ASEAN+6 as a step towards an Asian Economic Community

Author: Mun-Heng Toh, National University of Singapore

At the second East Asia Summit (EAS) held on 15 January 2007 in Cebu, the Leaders of ASEAN and six other nations (China, India, Japan, S Korea, Australia and New Zealand, agreed to launch a study on a Comprehensive Economic Partnership in East Asia (CEPEA) among EAS participants. An underlying ambition was the establishment of an ASEAN + 6 FTA.

Foreign Ministers during trade talks in Hua Hin, Thailand

A cross-country Study Group was formed and, after about a year, made its submission proclaiming concurrence on the three main objectives of CEPEA. It must contribute to deepening economic integration in the region, and at the same time it must help narrow development gaps in the region. Along with these two objectives, sustainable development, which will enable the region to enjoy the benefits of development in the years to come, is reckoned to be the third objective.

To achieve the above objectives of CEPEA, the Study Group recognizes the scope of CEPEA as: economic cooperation, facilitation of trade and investment, and liberalization of trade and investment. The Group also set three basic principles to be followed under CEPEA.

Firstly, ASEAN should be regarded as the driving force of economic integration.

Secondly, CEPEA should be business-oriented as the business sector will be both the beneficiary and the implementation body of measures under CEPEA.

Finally, open regionalism also should be taken into account, as development of the region under CEPEA should contribute to global liberalization, be beneficial to the region outside East Asia, and not hinder the development of the world economy.

Despite having received the report of the study, the EAS Leaders in the December 2008 meeting did not make a decision nor issue a joint statement announcing the start of negotiation for an ASEAN+6 FTA.

Instead, a second phase of the study is being initiated. This decision is undeniably one that is to buy time and to have another look at the alternative but less ambitious configuration of an ASEAN+3 FTA(the 3 non-ASEAN countries are China, Japan and South Korea. There is a separate study group for ASEAN+3 FTA). The negotiation for all the key ASEAN+1 FTAs have somewhat been completed by the end of 2008. FTAs proliferation and the possible complication arising from preferential trading rules of origin is a concern. But perhaps, there is also a lack of leadership and resources on the part of ASEAN being able to play an anchoring role in the larger FTA configuration of ASEAN+6. Nonetheless, optimism for an eventual path towards multilateralism should not be ruled out.

As noted by Peter Petri, an aggressive multi-track strategy – parallel regional, trans-Pacific, and global initiatives may have promulgated a situation whereby the proliferation of many bi-lateral and mini-lateral FTA negotiations has created a new global framework for deeper economic integration. It is a development that is more favourable to multilateralism than previously thought.

The eventual goal may be that CEPEA evolve into a free trade area or – more ambitiously – into an Asian Economic Community. It may appear a bit impatient to have ASEAN+6 to consider a FTA right from the beginning, given that several efforts have already been made to set up an FTA among smaller group of countries.

A case in point is ASEAN + 3 (APT) alluded to earlier. Proponents of ‘gradualism’ in the formation of Asian Economic Community (AEC), favour a sequential approach in expanding the membership of an initial East Asian FTA. With an ASEAN Free Trade Agreement (AFTA) already in place, ASEAN + 3 is viewed by many as the next ‘logical’ phase.(There is also an alternative view that following AFTA, the ‘ASEAN + 1’ FTAs will provide the basis for APT which can possibly evolved from the amalgamation of the ‘ASEAN+1’ FTAs.)

The next stage then involves the accession of another three economies: India, Australia and New Zealand. The configuration in the latter stage involves all the economies included in CEPEA, and there is a possibility that the CEPEA membership may increase to include other countries like Mongolia and Russia. Basically the process can be described as ASEAN+3+3 path to economic integration.

However, such an approach is overly ‘deterministic’ in the evolution of an AEC. It may result in ‘still birth’ especially when economic benefits perceived or otherwise are unable to overwhelm the negative historical residual encumbrances. The inclusion of developed economies in the configuration, as what CEPEA would entail, makes the differences in the level of economic development even more conspicuous, and the lack of complementarity more pronounced.

Furthermore, there is a perception that ‘late-joiners’ to a club will likely to be disadvantaged. The ‘late-joiners’ may not like nor can it be in a position to accede to all the agreements settled in the APT.

While one can think of ‘starting afresh’ with ASEAN+6 as a feasible FTA item, the idea of encompassing APT within an OECD type organization comprising of CEPEA members is worth serious consideration. Following the OECD, CEPEA can provide a setting where governments can compare policy experiences, seek answers to common problems, identify good practice and coordinate domestic and international policies. It is a forum where peer pressure can act as a powerful incentive to improve policy.

CEPEA helps governments to foster prosperity and fight poverty through economic growth, financial stability, trade and investment, technology, innovation, entrepreneurship and development co-operation. It is helping to ensure that environmental implications of economic and social development are taken into account. As in the OECD, some members have the freedom to form or to be part of FTAs, customs unions, and economic community.

One can envisage the CEPEA OECD to be a platform for more action-oriented, in-depth collaboration in ‘immediate’ and functional region-wide issues (often with global implications), such as climatic change related policies, energy (oil) collaboration, financial swaps, pandemics control, and pan region double taxation agreement. In the area of trade liberalization, it can make small but significant step forward by considering the WTO Information Technology Agreement (ITA).

The ITA provides for participants to completely eliminate duties on IT products covered by the Agreement. CEPEA can remain WTO consistent and also WTO-plus, if it can agree to implement the WTO ITA with a wider range, if not all IT products. It will be a ‘Comprehensive ITA’ in the CEPEA region. With similar modi operandi, other product lines can be explored. As it makes progress, overlapping concern and interest will lead to convergence in objectives aspiration. CEPEA as an FTA can be one of the objectives.

CEPEA is in need of more permanent body, like a Secretariat, that can act as a focal point for raising issues and working diligently towards solutions and best practices. Integration into the global economy is not just desirable but also a necessary and inevitable modality for ensuring economic viability and survival in a highly competitive global market place.

The member states of CEPEA, therefore, need to devise and implement a strategy which will not only protect them from the negative effects of globalization, but also help them to conform and adapt to the requirements of the global economic system.

One can imagine that the CEPEA OECD task is full of challenges, stemming essentially from the inherent economic structures and policy frameworks of the CEPEA member states. The CEPEA grouping includes a diverse range of economies, each at different stages of economic development, market and institutional majority, and openness to trade and investment flows. It was only a few years ago that member states began to accept open and outward looking policies to attract foreign investments and promotion of international trade such that domestic growth and development can be facilitated.

Problems involving customs and procedures often posed serious impediments to routine operations of business involved in intra-regional trade. According to an UNCTAD study as well as an APEC study, import documentations and other formalities add 7 to 10 per cent to the cost of goods traded by developing economies. The need for simplification and harmonization of customs rules and procedures and rationalization of tariff structures is quite apparent for CEPEA member states, many of whom are looking forward for relief from high transaction costs arising from arcane custom rules and regulations.

It would be a significant development if the ASEAN+6 or CEPEA became institutionalised to provide and support an integrated framework for cooperation, facilitation and liberalization. This would serve to achieve CEPEA’s objectives of deepening economic integration, narrowing development gaps, and realizing sustainable development.

In order for CEPEA to continue to flourish, it is recommended that it begin as an OECD type organization to foster economic cooperation, promoting an enabling environment for enhanced economic liberalization in trade, investment and skilled labor, which will lead to the formation of a FTA and – eventually – an Asian Economic Community.

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