EAE: Regional Integration towards “One Asia” * Some parts of this note are summary of the references for teaching purpo

1. East Asian Economy <Lecture Note 7 > 2013.11.28 EAE: Regional Integration towards “One Asia” * Some parts of this note are summary of the references for teaching purpose only. Semester: Fall 2013 Time: Thursday 2-5 pm Room: 423 Professor: YooSooHong Mobile: 010-4001-8060 E-mail: yshong123@gmail.com Home P.: http://yoosoohong.weebly.com 1 1

2. Global View of Asia • The 21st Century is the Asian Century. • Regional blocs, including East Asia will be prominent. • Principal blocs will be Europe, East Asia and the Americas. •  Asia will be almost half of the world’s economy by 2020.

3. Issues for ‘One-Asia’ • Lessons from EU • Economic conditions • Political / Diplomatic / IR conditions • Leadership • Institutional development • How much transfer of sovereign power (right) ?

4. Basic Economic Indicators by Region and Subregion

5. Average GDP Growth Rates of Selected Asian Economies and Sub-regions

6. Three Mega-Regions

7. Main Regional FTAs/EPAs

8. FTA Coverage RatiosProportion of trade with FTA partners in total trade (%) Source: JETRO, FTA (July, 2012), Trade data (2011)

9. Free Trade Area of Asia-Pacific (FTAAP) ASEAN+6 EPA (ASEAN , Japan, China, Korea India, Australia, New Zealand) Competitive Liberalization in Asia-Pacific ASEAN+3 FTA (ASEAN, Japan, China, Korea) USA Canada Mexico Peru Chile Hong Kong Taiwan Russia Papua New Guinea November 2004 Proposed by China at ASEAN+3 Summit August 2006 Proposed by Japan at ASEAN Economic Ministers’ Meeting November 2006 Proposed by the US

10. FTAAP: Free Trade Area of the Asia-Pacific TPP RCEP(ASEAN+6) （ASEAN+JP, CH, KR, IND, AUS, NZ） Current members Vietnam Viet Nam Malaysia Peru TPP Australia ASEAN+1 FTA Brunei FTAAP (APEC) USA Japan-China-Korea Korea Russia China Canada China Japan Korea India Japan CH. HongKong CH. Taipei Thailand US Brunei Singapore Mexico Malaysia Vietnam Philippines Peru Singapore Chile Indonesia PNG New Zealand Australia & NZ Australia Chile New Zealand (Source:METI, Japan)

11. Issues and Challenges in Regional Integration • Sequencing: How should Asia sequence its integration efforts in the areas of trade, monetary, and financial integration? • Style: What is the appropriate style for Asian economic integration? Specifically, how institution-intensive should Asia’s integration initiatives be? • Scope: What would be the scope of Asian economic integration in terms of countries and sub-regions covered? • Speed: How fast should Asia pursue regional integration in its various dimensions/tracks, or what is the appropriate speed for Asian economic integration?

12. Source: Fischer Stanley. 2006. “The New Global Economic Geography”.

13. Source: Fischer Stanley. 2006. “The New Global Economic Geography”.

14. Asia’s Importance in the Global Economy to Rise • Asia now accounts for about 60% of the world’s population, 40% of the global output, and 30% of world trade. - With the possible exception of the 1997-98 crisis years, Asia has been the fastest growing region in the world economy for many decades.  Impressive achievements in poverty reduction and improvements in socio-economic conditions in the last few decades. - China and India – two countries with over a billion people each – have also joined the Asian economic success story.  Most projections indicate that Asia’s importance in the global economy is going to increase in the next few decades. - Current assessment is that by 2020 most large Asian economies would have graduated to middle income status.

15. Rise of Asia • Regional Development • There are already important and rapidly developing economic linkages among parts of Asia, particularly in East Asia, where a grouping of ASEAN plus Japan, China and Korea seems to be emerging. The politics of such a grouping are not simple, for the Japan-China relationship is evolving as the Chinese economy grows, and as it becomes clearer that China will overtake Japan at some point in the not too distant future • Some in East Asia talk of following the example of Europe by improving trade and financial links, and later moving to a common market and unified financial system. It is recognized that this will take a long time, but those involved note correctly that it took the European Union a long time to evolve to its current condition • At present, there is much talk of an East Asian common currency. Whether there would be a basis for such a currency depends on how China’s financial and currency management systems evolve. Since China would eventually be dominant in an East Asian economic bloc, its preferred currency arrangements will determine the eventual outcome.

16. Economic Implications • The rise of Asia, especially the rise of East Asia and of India, is already reshaping the world economy. • China has a comparative advantage in everything. Part of the anxiety must derive from the discomforts of the adjustment process forced by the dynamism of Asia. • Most of the developing countries and most of China’s neighbors can count the gains from China’s (and India’s) booming growth. China’s demand for raw materials, which has produced a boom in commodity prices, has helped many developing countries. China and India’s energy needs have helped push oil and other energy prices to their highest sustained levels. • The fact that the global economy has been growing very rapidly by historical standards in the last few years despite concerns over global imbalances, the years 2004-2006 will see high growth rates in Latin America and Africa, due to the rise of Asia as to as the global engine of United States growth.

17. Asian growth has benefited greatly from the relatively open international trading system that was built up after World War Ⅱ. All the East Asian miracle economies pursued export led growth strategies, with the bulk of the exports going to industrial countries in the west. • However the impact of China and India on the international financial system does not depend mainly on the size of their quotas in the international financial institutions.

18. Defining Institutions for Regional Integration • Definition of Institutions in several ways - Durable rules that shape expectations, interests, and behavior - Formal obligations, informal norms, acceptable behavior - Arrangements and organizations ranging from ad hoc and informal forums that lack an organizational core to formal standing • Institutions for regional integration in Asia - Organizations involved in regional economic integration and cooperation - The principals or contracting parties of these institutions include national governments or non-governmental organizations.

19. Regional Economic Integration - Process whereby countries in a geographic region cooperate to either reduce or eliminate barriers to the free flow of products, people, or capital

20. Description in the Opposite Direction

21. Levels of Regional Integration • Political Union - Coordinate aspects of members’ economic and political systems • Economic Union - Remove barriers to trade, labor, and capital; set a common trade policy against nonmembers; and coordinate members’ economic policies • Common Market - Remove all barriers to trade, labor, and capital among members; and set a common trade policy against nonmembers • Customs Union - Remove all barriers to trade among members, and set a common trade policy against nonmembers • Free-Trade Area - Remove all barriers to trade among members, but each country has own policies for nonmembers

22. Type and Scope of RTA

23. Motivation and Conditions of Economic Integration • All countries can gain from free trade, investment and other economic cooperation. Linking countries together, making them more dependent on each other • creates incentives for political cooperation and reduces the likelihood of violent conflict • gives countries stronger leverage when dealing with other nations • Economic integration can be difficult because • while a country as a whole may benefit from a regional free trade agreement, certain groups within the country may lose • a loss of national sovereignty to a certain extent • Regional economic integration is only beneficial if the amount of trade it creates exceeds the amount it diverts • trade creation occurs when low cost producers within the free trade area replace high cost domestic producers • trade diversion occurs when higher cost suppliers within the free trade area replace lower cost external suppliers

24. Economic integration can be difficult because • while a nation as a whole may benefit from a regional free trade agreement, certain groups may lose • it implies a loss of national sovereignty • Regional economic integration is only beneficial if the amount of trade it creates exceeds the amount it diverts • trade creation occurs when low cost producers within the free trade area replace high cost domestic producers • trade diversion occurs when higher cost suppliers within the free trade area replace lower cost external suppliers

25. Effects of Integration  Potential benefits • Trade creation • Greater consensus • Political cooperation • Creates jobs • Potential drawbacks • Trade diversion • Shifts in employment • Loss of sovereignty

26. Main Regional, Intraregional, and Transregional Forums in Asia Source: ADB staff elaborations based in part on field interviews.

27. Support for Different Modalities for Enhancing Asian Cooperation

28. Evolution of Intra Regional Trade Shares (%)

29. Foreign Exchange Reserves of ASEAN+3 Countries

30. Uneven Economic Integration

31. Regionalization in East Asia • Concentration of economic activities (trade in goods and services, • capital, people, etc) in a particular region • Benefits of agglomeration > costs of agglomeration • - Measurement of regionalization in terms of trade: • Increasing intra-regional trade in world trade • Increasing intra-regional trade in region’s overall trade • Two Types of Regionalization - Market-driven regionalization • - Institution-driven regionalization • Factors behind Market-driven Regionalization • - Rapid economic growth • - Trade and FDI liberalization: multilateral and unilateral liberalization

32. Some Basics of Regionalism • RTAs have obvious benefit for members - Second-best choice - Scale economy and competition - More attractive to FDI - Political and geopolitics benefits - Trade creation or trade diversion? - A recent IMF staff paper suggests that Asian FTAs have not led to trade diversion. - Building block or stumbling block? - WTO consistency? - Trade realism

33. Regionalism or not? • - Economic gains are not the only determining factor. • - Multiple objectives of regionalism: • Regional politics and stability • Strengthen domestic policy reform • Increasing multilateral bargaining power • Securing market access • Forming strategic linkages

34. Why integrates? • The Economic Role of China in Asian Economic Integration • China becomes the major market for many Asian economies • China’s rise as the major factor in shaping the new division of labor (production- • sharing network) • Trade within the Asian region is far from reaching its potential, and policies that facilitate integration and more efficient regional trade accelerate growth and expandits basis, especially for lower-income Asia. • Tariff barriers are only part of the challenge to further economic integration and trade expansion in the region. A deeper and more inclusive Asian Free Trade Area can achieve for its members larger benefits than that would arise from global tradeliberalization along WTO lines. • The economies of the ASEAN have the most to gain (in domesticterms) from Asian economic integration, provided that this happens in a relatively uniform way.

35. Emergence of Institution-driven Regional Economic Integration • Rapid expansion of free trade agreements (FTAs) in East Asia in the 21st century • FTA (free trade agreement): free trade (elimination, reduction of tariff and non-tariff barriers among FTA members) • In East Asia ASEAN has become a hub of FTAs: 5 ASEAN+1 FTAs have been implemented • Long term goal: Free Trade Area of Asia-Pacific (FTAAP) APEC-wide FTA • 2 major initiatives have been negotiated: Trans-Pacific Partnership (TPP), RCEP (ASEAN+6)

36. Economic Integration in Asia

37. Intensity of FTA Activity in Asia • Growth of FTA in East Asia - The number of concluded FTAs includes Singapore (20), the PRC (12), Japan (11), India (11), Thailand (11), and Malaysia (10), with many more FTAs under negotiation. It is noteworthy that ASEAN—with one of the oldest trade agreements in Asia—is emerging as the major regional hub linking ASEAN members with the region’s larger economies. Having enacted FTAs with the PRC, Japan, and the Republic of Korea, ASEAN recently implemented regional agreements with India and with Australia and New Zealand jointly, and is in FTA discussions with the EU. - The varying degrees of intensity of FTA activity across economies in Asia can be related to several factors, including economic size, per capita income, levels of protection, economic geography, and production network strategies of MNCs.

38. - Singapore is by far the most active Asian economy in terms of the number and geographic coverage of FTAs. With its strategic location, the region’s most open economy, and world-class infrastructure and logistics, the country is the regional headquarters for many leading MNCs. - Singapore is seeking access to new overseas markets, particularly for services and investments. The country is a founding member of the ASEAN Free Trade Area (AFTA) and has implemented bilateral agreements with the largest Asian economies—the PRC, India, Japan, and the Republic of Korea—as well as economies outside the region, including the United States (US) and Australia.

39. - As a supporter of multilateralism, Japan was a latecomer to FTAs. The region’s first developed economy, Japan has the strongest base of giant MNCs involved in production networks and supply chains throughout Asia. One motivation for Japan’s engagement in FTAs is to provide a market-friendly and predictable regional business environment for its MNCs. Japan has rapidly implemented bilateral economic partnership agreements (EPAs) with 10 countries,5 an agreement with ASEAN, is negotiating agreements with Australia and India, and is about to reopen negotiations with the Republic of Korea.

40. - The two Asian giant developing economies, the PRC and India, are forming FTAs to ensure market access for goods and expand regional coverage for outward investment. To this end, the PRC implemented separate FTAs on goods and services with ASEAN and is now finalizing its negotiations on an investment agreement. The PRC has also forged bilateral comprehensive economic partnership agreements (CEPAs) with Hong Kong, China and Macau, China; FTAs with Chile and Pakistan; and is a member of the Asia–Pacific Trade Agreement (APTA). In addition, the PRC concluded FTAs with Singapore and New Zealand in 2008, and an Economic Cooperation Framework Agreement with Taipei,China in 2010. India is a member of APTA and has a comprehensive agreement with Singapore. It also has agreements with its South Asian neighbors.

41. FTA in Asia and the Pacific (as of January 2010)

42. FTAs in Asia by Country and Subregion Source: Asia Region Integration Center website. www. Aric.adb.org (accessed 15 February 2012)

43. Growth of Concluded FTAs in Asia(number of FTAs by economy) FTA = free trade agreement. Note: FTAs in Asia cover all FTAs with at least one Asian economy. Here, Asia includes the 16 economies included in the figure. Source: ADB’s FTA Database (available: www.aric.adb.org), downloaded August 2010.

44. Benefits of FTA • Increase in Trade and Expansion of Foreign Markets • Trade creation effects and trade diversion effects • Enhance Technological Capability and Competitiveness - Product differentiation and new technology development for enhancing international competitiveness • Induce FDI and Capital Accumulation • - FDI positively effects capital accumulation, technology transfer, • employment, exports, etc. • Improve Economic System Through Opening • - Transforming the system through learning and for world standards • Enhance negotiation leverage and credibility against foreign partners

45. Trade Liberalization in Terms of Declining Tariff Rates (%)

46. Institution-driven Regionalization in East Asia • Regional cooperation APEC: Trade and FDI liberalization and facilitation, • Economic and technical cooperation • - Bilateral andmultilateral cooperation: • Free trade agreements (Economic Partnership Agreements for • comprehensive contents), ‘Chiang Mai Initiative’ (Currency swap), etc • - ASEAN, AFTA, AIA (ASEAN Investment Area), etc. • ASEAN+3 (China, Japan, Korea) • Recent Surge of FTAs in East Asia • Trend: East Asian economies started showing strong interest in FTAs • toward the end of 1990s. • Special characteristics: Comprehensive FTA (EPA) covering trade and FDI • liberalization, facilitation, economic cooperation: APEC’s three pillars

47. The Factors behind the Proliferation of FTAs in East Asia • - Increase in market access • - Sharp increase in FTAs in the world • - Slow progress in trade liberalization under the WTO • - Promote liberalization and policy reforms • - Financial crisis in 1997-1998 • - Rivalry among East Asian countries (competitive FTAs, China-Japan, • among ASEAN members) • Motives behind FTA for Selected East Asian Countries • Japan, Promote economic growth in East Asia: Increasing dependence • on East Asia, Improve business environment for Japanese firms • - China, Promote economic relations with East Asia • - Korea, Play a role of facilitator for institutional regionalization in East Asia, • Reunification of Korean Peninsula • - ASEAN, Maintain bargaining power in East Asia, Receive economic assistance

48. Arguments Surrounding Economic Integration • Trade Creation and Trade Diversion - Trade creation – Increased exports by new members to other members resulting from membership • Trade diversion – Decreased exports to members of the economic union by nonmember nations often resulting in the advantage shifting away from the lower-cost producer to the higher cost producer  Reduced Import Prices – Results from importers’ efforts to remain competitive despite tariffs imposed

49.  Increased Competition and Economies of Scale • The larger market created also means more competing firms which can result in greater efficiency and lower consumer prices - Internal and external economies of scale – Lower production costs from greater production or free mobility of factors of production  Higher Factor Productivity - Movement of labor and capital from areas of low productivity to areas of high productivity - Poorer countries may lose badly needed investment capital or labor to a more profitable richer country - More developed countries may lose companies who move to areas where operating costs are lower  Regionalism versus Nationalism – The greatest impediment to economic integration

50. Regional Groupings – Asia • Integration in Asia - Market forces are compelling Asia to move toward formal integration - Association of Southeast Asian Nations (ASEAN) was very informal - ASEAN Free Trade Area (AFTA) formed in 1991 reduced tariffs and set goal for customs union by 2010 - East Asia Economic Group (EAEG) has been proposed - Asia Pacific Economic Cooperation (APEC) has set goals of liberalizing trade - South Asian Association for Regional Cooperation (SAARC) on Indian subcontinent in 1985