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Important challenges face Asian FTAs

Ohmynews | 2007/05/16

Important Challenges Face Asian FTAs

[Analysis] The 1997 financial crisis prompted moves towards regional economic integration

Jae Young Lee

Today’s Asia sees no sign of a stop in aggressive attempts to intensify economic integration through Free Trade Agreements (FTAs). Right after South Korea completed its FTA negotiation with the U.S. in April, it kicked off a new negotiation with the European Union (EU) this month. South Korea also hopes to finalize its Comprehensive Economic Partnership Agreement (CEPA), a trade pact with India, by December of this year. Japan, already holding FTAs with Singapore, Mexico, Malaysia and the Philippines, became somewhat nervous in the face of the strengthened competition with South Korea for its export to the U.S. and is strenuously pursuing new FTAs with Australia and Switzerland.

Asian economic regionalism, driven by active FTAs, has finally reached a decisive point recently as China, South Korea, Japan and ASEAN countries compromised on the plan for financial reserves to put the possible financial crisis under control. This evidence demonstrates that Asian economic integration, though different from other regional economic integrations such as NAFTA and EU in terms of being driven by market development rather than legal constraints, could take shape as a substantial foundation for economic cooperation and prosperity.

The major seed of Asian economic integration was planted when the Asian financial crisis in 1997 brought about an exchange of skepticism and criticism. The criticism was directed against Asia’s Confucian tradition and culture, which was deeply rooted in Asian countries’ societies and which produced "crony capitalism" incapable of creating a transparent and moral capitalist system. On the other hand, Asian countries were skeptical toward Western countries because they had lost their trust in Western countries’ willingness and capabilities to sustain Asian financial stability.

However, it seems that this skepticism and criticism, joined by other factors, have been transformed into a driving force building up Asian economic integration, which previously was recognized as only conceivable, but not practical. The other factors driving Asian economic integration are growing Asian interest in promoting a regional identity which has been motivated by similar regionalism elsewhere in the world, the enormous growth of intra-regional trade, and the necessity of integrating a rising China into the international system. [1]

In addition to the recent FTAs’ efforts, as can be clearly seen from ANZ-CER (FTA between Australia and New Zealand), AFTA (FTA among ASEAN countries such as Indonesia, Malaysia, the Philippines, Singapore and Thailand), ASEAN + 3 (ASEAN countries plus China, South Korea and Japan), and APEC, Asian FTAs are on the rise, but accompanied by some problems that are related to their diversity and complexity.

First, a general challenge that any regionalism can invite is a conflict between the old and new generations’ economic treaties. The proliferation of FTAs may result in a country being a member of one FTA at the same time it joins other FTAs; therefore, leading to overlapping obligations. [2]

Second, a "hub-and-spoke" structure can intervene in the process of the proliferation of FTAs. Many participating countries tend to compete to occupy the hub position in the midst of regional integration initiatives. As a consequence of such competition, the demand for a governmental role in managing trade will increase. Accordingly, this is likely to create serious inefficiencies and red tape. [3]

Third, the proliferation of Asian FTAs produces diverse Rules of Origin (ROO). These ROO can place obstacles before a company in pursuit of exports. For instance, AFTA (ASEAN FTA), Australia-Thailand FTA, Japan-Thailand FTA and U.S.-Thailand FTA each requires different standards concerning ROO. Therefore, a company that conducts business in Thailand should confront all different ROO depending on its exports’ destinations. [4]

Diverse ROO put few obstacles in the way of electronics, in which field the tariffs are almost eliminated or are very low among the major producers. On the other hand, these obstacles become a serious problem in the case of automobiles and general machinery, which are more likely to contain more complicated process than electronics. Imposing a high and complicated standard for ROO may function as an unintended heavier protection barrier than tariffs. Therefore, ROO need to be adjusted to be as simple and generous as possible. [5]

Fourth, the complexity issue also exists in the investment rules of different FTAs. A common investment rule is needed to cope with possible discrimination against foreign investors. As the investment structure becomes complicated in Asia, opportune efforts to adjust different investment rules to a common principle should not be made too late. [6]

Asian economic integration has been ongoing, but is accompanied by several obstacles mentioned above, which could hamper further integration. This leads to the need for the supplementary role of a regional cooperative approach for bilateral FTAs [7]; such a regional approach could be an effective method to iron out conflicts in rules. Handled wisely in this way, Asian FTAs would continuously function as a driving force for Asian economic integration.

Asian economic regionalism could also be a target of criticism, as in the case of NAFTA and other bilateral FTAs, because it is inconsistent with the multilateralism sustained by the WTO system. However, the system itself is partly to blame for its failure to control regionalism, which is permitted under GATT Article XXIV. Furthermore, Asian economic regionalism would produce a cooperative mechanism meeting the regional needs such as energy security and political stability.