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IPE-K <Lecture Note 5 > 13.4.26. IPE-K: FTA and Regionalism * Some parts of this note are summary of the references for teaching purpose only. Semester: Spring 2013 Time: Friday 2-5 pm Professor: Yoo Soo Hong Office Hour: By Appointment Mobile: 010-4001-8060

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IPE-K: FTA and Regionalism

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    1. IPE-K <Lecture Note 5 > 13.4.26 IPE-K: FTA and Regionalism * Some parts of this note are summary of the references for teaching purpose only. Semester: Spring 2013 Time: Friday 2-5 pm Professor: YooSoo Hong Office Hour: By Appointment Mobile: 010-4001-8060 E-mail: Home P.: 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 Regionalism • Lessons from EU • Economic conditions • Political / Diplomatic / IR conditions • Leadership • Institutional development • How much transfer of sovereign power (right) ?

    4. Three Mega-Regions

    5. Main Regional FTAs/EPAs

    6. 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

    7. 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?

    8. 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.

    9. 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.

    10. 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.

    11. 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.

    12. Political Implications • Are we more sophisticated now than the world was a hundred years ago? How long can the Pax Americana continue to maintain stability in Asia? How wise will the sole superpower be in its future dealings in Asia? How can China and India take their rightful places in the world and in their regions without further confrontations? • Does the fact that China and India are nuclear powers and so is Pakistan, make the situation more stable as well as more dangerous? How will a potentially nuclear Iran influence the equilibrium? How important is the North Korean nuclear threat, and how long will Japan be willing to remain non-nuclear in the face of that and other threats?

    13. 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

    14. 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

    15. Type and Scope of RTA

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

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

    18. Evolution of Intra Regional Trade Shares (%)

    19. 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

    20. 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

    21. 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

    22. 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.

    23. Economic Integration in Asia

    24. 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.

    25. - 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.

    26. - 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.

    27. - 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.

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

    29. 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:, downloaded August 2010.

    30. 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

    31. 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

    32. 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

    33. 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

    34.  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

    35. 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

    36. Regional Cooperation and Integration • Recent Progress - With the global economy immersed in double-track growth- emerging economies expanding faster than advanced countries- Asia is forging ahead in part due to increased regional integration. - Asia is leading growth in global trade through increased openness, with intraregional and “South- South” trade growing faster than trade with traditional markets in the US and Europe. - The depth of trade integration varies across subregions, with the emphasis on intermediate goods trade reflecting expanding regional production networks.

    37. Regional Cooperation and Integration - Cooperation in trade policy has developed most effectively in Asia through a combination of unilateral actions. But some regional free trade agreements (FTAs) also help foster intraregional trade flows, with the number of FTAs involving at least one Asian country dramatically increasing over the past decade. The degree of trade integration will likely increase. - Asia’s financial integration lags behind trade integration. The region’s financial markets remain more integrated through global markets than among themselves, but signs since the 2008/09 global crisis show financial integration has accelerated; yet subregional variations remain significant. - Indeed, Asia’s infrastructure gap is huge, requiring more cross-border connectivity to strengthen intraregional trade and regional demand.

    38. Regional Cooperation and Integration - In addition to physical infrastructure, for effective connectivity Asia needs to strengthen its soft infrastructure—policy, legal, regulatory and institutional frameworks, along with systems and procedures. - International transmigration—including labor mobility within Asia—is increasingly important as migrants contribute to growth both in host economies and via remittances back home. - Regional integration can expand markets and input sources, better allocating resources across the region, thus accelerating economic growth. It can also improve risk-sharing. But there are also downside risks, ranging from potential contagion to growing income inequality and polarization.

    39. Integration Perspectives • The current system of overlapping FTAs seems to gain a certain level of appreciation; economic/political momentum toward plurilateral framework may not be very strong in East Asia.  ASEAN+3 vs. ASEAN+6 • Consolidated FTA: not worthwhile discussing seriously without CJK FTA • Forum competition: depending on attractiveness of topics, willingness for dialogue partners to participate in, and the feeling of ownership by ASEAN  East Asia vs. Asia-Pacific • Approach and agenda are different (pragmatism vs. rule-oriented, advanced-country-oriented vs. development); can go both at the same time. • Effective interactions of the two would provide an alternative framework for G2.  Asia-Pacific is likely to lead further development of FTA networking/consolidation in the coming years.

    40. Forming a Regionwide FTA - There is increasing recognition in Asia of the merits in forming a regionwide FTA as a means to consolidate the plethora of bilateral and plurilateral agreements. - Such an FTA would confer various economic benefits: increase market access to goods, services, skills, and technology; increase market size to permit specialization and realization of economies of scale; facilitate the FDI activities and technology transfer of MNCs; and permit simplification of tariff schedules, rules, and standard.

    41. EAS (East Asia Summit) • - The East Asia Summit (EAS) is a forum for dialogue on broad strategic, political and economic issues of common interest and concern with the aim of promoting peace, stability and economic prosperity in East Asia. It is an open, inclusive, transparent and outward-looking forum, which strives to strengthen global norms and universally recognized values with ASEAN as the driving force working in partnership with the other participants of the East Asia Summit.

    42. ASEAN + 3 • The leaders of Japan, China, and Korea were invited to the informal ASEAN leaders' meeting in December 1997, in the midst of the Asian financial crisis, which de facto initiated the ASEAN 3 process. Many ministerial processes have been created within the ASEAN 3 framework, including processes for foreign affairs; economy and trade; macroeconomics and finance; environment, energy, health, labor, science, and technology; and social welfare. China regards ASEAN 3 as a natural grouping for East Asia's trade and investment cooperation and has proposed an EAFTA. • - The ASEAN 3 leaders agreed in 2004 that the establishment of an "East Asian Community" is a long-term objective and affirmed the role of ASEAN 3 as the main vehicle for this eventual establishment. The East Asia Study Group (EASG 2002) had identified seventeen concrete short-term measures and nine medium- to long-term measures to move East Asian cooperation forward. The leaders then endorsed in 2003 the implementation strategy of the short-term measures--to be realized by 2007--and in 2004 encouraged a speedy implementation of the short- and long-term measures. Some key long-term measures relating to economic, trade, and investment integration, with the economic community in mind, include: • * formation of an East Asian Free Trade Area (EAFTA); • * establishment of an East Asia Investment Area by expanding the AIA; and • * promotion of investment by small- and medium-sized enterprises (SMEs).

    43. ASEAN + 6 • - ASEAN 6 (13 ASEAN 3 members and Australia, India, and New Zealand) has met three times since December 2005, focusing on wider issues including avian flu, education, energy, finance, and natural disasters. Japan regards ASEAN 6 as an appropriate group for East Asia's trade and investment cooperation and has proposed a CEPEA • - Future economic cooperation in East Asia, leading to an East Asian economic community, is likely to evolve around the multiple groupings under ASEAN, ASEAN 1's, ASEAN 3, and EAS (or ASEAN 6). It is likely that the ASEAN Economic Community, to be created by 2015, will be the hub of East Asian economic integration, thereby securing ASEAN as the driving force, ASEAN 3 as the main vehicle for an eventual East Asian economic community, and the EAS as an integral part of the overall evolving regional architecture

    44. APEC • - APEC has encouraged trade and investment liberalization in a voluntary and unilateral fashion within an Asia-Pacific context. Australia played a major role in promoting APEC as a trans regional forum with the basic principle of "open regionalism". One of its most important achievements was to induce unilateral, voluntary trade liberalization of the then non-WTO members, such as China and Taipei, China. But APEC's prominence appears to have declined since the Asian financial crisis because of its inability to effectively respond to the crisis, and as its members have pursued bilateral and sub regional FTAs. Open regionalism can remain important, nonetheless, if APEC members take APEC--and WTO--principles as a liberalization infrastructure for their FTAs and attempt to go beyond them.

    45. Economic Position of NEA (2010, Bil.US$) • The three countries share 20% of the world total GDP. • Exports share 19%, imports share 16%.

    46. Intra-Regional Trade Trends Shares of Intra-regional Trade between CJK Shares of Intra-regional Trade % % Source: IMF (2011), Direction of Trade Statistics.

    47. FTAs involving China, Japan and Korea • FTAs concluded by CJK • Japan: Singapore, Mexico, Brunei, Indonesia, Malaysia, the Philippines, • Thailand, Vietnam, ASEAN, Chile, Switzerland, Peru and India • Korea: Chile, Singapore, the EFTA, ASEAN, the United States, • the European Union, India and Peru • China: Hong Kong, Macao, Chile, Pakistan, ASEAN, New Zealand, • Singapore, Peru and Costa Rica • Ongoing FTA negotiations by CJK • Korea: Canada, Mexico, the GCC (Bahrain, Kuwait, Oman, Qatar, • Saudi Arabia, the UAE), Australia, New Zealand, Colombia and • Turkey • Japan: Australia and the GCC • China: Australia, the GCC, Iceland, Norway and SACU (Southern • African Customs Union) • Many FTAs under study or preparation involving CJK

    48. NO FTA between China, Japan and Korea • Japan-Korea FTA • Korea-Japan FTA negotiations started in December 2002 and have • been stalled since November 2004 • Currently only Director-General-Level Consultations on a Korea- • Japan FTA are under way • China-Korea FTA • Official tripartite joint study on a Korea-China FTA, which started • in March 2007, was concluded in May 2010

    49.  China-Japan-Korea FTA • Joint Study Committee on a CJK FTA • Agreed at the Trilateral Summit Meeting in Beijing, in October 2009 • Five meetings since May 2010, and two more meetings to be held • by the end of 2011 • At the Trilateral Summit Meeting, which was held in Tokyo in May • 2011, the leaders agreed to conclude the Joint Study within the year. • The outcome of the Joint Study Committee was submitted at the • next year’s Trilateral Summit Meeting, 2012.

    50. Korea’s FTA Partners