South Korea and Taiwan are in the top twenty. With dense populations and limited natural resources, they need global links and their economic interests cannot be accommodated in anything less than a single global economy.

There are many opportunities to integrate Northeast Asian economies consistent with their overriding interest in an open international economic regime. They could undertake more unilateral reform, especially of their agriculture and services sectors. They could show more leadership in the WTO.  And they could accelerate work to address behind-the-border and across-the-border obstacles to trade or investment within the APEC process.

Unfortunately , the current discussion of regional economic integration in Northeast Asia remains trapped within the paradigm of preferential FTAs. This inability to think beyond following the current fashion is problematic, for several reasons.

First, the preoccupation with preferential FTAs ignores the reality that that economic links in East Asia are market-driven. The different resource endowments of East Asian economies create the potential for integration. This potential is being realised by buyers and sellers responding to price signals, backed by:

• the confidence that governments will abide the WTO disciplines to limit protectionism;
• spectacular improvements in information technology,
• falling costs of transport,
• the extensive ‘opening to the outside world’ by these economies, most recently by China.

All of these trends are leading to ever-finer specialisation. Multi-economy production networks allow value to be added to products in the economies in line with their evolving comparative advantage.

Second, recent experience demonstrates that governments can facilitate this market-driven integration by removing politically-motivated discrimination against potential economic partners.  Trade and investment links between China and South Korea grew spectacularly after mutual diplomatic recognition in the early 1990s.  The 2010 ECFA between China and Taiwan will allow the potential for mutually beneficial trade and investment between these two to be realised.  With such evident gains from eliminating discrimination, it is surprising that governments want to negotiate trade deals to create needless new discrimination.

Third, fixation on preferential FTAs as the default option for trade policy fails to address the nature on international commerce in the 21^st century. Compared to the mid-1900s, trade in commodities and goods produced in a particular economy no longer dominate international commerce. The new model of international commerce is an intertwined flow of goods and services accompanied by international movement of information, capital and people. Trade in services and international investment is growing faster than trade in goods, while trade in components is expanding relative to trade in finished products.

Traditional border barriers to trade in a few sensitive products remain costly, but affect only a rapidly shrinking part of international commerce. Today, it is more efficient to concentrate on problems of communications and logistics, combined with the lack of efficiency, lack of transparency and often arbitrary implementation of economic policies in different economies.

Preferential FTAs, claim to address these new issues. But it is not sensible to hold up progress on new issues by making them hostage to tit-for-tat negotiations about residual traditional border barriers. Real progress on practical matters such as business mobility needs patient work to set up compatible information technology to allow movement of people consistent with security requirements.

Fourth, and more specifically to the region of North-East Asia, China, Korea and Japan have already entered into FTAs with several others, but not with each other. By choosing their FTA partners carefully and setting up ingenious, complex rules of origin they have been able avoid difficult political decisions, especially on sensitive topics such as agriculture. An attempt to negotiate preferential bilateral deals or a three-way ‘CJK’ trading bloc would focus attention on the most troublesome part of their economic relations, compounding the existing tensions over territorial issues. The likely outcome would be no agreements or more trade deals which fail to address significant traditional barriers.

Japan is also considering joining nine others in negotiations for a Trans-Pacific Partnership (TPP). These include the United States, but not China. Yoichi Funabashi sees this as the most significant way for Japan to endorse a liberal international order. A TPP may be a new opportunity to use gaiatsu to reduce Japan’s costly protection of its agricultural producers. But the TPP is also a risky policy tool, and it is not certain that negotiations to create it will succeed.

One possible outcome is a token agreement which wastes time and goodwill but leads to little change on protection of sensitive products. But it may be possible to clear the many political hurdles and reach an agreement requiring substantial new liberalisation by all participants. Such a deal would give Japan better access to some United States than its Northeast Asian neighbours. The faint prospect of such an outcome may prompt Korea to seek to be part of TPP negotiations. But such an arrangement would raise other difficult issues. Most importantly, because China is excluded from the TPP, it would damage economic and political relations with China, making it harder for Japan and Korea to facilitate closer economic links to their now most important trading partner.

And the problem could not be overcome by China joining the TPP. This is because the long-standing NAFTA contains carefully drafted, elaborate rules of origin to prevent significant new competition from labour-intensive products from the rest of the world. The probability of renegotiating NAFTA’s rules of origin is negligible.

Fortunately, Northeast Asian economies do not need to become involved in any of these preferential games. They are all part of the APEC process, which has already proven to be reasonably effective in dealing with the impediments to trade and investment that are of greatest relevance to people actually engaged in international commerce in the region.

Structural adjustment and cooperative arrangements promoted by APEC are already helping to complement a world of low formal obstacles with an environment of transparency, best practice, and consistency of regulations. APEC’s cooperative arrangements include competition policy, regulations on government procurement, mutual recognition of standards and qualifications, and efficient communications, including e-commerce and best practice logistics.

These arrangements effectively reduce the need for a separate free trade framework. Indeed, APEC leaders and ministers endorsed this strategy for economic integration in Singapore in 1999 and have reaffirmed their intent to promote a seamless regional economy in Yokohama in recent days.

Within East Asia, ASEAN is pointing the way forward. ASEAN economies negotiated a sub-regional free trade area almost 20 years ago. Since then, their experience has paralleled that of the European Union. In both cases, it became evident that eliminating traditional border barriers to trade in goods is nowhere near enough for substantive economic integration. Therefore, Southeast Asian governments have committed themselves to creating an ASEAN Economic Community.  Their reforms, for example to improve transport and communications links are not APEC initiatives. However, they are setting positive examples for other economies.

Northeast Asian governments could learn from and follow this example.  That could accelerate APEC’s ongoing effort towards genuine economic integration in the Asia Pacific.

Andrew Elek is a Research Associate of the Crawford School of Economics and Government, Australian National University; he was the inaugural Chair of APEC Senior Officials in 1989.