The past decade has seen a dramatic proliferation of bilateral, plurilateral and regional free trade agreements (FTAs) especially in East Asia. How can we maximize their benefits and minimize their costs? According to the World Bank, the answer lies in striving for “open regionalism”, that is, agreements with low external barriers to trade, nonrestrictive rules of origin, liberalized service markets, and a strong focus on reducing transaction costs at the borders.

FTAs are often one element in deeper economic and political efforts of neighbouring countries to cooperate with each other. While East Asia needs to strive better for open regionalism, and to rationalize its “noodle-bowl” of FTAs, it is also needs to work much harder to deepen its regionalism.

Asia’s regionalism is quite from that of Europe or North America. Europe’s has been politically driven as a response to half a century of war and economic depression. And although European Union (EU) is a free trade area with a common trade policy, the EU is very much more than an FTA. The North American Free Trade Agreement (NAFTA) is essentially an FTA, although the three countries do cooperate across a vast array of areas.

In East Asia, economic integration has been essentially market driven. The Japanese yen started appreciating following the 1985 Plaza Accord. This induced Japanese manufacturers to outsource their labour-intensive production to countries like China, Thailand, Indonesia and the Philippines. Following this, Hong Kong, Taiwan and Korea also outsourced their labour-intensive activities to the same countries. This resulted in East Asia’s well known supply chains and a complex pattern of trade and investment within the region.

These trade and investment relations were inefficient in many ways. Many outsourced activities took place in export processing zones or special economic zones with many privileges given to the investing companies, like tax holidays, duty-free imports, free land and sometimes infrastructure, and very little government regulation.

The sensible thing to do was to start liberalizing trade and investment. And so East Asia’s rush into FTAs started with the ASEAN Free Trade Area, which removed distortions in trade and investment decision making among the ASEAN countries. Following that there was a giant rush to conclude FTAs in the region, and there are now well over 200 on the board!

While it takes a lot more than FTAs to create region, these FTAs do create a momentum in regional cooperation which is now marching forward in East Asia. Much remains to be done, but the glass is very much half full rather than half empty.

Everyone has noticed that East Asia's development is concentrated in a few centres on the coast, close to international ports and airports. Inland areas, remote or landlocked regions and islands are economically cut off and untapped. Why? One reason is that while some of East Asia’s infrastructure is world class, much of it is simply lousy. To boost trade and investment we need better roads, railways, electricity grids, and telecommunications networks. A recent joint study by ADB and the ADB Institute estimates that between 2010 and 2020, Asia needs to invest more than $8 trillion in overall national infrastructure, as well as $290 billion on specific regional transport and energy projects that are already in the pipeline.

As any businessman can tell you, there is a lot more to getting your exports to market than have low import barriers. There are a whole range of logistics issues that mean that your strawberries can go rotting in the port. According to the World Economic Forum, many developing countries in East Asia rank poorly when it comes to: (i) border administration (efficiency of customs administration and import-export procedures, and transparency of border administration); (ii) transport and communications infrastructures; and (iii) business environment (regulatory environment and physical security).

Then you may find a nice country in which to invest, only to discover that the quality of human resources is woeful. This is something that will take a long while to solve, but organizations like the World Bank and the Asian Development Bank are working on this valiantly.

The most common thing that investors strike in South East Asia is the demand for kickbacks to government officials. Corruption is rife. According Transparency International, most East Asian countries are badly ranked in terms of corruption perceptions. While Somalia is the worst ranked in the world at 180th, Malaysia comes in at 56th, China 79th, Indonesia at 111th, Vietnam at 120th, and the Philippines at 139th. While some attempts are being made to tackle this, this is a glass that is very empty.

Governments in the region have also been learning to work together better since the 1997 Asian Financial Crisis.

When that crisis struck, the bully boys from the IMF came into town, and flexed their muscles. Ever since, the Fund has not been welcome in a region which has since armed itself with large foreign exchange reserves and created the so-called Chang Mai Initiative. Agreed to by the ASEAN countries and China, Japan and Korea, and with a total size of $120 billion, the Chang Mai Initiative will provide financial support through currency swap transactions to its participants facing short–term liquidity difficulties as a complement to the IMF. This could be the embryo of a new regional monetary institution.

Things move slowly in Asia. But ASEAN plans to create full fledged ASEAN Economic Community by 2015. And ASEAN has even agreed to establish an infrastructure fund.

But East Asia will need to work even more together, as new challenges and problems are always emerging.

One of the lessons of the 1997 Asian crisis was the need to have more flexible exchange rates. But when there are big exchange rate swings between currencies in the region, this can create competitiveness problems, especially for complex supply chains which span several countries. Intra-regional coordination on monetary and exchange rate policies and reserve management needs to be strengthened.

A recent ADB study suggests that Southeast Asia is particularly vulnerable to climate change due to its long coastlines, high concentration of population and economic activity in coastal areas, and heavy reliance on agriculture, natural resources, and forestry. Another study found that irrigated rice yields across Asia will fall 27% by 2050, with irrigated wheat production down by a staggering 46% unless climate change adaptation measures are taken. This will make grains worldwide more expensive, and will obviously disrupt food security. Climate change impacts could reduce the combined GDP of Indonesia, Philippines, Viet Nam, and Thailand by nearly 7% annually by the end of this century, more than twice the global average. Other parts of Asia and the Pacific are similarly vulnerable.

So when we are examining the pros and cons of FTAs, we need to look at them in the context of the broader, deeper regionalism of which they are part, like APEC, ASEAN, ASEAN+3 (China, Japan and Korea), ASEAN+6 (Australia, India and New Zealand), Asian Development Bank.

They could also the building blocks towards a deeper community in East Asia. Former Japanese Prime Minister Yukio Hatoyama was promoting the idea of an East Asian Community, former Australian Prime Minister Kevin Rudd proposed an Asia-Pacific Community, Korea’s President Lee Myung-bak speaks of a New Asia Initiative, China’s President HU Jintao says China is promoting a Harmonious Asia, while India’s Prime Minister looks forward to a future Asian Economic Community.

The creation of a full fledged east Asian grouping would be a plus for peace and prosperity in the region. But it would require massive political will and reconciliation between many neighbours.

References:

Global Economic Prospects: Trade, Regionalism, Development. 2005. World Bank

www.worldbank.org

Towards a Stronger Developing Asia, Haruhiko Kuroda, President, Asian Development Bank

http://www.adb.org/Documents/Speeches/2010/ms2010054.asp

Corruption Perceptions Index 2009. Transparency International.

http://www.transparency.org/policy_research/surveys_indices/cpi/2009/cpi_2009_table