East Asian FTA: China's Interest

May 25, 2005

Prof. Zhang Yunling
Professor and Director of the Institute of Asia Pacific Studies,
Chinese Academy of Social Sciences (CASS)

I. Trend of regional arrangements

The process of East Asia cooperation and integration is progressing, currently with "10 plus 3" framework as the main course and also with other multi-layered arrangements for FTAs or EPAs.

An important role for East Asian cooperation and integration process is to make rules and to develop the legal mechanism among countries in the region through all kind of arrangements. Those arrangements and agreements both on the bilateral or sub-regional levels are rules making in nature in considering the principle of international standards, or "WTO consistent". In East Asian relations, this has profound significance since both "rule of standards" and "rule of law" will help to improve the systems of the regional members and to create a reliable foundation for the regional cooperation process.

East Asian cooperation and integration will help to develop a new regional order based on increasing common or shared interests among all parties. The nature of East Asian community building is not to create a powerful regional body, but to set principles and standards through agreements and commitments based pn the cooperation..

East Asian institutional building creates " public property" for the regional countries to maximize their interests. In a context of globalization, East Asian regionalism may help to identify its regional role and strive for its interests, and also help to create a more balanced world order.

This East Asian convergence goes beyond market integration by desiring governmental cooperation and institutional building. By definition, East Asian economic integration started as early as from 1960s based on regional economic growth and by only market approach, while the process of regional cooperation through regional institutional arrangement or formation through governmental efforts began only from late 1990s. East Asian market based integration shows its vulnerability during the financial crisis. Thus, the new initiative for promoting regional cooperation will certainly help to create a more secured environment for the regional economies.

"Ten plus three" (TPT) becomes the major course of East Asian cooperation process. Thus, an integrated framework for East Asian cooperation is emerging. East Asian economic arrangements have followed a multi-layered model that mostly refers to trade and investment liberalization, which is called as a model of "competitive regional cooperation". We have seen already some arrangements in East Asian region, like AFTA, Japan-Singapore and China-ASEAN FTA. More such bilateral or sub-grouping trade and investments may be concluded not just in intra-region, but also inter-region. These kinds of rule-based arrangements will help to setup legal foundation for regional institutional building and also to be beneficial for developing economies in preparation participating regional integration.

II. Adopting an integrated approach for FTA

ASEAN was formed in 1967, AFTA was launched in 1992, preferential trading agreement (PTA) only started from 1997. Japan and ROK began to approach RTA from 1999 when they proposed a bilateral FTA. Since then, several other initiatives have been made between Japan-Singapore, China-ASEAN, Japan -ASEAN. Japan and Singapore have concluded their negotiation and signed an agreement for closer economic partnership (CEP) in early 2002. China and ASEAN signed their agreement for trade in goods in 2004. Japan and ROK may conclude negotiation by the end of 2005. ROK-ASEAN FTA has been put on agenda in 2005, and China-ROK will start their FTA negotiation soon. What has been left is China-Japan, or China-Japan-ROK. Three countries are now conducting their joint research on trade and investment barriers.

With progress of these multi-layered arrangements, it is reasonable to expect a "convergent process", ideally by launching a new EAFTA or East Asian closer economic partnership (EACEP). The feasibility study decided by TPT economic ministers and supported by leaders in 2004 has been started in April of 2005. The joint expert group for feasibility study of EAFTA will make its recommendation by October of 2006. It is expected that EAFTA could be negotiated based on three "10 plus 1" FTAs after they are concluded, hopefully by 2008. At the same time, it is important to make the guide lines for the bilateral or sub-regional agreements by "10+3" or East Asian summit to be held in 2005 to make sure that such agreements not against each other.

III. China's interest

China gains significantly from its involvement to the regional integration and cooperation. China started to become active in the regional trade arrangements after joining WTO. Its first strategic move is to initiate China-ASEAN FTA in 2000. By being close economic ties with ASEAN, not just business relations, but also political relations have been significantly improved. China is also active to promote the trilateral FTA of China-Japan-ROK. The academic feasibility study has been jointly done already that shows the all three parties will benefit from it and the benefit will be larger than any bilateral arrangement between China-Japan, China-ROK, or Japan-ROK.

According to the modeling done a study group led by Zhang Yunling, China's gain from EAFTA will be about 2.5 times of that from China-FTA. By an EAFTA, China will confirm a close economic arrangement with both Japan and ROK since the two countries are the major FDI providers to China.

By showing its strong interest, Chinese leader proposed to take the responsibility to organize a joint expert group for the feasibility study of EAFTA during TPT leaders' meeting in 2004 that was supported by all leaders. This group now is starting to work with members coming form all 13 countries.

Being integrated with ASEAN seems easier since China's economic development level is closer to it. But for China to make a comprehensive arrangement with Japan or even with ROK seems more difficult than with ASEAN since the later two are more advanced in general. The challenges to China will come from further liberalization of service sector, telecommunication, banking and insurance etc. China hopes to follow a gradual approach, i.e. the easy first and fast.

Generally, China shows its confidence in facilitating the process of EAFTA, which has been backed up by two basic factors: one is continuous dynamic economic development, while another is demand of reforms facilitated by liberalization.

IV. China and Japan work together

Great concern has been raised on the attitudes and roles of China and Japan in the process of East Asian cooperation. It is obvious, East Asian cooperation process cannot smoothly move forward without active participation and real cooperation of the two countries. The two countries have already built up significant economic interests through trade and investment. But real trust has not been created due to the big differences in the political understanding and security concern. The two are still treated as rivalries, rather than close partners.

The process of East Asian cooperation and integration itself is an important mechanism for the two countries to create common interests and to build up trust. China should accept and support Japan's leading role in some areas where Japan has its own advantage, while Japan does the same. For China, Japan's giant economic strength should be considered as a valuable regional wealth, and for Japan, a rising China and an active China's role in the region should be treated as a positive factor. In so doing, China and Japan can become partners bilaterally and also in the regional affairs. Positive trend has been witnessed, for example in promoting trilateral dialogue (China, Japan and ROK), swap arrangement, as well as sub-regional development, but this is far from enough.

The train of East Asian cooperation and integration is just starting. There is no clear final destination yet. The real value of the train is that it is moving. However, the train needs to be fueled along the way and the final goal needs to be identified only through consensus building.

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