotiation

Singapore                      Economic Partnership Agreement, 2002

                                    Thailand                        Under negotiation

           

Korea                           Chile                             Pending ratification

                                    Mexico                         Negotiations suspended, 2003

                                    Japan                            Under negotiation

                                    Singapore                      Proposed

 

Malaysia                       China                            Under negotiation

                                    Japan                            Under negotiation

                                    United States                Proposed

 

The Philippines              Japan                            Under negotiation

                                    United States                Proposed

 

Singapore                      Australia                       Agreement signed, 2003

Canada                         Under negotiation

China                            Under negotiation

                                    EFTA                           Agreement signed, 2003

EU                               Proposed, rejected by EU

India                             Under negotiation

                                    Japan                            Economic Partnership Agreement, 2002

                                    Korea                           Under negotiation

New Zealand                Agreement signed, 2000

                                    New Zealand

                                                And Chile         P3FTA proposed

                                    Sri Lanka                      Proposed

 

Taiwan                         Guatemala                    Under negotiation

Panama                                    Agreement signed, 2003

 

Thailand                        Australia                       Preliminary agreement signed, 2003

China                            Agreement signed, 2003

India                             Agreement signed, 2003

                                    Japan                            Under negotiation

                                    New Zealand                Under negotiation

Singapore                      Under negotiation

United States                Under negotiation

 

United States                ASEAN                        Enterprise for ASEAN Initiative, 2002,

                                    Australia                       Under negotiation

                                    Malaysia                       Proposed

                                    The Philippines              Proposed

                                    Thailand                        Under negotiation

 

 

Figure 1