"Prospects for East Asian Economic Integration: A Plausibility Study"

Creating Cooperation and Integration in Asia -Assignment of the Term Paper- "Prospects for East Asian Economic Integration: A Plausibility Study" As a term paper for this Summer Seminar, please write a short essay on Cooperation and Integration in Asia based on the lectures and discussions in this seminar. 1. Length of the paper: approximately 2000 words 2. Dead line: Sep. 15 th, 2006 3. Submission: Please send e-mail with an attached file of the paper to initiative@wiaps.waseda.ac.jp by the dead line. In this e-mail to submit the term paper, we would also appreciate it very much if you could write 100-200 words comments on this Summer Seminar including (1) your general messages to the organizer, (2) what you have learnt from the seminar, (3) your positive and negative evaluations on the seminar, and (4) your suggestions to the seminar. This will greatly help the next seminar secretariat to better organize the 2 nd Seminar. Thank you very much for your contribution in advance. Elizabeth Payne Australian National University Canberra, Australia 1

Contents Page Page Introduction 3 The Concept of an East Asian Community 3 Current Mechanisms for Economic Cooperation 4 ASEAN 4 APEC 4 Impetus for Integration and Cooperation in East Asia 5 Potential Benefits from East Asian Integration 5 Implications for an East Asian Community 6 The Role of Australia in East Asia 7 Conclusions 8 2

INTRODUCTION East Asian economies long known for their tentative approach towards regional integration are dramatically changing their policy directions, with changes began to take form most noticeably in the late 1990s and following the Asian Financial Crisis (Manukata, 2001; Mingqi, 2003). This paper will discuss the concept of an East Asian Community, the current mechanisms for economic cooperation in East Asia, impetus for East Asian integration, potential benefits and implications for integration, and the future prospects for the role of the United States and Australia in East Asia. THE CONCEPT OF AN EAST ASIAN COMMUNITY East Asia is a sub-region of Asia, which covers about 6,640,000 km², or 15% of the Asian continent. Culturally, it embraces those societies that have long been part of the Chinese cultural sphere: Historical influence from the Classical Chinese language; Confucianism and Neo-Confucianism; Mahayana Buddhism; and Daoism (Taoism). From the establishment of the Asia Pacific Economic Cooperation (APEC) in 1989 to the first East Asia Summit (EAS) in December 2005, East Asian National Governments have endeavored to institutionalize regional cooperation and the building of an East Asian community, ranging from ASEAN 1, the ASEAN regional Forum (ARF), to ASEAN+3 2 and ASEAN+6 3. Figure One illustrates geographic East Asia. Figure One: Geographic East Asia 1 Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Viet Nam + 2 ASEAN + China, Japan, and RoK 3 ASEAN+3+ India, Australia and New Zealand. 3

CURRENT MECHANISMS FOR ECONOMIC COOPERATION Until recently the only examples in the region of economic integration agreements, were the ASEAN Free Trade Agreement (AFTA) and the Australia/New Zealand Closer Economic Relations Agreement (ANZCERTA). One way only preferential trade agreements also existed between Australia and New Zealand on the one hand and Papua New Guinea (PAFTA) and the Pacific Island States (SPARTECA) respectively on the other. Currently there are two major regional mechanisms for economic cooperation: the Association of South East Asian Nations (ASEAN), and the Asian Pacific Economic Cooperation (APEC). They are discussed below. Association of South East Asian Nations (ASEAN) The Association of Southeast Asian Nations or ASEAN was established on 8 August 1967 and has a regional population of about 500 million, a total area of 4.5 million square kilometers, a combined gross domestic product of almost US$ 700 billion, and a total trade of about US$ 850 billion (ASEAN, 2006). The ASEAN Declaration states that the aims and purposes of the Association are: (1) to accelerate economic growth, social progress and cultural development in the region and (2) to promote regional peace and stability through abiding respect for justice and the rule of law in the relationship among countries in the region and adherence to the principles of the United Nations Charter. The ASEAN Vision 2020, adopted by the ASEAN Leaders on the 30th Anniversary of ASEAN, agreed on a shared vision of ASEAN as a concert of Southeast Asian nations, outward looking, living in peace, stability and prosperity, bonded together in partnership in dynamic development and in a community of caring societies (ASEAN, 2006). Asian Pacific Economic Cooperation (APEC) Amongst a proliferation of regional agreements around the world, APEC s fundamental principle of open regionalism reinforced East Asian member countries resistance to the establishment of preferential internal trading arrangements that discriminate against other trading partners. Considerable progress has been made in terms of both facilitation and liberalization of trade and investment through the APEC process of concerted unilateral decision- making. Average tariffs have declined significantly and continuously since the formation of APEC and APEC governments are setting positive examples in new areas such as investment, competition policy and government procurement (Drake-Brockman and Drysdale, 2002). More recently however, a marked departure from past policy thinking throughout the East Asian region has occurred. APEC is no longer seen as the only mechanism for regional economic co-operation. Most countries in East Asia are now proposing or negotiating bilateral or plurilateral sub-regional trade arrangements of one kind or another. Fresh impetus has also developed for the establishment of some kind of East Asian economic community, though the final form this might take and the steps by which it might be achieved remain very unclear. The motivations behind this explosion of new proposals are many and complex (Drake-Brockman and Drysdale, 2002). 4

IMPETUS FOR INTEGRATION AND COOPERATION IN EAST ASIA The impetus for integration and cooperation in East Asia include: Building a sense of Community among Neighbors Capacity Building for Development The Copy Cat Syndrome The motive for regional economic cooperation is often political as well as economic. For the European Union (EU), for example, which has no common foreign or security policy, trade policy represents the only available instrument for external influence. East Asian economies are also searching for means of closer cooperation on security as well as economic matters Drysdale and Huang, 1997). Bilateral and sub-regional trading arrangements are sometimes advocated as development tools as they encourage a shift towards greater market openness. Such agreements can also reduce the risk of reversion towards protectionism, locking in reforms already made and encouraging further structural adjustment (Drake-Brockman and Drysdale, 2002). Standing seemingly alone, watching the rest of the world, including the US and the EU negotiate bilateral preferential deals with trading partners initially outside the East Asian region but steadily geographically closer, has led to real, if unjustified fears in the East Asia of being hurt and of being left out, giving rise to the desire for increased regional integration (Drake- Brockman and Drysdale, 2002). POTENTIAL BENEFITS FROM EAST ASIAN INTEGRATION Economic Growth - Free and Open Trade and Investment South Korea, Japan and China alone account for approximately 24 per cent of the global population. Including ASEAN+3 countries the combined population is roughly five times larger than that of the NAFTA countries and more six times that of the EU countries. In 2002, the combined GDP of South Korea, Japan and China was more than US$7 trillion and that of the 10 original ASEAN countries was US$609 billion. The East Asian economy would be even larger and stronger if Hong Kong and Taiwan were added. Some people have estimated that in the next 15 years East Asia s GDP will be above US$25 trillion, making the region the largest and most influential economy in the world (Mingqi, 2003). With these attractive prospects, the potential benefits stemming from East Asian integration is impressive. Regional Security Regional security is another major benefit flowing from an East Asian community. The risk of regional instability and conflict has increased since the 9/11 terrorist attacks in the United States. East Asia is no exception to this risk. This is especially true for Northeast Asia, where the influence of the Cold War is still felt and where different countries have very different political and social systems which are influenced by US security interests and global strategies. Increased East Asian integration, with greater cooperation, information sharing and harmonisation of standards, may help to alleviate these risks. 5

IMPLICATIONS FOR AN EAST ASIAN COMMUNITY Following the Asian Financial Crisis, countries in the region have moved towards closer cooperation and coordination, with various proposals for free trade areas and Asian monetary cooperation. Regionalism in East Asia has been spurred by a worldwide tendency in favour of regional interdependence and integration in the region. Despite the worldwide tendency towards regionalism, the move towards integration in South East Asia has remained slow and typically there has been a relative absence in the East Asian region of bilateral and subregional preferential trading arrangements. Kim (2006) and Munakata (2002) suggest several explanations for this trend: 1. The lack of political and social consensus (ambivalent attitudes) on the evaluation of Japan's action in East Asia during the first half of the twentieth century, including its colonization of Korea and occupation of Manchuria, the lack of mutual appreciation and respect for each other's culture. 2. Fondness for things Western. 3. The lack of the perceived need for community and cooperation among East Asian nations. 4. Ethno-centric and nationalistic contents of textbooks. 5. Conservative (and nationalistic) tendencies of the news media, particularly newspapers. 6. The US factor while all the East Asian countries maintain a very close economic relationship with the US, they differ strikingly in terms of political and military relationships. 7. Mutual suspicion and distrust between Japan and China causing Asian neighbours to consider how this will hinder the development of regional cooperation and put pressure on them to choose sides. 8. A spate of continuing controversies, such as those over ultra-nationalistic Japanese history textbooks and Prim Minister Junichiro Koizumi's visits to the Yasukini shrine, that tend to distance Japan from the rest of East Asian countries. 9. Sensitive sectors such as agriculture and textiles are often competitive and a source of precious income for developing countries. These industries make trade liberalisation through FTA's difficult. 10. Diverse development stages among East Asia also make trade liberalisation difficult. Developing economies need industries to raise income levels and tariffs cannot be eliminated overnight when these economies strive to develop viable industries (Kim, 2006; Munakata, 2002). 6

THE ROLE OF AUSTRALIA IN EAST ASIA Since the 1960s, there has been a rapid acceleration of underlying forces and processes for integration between Asia Pacific countries. Australia currently has free trade agreements with Singapore and Thailand, and is in the process of negotiating/ considering free trade agreements with ASEAN, China, Malaysia and Japan. Australia is also a member of APEC and is a dialogue partner of ASEAN. The economic dimension of these forces has been particularly important as the level of intra-regional trade and investment has risen, as Australia has a number of complementary sectors with its Asian neighbors. The Australian resources sector is thriving, thanks to historically high commodity prices and strong demand from North Asia. Our three most prominent resource markets are Japan, China and Korea. In 2005, resources exports to Japan rose by 56 per cent to $15.6 billion. Exports to China surged by 87 per cent to $8.3 billion and exports to Korea rose 36 per cent to $5.9 billion. Elsewhere, India is quickly emerging as a major market with resources exports growing 67 per cent in 2005 to $2.9 billion. Other major resources export markets included ASEAN, the EU, and Taiwan. Analysis of Australia's resources sector alone (Figure 2) highlights the regions mutual dependency in this industry (DFAT, 2006). Figure 2: Resources trade Growth in 2005 Australia greatly values its trade relationship with Japan, our largest export market. The Australia- Japan Commerce Agreement will be fifty years old in 2007; our countries also signed a Trade and Economic Framework in 2003. This year, the Australian and Japanese governments will continue to work together on a feasibility study into a possible Free Trade Agreement. However in addition to this, Australia has also developed a plethora of other bonds with countries within the East Asian Hemisphere, and with this a greater mutual understanding within the region has been created. Cultural convergence and interconnection between Eastern and Western societies is also a reality. However, Prime Minister Paul Keating has readily conceded that Australia is not and never can be an "Asian Nation", any more than we are able to be European, North American or African. In this way, we can only be defined as Australians, and relate to our neighbors as Australian. 7

CONCLUSIONS The concept of an East Asian Community is not new and the benefits are well documented. Economic growth from increased trade and investment, building a sense of community among neighbors, capacity building for development, and improved regional security in light of conflict and terrorism are also grounds for the move towards integration and greater cooperation. However despite these noted benefits, there are also associated factors that hinder this process including ambivalent attitudes, conservative tendencies, conflicting political and military relationships, mutual suspicion and distrust between some countries, sensitive sectors, and the diverse development stages of East Asian countries. Traditionally, Australia has been overlooked in considerations of a new East Asian community, however, much of the economic growth that has occurred in the region can largely be accounted for regional trade, and Australia is as regionally integrated economically as most, if not more in some sectors. Furthermore, a greater mutual understanding within the region has also been created. Historical conflicts plague the formation of an East Asian Community, hence it is for this reason that potential discussions surrounding East Asian integration should consider all of these points and included countries that are able to provide the most economic benefit for its members. 8

References Prospects for East Asian Economic Integration: A Plausibility Study ASEAN, (2006), " Overview: Association of South East Asian Nations", http://www.aseansec.org/64.htm DFAT, (2006), "Trade 2006", Canberra http://www.dfat.gov.au/trade/trade2006/trade2006.pdf Drake-Brockman, J. and Drysdale, P. (2002), "History of regional economic integration in East Asia", Australian National University Drysdale, P. The East Asia Community: What Trade Arrangements Make Sense?, Presentation to Asian Values and Japan's Options conference, University of Singapore, October 2001. Drysdale, P. and Huang, Y. (1997), "Technological catch up and Economic Growth in East Asia and the Pacific", The Economic Record, Vol 73: 222, September: Pp 201-211 Mingqi, X. (2003), "East Asian Integration: China's perspective and policy", Australia- Japan Research Centre, Australian National University Munakate, N. (2001), "Evolution of Japan's Policy Toward Economic Integration", CNAPS Working Paper, December 2001. 9