When Chinese and ASEAN (Association of Southeast Asian Nations) leaders agreed to establish a free trade area within ten years, it sets off a chain reaction around the world. The impact has been especially marked in Asia where it is adding impetus to the process of regional economic integration.

The third China-ASEAN meeting of Senior Economic Officials was held in Beijing on May 14. On their agenda was the Framework Agreement. This covered the guidelines, principles, timetable, scope and model for a free trade area. It also marked the founding of the China-ASEAN Trade Negotiation Committee.

Following approval of the Framework Agreement by both parties, formal talks aimed at establishing a free trade area would commence.

If real progress is to be made a number of issues need to be resolved.

Exclusivity

The regional nature of the agreement requires it to be exclusive. There are two essential criteria.

The first is geographical. Member states must be from the same area. For instance countries other than the ten Southeast Asian states would not be eligible to join ASEAN. As a result, a request for ASEAN membership by India has been rejected.

Second is the requirement to restrict preferential treatment to the member states. The favorable treatment should only be mutually available to the member states drawn from the region. It cannot be extended to countries from other parts of the world.

The aim of a free trade area is to reduce mutual trade barriers among member states and to remove other non-tariff barriers step by step. Protectionist policies against non-member countries are still retained.

Customs union is an advanced form of free trade area. Here free trade applies among member states. They mutually rescind import duties while a consolidated external tariff is adopted to maintain a common external trade barrier.

In essence any free trade area is established by agreeing and implementing a set of logical measures to ensure economic exclusivity.

Taking the Lead

There remains an unresolved controversy on the issue of whether or not a preeminent country or leading group is necessary for successful regional economic integration.

The spectacular progress in regional economic integration in North America has been attributed to the powerful leadership of the United States. It spares no effort in promoting regional integration in the North American Free Trade Area.

Meanwhile, the European Union with France and Germany in the driving seat has been energetically expanding regional integration out from the economic arena and into political, military and social fields.

However no single nation or leading group has so far emerged in the leading role for regional economic integration in Asia. In the absence of a strong leader, little progress has been made to date in Asia's regional economic integration.

Who then should shoulder the responsibility for leadership in the quest for regional economic integration in East Asia? There are four serious contenders: ASEAN, Japan, China or a joint Sino-Japanese leadership.

To date Japan has been trying to lead East Asian economic cooperation single-handedly. No doubt Japan fears that China will become the main economic power in Asia. China on the other hand would rather back up ASEAN to take the leading role in regional integration than see Japan dominate economic cooperation in Asia on its own.

Relations between China and Japan can be expected to fall short of full mutual trust unless and until Japan's official attitude to history is modified and becomes acceptable in China. So joint leadership by China and Japan could not be considered feasible at present.

The United States has its own strategic and economic interests in East Asia and has a voice that cannot be ignored.

A strategy of developing a 10+3 option (ASEAN + China, Japan and the Republic of Korea) is fundamentally sound. A 10+1 model (ASEAN + China) when coupled with strengthened trilateral cooperation among China, Japan and ROK also has its merits.

China should continue to endorse 10+3 as the main channel for future East Asian cooperation in the longer term. However the reality of circumstances in East Asia means it would be no easy matter to set up the 10+3 cooperative mechanism.

Consequently China should fully support the establishment of the (10+1) ASEAN-China Free Trade Area. This would neither adversely affect common understanding nor present a barrier to eventual progress towards the 10+3 framework.

East Asian countries have been making progress in the field of financial cooperation. Japan has concluded individual agreements on currency exchange with the Republic of Korea (ROK), Thailand, Malaysia and the Philippines. China has signed currency exchange conventions with both Thailand and Japan.

In the absence of such issues like the locus of the leading role, farm produce export subsidy and overshadowing of the extant ASEAN Free Trade Area, the establishment of the ASEAN-China Free Trade Area will turn out to be a win-win result.

Institutionalized or Not?

Regional economic integration can progress through the free trade area, customs union, common market, economic union and finally to full-scale economic integration. All these are institutionalized forms of economic cooperation. These stages represent progressive moves to higher and higher levels of institutionalization.

Right at the start, the forum for Asian Pacific Economic Cooperation (APEC) was defined as a consultative and non-institutionalized economic forum. This has led to a long-standing but unfounded view that non-institutional is better than institutional. What does it really mean?

Institutionalization represents the more rigorous mode of agreement. A consensus is reached at the conference table. This is set out in the form of a treaty or agreement. This then has to be ratified by the legislative bodies of each of the individual nations before it takes effect.

Within a non-institutionalization model, national leaders agree to implement an agreement, which has been achieved through consultation. Compliance is then not a matter of legislation but merely one for individual reputations.

In East Asia, the two models 10+3 and 10+1 are intended as institutionalized regional economic cooperation mechanisms. Their success would hinge on inter-governmental negotiations covering a wide range of issues.

The American-Canadian Free Trade Agreement and the Free Trade Conventions of the United States, Canada and Mexico are appropriate exemplars of the institutionalized approach. In each case the talks covered broad ground including guidelines, principles, system, framework, operational mechanism and the model for establishing the free trade area. The Free Trade Conventions set out the principles of trade liberalization dispute resolution through consultation, preferential regional economic development and so on. Their scope embraces trade in commodities, provision of services, farm produce, intellectual property, environmental protection, investment, policies on competition, government procurement, import and export procedures, an index of volume of trade and mechanisms for dispute resolution etc.

Though they differ in approach, both the China-ASEAN free trade negotiations and those entered into by the US, Canada and Mexico share the same goals. The North American Free Trade Conventions are based upon the American-Canadian Free Trade Agreement. The China-ASEAN Free Trade Agreement takes its model from the ASEAN Free Trade Treaty. China should therefore make a careful study of both the North American Free Trade Conventions and the ASEAN Free Trade Treaty.

The US-Canada free trade negotiations lasted 16 months while the subsequent talks involving the US, Canada and Mexico took only 14 months. In the light of these precedents China should work to reach a consensus with ASEAN as soon as possible.

Majority v Minority

Regional economic cooperation can extend beyond freedom of economic movement within the zone to include collective cooperation with other external economies.

History reveals that disputes are sure to arise no matter what kind of joint endeavor is looked at. They have occurred in the context of South-South, North-South and North-North cooperation. Disputes tend to arise between majority and minority interests and can be a real pain as they are difficult to resolve.

Aims identified for the ASEAN-China free trade zone go well beyond just reducing tariffs and removing tariff barriers. Cooperation is to extend to agriculture, information and communications, human resources development and transportation. Then there is the proposed development of the Mekong River.

When measures necessary for progress are discussed, there will always be different viewpoints. These are driven by differences in underlying economic interests. When a consensus seems out of reach there are two courses of action. Go along with the majority view or just quietly give up.

The main contribution to economic regionalization made by the European Union (EU) has been its single currency system. Two points are worth mentioning. Member states were not forced to join and some chose not to. Conditions had to be met by those who did wish to join. East Asian countries would do well to learn from the EU experience when dealing with disputes.

National Interests v Regional Interests

Member states engaging in regional economic cooperation each have their own different economic drivers and expectations. If all the participants were to put their narrow national interests above the broader regional interests, then everyone loses.

If regional cooperation is to succeed, it will be necessary to converge national and regional interests. The North American Free Trade Zone provides some examples for East Asia.

The US dominates the North American Free Trade Zone. It has been careful to respect the interests and position of its two partners, especially Mexico. The North American Free Trade Zone Treaty provided for a transition period and preferential treatment for Mexico.

During the first round of tariff reductions, Mexico was only required to eliminate tariffs for 35 percent of US products. In contrast both United States and Canada removed their tariffs for 80 percent of Mexican products. The treaty also included a 10- to 15-year buffer period for Mexico's uncompetitive industries allowing them this time to restructure.

The negotiations between China and ASEAN have also sought to balance the various interests involved. Before the start of formal talks, Chinese leaders announced most favored nation treatment for Vietnam, Laos and Myanmar. This will strengthen imports into China from these three nations.

This significant measure shows that China is a responsible country. Its commitment to establishing a China-ASEAN Free Trade Zone is not only for the sake of its own interests but also for those of ASEAN as a whole. It has shown willing to promote the economic development of less well developed areas in the pursuit of common prosperity and development.

Economic v Non-economic Factors

In today's world, international economic relations are influenced not only by economic factors but also by non-economic factors like politics, society, culture, thoughts and ideology.

New trends are emerging in international political and economic relations. Political influences on economies and economic influences on politics are gaining ground. Then there is the growth of domestic influences on international issues and of international influences on domestic issues. These serve in turn to demonstrate an increasing influence of non-economic factors on economic development and international economic relations.

Non-economic factors influence both the 10+3 option (ASEAN + China, Japan and ROK) and the 10+1 model (ASEAN + China, coupled with strengthened trilateral cooperation among China, Japan and ROK).

Key non-economic factors having a bearing on future talks could be Japan reviewing its past, US-Japan Security Treaty, the actions of a few countries impinging on the interests of the others, extreme actions linked to Islamic fundamentalism, territorial disputes, turmoil in society and unwelcome imposition of Western values. Any or all of these could have a negative impact on the Asian economy and this would be felt particularly in East Asia.

So East Asia should anticipate real challenges along the road to regional economic integration. They will need to be addressed both at a broad regional level and also at the level of individual issues.

An ASEAN and China Free Trade Zone can be thought of as a kind of South to South regional integration. What the states have in common is more important that what divides them.

All parties agree the need to expedite regional economic cooperation while strengthening political dialogue and cooperation. The main challenges to ASEAN and China Free Trade will come from outside the zone. The internal issues will be more easily resolved.

Gu Yuanyang is a researcher with the Institute of World Economics and Politics under the Chinese Academy of Social Sciences

(china.org.cn, translated by Shao Da and Zheng Guihong, September 9, 2002)