Japan Economic Foundation

Chairman's Speech

5 . An East Asian Community or the EAFTA?

International Symposium
"East Asian Free Trade Area (EAFTA) and its Basic Framework"
Jakarta, Indonesia
November 30-December 1, 2006
Noboru Hatakeyama, Chairman and CEO

[Difference between EAC and EAFTA]

An EAFTA is different from an EAC although the former could be part of the latter. I would like to explain the differences between an EAC and an EAFTA by comparing a community and an FTA in general.
Firstly, a full fledged community ordinarily has three pillars: an economic community, a security and political community, and a social and cultural community. However, the scope of an FTA is limited to economic activity. The EU, a typical community, consists of these three pillars. In the BALI CONCORDII, announced in 2003, the ASEAN declared that they would establish an ASEAN Community (AC) consisting of these three pillars in the future. On the other hand the NAFTA, a typical FTA, deals with only economic activity.
Many Asian countries, including Japan, have bilateral security arrangements with the US. There is a strong possibility that regional security arrangements offered by an East Asian community will clash with pre-existing bilateral security arrangements. Therefore I think that most Asian countries are not ready at this stage to consider such a full-fledged community, although they might be ready to participate in an economic community.
The second difference between a community and an FTA is that the former often requires concessions in sovereignty. For example, member countries of the EU have conceded their sovereignty in terms of trade and competition policies.
However the ASEAN is not ready to concede part of their sovereignty.
The BALI CONCORDII emphasized the importance of the principle of non-interference and this seems to contradict the concept of a community, which often accompanies concessions of partial sovereignty to the community. A leader of ASEAN countries noted that the AEC would be something like an ASEAN Economic Partnership Agreement, expanding the AFTA to include trade in services and foreign direct investments, but this expanded AFTA would be quite different from a community.
Currently, Japan, China and South Korea all seem to be unable to take a leadership role in formulating an EAC, for many reasons and therefore the ASEAN has to take the leadership role. However, the ASEAN are thus incapable of creating a community, even among members of the ASEAN, so it would only be natural to presume that the ASEAN cannot take the lead in creating an EAc either. The only thing that the ASEAN could do would be to establish an FTA among East Asian countries, as would be the case with an ASEAN Economic Community, which will turn out to be just an expanded AFTA instead of a community.
The third difference is that it is necessary for members of a community to share common values, a need that does not arise in the case of an FTA.
In establishing a community, every member country has to share universally recognized values such as democracy, transparency, the rule of law and respect for human rights.
For example the EU has not welcomed communist countries as members, which is why it took more than ten years for ex-communist countries like Hungary and Poland to join the EU. On the other hand, an FTA does not require common values among member countries, only common interests regardless of any individual country's values.
The three points mentioned above all indicate that in Eastern Asia it is necessary to pursue an FTA instead of a community.



[ASEAN+3 vs. East Asia Summit]

The ninth ASEAN+3 leaders' meeting and the first East Asian Summit (EAS) were held in Kuala Lumpur on December 12th and 14th 2005, respectively. The EAS was attended by leaders of not only the ASEAN+3, but also by those of India, Australia and New Zealand.
The tenth leaders' meeting of ASEAN+3 and the second EAS will be held on Cebu Island on December the 11th and 13th 2006, respectively, but the enthusiasm for establishing an EAC seems to have lost momentum.



On the EAFTA front, two proposals were submitted to the economic ministers' meeting of the ASEAN+3, held on August the 24th, 2006. The first was proposed by the joint expert group [JEG] consisting of experts from every ASEAN+3 country. Based on an endorsement by the eighth ASEAN+3 Summit in Vientiane in November, 2004, this JEG was established in April, 2005 in Beijing and has been conducting a feasibility study on an EAFTA since then, under the chairmanship of Dr. Zhang Yunling. The JEG proposed that the original members of an EAFTA comprise the ASEAN+3 countries and that an independent process to form an EAFTA could be launched in 2007. However, the economic ministers' meeting of the ASEAN+3 of August the 24th decided that senior officials should conduct further studies.
The second proposal was made by Japan's METI Minister, Nikai. According to this proposal, an EAFTA should consist of the ASEAN+3, India, Australia and New Zealand and a track-2 feasibility study on such an EAFTA should commence next year, with target of negotiations set for 2009. The economic ministers' meeting of ASEAN+3 of August the 24th took note of Japan's proposal.



[On Excluding the US]

A senior official of the US government told me last month in Washington DC that: "China has proposed an ASEAN+3 FTA, excluding the US and a Japanese former METI Minister has proposed excluding the U.S."
My comment on this issue is as follows:
The US is not located in Eastern Asia. Therefore it is difficult for the US to join an East Asian FTA, per se. Many Americans counter this argument on the basis that although the US is not located in East Asia, the US should qualify to join because it offers the biggest market to this region and ensures the region's national security by means of bilateral security arrangements with many countries. This is true, however, it is also true that immediately after World War II the US assisted European economic restoration, mainly through the Marshall Plan and furthermore bolstered European security with the establishment of NATO. Nevertheless, the US has not joined the EEC or the EC. In view of this history, why is the US trying to join an FTA in Eastern Asia?
Of course, it is in the interests of East Asian countries to have the US involved in this region. The sole reason for many people opposing the idea is the fact that the US is not situated in the region: a matter of geography, not geopolitics. Therefore, it is significant if we can come up with a plan to overcome this geographical difficulty.
A bi-national joint study conducted recently by the Japan Economic Foundation [JEF], the Chicago Council on Global Affairs and the Pacific Council on International Policy, offered mainly two ideas to address this difficulty.
The first idea is to create an APEC FTA. The APEC does include the US as a member. However, the APEC has been a non-binding organization since its establishment in 1989. Although its leader's meeting in Bogor, Indonesia declared clearly that industrialized economies will completely liberalize trade and investment by 2010 and non-industrialized economies will do so by 2020, this statement is not binding. In order for us to engage the US in this area legally, the joint study recommends that the APEC should have an FTA among its members and then the US economy will be linked institutionally to this area.
One of the difficult issues in formulating an Asian-wide FTA is Taiwan's status. However Taiwan is a member of APEC, not as a country but as a custom territory. Therefore, Taiwan can become a member of an APEC FTA almost automatically with this qualification.
As we all know,14th APEC Economic Leaders' Meeting Hanoi Declaration issued 10 days ago clearly stated that leaders instructed officials to undertake further studies on ways and means to promote regional integration, including a Free Trade Area of the Asia Pacific as a long]term prospect, and report to the 2007 APEC Economic Leaders Meeting in Australia.
The second idea referred to by the joint study is for the US to have an FTA with the ASEAN as a whole. During FTA negotiations the ASEAN devised a so-called ASEAN plus one formula. Typical examples are the ASEAN-China FTA concluded in November, 2004 and the ASEAN-South Korea FTA concluded in May this year. In addition, the ASEAN as a whole has been negotiating an FTA with Japan, India and the CER (Australia & New Zealand,) respectively.
Each FTA between the ASEAN and a country can be called an ASEAN plus one FTA.
Japan proposed an FTA consisting of the ASEAN plus six (Japan, China, South Korea, India Australia and New Zealand.) These six countries are all partners of the ASEAN in the context of ASEAN plus one FTA. Therefore, the joint study proposed that the US has to approach the ASEAN as a whole to negotiate an ASEAN plus US FTA, so that the US can gain a seat in pan-Asian trade negotiations.



Needless to say, the really successful conclusion of WTO negotiations would make any bilateral or regional economic integration, such as the EU and the NAFTA, unnecessary. In that case, formulating an EAFTA would also become unnecessary. Then, an argument on whether or not the US would be in or out will disappear.



[Conclusion]

In conclusion, establishing an EAFTA is feasible although it is quite difficult to establish an EAc. If the US is not satisfied with being omitted from an EAFTA, feasibility studies of the APEC FTA and the ASEAN-US FTA, mentioned above should be undertaken.
What would the relationship be between an EAFTA, be it consisting of ASEAN+3 or ASEAN+6, and an APEC FTA? According to my personnel view, the answer is competitive liberalization. Why don't we have three FTAs proposals, namely an ASEAN+3 FTA, an ASEAN+6 FTA and an APEC FTA compete with each other on the first come first served basis. ASEAN+3 countries have three regularly held summit meetings. These three are ASEAN+3 Summit, East Asian Summit and APEC Economic Leaders' Meeting. Which meeting should be in charge of which FTA proposal? Identity of members of an FTA with members of a leaders' meeting is the key words to answer this question. Namely an ASEAN+3 FTA proposal should be discussed in the ASEAN+3 Summit. An ASEAN+3 FTA proposal should be discussed in the East Asian Summit consisting of ASEAN+6. Of course an APEC FTA proposal should be discussed in the APEC Economic Leaders' Meeting.
There might be a counter argument against competitive liberalization to the effect that unless discussions on each proposal are held sequentiallyAhuman resources would become unavailable due to too many meetings held here and there all at once. However, economies of scale advantage will work here. If you negotiate an ASEAN+3FTA today, you can join a study on an ASEAN+6 on track 2 basis tomorrow and can contribute to complete a report an APEC FTA the day after tomorrow, in the same venue. Even if three FTAs turn out to be co]existing, that would be fine since they will be integrated in due course.