Economic Regionalization in East Asia

Urata Shujiro

Recent trends in the world economy show the processes of globalization and regionalization proceeding simultaneously. Economic globalization, as measured by the ratio of foreign trade to gross domestic product (GDP), soared from 25 to 46 percent from 1960 to 1999. Other globalization indicators are foreign direct investment (FDI), which grew more than 90-fold since 1970, and world trade (18-fold). Both have increased faster than GDP, which increased 10 times in the same period.

The pace of postwar globalization has been spurred by multilateral trade liberalization under the General Agreement on Tariffs and Trade (GATT), succeeded by the World Trade Organization (WTO); unilateral liberalization of trade and investment; deregulation and privatization of state-owned enterprises; and the increasingly cheaper cost of foreign transactions brought about by technological developments in telecommunications and transportation.

Regionalization is the concentration of economic activities – trade in goods and services, movement of capital and people – within a particular region or country. An indicator of this process is the increase in intra-regional trade as a percentage of world trade and of the region’s own trade. East Asian intra-regional trade as a proportion of world trade increased by more than 3 points from 1990 to 2001 (from 8.4 to 11.9 percent). In the same period, as a proportion of the region’s own trade, intra-regional exports grew from 40.1 to 47.5 percent, and intra-regional imports grew from 47.5 to 56.9 percent.

Globalization entails a well-known set of benefits – economic growth, improvement in resource allocation, and the promotion of technological progress – while its costs include greater income inequality. Regionalization comes with its own costs and benefits. The advantages of pooling labor and information sharing must be offset against the costs of congestion.

 A Shift to Institution-led Regionalization

In East Asia, defined here as the area from Northeast through Southeast Asia, there has been a shift in recent years from market-led to institution-led mechanisms of regionalization. The rapid economic growth of the 1990s contributed to market-led regionalization by encouraging and rewarding liberalization in the terms of trade and investment. Since 1997, however, despite recovery from the financial crisis, most countries are not achieving their potential and see free trade agreements (FTAs) as a way to promote economic growth. An FTA, a type of regional trade agreement (RTAs), removes tariffs and quotas within the signatory group. As FTAs discriminate against non-member states, they constitute an exception to the WTO rule of non-discrimination. On the other hand, an FTA represents a shallower form of regionalization than a customs union (the other type of RTA), which establishes common tariffs for countries outside the group, or a common market, which lifts restrictions on the movement of the factors of production within the group.

According to WTO reporting, RTAs have increased sharply since 1995, now numbering more than 180 globally. And they are expanding their memberships. The North American Free Trade Area (NAFTA) is set to incorporate the Southern Common Market of Latin America to become the Free Trade Agreement of the Americas (FTAA) by 2005, while the European Union will expand to 25 members next year.

East Asia has been slower to establish these regional formations. If we consider that in 2000, Japan, China, South Korea, and Taiwan were the only major trading economies not yet belonging to any RTAs and that these economies combined had only a 15 percent share of world trade, it is clear that the overwhelming majority of world trade took place involving countries party to some kind of RTA. Until recently, the only major RTA in East Asia was AFTA, the Association of Southeast Asian Nations (ASEAN) Free Trade Area, established in 1992, but not fully in force.

APEC, the Asia Pacific Economic Cooperation framework, has also liberalized trade and investment and facilitated economic and technical cooperation. But because its objectives of liberalization and facilitation are also extended to nonmembers, APEC is not classified as an RTA. Further, liberalization is not a requirement but depends on each country’s volition. In reality, rather than forcefully pursuing liberalization of foreign trade and investment, APEC’s activities are geared more towards the pursuit of economic cooperation, with the participation of the private sector, government, and academia. Another loose regional grouping that discusses economic issues, though not exclusively, is ASEAN + 3 (ASEAN’s member states of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam, plus China, Japan, and South Korea).

Since 2001, however, regional trade agreements involving East Asian nations have accelerated. An FTA came into force between Singapore and New Zealand in 2001, and between Singapore and Japan in 2002. The latter, Japan’s first FTA, is a wide-ranging agreement that is not limited to trade, but also covers the liberalization and facilitation of investment, services trade, and skilled labor mobility; as such, it is known as an Economic Partnership Agreement (EPA).

In East Asia several FTAs are currently under negotiation, and many more are being studied. Particularly noteworthy is the rivalry between China and Japan in pursuing FTAs with ASEAN. On November 4, 2002, China and ASEAN signed a framework for negotiation; on November 5, Japan proposed its own FTA with the regional group. ASEAN has also been approached by the United States and has itself approached India. The emergence of China as a major economic power provides the impetus for much of this activity. As a new member of the WTO, China seeks to increase and improve its relations within East Asia, while ASEAN, as a group of smaller economies, tries to maintain its bargaining power. 

Factors Behind Regionalization

East Asian regionalization through FTAs is popular for a number of broad reasons, as well as some particular to specific countries. General reasons include the global trend toward membership in regional groupings, increased access to markets, and the expected positive impact on economic growth. It is simply better to be included than excluded, especially if regionalization eventually leads to an East Asian Economic Community.

FTAs can move quickly past the slow and contentious pace of WTO negotiations with like-minded partners and can pioneer liberalization in new areas like labor mobility. For East Asia in general, the 1997 currency crisis also showed that area economies could not depend for help upon countries outside the region. This realization has led to a number of proposals aside from regional FTAs, such as the Chiang Mai Initiative, a proposal to swap currencies when liquidity is needed.

Finally, for countries such as Japan, FTAs can be useful in promoting domestic policy reform and improving business opportunities through the harmonization of systems such as technical standards for electronics products. For those advocating them, FTAs are expected to aid robust economic recovery through closer integration with countries having higher growth potential than post-industrial Japan.

But the very breadth of benefits countries hope to reap from FTAs indicates that the process is not without obstacles. Countries with differing goals must define a set of common objectives, which can be difficult to find amidst a tangle of historical issues, political and security alliances, lack of political leadership, and domestic protectionist impulses. This can be seen in Japan’s negotiations with Thailand and the Philippines over labor mobility. Presently, the two developing countries’ access to Japan’s labor market is largely restricted to the gendered and exploitative “entertainment” sector. Both want to send workers to staff Japan’s growing services and medical sectors, a move that has been resisted thus far by Japan. At the same time, WTO consistency requires comprehensive liberalization, a particular problem for Japan and South Korea, where strong opposition comes from the agricultural sector. In other words, regional and even bilateral FTAs are not immune to the problems that resist consensus at the WTO level.

Achieving the public support and common understanding necessary to pursue FTAs within a framework of East Asian regionalization will require education, advocacy, and international exchange among students, scholars, politicians, and bureaucrats. It will also demand time and public assistance to those sectors and workers disadvantaged by the liberalization of trade and investment. In the case of Japan, where even the top political leadership shows a lack of urgency and awareness of the growing importance of East Asia to the country’s future, the efforts must be redoubled.


Urata Shujiro
The author is professor of international economics at Waseda University and visiting professor at the Center for Southeast Asian Studies, Kyoto University.