Comprehensive Economic Partnership in East Asia (Part 2)
Risaburo Nezu
Senior Executive Fellow, Economic Research Center
September 9, 2009 (Wednesday)
Unavoidable FTAs
Free trade agreements (FTA) are the foundation of economic partnerships, and without them a regional economic sphere cannot be realized. Tariffs have been dropped by member countries in both the EU and NAFTA (North American Free Trade Agreement), and are gradually being reduced around East Asia in accordance with FTAs. Asian FTAs, however, exclude many items, and the degree of liberalization is relatively low. Japan has tried to exclude tariffs on rice and other agricultural products, making it difficult to conclude FTAs with countries with high hopes for open agricultural markets such as Australia and New Zealand. The Democratic Party of Japan’s (DPJ) announcement to “conclude a FTA with the US” during the current election was met with a swift chorus of opposition from agricultural interest groups, leading the DPJ to tone down its statement to “promote negotiations.” A similar reaction can be expected with regards to East Asian FTAs. However, regardless of who wins the election it is clear that Japan cannot avoid FTAs with Asia in the future, and it must make a decision sooner or later.
Unused FTAs
The course of discussion on the report revealed that even if concluded, Asian FTAs are barely used. For example, the FTA tariff rate is applied to only 22% of exports from Thailand to Japan, and only 11% from Malaysia, rendering these FTAs less meaningful. Reasons behind the infrequent use of FTAs include the following: (1) general unawareness of the FTA in the first place; (2) cumbersome paperwork; (3) tariff reductions are marginal, leaving little monetary incentive. Governments are proactively launching PR activities to address the first reason, and awareness should rise eventually. Regarding paperwork, however, proof that the product in question was manufactured in the partner country (so-called certificate of origin) must be provided under FTAs. This is an unpopular requirement. Given this, for the time being government negotiations will likely focus on standardizing procedures and formats of documents within Asia to lessen the burden on exporters as well as making FTAs easy to use.
Another issue is that normal tariff rates are already low, and tariff reductions under FTAs would be implemented slowly and over a long period of time. In other words, the tariff cuts are insufficient. If unprepared to go through with more substantial tariff reductions, FTA negotiations will produce negligible effects and Asian FTAs will increasingly be regarded as qualitatively insufficient compared to FTAs in other regions.
Efficient and Transparent Economic Cooperation
In the report, economic cooperation carries as much importance as FTAs. Frameworks that actively facilitate economic development are necessary in undeveloped regions. The EU has had a mechanism for transferring wealth from developed Northern European countries to their less developed southern counterparts for some time, but there is no such unified framework in East Asia. In April, Japanese Prime Minister Aso announced a US$20 billion income-doubling plan in East Asia. China immediately followed with an announcement to create an eight-point cooperation program for ASEAN that includes an investment fund, and South Korea released a similar statement.
It is good that Japan, China and South Korea, aware of each other, are launching cooperation plans for Asian countries. The details of these initiatives, however, are largely unclear, and if pursued without fine-tuning among them, it will be difficult to avoid issues of overlapping and imbalance. In the past, most cooperation initiatives have been decided and implemented between two countries: the donor and recipient. With only the accumulation of such bilateral cooperation, however, historical connections and the presence of resources dominate, leaving doubt as to whether the economic aid is optimal for East Asia as a whole.
Moreover, the aid itself tends to go into eye-catching projects like infrastructure or tie into special interests, and modest activity such as education, job training, and unprofitable environmental measures are often delayed. The providing country sets the standards and specifications, making it difficult to achieve interoperability among Asia as a whole. Despite Asia’s high growth, funds available to put into economic cooperation are limited. Aid will make it impossible to buy cheap products from third countries, if the aid is conditional on buying from the donor countries.
The report notes the need to discuss East Asia development strategies to ensure the efficient use of the aid. Providing information on when and how cooperation initiatives are progressing is essential for this. The information provided by various countries on individual projects should be collectively reviewed, the balance in East Asia as a whole should be assessed, and the most effective method for economic cooperation should be examined by all member countries.
Clear Need for an Institutional Framework
The examination of East Asian development strategies ties in with the establishment of an institutional framework discussed in the last chapter of the CEPEA report. Indonesia was the first country to make a request to consider such an institutional framework. I worked for many years at the OECD headquarters in Paris, and have thought that Asia’s lack of an institutional framework represents serious problem for the region. As economic partnership deepens within the region, the impact countries have on each other also becomes stronger. For example, some Asian countries reacted to the recent global financial crisis with protectionist moves. In some cases, this inflicted damage on other Asian countries; in others, foreign workers from around Asia were partially forced to return to their home countries. Countries will become more interconnected in all areas including trade, the environment, and management of the economy. This means that what was considered domestic policy in the past must be reevaluated—absent of this, Asia will not become unified and exert a strong influence in the global community.
Five countries from the CEPEA region participated in the April G20. Many say that the G7 era has ended, and G20 is the framework of the future. This view, however, is shortsighted. While Asian countries are represented in G20, they are unable to command much authority because of diverging opinions. To remedy this, it is necessary to first coordinate policy within East Asia. Though the ASEAN 10 countries have observed a long-standing principle of nonintervention, this should not stand in the way of coordination in the entire East Asia region. In contrast, while the 27 member countries of the EU are not necessarily major powers individually, they decide their stance beforehand and speak with one voice in international forums, projecting a strong collective presence. Asia also needs such a framework for policy coordination.
The now established APEC summit is also saddled with problems. This annual meeting is hosted by member countries on a rotating basis, and the host country conveniently selects the agenda for discussion. The press is fed flashy sound bites, the attending presidents and prime ministers are dressed in national costumes, and pictures are taken. There is no follow-up on what is actually decided at the forum, so words carry little weight, and the following year the new host country decides the theme again. This cycle strips the forum of meaning. Continuous discussion and progress towards common goals require both top-down guidance from leaders and bottom-up research and analysis from administrators.
Towards an East Asian OECD
Looking further to the future, the economic structures of Asian countries will be forced to change. Growth dependent on exports to the US has become unsustainable, and demand from within the region must be increased. Why is it that people in Asian earn less than a tenth of what Americans earn, yet save more? It is because of an absence of safety nets like pensions or social security, and people can only rely on their own savings. Asian societies are beginning to rapidly age, and minimally acceptable social security systems must be established before this trend takes root.
There is a need for a high-caliber research institute that can provide Asian countries with appropriate recommendations on economic and social issues. The OECD fulfills this role for developed countries. In fact, the seeds for such an East Asian framework have already been sown: the ASEAN Secretariat can become the hub of such policy coordination, and the ERIA (Economic Research Institute of Asia) is equipped to make policy recommendation through research and analysis. A combination of this efficient administrative body and a reliable research and analysis function starts to give shape to an “East Asian-style OECD,” and the realization of such a framework would make it possible for Asia to begin progress toward real economic integration.