FTAs and EPAs in East Asia: Regional Focus, Global Benefits

May 25, 2005

Cesar V. Purisima
Philippines, Finance Secretary

Thank you and Good Afternoon.

The Philippines on a global order is not as great as my colleagues' home countries China and Japan. That is why the future for the Philippines and the other members of the ASEAN countries is in more economic integration. The leaders of ASEAN have recognized this and have agreed towards moving to an ASEAN Economic Community by the year 2020. Asia's continued march to sustained economic prosperity lies in the ability of the Asian countries to see beyond historical issues in order to accelerate the pace of economic integration.

The price in the end is increased intra-Asian trade with Asian consumer markets as the final destination. To date increased economic activity basically driven by more integrated supply chain directed at cross-ocean markets not at-home markets. In this march towards more economic integration, the ASEAN countries can play the role of the hub. At present, ASEAN has on-going free trade or economic relationship discussions with the economic giants surrounding it. ASEAN has discussions with China and Korea in the north, Japan to the east, Australia and New Zealand in the south and India to the west.

The Philippines for its part is an active participant in ASEAN's bid not only to integrate within itself but more importantly to play the role of catalyst of an Asia wide effort.

Exactly three years ago in May 2002 - almost to the day - Philippine President Gloria Macapagal-Arroyo during her state visit to Japan, explored with Japanese Prime Minister Junichiro Koizumi the possibility of establishing an economic partnership between our two countries.

This fortuitous event set in motion a series of bilateral actions leading to the study and establishment of the Japan-Philippines Economic Partnership Agreement or JPEPA. On 29th November last year, the two heads of state met again and confirmed that both the Philippines and Japan have "reached agreements in principle on major elements of the Agreement". JPEPA is now in the legal scrubbing stage, and it is envisioned that the Agreement will be completed and signed by the Leaders some time in the third quarter this year.

JPEPA, which will be a component of the ASEAN-Japan Comprehensive Economic Partnership (AJCEP), an FTA+, is only perhaps the most dramatic example, in the Philippine case, of bilateral and regional FTAs, and this trend demonstrates that comprehensive preferential trading agreements that bind bilateral parties or regions do bring with them a rearrangement of the economic landscape. Do bilateral and regional FTAs really lead to global benefits? The issue has long been debated, and I should perhaps leave a categorical answer to the savants. But for myself, I respectfully submit that bilateral and regional FTAs do have a strong potential for generating global economic benefits.

The Philippines, for instance, has had some interesting fallout from the JPEPA. While we do not want to kiss and tell because we still want to continue playing the FTA dating game, I can tell you that at least three major economies have sent us emissaries asking for informal consultations about the impact of JPEPA on our trade relations with them. Some of the inquiries were polite and constructive, others were less polite and more contentious. But in the end, all parties reckoned that JPEPA only means that the Philippines and these economies must and can continue to foster further evolution of their trade relations in the changed economic landscape.

This is not unique and the experience of Mexico, for instance, is illustrative. I am told that upon Mexico's accession to NAFTA, non-party economies pulled up stakes and stayed away for a while. But soon enough, Mexico and these non-NAFTA parties began a rapprochement and are once again working on improving their trade relations.

We can influence this trend to generate more positive rather than negative ripple effects on the global economy. We can do this through hard work in the nitty-gritty of FTA design and engineering and FTA negotiation. We all of course endeavor to adhere to the WTO principles - substantially all trade, agreements that will create and not divert trade, and transparency and disclosure. And as many of us already realize, it would help much if we could wrap the package of negotiated core agreements on trade in goods, trade in services and cross-border investments, in a nurturing nest of cooperation and collaborative measures including increased integration among financial markets. This idea may then lead us to appreciate more the trite but no less true adage: In order to ensure that regional and bilateral FTAs succeed of themselves and go further to generate global benefits, the effort to forge such FTAs must be comprehensive - all-encompassing to achieve integration on the broadest possible economic front between the parties.

Before the Asian crisis in 1997, regional cooperation largely focused on trade and investment. Since the crisis, intra-regional cooperation has transcended the sphere of trade and investments to include monetary and financial cooperation. The ASEAN + 3 Finance Ministers process have launched several initiatives, primarily geared towards the strengthening of regional financial markets that would encourage regional economic integration in the long term.

One of the initiatives adopted in the meeting Finance Ministers in Chiang Mai in 2000, the ASEAN + 3 countries have made significant progress in concluding a regional financing arrangement called the "Chiang Mai Initiative". It consists of two components: an expanded ASEAN Swap Arrangement (ASA) and a network of bilateral swap arrangement among ASEAN countries, Japan, China and the Republic of Korea. As of today, the ASA has been expanded from US$ 1 billion to US$ 2 billion during the last ASEAN Finance Ministers in Vientiane, Lao PDR. A network of bilateral swap facility entered into among 8 ASEAN + 3 countries covers a total size of US$ 37.5 billion.

The Philippines alone has bilateral swap arrangements with China, Japan and the Republic of Korea amounting to an aggregate total of US$ 6.0 billion. These currency swap arrangements have been established to make immediately available to a participating country foreign exchange resources during periods when such support is needed most to avert a financial crisis in the economy. Recently, in Istanbul, the ASEAN Finance Ministers agreed to further enhance the CMI by pursuing to increase the size of the swaps even up to 100%, improving the drawdown mechanism, integrating the ASEAN+3 economic surveillance into the CMI framework, and multilaterization of the swap arrangements.

In the sphere of bond market initiative, concrete steps are being taken at the regional level under the Asian Bond Market Initiative (ABMI). The ABMI, which aims to develop capital markets in the region, is envisaged to serve as a vehicle that would recycle savings and reserves for investment opportunities and enhance national government's financial self-reliance. The ABMI will benefit countries in Asia in four aspects:

1. Providing business and public sectors in the region with stable and long-term source of financing;
2. Promoting stability and efficiency in financial markets by making available multiple alternatives for the transfer of saving into capital investment within the region;
3. Enhancing corporate transparency and market discipline; and
4. Assisting in corporate debt restructuring.

So far, the ASEAN + 3 local currency bond markets have grown rapidly and some structural improvements have been observed such as stretching of the government bond yield curves and diversification of instruments and issuer base.

ASEAN+3 Finance Ministers are vigorously working for the development of a deeper and more liquid regional bond markets that would assist in the efficient allocation of the large pool of savings in Asia to finance productive investment in the region. In pursuit of this, the Finance Ministers are introducing a roadmap for gathering and sharing information in an integrated manner on bond market development including a study of Asian Bond Standards to explore the development of international bonds markets in Asia. We are likewise looking at the possibility of issuing Asian currency-basket bonds as part of this roadmap.

Within ASEAN, financial and monetary integration is steadfastly moving forward. ASEAN Finance Ministers have committed to develop an interlinked ASEAN securities market by 2010. Through harmonizing market standards and practices, and facilitating cross-border market access, ministers of ASEAN finance authorities are aiming to create a large integrated market similar to that of trade in goods. In their recent meeting, ASEAN finance ministers concluded the third round of negotiations on liberalization of financial services and signed the protocol to implement the third package of commitments as well as commence the fourth round of negotiations, which aims to be concluded in 2007.

Finally, I am reminded that every economy that seeks to partner with others in an FTA has a responsibility to mind its own backyard. As we partner with each other through FTAs, we grow more deeply integrated, our systems become more seamlessly interactive. And so we must all strengthen ourselves lest we inadvertently transfer our burdens to our neighbors. In this regard, the Philippines is taking a cold hard look at itself and is confidently pushing forward with its own housekeeping so that we can contribute even more to our FTA partnerships. And so, after having had the honor of serving as the Philippines' ASEAN Economic Minister and APEC Minister Responsible for Trade, I am now contributing on the domestic fiscal front to making the Philippines a partner of choice for FTAs, whether bilaterally or as a member of ASEAN.

I have established my policy as Finance Secretary to make sure we improve our macroeconomic environment. The Philippine Bureau of Customs shall support tariff liberalization in FTAs, opposing only the most irreparably crippling waivers of tariff revenue. We shall do this, secure in the knowledge that liberal trade regimes ultimately generate domestic income, which can be a stronger base for fiscal health.

I am also happy to report an increasing trend in the Philippine Bureau of Customs to look at themselves not only as revenue collectors but also as trade facilitators. We are proud to have been chosen by the ASEAN to be the pilot economy for the ASEAN Customs Single Window project. At the ASEAN Economic Ministers Retreat in Vietnam last April, it was decided that we would submit our pilot project to the scrutiny of end-users, especially logistics companies. We will be happy to do this, and I have instructed my officials to carry out these instructions of the Ministers for ASEAN Economic Integration, and they will have my full support in doing this because like all of us here, I realize that comprehensive and well-coordinated FTAs and day-to-day trade operations requires willingness of Customs authorities to cooperate or even take leadership in these endeavors.

Meanwhile, under my instructions, the Philippine Bureau of Internal Revenue has launched a campaign against tax evasion, and the message that this has sent to the citizenry is even now generating benefits. Realizing that we mean business, parties who have evaded taxes are even now submitting their payments, and this has yielded an improvement of 18.7 % in our internal revenue take. We are turning the tide visibly, and even setting aside questions of VAT legislation, these measures have already pulled us far away from the brink of a possible fiscal crisis which we were so worried about only a few months ago.

In this way, the Philippines can be a more liberal partner in trade matters, because we are even now making ourselves stronger on the domestic fiscal front. And so we will be better able to continue to integrate as FTA partners, using the homespun but effective structures we have employed in the ASEAN Economic Ministers circuit, and developing these to make them even more effective. Then, as we integrate more closely within ASEAN and with our FTA partners, even third party economies shall find our Free Trade Areas a locus of choice for their investments. This will lead to more integrative trade, which is the very essence of the beneficial global effects that we all aspire for through the building blocks of bilateral and regional FTAs.

Thank you very much, ladies and gentlemen, for the honor of sharing a few thoughts with you.

Titles of speakers, names of companies, etc., were correct as of the time when the forum was held.