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East Asian Free Trade Area: bank on it

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In Brief

The global financial crisis forced East Asian nations to get serious about regional architecture.

As global trade entered a precarious decline during the height of the crisis in 2008–09, one of the obvious areas of focus for East Asia was trade regionalism, aimed at making East Asia a more efficient production network and, over time, a final market in its own right.

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At last, these initiatives are starting to bear fruit.

This year has seen significant progress in negotiations. This was revealed at the November ASEAN+3 summit which saw the heads of state agree to bureaucrat-level negotiations outlined earlier in the year.

Early indications that agreement on an East Asian trade area might finally be reached occurred in August at the 14th ASEAN Economic Ministers Plus Three (AEM+3) Meeting in Indonesia. The final communication welcomed a joint proposal by China and Japan, declared as the ‘Initiative on Speeding up the Establishment of an East Asia Free Trade Area (EAFTA) and Comprehensive Economic Partnership in East Asia (CEPEA)’.

Until this joint proposal the whole process had been held hostage by Sino–Japanese strategic rivalry. But the deadlock was broken by the worsening global economic situation and Washington’s bid to boost its flagging growth through exports, driving a return to Asia via the under-negotiation Trans-Pacific Partnership (TPP) agreement.

For China, the TPP is a potentially threatening arrangement, as its intellectual property and investment protection requirements will pose formidable barriers to joining. That’s if China was invited — which it has not been. And it seems this reality has been enough to shift China’s priorities towards reaching a regional trade agreement in East Asia, even if it means moving towards Japan’s position on issues of coverage and membership.

The outcome of all this is the joint proposal by China and Japan calling for the East Asian Free Trade Area to cover goods, services and investment — that is, an agreement which brings in Japan’s WTO-plus interests. Since the outset of negotiations on the EAFTA, Japan has focused on the investment-related issues (in contrast to tariff liberalisation). As Japan has few tariffs left to cut — and those that remain are in the politically-sensitive agricultural area — any EAFTA which focuses solely on tariff measures would be of little political interest to Japan.

Japan is also unwilling to enter into agreements with China that fail to address Japanese firms’ concerns about investing in the growing Chinese market. It is partly for this reason that the bilateral China–Japan FTA remains frozen. But outside the bilateral negotiations, and in the context of the EAFTA, China is now willing to discuss Japan’s wider set of economic interests. This year Japan and China have jointly sponsored setting up three working groups to deal with trade in goods, services and investment which will begin work in early 2012.

More importantly, the joint agreement is a promising step toward resolving long-standing disagreement over the grouping’s membership. While China had been adamant about the EAFTA being limited to ASEAN+3 members only (the ASEAN 10 plus Japan, South Korea and China), it appears that the final agreement will be expanded to include the ASEAN+6 grouping, adding Australia, New Zealand and India.

It is likely that these three countries would be brought into the new trade area via the so-called ‘ASEAN + +’ institutional mechanism. The framework is being negotiated at the ASEAN Plus Working Groups, and under consideration are rules of origin, tariff nomenclature, customs procedures and economic cooperation. These will feed into the working groups on trade, services and investment to provide a single template agreement.

Still, there remain hurdles. First, the terminology is not yet settled, with ‘EAFTA’ and ‘CEPEA’ still being bandied around. This suggests there do remain some tussles over membership — with China favouring an East Asia–Southeast Asia-only grouping. Second, while the Japanese and Chinese leaders have directed the bureaucrats to start negotiations, political leadership will be required to sign the agreement into force. However, the Heads of Government only enter the process next year, and in the meantime another flare up in Sino–Japanese relations could put everything back into deep freeze.

Notwithstanding those issues, the halting trend towards the realisation of an EAFTA is progressing. There will no doubt be more setbacks; but an EAFTA now seems more a question of when than if.

Joel Rathus is an EAF postdoctoral scholar and a regular contributor to the East Asia Forum.

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