The Asian financial crisis that broke out in

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1 Essay Northeast Asian Economic Cooperation: The Need for a New Approach by Chang-Jae Lee The Asian financial crisis that broke out in Thailand in July 1997 and spread throughout East Asia brought a great deal of hardship to many countries in that region. Even the neighboring economies that managed to avoid the brunt of the crisis were affected. Three years later, most economies seem to have overcome the crisis, though some are still struggling. In my view, however, the episode has also produced some positive side effects. In the wake of the crisis, more and more people have come to recognize that a country cannot be completely immune to the economic sufferings of its neighbors. Therefore more and more scholars and business people are becoming interested in economic regionalism, hitherto an unfamiliar concept in East Asia, especially in Northeast Asia. THE NEED FOR A NEW APPROACH TO NORTHEAST ASIAN ECONOMIC COOPERATION Despite its huge potential, economic cooperation in Northeast Asia had been hindered by the iron curtain, so expectations for the future of Northeast Asian economic cooperation were very high when the cold war ended. Debate on its progress began immediately afterward within Korea s academic circles and in China and Japan. Substantial progress has been made since then in many areas, but the current achievements look small compared with those first expectations. There are still many obstacles. Diverse political and economic systems, lingering thorny political issues, such as territorial disputes, historical hangovers, and national 5 NIRA Review

2 disparities at the levels of economic development, limit and condition the nature of cooperation in the region. Given these considerations, no serious attempt has been made to consider regional integration along the lines of the EU (European Union) or NAFTA (North Atlantic Free Trade Association). Instead, Northeast Asian economic cooperation has been primarily regarded as economic cooperation between nearby localities across national boundaries. For instance, numerous conferences have been held throughout Northeast Asia to discuss ways to promote trade and other types of economic cooperation between localities in the East Sea (Sea of Japan) rim, in the Yellow Sea rim, and in the Bohai Bay area. 1 H o w e v e r, two events have forced us to go beyond this limited concept of economic cooperation. First, regionalism intensified in the 1990s. 79 new regional trade agreements were formed in the 1990s under the auspices of GATT (General Agreement on Trade and Tariffs). The formation of NAFTA in 1994, the European Monetary Union (EMU), which was launched in 1999, and the Free Trade Area of the Americas (FTAA) that is currently under negotiation is further evidence of this trend. To meet the challenge of this rising regionalism, central governments are being compelled to play more active roles and to search for every possible option on regional trade arrangements. In the absence of an ability to form regional trading blocs, governments must devise alternative cooperative measures short of this goal. Second, the Asian financial crisis highlighted the need for financial cooperation and macroeconomic policy coordination NO SERIOUS ATTEMPT HAS BEEN MADE TO CONSIDER REGIONAL INTEGRATION ALONG THE LINES OF THE EU OR NAFTA among regional countries all impossible to achieve without the active involvement of central governments. WHY WE NEED ECONOMIC COOPERATION BETWEEN KOREA, CHINA, AND JAPAN The Northeast Asian political situation, however, makes it difficult to engage central governments of the region in the task of enhancing economic cooperation. North Korea, despite its recent change of attitude, remains in isolation and has not yet launched any radical economic reforms. Although the Russian Far East geographically belongs to Northeast Asia, it is difficult to regard Russia as a Northeast Asian country. And Taiwan is another thorny issue, since China considers it a part of their territory. Therefore in my view, a practical way to involve the central governments of the region is to begin the process with its three major countries: Korea, China, and Japan. These three countries are the most important in the region in economic size, representing about a fifth of the world s total gross domestic product. The level of economic cooperation between them has grown sizably during the past two decades, although it still lags far behind other regions of the world. And though intraregional trade between Korea, Japan and China has increased since 1980, the region s total share remains small compared with other regional economic entities. In 1997 the share of intra-regional trade was 71.1 percent for APEC (Asia-Pacific Economic Cooperation), 21.0 percent for ASEAN (the Association of Southeast Asian Nations), 59.7 percent for the EU, 43.5 percent for NAFTA, and 21.9 percent 1 The East Sea (Sea of Japan) is between the Korean peninsula and Japan; the Yellow Sea and Bohai Bay are between the Korean peninsula and China. Autumn

3 for MERCOSUR 2 but it was only 18.7% between Korea, Japan, and China. We know that the bigger the group gets, the higher the share of intra-bloc trade. Thus the Korea- Japan-China group should be compared only with groups of similar size, such as NAFTA and MERCOSUR. We need to adjust the intraregional trade shares to account for each group s importance in world trade to get a better perspective on regional cooperation. According to these regional concentration ratios, the Korea-Japan-China trade group is still less concentrated than similar groups. As of 1997, its ratio was 1.53, lower than the ratio of 2.16 for NAFTA and the ratio of for MERCOSUR. Moreover, the level of direct investment among the three countries is even lower than that of trade. So what can be done to enhance economic cooperation between the three countries? Given the many serious outstanding obstacles, EU-style economic integration in Northeast Asia has but little possibility of becoming reality in the near future. The prospects of forming a regional trade arrangement between Korea, Japan, and China soon also seem bleak because of several economic and noneconomic reasons. The disparity in levels of economic development, for instance, is a very serious negative barrier to economic cooperation. Were a regional trade agreement to be signed between countries with widely different levels of development it is most likely that the present division of labor would be maintained, a situation that would be quite difficult for the less developed countries to accept. It is quite unlikely, therefore, that Korea, Japan, and China, whose development levels are highly diverse, will agree to form a regional trade arrangement. THE PROSPECTS OF FORMING A REGIONAL TRADE ARRANGEMENT BETWEEN KOREA, JAPAN, AND CHINA SOON ALSO SEEM BLEAK The other major hindrance to an agreement of this kind is the difference in political systems. Free trade areas are in practice formed among countries that are allies in a political-military sense, with the deliberate aim of helping their friends economically through trade creation and hurting their adversaries through trade diversion. Another fundamental issue that must be solved is the lack of community spirit among the three countries. The advocates of regionalism argue that it is easier to persuade people to move toward economic openness regionally than it is to do so unilaterally or multilaterally. But it is difficult to see how this might be done in a regional grouping that involves Korea, Japan, and China, where a sense of community is still underdeveloped. A PROPOSAL FOR A COUNCIL FOR NORTHEAST ASIAN ECONOMIC COOPERATION Given the difficulties I ve outlined in pursuing EU-style economic integration, Korea, Japan, and China must devise some other mechanism to enhance regional cooperation. As an alternative I propose the formation of the Council for Northeast Asian Economic Cooperation (CNAEC) to discuss economic cooperation and major economic issues between the three countries. In general, economic integration in which governments establish the legal and institutional framework, which has been done, for example, with EU and NAFTA, is called institutional integration. Regional economic integration, pursued under the auspices of market forces, without institutionalization efforts, such as Northeast Asian economic cooperation, is called functional integration. In 2 MERCOSUR, created by the Treaty of Asunci, was signed by Argentina, Brazil, Paraguay, and Uruguay in Chile and Bolivia became associate members in 1996 and 1997, respectively. With a population of 220 million and a GDP of US$1.3 trillion in 1997, it is the fastest-growing trading bloc in the world. 7 NIRA Review

4 the sense that functional integration is an outcome of natural market forces and not a creation of governments, it reveals the real potential for regional economic integration. In discussions on advancing regional cooperation in Northeast Asia, many scholars have emphasized the need for institutionalization. For instance, Shi Min has proposed the creation of a mini Pacific Economic Cooperation Council in which governments, businesses and academics jointly participate, and I have also argued for the establishment of the Initiative for the Advancement of Northeast Asian Economic Cooperation to discuss, among other issues, its needed institutionalization. Hisao K a n a m o r i 3 has proposed a joint research effort for the institutionalization of regional cooperation to be undertaken by businesses, academics and local governments, given that institutionalization at the central government level is difficult to achieve in Northeast Asia. Forming the council would fulfill the objective of strengthening Northeast Asian economic cooperation by providing a muchneeded institutional framework. For practical reasons, the council would begin with the three major countries of the region, in terms of economic size. The other Northeast Asian countries and economies could join the council when they are ready to do so. Pressure for closer cooperation between Japan, China, and Korea has been mounting. In ASEM (Asia-Europe Meeting), the three countries, along with ASEAN, are the Asian I PROPOSE THE FORMATION OF THE COUNCIL FOR NORTHEAST ASIAN ECONOMIC COOPERATION (CNAEC) TO DISCUSS ECONOMIC COOPERATION AND MAJOR ECONOMIC ISSUES BETWEEN THE THREE COUNTRIES counterpart of the EU, and ASEAN + Three (Korea, Japan, and China) summits take place regularly. In APEC, though most countries are also members of regional trade agreements such as NAFTA, AFTA, and CER 4, Korea, China and Japan are not members of any such regional trade blocs. Thus the council could also serve as a forum to coordinate views among the three countries on the issues of these larger regional and multinational forums. The idea of forming the Council stems from the judgment that establishing a free trade area such as NAFTA will be difficult in the short term, let alone a more advanced type of economic integration, such as the EU, among the three countries. Therefore the council must aim through nontraditional ways to realize the benefits of traditional economic integration, such as economic benefits, political and security dividends, and a strengthened voice in the international arena. It must attempt to enhance economic cooperation in broad areas such as trade, investment, industrial cooperation, technology, the environment, telecommunications, transportation, energy, financial cooperation, and macroeconomic policy coordination. For instance, in trade, investment, and industrial cooperation, the council could attempt to eliminate trade barriers and to enlarge and intensify the division of labor by reducing nontariff barriers, forming a bilateral or trilateral investment agreement and building 3 Professor Shi Min is director of the Asia Pacific Research Institute in the State Council s Development Research Center, P.R.China. Hisao Kanamori is president of the Economic Research Institute for Northeast Asia. 4 The ASEAN Free Trade Area (AFTA) was established in It now comprises the 10 countries of ASEAN: Brunei, Burma, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand, and Vietnam. The agreement provides for the phased reduction of tariffs on manufactured imports from ASEAN countries through a mechanism called the Common Effective Preferential Tariff (CEPT) scheme. The Australia and New Zealand Closer Economic Relations Trade Agreement (known as CER) became active in Its central provision is the creation of a WTOconsistent free trade agreement between Australia and New Zealand. Autumn

5 business alliances between corporations. The formation of the council and advancing economic cooperation will also help reduce tension in the region. We need to remind ourselves that a main motive for European economic integration was to prevent wars by further developing economic ties between old enemies. Considering the Northeast Asian situation, where even a decade after the end of the cold war the Korean peninsula is still divided and creating tension in the region, the importance of this political dividend cannot be underestimated. Furthermore, to build community spirit between these countries, the council should also concern itself with cultural and educational issues, such as student exchanges, cultural and sports exchanges, and tourism. Its formation could also strengthen the voices of Korea, China, and Japan in the international arena, even though the three countries will not be in total agreement on every issue. But the mere reality that discussion is taking place among them will strengthen their collective position. Some people might argue about the council s usefulness because basically it does not go beyond APEC, of which all three countries are already members. Indeed, the council would produce no legally binding decisions. It would instead be a loose economic cooperation body, like APEC, and it might even be more informal than APEC. But unlike APEC, which has 21 members and covers diverse geographic areas, it can function more effectively by concentrating on the regional issues that all three countries are interested in. In this sense the council will play a supplementary role to APEC. The council must also assume a complementary function to ongoing efforts to promote Northeast Asian economic cooperation at the regional government, business, and academic levels. It should also contribute to all projects aimed at regional cooperation, such as the TRADP and the Irkutsk gas development project 5, even if they should not involve China, Korea and Japan. In spite of the formation of the council, bilateral economic relations are very likely to remain more important than trilateral economic cooperation. The creation of the council will not exclude the possibility of signing diverse bilateral agreements either, though in some areas a trilateral dialogue may be more effective. Furthermore, the multiplying effects of membership of the council, may help bilateral relations among these three countries to develop more vigorously. Because the council s functions are similar to those of APEC, its structure could be based on APEC. At council summit meetings, there will be ministerial meetings, senior officials meetings, and diverse committees and working groups. The ministerial meetings will be attended by foreign ministers, trade ministers, and economic ministers. Since the council covers broader economic issues than APEC does, participation by the economic ministers seems necessary. Other separate ministerial meetings can be held whenever needed. In addition, private and research councils could complement the Council. In my view, the Korean government should propose formation of the council. Among the three countries, Korea is in the middle, both geographically and economically. Moreover, unlike China and Japan, Korea is not suspected of seeking hegemony in the region. 5 Discussions in 1991 led to agreement among five Northeast Asian countries to cooperate in the economic development of the following areas: Rajin-Sonbong Economic and Trade Zone in the Democratic People s Republic of Korea (DPRK); Eastern Mongolia; Yanbian Korean Autonomous Prefecture in Jilin Province, Northeast China; and Primorsky Territory in the Russian Far East. Collectively, these areas are referred to as the Tumen River Area and connecting hinterland, or the Tumen Region. The Tumen River serves as a border where China, DPRK and the Russian Federation meet, thus the name for the Tumen River Area Development Programme (TRADP). The Republic of Korea is the fifth member. The Irkutsk project is a plan by Russia and China to build a gas pipeline from the Kovytkino gas field, the Irkutsk Region, to China and possibly in the future to third countries. 9 NIRA Review

6 In regard to APEC, institution-building took up the first five years of its existence. In fact, it was four years after the first ministerial meeting, in 1989, when it held its first Economic Leaders Meeting, in Since we all now have APEC experience, however, and because the council will involve only three countries, the duration of the institutionalization process will most likely be shorter. Chang-Jae Lee is director of the Center for Regional Economic Studies at the Korea Institute for International Economic Policy. Suggested readings Frankel, Jeffrey A. (with Ernesto Stein and Shang-Jin Wei) (1997). Regional Trading Blocs in the World Economic System. Washington, DC: Institute for International Economics. Lawrence, Robert (1996). Regionalism, Multilateralism, and Deeper Integration. The Brookings Institution. World Trade Organization (1995). Regionalism and the World Trading System. Yoo, Jang-Hee and Lee, Chang-Jae (eds.) (1994). N o r t h e a s t Asian Economic Cooperation: Progress in Conceptualization and in Practice. Seoul: KIEP. Panagariya, Arvind (1999). The Regionalism Debate: An Overview, The World Economy, Vol. 22, No. 4, 1999, pp Autumn