Cross Regional Trade Agreements: Understanding Permeated Regionalism in East Asia (The Political Economy of the Asia Pacific)

The Political Economy of the Asia Pacifi c

EditorVinod K. Aggarwal, University of California, Berkeley, CA, USA

Saori N. Katada • Mireya SolísEditors

Cross Regional Trade Agreements

Understanding Permeated Regionalism in East Asia

ISBN 978-3-540-79326-7 e-ISBN 978-3-540-79327-4

Library of Congress Control Number: 2008923543

© 2008 Springer-Verlag Berlin Heidelberg

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EditorsProf. Saori N. KatadaUniversity of Southern California School of International RelationsVKC 3303518 Trousdale ParkwayLos Angelos, CA [email protected]

Prof. Mireya SolísAmerican UniversitySchool of International Service4400 Massachussetts Ave, N.W.Washington [email protected]

For Satoshi and Todd

vii

Preface

This book took shape as we, the two editors of this volume, Mireya Solís and Saori N. Katada, became intrigued by the Japanese government’s step to negotiate the country’s second and more meaningful Free Trade Agreement (FTA) with Mexico in 2002. During the same period, other East Asian economies also began to negoti-ate FTAs with initial partners, that extended beyond the region. Conventional wisdom and many discussions on “regionalism” presume that intense economic cooperation and government efforts toward integration start with one’s neighbors (or security alliance partners). So when South Korea engaged with Chile as its first FTA partner, and Japan with Mexico as its second, the puzzle was obvious: why? Hence, our “cross-regional FTA” project was born.

Of course, the concept of “region” is important as a frame of reference to understand the complex forces of international politics and international political economy. Social science paradigms too are often constructed using regions as a unit. Scholars are also trained through regional specializations: one tends to be boxed in as a “Latin Americanist” or an “East Asia specialist.” Nevertheless, as we went outside the regional box and zoomed into those cross-regional partnerships, we found exciting economic and political dynamics not only among cross-regional partnerships, but also in the ways in which cross-regional relations are used to enhance one’s leverage in intra-regional bargaining dynamics.

This book is a product of the wonderful working relationship between the two editors who happen to have common “triangulated” interests across regions. Mireya, a native of Mexico, is a Japan specialist who speaks the language fluently; and Saori, a native of Japan who lived in Mexico, has strong interests in Latin America. Both were trained in the United States, and have made this country their adopted home.

The project was first conceived with the financial and intellectual support of the Center for International Studies (CIS) at the University of Southern California, and its then-director, Peter Rosendorff, as we organized a conference on this issue in October 2005. With the contribution of chapters by premier experts in the field, we are extremely fortunate to be able to bring out this volume which aims to provide novel views on the hot topic of the FTA frenzy. The CIS under its current director, Patrick James, has continued to support our project with funding for manuscript preparation in 2007.

During the above-mentioned conference, we benefited significantly from the discussants who actively participated in the discussion: Gregg Felker, Stephan Haggard, Geoffrey Garrett, Megumi Naoi, and Min Gyo Koo (who later joined us as a co-contributor of the Korea chapter). Eul-Soo Pang also joined this conference to provide his view on the US–Singapore FTA. Barbara Stallings, in particular, kindly stayed during the brainstorming session where we discussed the revision strategies and offered us wise advice. We have also benefited from the insightful comments of generous colleagues along the way: Vinod Aggarwal, Ellis Krauss, Mark Manger, John Ravenhill, Alberta Sbgria, Ulrike Schaede, and Shujiro Urata. We are also fortunate to have had opportunities to present this work to a diverse audience for comments and suggestions during its preparation stage as we partici-pated in several conferences. Some of these venues include the Brown Bag series at the Research Institute for Economy, Trade and Industry in Tokyo, the regional-ism conference at Claremont Graduate University, and the seminar series of the Center for US–Mexican Studies at UCSD. We particularly thank Yong Wook Lee and the participants in the conference on “The Emergence of East Asian Community: Material and Ideational Foundations” at the Watson Institute for International Studies (Brown University).

The earlier version of most of the chapters came out as a special issue of Pacific Affairs on East Asian Cross-Regionalism (Summer 2007, Volume 80, Number 2). We thank its editor, Timothy Cheek, for his support and encouragement and all the reviewers who provided invaluable critiques and advice toward improvement of all the chapters. We also thank the journal for kindly allowing us to use the bulk of those chapters for this book. It is extremely exciting that our work is coming out as a book – with Linda Low now joining as a contributor and with revised and updated chapters – since this step will make our study available to many more students and scholars of international relations. For that, our thanks go to Vinod Aggarwal, the series editor on the Political Economy of Asia Pacific, and Niels Thomas, the acquisition editor at Springer. We also thank our efficient and committed research assistant, Jason Enia, who worked on this project from its initial stage. Without his assistance, our work would have been much less polished and much slower. Vidal Seegobin at American University also provided superb research assistance in the later stages of this project.

We dedicate this book to our spouses, Satoshi Katada and Todd Eisenstadt, who have always offered unwavering support as we ventured across regions to accom-plish our professional goals, and provided us with comfort and companionship when we returned home. They are indeed the pillars that sustain all our endeavors.

Los Angeles Saori N. KatadaWashington DC Mireya Solís

viii Preface

ix

Contents

1 Permeated Regionalism in East Asia: Cross-Regional Trade Agreements in Theory and Practice ...................................................... 1M. Solís and S.N. Katada

2 Forming a Cross-Regional Partnership: The South Korea–Chile FTA and Its Implications ........................................................................ 27S.-H. Park and M.G. Koo

3 A Case Study of Singapore’s Bilateral and Cross-Regional Free Trade Agreements .................................................................................... 47L. Low

4 The Japan–Mexico FTA: A Cross-Regional Step in Japan’s New Trade Regionalism........................................................................... 71M. Solís and S.N. Katada

5 Thailand’s and Malaysia’s Cross-Regional FTA Initiatives ................ 95S. Hoadley

6 China’s Free Trade Negotiations: Economics, Security, and Diplomacy .......................................................................................... 123S. Hoadley and J. Yang

7 Cross-Regional Trade Agreements in East Asia: Findings and Implications ....................................................................................... 147S.N. Katada and M. Solís

Index ................................................................................................................ 161

xi

Biographical Sketch of the Authors

Stephen Hoadley is Associate Professor of Political Studies at the University of Auckland, New Zealand. Publications include Negotiating Free Trade: The New Zealand-Singapore CEP Agreement (Wellington: New Zealand Institute of International Affairs, 2002), New Zealand United States Relations (Wellington: New Zealand Institute of International Affairs, 2000), New Zealand Taiwan Relations (Auckland: New Zealand Asia Institute, 1998), and New Zealand and Australia: Negotiating Closer Economic Relations (Wellington: New Zealand Institute of International Affairs, 1995). Contact at [email protected]

Saori N. Katada is Associate Professor at School of International Relations, University of Southern California. She is the author of Banking on Stability: Japan and the Cross-Pacific Dynamics of International Financial Crisis Management (University of Michigan Press, 2001). She has numerous articles on the issues of for-eign aid, regionalism, politics of finance and trade. Contact at [email protected].

Min Gyo Koo is Assistant Professor of Public Administration at Yonsei University in Seoul, Korea. He has published in journal such as the Pacific Review, Global Asia, Journal of East Asian Studies, and Pacific Affairs, and is currently revising for publication his dissertation, Scramble for the Rocks: The Disputes over the Dokdo/Takeshima, Senkaku/Daioyu, and Paracel and Spratly Islands. E-mail: [email protected]

Linda Low is the Head of Strategic Planning, Department of Planning and Economy, Abu Dhabi, United Arab Emirates and Adjunct Professor, United Arab Emirates University, College of Business and Economics. Her academic areas of specialisation include public sector economics and public policy, public enterprises and privatisation, social security and retirement, health economics, human resources development and manpower policies, international trade and regionalism including free trade agreements, international political economy, development economics and macroeconomic public policies related to economies in Asia Pacific, Association of Southeast Asian Nation (ASEAN) and the Middle East. Contact at [email protected].

Sung-Hoon Park is a tenured professor at the Graduate School of International Studies (GSIS), Korea University since 1997. He has held visiting professorships at Macau Institute of European Studies (2000-present), Ritsumeikan University (2003) and ASEF University (2000, 2004), as well as Fulbright Visiting Scholarship at IR/PS of University of California, San Diego (US) during the 2003-04 academic year. His main research interest is on international trade policy, Asian and European economic integration, and WTO affairs. Contact at [email protected]

Mireya Solís is Associate Professor at the School of International Service at American University. She is the author of Banking on Multinationals: Public Credit and the Export of Japanese Sunset Industries (Stanford University Press, 2004). She has published in journals such as International Studies Quarterly, The World Economy, Pacific Affairs, Business and Politics, and the Journal of East Asian Studies. Email [email protected].

Jian Yang is Senior Lecturer in International Relations at the University of Auckland. His publications include Congress and US China Policy: 1989-1999 (2000) and articles on China’s foreign relations, Asia Pacific security, China’s domestic politics, environmental politics and human security. He is an Associate Editor of The Journal of Human Security. He also chairs the Auckland Branch of the New Zealand Institute of International Affairs. Email [email protected].

xii Biographical Sketch of the Authors

Chapter 1Permeated Regionalism in East Asia: Cross-Regional Trade Agreements in Theory and Practice

M. Solís and S.N. Katada

1.1 Introduction

The new wave of regionalism has become an important feature of global political economy today. By the late 1990s, even East Asia, a region previously characterized by a near absence of formal free trade agreements (FTAs) and regional institutions, was engaged in a remarkable number of negotiations toward inter-state cooperation in the areas of finance and trade. As Table 1.1 shows East Asia was engaged in 124 FTAs (in force, under negotiation or under study) as of October 2007, and there are more to come. Hence, East Asia’s appetite for regional integration is already evident. However, a key feature of East Asian FTA diplomacy remains unacknowledged and therefore unaccounted for: the activism displayed in seeking preferential trading relations with countries outside the region.1

The spread of such cross-regional initiatives leads us to contend that the still prevalent view of economic integration as a region-bound phenomenon is empiri-cally outdated, so the motives and implications of cross-regionalism deserve further theoretical treatment.2 In fact, conventional theories of regionalism continue to emphasize geographical proximity as a key ingredient for the establishment of preferential trade relations in that lower transportation and transaction costs foster

S.N. Katada, M. Solís (eds.) Cross Regional Trade Agreements, 1© Springer-Verlag Berlin Heidelberg 2008

1 In this book, we adopt a pragmatic definition of region as a “contiguous territorial area having sufficiently clear internal cohesion and definitive external boundaries,” which matches the charac-terization by the World Bank and the Organisation for Economic Co-operation and Development (OECD) of East Asia as comprising Northeast and Southeast Asia, but excluding the United States, any of the Latin American countries, Australia, New Zealand, and the Pacific Island states. See T.J. Pempel (2006) “Introduction: Emerging Webs of Regional Connectedness” In: T.J. Pempel, ed., Remapping East Asia: The Construction of a Region. Cornell University Press, Ithaca NY, pp. 4.2 The World Trade Organization’s (WTO) own nomenclature also has obscured, rather than clari-fied, the importance of cross-regionalism by loosely using the term “Regional Trade Agreements (RTAs)” to cover all preferential trade deals within and beyond regions. To avoid such confusion, we make an explicit distinction between regional (RTAs) and cross-regional trade agreements (CRTAs). Whenever we refer to preferential trade agreements in general we use the neutral term FTA (or free trade agreement).

2 M. Solís, S.N. Katada

Table 1.1 East Asia’s regional and cross-regional FTAs

CountriesType of agreement Status Year

ASEAN–AFTA RTA In effect 1965, 1992ASEAN–China RTA In effect 2003ASEAN–New Zealand–Australia CRTA Under negotiation 2007ASEAN–India CRTA In effect 2004ASEAN–Japan RTA Under negotiation 2006ASEAN–Korea RTA Signed framework 2005ASEAN+3 RTA Summit conference;

partial agreement2007

Singapore–EFTA CRTA In effect 2003Singapore–GCC CRTA Under negotiation 2006Singapore–Australia CRTA In effect 2003Singapore–Canada CRTA Under negotiation 2007Singapore–Chile CRTA Under negotiation 2007Singapore–Chile–New Zealand CRTA In effect 2006Singapore–China RTA Agreed to negotiate 2004Singapore–India CRTA Signed 2005Singapore–Japan RTA In effect 2002Singapore–Jordan CRTA Ratified 2004Singapore–Korea RTA In effect 2006Singapore–New Zealand CRTA In effect 2001Singapore–Panama CRTA Under negotiation 2004Singapore–Mexico CRTA Under negotiation 2000Singapore–Ukraine CRTA Under negotiation 2007Singapore–Peru CRTA Under negotiation 2006Singapore–USA CRTA In effect 2004Thailand–Australia CRTA In effect 2005Thailand–Bahrain CRTA Framework agreed 2002Thailand–China RTA In effect 2003Thailand–Peru CRTA Signed framework 2003Thailand–India CRTA Signed 2004Thailand–Japan RTA In effect 2007Thailand–Korea RTA Under study 2001Thailand–New Zealand CRTA In effect 2005Thailand–USA CRTA Stalled 2006Korea–EU CRTA Under negotiation 2007Korea–Australia CRTA Official discussion 2000Korea–Canada CRTA Under negotiation 2005Korea–China RTA Proposal/study 2007Korea–EFTA CRTA In effect 2006Korea–Chile CRTA In effect 2004Korea–India CRTA Under negotiation 2007Korea–Japan RTA Under negotiation 2003Korea–Malaysia RTA Basic agreement 2005Korea–USA CRTA Signed 2007Japan–Canada CRTA Proposal/study 2002Japan–Chile CRTA Came into effect 2007Japan–Mexico CRTA Came into effect 2005

(continued)

1 Permeated Regionalism in East Asia 3

Japan–Phillipines RTA Basic agreement 2004Japan–Indonesia RTA Basic agreement 2007Japan–Malaysia RTA Signed 2005Japan–Vietnam RTA Under study 2005Japan–Brunei RTA Basic agreement 2007Japan–Bahrein CRTA Under study 2005Japan–India CRTA Under negotiation 2007Japan–Switzerland CRTA Under negotiation 2007Japan–Australia CRTA Under study 2005Japan–GCC CRTA Preparations for

negotiation2006

Philippines–USA CRTA Proposal 2002Philippines–China RTA Under negotiationMalaysia–Australia CRTA Under negotiation 2006Malaysia–China RTA In effect 2004Malaysia–USA CRTA Under negotiation 2006China–Hong Kong RTA In effect 2005China–Japan–Korea RTA Under negotiation 2007China–Macao RTA In effect 2004China–SACU CRTA Agreed to negotiate 2004China–GCC CRTA Under negotiation 2007China–New Zealand CRTA Under negotiation 2004China–Chile CRTA Signed 2005China–Pakistan CRTA Signed 2006China–Australia CRTA Under negotiation 2005Hong Kong–New Zealand CRTA Under negotiation 2001Taiwan (China)–Panama CRTA In effect 2004Taiwan (China)–USA CRTA ProposalEight provinces (Guangdong,

Guizhou, Hainan, Jiangxi, Hunan, Fujian, Yunnan, Sichuan) + one autonomous region (Zhonggu Guangxi Zhuangzu Zizhiqu) + two special administrative area (Hong Kong, Macao)

RTA Came into effect 2004

Pacific 5 RTA Proposal 1998Pacific 5–Mercosur–urkey–

Afghanistan–Indonesia–Pakistan–Japan, etc.

CRTA News reports

EU–Tunisia–Morocco–Israel–Palestine–Egypt–Jordan–Algeria–Syria–Turkey

CRTA • Came into effect: Tunisia, Morocco, Israel, Palestine, Egypt, Jordan

• Tunisia: 1998

• In process of ratifica-tion: Algeria

• Morocco: 2000

• Council to decide on signature: Syria

Table 1.1 (continued)


(continued)


trade concentration, and the greater likelihood of sharing cultural, linguistic, eco-nomic, or political ties facilitate the tasks of policy coordination.3 This emphasis on physical and cultural proximity is, nevertheless, at odds with the myriad preferential trade agreements crisscrossing the globe, as can be seen in Map 1.1.

East Asia, however, stands apart in this cross-regional world in one important way. Whereas European and North American countries pursued extra-regional partnerships after consolidating their regional blocs,4 East Asian countries embarked on cross-regionalism much sooner, when they were just beginning to launch their FTA initiatives. Understanding the origins and dynamics of East Asian cross-regional trade agreements, therefore, gives rise to three main questions. First, are there regional factors in East Asia itself encouraging countries to explore cross-regionalism early on? Second, what are the most important objectives behind the selection of specific cross-regional partners? Finally, how do CRTAs influence the intra-regional trade initiatives of these East Asian countries? In sum, will cross-regional trade agreements yield a much more open pattern of regional inte-gration in East Asia, which we label permeated regionalism?

3 E. Mansfield and H. Milner (1999) “The New Wave of Regionalism,” International Organization 53, 3: 590–91.4 The one exception is the United States–Israel FTA which preceded the North American Free Trade Agreement (NAFTA). However, Israel has always been a key strategic priority for the United States deserving special treatment, and in all other instances CRTAs for Europe and North America came after their main regional blocs were firmly in place.

• Agreement establish-ing the definite phase of the customs union: Turkey

• Israel: 2000

• Palestine: 1997• Jordan: 2002• Egypt: 2004• Algeria: 2002• Turkey: 1996

Azerbaijan–Armenia–Belarus–Belarus–Kazakhstan–Kyrgyzstan–Moldova–Russia–Tajikistan–Turkmenistan–Uzbekistan–Ukraine–Ukraine–Georgia

CRTA Signed 1993

Korea–Argentina–Brazil–Paraguay–Uruguay

CRTA Agreed to study




In searching for answers to these pressing questions, we develop here an analytical framework for studying East Asian cross-regional FTAs to guide the analyses undertaken by the contributors to this book. We seek to identify the com-mon patterns and fundamental factors behind the East Asian governments’ moves towards establishing CRTAs at the same time as they launch their intra-regional integration efforts. To that end, we offer first an overview of the spread of regionalism and cross-regionalism in the world economy. Next, informed by the existing literature on preferential trading, we lay out the motivations behind CRTAs in East Asia. We are interested in identifying the various “environmental” factors that affect all countries in the region and create incentives for pursuing CRTAs; in addition, we seek to give proper credit to the diversity of motives spurring East Asian countries to select specific extra-regional countries as FTA counterparts. In this section, we pay attention to conventional arguments regarding economic and security interests behind FTA partner selection , but we also develop a new analytical category, what we call “leverage ,” to highlight how cross-regional and intra-regional FTA initia-tives are intimately linked. East Asian countries frequently choose an extra-regional FTA partner in order to break regional inertias that hinder integration, to win domestic battles and to appropriate extra-regional negotiation modalities that they can use in their subsequent intra-regional FTA negotiations.5 Finally, in the last section of this introduction chapter, we offer an overview of the case studies on East

5 In this way we offer an explanation of cross-regionalism that is distinct from the oft-noted moti-vations behind the selection of cross-regional partners: special security relations (US–Israel), former colonial ties (EU–South Africa), and natural resource diplomacy (Japan and Gulf states, in negotiation).

Map 1.1 Cross-Regional RTAs as of February 2005

Source: Jo-Ann Crawford and Roberto V.Fiorentino. 2005. “The Changing Landscape of Regional Trade Agreement,” WTO Discussion paper #8, p. 22. Map III: Cross-Regional RTAs as of February 2005.


Asian cross-regionalism included in this book. A summary of the main findings from the country case studies is offered, but we leave a more systematic analysis of the theoretical and policy-implications of CRTAs for East Asia’s permeated region-alism to the conclusion chapter.

In sum, while we are skeptical that geography shapes economic integration pat-terns, given the spread of crisscrossing FTAs, we also believe that the distinction between cross-regional and intra-regional preferential trade agreements is a useful heuristic tool in that it allows us to address hitherto neglected aspects of East Asian regionalism: the simultaneous pursuit of intra-regional and extra-regional integra-tion initiatives in contrast to the American and European practice of solidifying first their regional blocs; and the larger influence of extra-regional FTA models on East Asian integration through the systematic use of CRTAs to score leverage points in regional negotiations.

It is essential to clarify that we are not arguing that FTAs and CRTAs follow an entirely different logic. As we will show, interest in economic complementari-ties and market access , concern over ongoing trade diversion and the desire to emerge as a visible trade hub are common objectives in FTA negotiations both regionally and cross-regionally. What we do argue, however, is that East Asian countries have been more prone to select FTA partners from outside their region because of the very real constraints they feel in advancing a regional integration agenda. And that CRTAs offer unique opportunities for these countries to consoli-date their FTA strategies by strengthening trade negotiation capacity and setting negotiation precedents in a low-risk political environment as they deal with their cross-regional partners.

1.2 East Asian in A Cross-Regional World

Spurred by the deepening of the European integration process, the decision of the United States to embark on ambitious minilateral trade agreements such as the North American Free Trade Agreement (NAFTA) , and the uncertainty regarding the General Agreement on Tariffs and Trade ’s (GATT) Uruguay Round negotiations, many coun-tries decided to follow suit and negotiate multiple FTAs.6 However, until recently, one conspicuous laggard region in this rush towards regionalism was East Asia. Since the infamous attempt by Japan to establish the “Greater East Asia Co-prosperity Sphere ” failed in the 1940s, the region had been known to lack institutionalized cooperation

6 For a more detailed discussion of the reasons behind the proliferation of FTAs, see J.-A. Crawford and R.V. Fiorentino (2005) “The Changing Landscape of Regional Trade Agreements,” WTO Discussion Paper No. 8. World Trade Organization, Geneva, Switzerland, p. 16.


both in the fields of security and economics.7 The only exception to this dearth of preferential trade agreements in East Asia was the inauguration of the Association of Southeast Asian Nations ’ (ASEAN) Free Trade Area (AFTA) in 1992. However, the many sectoral carve-outs and lengthy liberalization calendars have prevented AFTA from emerging as a vigorous trade bloc in the region.8

By the late 1990s, however, East Asia began to experience a flurry of regional cooperation initiatives in the area of finance (the Asian Monetary Fund Proposal, the Chiang Mai Initiative , and the Asia Bond Market Initiative), trade (various bilateral and mini-lateral FTAs), and institution building of various kinds (ASEAN plus 3 , the ASEAN Regional Forum (ARF), and the East Asian Community ). Many researchers attribute this new phenomenon in Asia to the 1997 Asian financial crisis and argue that the crisis led Asian governments to feel an urgent need for regional coopera-tion.9 Meanwhile, others argue that East Asian interests in FTAs, in particular, arose from fear of exclusion and the economic costs from trade diversion, as Europe and the Western Hemisphere proceeded with their respective regional projects.10 Another possible reason is dissatisfaction with the lack of progress on existing trade forums in the late 1990s: the WTO’s Seattle and Cancún fiascos and the damage the Asia-Pacific Economic Cooperation (APEC) suffered over the open rift between the US and Japan over the early voluntary sectoral liberalization initiative.

The vertiginous pace with which East Asian governments have negotiated FTAs is evident in Table 1.1. Interestingly, a large number of these preferential

7 Scholars have explained this shortage of formal institutions in Asia in various ways ranging from the relative disparity shift hypothesis (Grieco); network replacing institutions (Katzenstein and Shirashi); domestic preferences of regional powers (Haggard); the region’s external reliance espe-cially on the United States (Crone); to historical US lack of interest in regional mechanisms in Asia (Katzenstein and Hemmer). See Joseph Grieco (1997) “Systemic Sources of Variation in Regional Institutionalization in Western Europe, East Asia, and the Americas,” In: Edward D. Mansfield and Helen V. Milner, eds. The Political Economy of Regionalism. Columbia University Press, New York; P. Katzenstein and T. Shiraishi, eds. Network Power: Japan and Asia. Cornell University Press, Ithaca New York; S. Haggard (1997) “Regionalism in Asian and the Americas,” In Mansfield and Milner, eds., The Political Economy of Regionalism; D. Crone (1994) “Does Hegemony Matter?: The Reorganization of the Pacific Political Economy,” World Politics 45: 501–25; and P. Katzenstein and C. Hemmer (2002) “Why is There No NATO in Asia? Comparative Identity, Regionalism, and the Origin of Multilateralism” International Organization 56, 3: 575–607.8 E. Lincoln (2004) East Asian Economic Regionalism. The Brookings Institution, Washington, DC, pp. 169–73.9 For example, P. Bowles (2000) “Regionalism and Development after the Global Financial Crises,” New Political Economy 5, 3: 433–55; M. Wesley (1999) “The Asian Crisis and the Adequacy of Regional Institutions,” Contemporary Southeast Asia. 21, 1: 54–73; and C.W. Hughes (2000) “Japanese Policy and the East Asian Currency Crisis: Abject Defeat or Quiet Victory?” Review of International Political Economy 7, 2: 219–53.10 The most prominent theoretical work on the “domino theory of regionalism” is by R.E. Baldwin (1997) “The Causes of Regionalism,” The World Economy 20, 7: 865–88. See also W. Mattli (1999) The Logic of Regional Integration: Europe and Beyond. Cambridge University Press, Cambridge.


trade deals comprise cross-regional partners. Thus, a noteworthy development in East Asia’s regionalism frenzy is the simultaneous effort to negotiate intra-regional and cross-regional FTAs. As Chart 1.1 below demonstrates, all three regions, Europe, North America and Asia, currently engage in CRTAs. The difference is, however, that both the European Union (EU) and the North American countries extended most of their cross-regional interests after they solidified their respec-tive regional arrangements. The EU only signed its first CRTA with Turkey in 1996, several decades after the initiation of the process of regional integration.11 The same is true for the European Free Trade Association (EFTA), whose first CRTAs were with Turkey in 1992 and Israel in 1993. The United States signed one CRTA before NAFTA, with Israel in 1985, although mostly for strategic reasons. The next CRTA for the United States would wait another 15 years with the agreement signed with Jordan in 2001. In sharp contrast, East Asia CRTA negotiations began to take place simultaneously with bilateral and minilateral negotiations within the region, raising the question: Why?

1.3 Theories of Cross-Regionalism: One Step Behind

The literature on the “new wave” of regionalism of the late 1980s and 1990s does not entertain the possibility that cross-regional arrangements could have a major role to play in our understanding of regionalism.12 A somewhat scant literature on the phenomenon of cross-regionalism exists, however. On the theoretical front, Aggarwal and Koo advocate a nuanced distinction among “trade governance measures .”13 One of the criteria they employ to categorize various trading arrangements in the world is physical proximity, with a distinction made between “geographically concen-trated ” and “geographically dispersed ” trading arrangements.14 In this way, these authors explicitly acknowledge the presence of cross-regional dynamics. The thrust of their analysis, however, is the categorization of a variety of arrangements that fall under the rubric of regional institutions and not a discussion of the interaction between geographically dispersed and concentrated FTAs. Aggarwal and

11 Although Europe has had preferential economic relations with former colonies through the Yaoundé and Lomé Conventions, these were not structured around FTAs, but rather entailed non-reciprocal trade concessions, aid and political dialogue. Ravenhill offers an excellent analysis of the reasons why the EU pushed for the negotiation of FTAs with African, Caribbean and Pacific (ACP) countries in the late 1990s. See J. Ravenhill (2004) “Back to the Nest? Europe’s Relations with the African, Caribbean and Pacific Group of Countries” In: V.K. Aggarwal and E.A. Fogarty, eds., EU Trade Strategies. Between Regionalism and Globalism. Palgrave Macmillan, New York.12 See especially Mansfield and Milner, “The New Wave of Regionalism.”13 V.K. Aggarwal and M.G. Koo (2005) “Beyond Network Power? The Dynamics of Formal Economic Integration in Northeast Asia,” The Pacific Review 18, 2: 189–216.14 In Aggarwal and Koo’s own words: “ pair of countries are geographically concentrated, if they are contiguous on land or within 400 nautical miles; otherwise, we view them as being geographically dispersed” (“Beyond Network Power,” p. 196).


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Fogarty focus on the EUs attempts to promote counterpart coherence (by developing cooperation dialogues among regional entities)15 and Hänngi, Roloff and Rüland discuss the forms and functions of inter-regional relations as a part of institutional balancing.16 Both arguments are different from what we document in East Asia: a much more fragmented negotiation process where there is no tight regional block (customs union) but rather where bilateral FTAs and CRTAs dominate the trade negotiation scene.

Among economists, the best-known debate on the subject centres on the natural trading partner hypothesis endorsed by Wonnacot and Lutz, Summers, and Krugman, and rejected by Bhagwati and Panagariya.17 The proponents of the hypothesis insist that when FTA partners are “natural partners ” with high initial volume of trade and a close distance between them, their FTA engagement maxi-mizes trade creation and efficiency gains .18 Its opponents, however, argue that the welfare implications of cross-regional and intra-regional FTAs are not so straight-forward given the reduction of transportation costs and the elasticity of export supply curves. While this debate among economists continues to generate new insights,19 it is insufficient to explain East Asian cross-regionalism because a host of other factors – and not exclusively efficiency gains – are likely to influence a government’s decision to engage simultaneously in preferential trading negotiations with its neighbors and its extra-regional partners.

Finally, the concept of “open regionalism ” actually helps in theorizing about the origin of cross-regionalism.20 Invoking Pempel’s notion of “embedded mercan-tilism ” in his analysis of Japanese political economy, Jayasuriya notes that “open regionalism ” a la APEC was promoted under a “particular configuration of power

15 V.K. Aggarwal and E.A. Fogarty (2004) “Between Regionalism and Globalism: European Union Interregional Trade Strategies,” In Aggarwal and Fogarty, eds., EU Trade Strategies: Between Regionalism and Globalism. Basingstoke, New York.16 H. Hänggi, R. Roloff and J. Rüland (2006) “Interregionalism: A New Phenomenon in International Relations” In: H. Hänggi, R. Roloff and J. Rüland, eds. Interregionalism and International Relations. Routledge, London.17 See P. Wonnacott and M. Lutz (1989) “Is There a Case for Free Trade Areas?” In: J.J. Schott, ed. Free Trade Areas and US Trade Policy. Institute for International Economics, Washington; Larry Summers (1991) “Regionalism and the World Trade System,” Symposium Sponsored by the Federal Reserve Bank of Kansas City, Policy Implications of Trade and Currency Zones; P. Krugman (1991) “The Move to Free Trade Zones,” Symposium Sponsored by the Federal Reserve Bank of Kansas City, Policy Implications of Trade and Currency Zones; Jagdish Bhagwati and Arvind Panagariya (1996) “Preferential Trading Areas and Multilateralism – Strangers, Friends, or Foes?” In: J. Bhagwati and A. Panagariya, eds., The Economics of Preferential Trade Agreements. AEI Press, Washington DC.18 Wonnacot and Lutz, “Is There a Case for Free Trade Areas,” pp. 62–72.19 For example, see M. Schiff (1999) “Will the Real “Natural Trading Partner” Please Stand Up?” World Bank, Development Research Department.20 APEC best exemplifies the notion of “open regionalism” – that is, a negotiated trade liberaliza-tion effort whose benefits are always extended to non-APEC members on the basis of most favored nation status.


and interests in the domestic and external economy” and, in order to maintain the policy environment of “embedded mercantilism,” Asian governments made “open regionalism…not about regional market making but about maintaining export markets.”21 Such efforts have been important for Asian governments trying to maintain domestic harmony by supporting internationally competitive industries and at the same time providing side payments to less economically advanced sec-tors under embedded mercantilism. This analysis is quite useful in investigating the reasons behind Asia’s reluctance to form a regional “bloc” that would risk separating the region from valuable extra-regional export markets. Nevertheless, this argument only makes sense in the context of East Asian cross-regional over-tures to large countries such as the United States and Europe; it does not explain how cross-regional FTAs with countries that have relatively small markets, such as Chile , Mexico , Australia or New Zealand , would benefit Asia’s “embedded mercantilism .”

We can find a slightly larger accumulation of empirical studies of Asian cross-regional FTAs, and as the numbers of those initiatives increase, we expect more to emerge. Ravenhill analyzes the “new bilateralism ” pursued by East Asian govern-ments in recent years and concludes that those initiatives emerge from (a) an increasing awareness of the weakness of existing regional institutions, (b) an expec-tation of positive demonstration effects, and (c) a positive impact in reforming domestic economic interests. He also argues that by engaging in bilateral FTAs that exploit the ambiguities in WTO rules, Asian negotiators are trying to exclude sensi-tive domestic sectors. Nevertheless, he has yet to incorporate the dynamics that could exist between cross-regional initiatives and intra-regional ones.22 Dent also examines the expansion of what he calls “Asia-Pacific Bilateral Free Trade Agreement (APBFTA)” projects and observes the emergence of “lattice regionalism ,” the many bilateral trade arrangements towards economic integration in Asia.23 Although Dent includes cross-Pacific arrangements in his analysis, the interaction among these arrangements is not explicitly discussed. Finally, the collection of work in Aggarwal and Urata provides a comprehensive coverage and systemic analysis of bilateral trade negotiations conducted by East Asian governments.24 Their work discusses various factors that motivate each government to pursue trade

21 K. Jayasuriya (2003) “Embedded Mercantilism and Open Regionalism: The Crisis of a Regional Political Project,” Third World Quarterly. 24, 2: 339–41. See also T.J. Pempel (1997) Regime Shift: Comparative Dynamics of the Japanese Political Economy. Cornell University Press, Ithaca, NY.22 At the time of writing (probably either late 2002 or early 2003), he remained skeptical about the conclusion of both the Japan–Mexico or South Korea–Chile agreements, for both Japan and South Korea remained fairly resistant to the idea of liberalizing their respective agriculture sectors. See J. Ravenhill (2003) “The New Bilateralism in the Asia Pacific,” Third World Quarterly. 24, 2: 314 and footnote 29.23 C.M. Dent (2003) “Networking the Region? The Emergence and Impact of Asia-Pacific Bilateral Free Trade Agreement Projects,” The Pacific Review 16, 1: 1–28.24 V.K. Aggarwal and S. Urata, eds. (2005) Bilateral Trade Agreements in the Asia-Pacific: Origins, Evaluation, and Implications. Routledge, London.


bilateralism. Even this comprehensive collection does not cover a systematic analysis of the role of CRTAs.

More specifically, some studies on individual cases of cross-regional trade negotiations undertaken by East Asian governments are now available. Solís underscores the power of trade and investment diversion across regions to explain the Japan–Mexico FTA; and Manger highlights the importance of Japanese multinational corporations (MNCs) in lobbying for this negotiation.25 Koo examines the shift from multilateralism to bilateralism in South Korean trade strategy by focusing on its first ever bilateral FTA concluded with Chile along with other ongoing FTA negotiations.26 Tongzon focuses on the US–Singapore Free Trade negotiations and discusses possible detrimental effects on ASEAN .27 Although rich in details and intriguing in coverage, these studies tend to be either a single case study, or fail to place the phenomenon of “cross-regionalism” within the country’s overall preferential trade efforts. Comparative and theoretically driven empirical analyses which contextualize the governments’ motivations behind cross-regional initiatives in international relations and domestic politics would likely advance our understanding not only of the cross-regional phenomenon but also of the current wave of regionalism in East Asia.

1.4 Explaining Permeated Regionalism in East Asia

The previous section made clear that an understanding of the factors behind the spread of preferential trading relations across regions is just beginning to emerge. Building upon the previous literature on regional and extra-regional integration, we seek to identify the most powerful forces that convince governments and interest groups to invest political capital in the negotiation of cross-regional FTAs that yield a more porous pattern of regional integration. We proceed first by identifying common regional factors in East Asia that have created an environment conducive to the exploration of cross-regional partnerships. Next, we lay out the various distinctive objectives and motivations that influence certain East Asian governments in their selection of specific extra-regional FTA counterparts. By laying out these possible explanations in a systematic manner, we hope to generate testable hypotheses that can help us understand the contours of East Asian cross-regionalism as explored in the specific case studies that follow this introductory chapter.

25 M. Solís (2003) “Japan’s New Regionalism: The Politics of Free Trade Talks with Mexico,” Journal of East Asian Studies. 3, 3: 377–404; M. Manger (2005) “Competition and Bilateralism in Trade Policy: The Case of Japan’s Free Trade Agreements,” Review of International Political Economy 12, 5: 804–28.26 M.G. Koo (2006) “From Multilateralism to Bilateralism? A Shift in South Korea’s Trade Strategy,” In: Aggarwal and Urata, eds., Bilateral Trade Arrangements in the Asia-Pacific (Routledge).27 J.L. Tongzon (2003) “Research Notes: US–Singapore Free Trade Agreement: Implications for ASEAN,” ASEAN Economic Bulletin 20, 2: 174–78.


1.5 Regional Factors Favoring Cross-Regionalism

1.5.1 Economic Factors

In the recent past, East Asia has experienced significant economic changes as regional economic interdependence grows and especially as China acquires a much larger presence in regional trade and investment flows. These trends notwithstanding, East Asian nations continue to rely heavily on cross-regional markets (notably the United States ) as outlets for exports and as sources for imports and inflows of investment capital. Economic realities, therefore, continue to weaken the rationale for pursuing exclusively intra-East Asian regionalism.

In the past 20 years, we have witnessed the intensification of economic exchange within East Asia, both in terms of trade and investment flows. For instance, the share of intra-regional trade among 15 East Asian countries grew from 34.7% in 1980 to 54% in 2003.28 Scholars argue that intra-regional trade in East Asia measured by the more accurate intra-regional trade index demonstrates actually higher level of integration than Europe and only a notch below NAFTA .29 In terms of foreign direct investment (FDI), the emergence of Asian production networks with an FDI boom by Japanese MNCs after the 1985 yen appreciation, the spread of ethnic Chinese business groups in the region, and the growing direct investments abroad from countries such as Korea, Taiwan and more recently China, have also received wide attention.30

These facts notwithstanding, East Asia is not, by any means, evolving into a self-contained economic bloc. As Lincoln notes, the evolution of the intra-regional trade intensity index over time does not reveal a major intensification of economic exchange in recent years.31 Kawai’s own figures reveal that this index has fluctuated between 2.5 and 2.2 between 1980 and 2003. Moreover, the importance of extra-regional MNCs remains evident. For example, between 1990 and 2002, the United States was the largest foreign investor in Asian newly industrialized economies (NIEs) and in China (with $70.6 and $42.7 billion, respectively). Only in the case of the ASEAN-9 was most of the FDI intra-regional (with Japan as the largest foreign

28 This group of fifteen East Asian economies includes ASEAN, Japan, Korea, China, Taiwan and Hong Kong. Figures are taken from M. Kawai (2005) “East Asian Economic Regionalism: Progress and Challenges,” Journal of Asian Economics 16: 32.29 The index value for East Asia is 2.2, while it is 2.5 for NAFTA and 1.7 for Europe; see Kawai, “East Asian Economic Regionalism,” p. 32. The intra-regional trade intensity index takes into account the weight of a region in the overall world economy to avoid overestimating the impor-tance of intra-regional trade for regions that are registering above-average growth. See Lincoln, East Asian Economic Regionalism.30 See W. Hatch and K. Yamamura (1996) Asia in Japan’s Embrace: Building a Regional Production Alliance. Cambridge University Press, Cambridge; R. van Hoese (1999) New Multinational Enterprises from Korea and Taiwan: Beyond Export-led Growth. Routledge, New York; M. Solís (2004) Banking on Multinationals: Public Credit and the Export of Japanese Sunset Industries. Stanford University Press, Stanford.31 Lincoln, East Asian Economic Regionalism, p. 47.


investor with a cumulative total of $19.8 billion). European multinationals were also active in the region, representing 14% of foreign investment in Asian NIEs, 22% in the ASEAN-9, and a smaller 6.2% in China during this same period.32

In fact, Lincoln argues that one of the most important developments on the trade front in East Asia is a redirection of intra-regional trade away from Japan and into China. Particularly notable are Japan’s increasing imports from China (from 4 to 17% of total imports between 1981 and 2001) and growing exports from the rest of Asia to China (from 5 to 12% in the same period). Both trends reflect the rapid rise of China as a major trading nation. Although these are indeed important changes, the main continuity is also equally revealing; the United States continues to be the most important trading partner for the region.33 Between 1980 and 1989, 24.4% of East Asian exports were directed to the American market. And between 1995 and 2004, the United States remained the main destination market capturing 20.7% of total exports.34

This overview of economic trends in East Asia demonstrates that, despite fairly intense intra-regional economic activities, countries in the region remain heavily dependent on extra-regional markets – especially the United States – as outlets for their exports and as sources of FDI. Therefore, to the extent that these East Asian countries wish to consolidate or expand access to some of their main markets of destination, they will frequently look across the Pacific and outside their immediate economic region.35

1.5.2 Security and Diplomatic Factors

The security environment in East Asia has not been conducive to the creation of regional trade governance institutions for at least three main reasons: the prevalence of a hub-and-spoke alliance system , the open dislike of the extra-regional hegemon for exclusive Asian bloc initiatives, and the unabated historical and regional tensions among neighbors in East Asia.

First, the historical context is important to understand the emergence and persistence of a hub-and-spoke alliance system in Asia. In sharp contrast to the development of

32 All figures from Kawai, “East Asian Economic Regionalism,” pp. 32–3.33 Lincoln, East Asian Economic Regionalism, pp. 51, 55, 58.34 IMF, Direction of Trade Statistics.35 See N. Munakata (2006) “Has Politics Caught up with Markets? In Search of East Asian Economic Regionalism,” In: P.J. Katztenstein and T. Shiraishi, eds., Beyond Japan: The Dynamics of East Asian Regionalism. Cornell University Press. Ithaca, NY. However, as we will elaborate later on in this and the subsequent articles in this volume, the objective of securing preferential access with key extra-regional economic partners is by no means the most important rationale behind many cases of East Asian cross-regionalism. Rather, more defensive economic reasons (counter trade diversion) or security and leverage motives frequently guide the selection of cross-regional partners at this early stage in East Asia’s FTA diplomacy.


a trans-Atlantic alliance in the form of the North Atlantic Treaty Organization (NATO), a trans-Pacific collective defense system never materialized in East Asia.36 In order to understand Asia’s “organization deficit” and the prevalence of bilateral security arrangements, Calder and Ye argue that it is necessary to factor in histori-cally contingent choices. In particular, the Chinese intervention in the Korean War exerted a powerful influence in the institutional infrastructure for Asia. Confronted with this crisis, the US government shelved its preferred project of a region-wide collective security mechanism (the Pacific Pact) in favor of a network of bilateral alliances with selected Asian countries (the San Francisco system). The desire to reach an early peace settlement with Japan, given concerns over aggressive Chinese behavior, was at the heart of this decision. The implications of this security arrange-ment for the future of Asian regionalism were, of course, enormous. Instead of forging a security bond that could help these nations overcome their distrust and manage regional frictions, they remained isolated from one another interacting individually with the United States as their main bilateral security partner.37 The absence of a minilateral collective security organization in East Asia, therefore, hindered the construction of regional economic regimes in as much states are more likely to trade with their allies since they do not fear the security externalities of such economic exchange.38

Second, the United States has influenced the fate of Asian regionalism not only in its role as the architect of the underlying security structures that condition trade choices, but also by actively discouraging the emergence of an Asian economic bloc. Contrary to its permissive attitude towards European integration, the United States has frowned upon purely Asian integration initiatives.39 In the aftermath of World War II , the United States came to support the European Community project for three main reasons: to strengthen its allies, to promote demand for American goods and investment as European nations recovered and to encourage more pros-perous European nations to make a larger contribution to the defense burden.40

The first official blueprints for an exclusive Asian economic grouping, however, took place in a very different security context from that of Europe, and drew a very different American response. When Malaysia ’s Prime Minister Mahathir proposed the creation of an East Asian Economic Group in 1990, the United States expressed its disapproval, and the initiative was shelved. Instead, APEC became the venue of

36 See Katzenstein and Hemmer, “Why is There No NATO in Asia?”37 K. Calder and M. Ye (2004) “Regionalism and Critical Junctures: Explaining the ‘Organization Gap’ in Northeast Asia.” Journal of East Asian Studies 4: 204–08.38 See J. Gowa (1994) Allies, Adversaries, and International Trade. Princeton University Press, Princeton; and E.D. Mansfield and R. Bronson (1997) “The Political Economy of Major-Power Trade Flows,” In: Mansfield and Milner, eds., The Political Economy of Regionalism. Columbia University Press, New York.39 P. Katzenstein (2005) A World of Regions; Asia and Europe in the American Imperium. Cornell University Press, Ithaca NY, pp. 50–60.40 Mattli, The Logic of Regional Integration, p. 71.


choice for the discussion of multilateral regionalism. Some key nations in the region (Japan ) supported the APEC initiative precisely because it circumvented US opposi-tion to the creation of an exclusive Asian economic club.41 A decade later, the United States once more reacted negatively to another proposal to develop an Asian regional institution, this time to deal with monetary cooperation. When the Japanese government launched its 1997 Asian Monetary Fund (AMF) proposal, it struck a chord with many Asian countries that were disappointed with the hands-off American approach towards the crisis in Thailand as well as with the actions of the International Monetary Fund (IMF) in dealing with the regional financial crisis.42 For the United States, the AMF threatened to undermine the IMF’s role as the guardian of international financial governance and raised the specter of supplying Asian countries with funds that lacked conditionality strings. Given the resolute opposition from the United States, the AMF initiative was pushed aside quickly. Concern over narrow Asian economic integration initiatives that could produce significant trade diversion has been a concern of elites in the United States .43 Due to the central role that the United States plays in the most serious hotspots of the region (the North Korean nuclear program and the Taiwan Strait), Asian governments cannot completely disregard the preferences of the extra-regional hegemon against an inward-looking regional bloc.44

Finally, the fact that East Asia is a region divided by geopolitics and historical legacies further complicates the chances of embarking on closer economic integra-tion. Cold War era confrontations are still very much alive in a region with the few surviving communist states and with the North Korean campaign to develop nuclear weapons. Moreover, Japanese aggression during World War II and dissatis-faction with Japan ’s accountability for past deeds have made it very difficult to generate relations of trust among neighbors. In general, the typical national development strategy adopted by Northeast Asian governments of “catching up” with the West, along with a strong sense of nationalism and competition, left those countries reluctant to compromise their sovereignty for the sake of benefiting neighbors.45

41 Y. Funabashi (1995) Asia Pacific Fusion: Japan’s Role in APEC. Institute for International Economics, Washington DC, pp. 105–18; E. Krauss (2000) “Japan, the US, and the Emergence of Multilateralism in Asia,” The Pacific Review 13, 3: 473–94.42 See S.N. Katada (2001) Banking on Stability: Cross-Pacific Dynamics of International Financial Crisis Management. University of Michigan Press, Ann Arbor. The one important exception was China, which opposed the AMF. Bowles notes that the Chinese opposed the idea because they feared this initiative would enhance Japan’s leadership position in the region, while Amyx notes that the Japanese government, going through the Hong Kong Monetary Authority first, made it harder for the Chinese authorities to reach a decision. P. Bowles (2002) “Asia’s Post-Crisis Regionalism: Bringing the State Back In, Keeping the (United) States Out,” Review of International Political Economy 9, 2: 255–56; J. Amyx (2005) “What Motivates Regional Financial Cooperation in East Asia Today?” Asia Pacific Issues 76: 2–3.43 The United States has not reacted strongly against its exclusion from the East Asia Summit held in Kuala Lumpur because it remains skeptical it can yield an inclusive regional block given the open disagreements between China and Japan over the future evolution of this forum.44 Lincoln, East Asian Economic Regionalism, pp. 256–57.45 G. Rozman (2004) Northeast Asia’s Stunted Regionalism: Bilateral Distrust in the Shadow of Globalization. Cambridge University Press, Cambridge.


The contrast with Europe could not be starker when it comes to the role of regional hegemons. In Europe, the two countries, France and Germany , with a long history of animosity and warfare joined a security alliance (NATO in 1949) almost at the same time they took the first steps to integrate economically (the Schuman Plan of 1950). In East Asia , instead of facilitating regional coopera-tion, growing discord between China and Japan constitutes a formidable obstacle to region-wide integration. Japan and China stood at the opposite ends of the Cold War divide and have not come closer in this era of American unipolarity. On the contrary, these nations see themselves as potential rivals in the construction of Asian regional institutions, competitively courting ASEAN , for example. Furthermore, their bilateral relations have recently soured at the time when respective governments proposed various initiatives including regional prefer-ential trade agreements and security dialogues.46 This climate of open rivalry and friction among would-be regional hegemons significantly clouds the prospects of devising region-wide economic arrangements and institutions. There are significant hurdles in the path of intra-regional cooperation, and they are visible in the minimal progress made in the negotiation of a China–South Korea–Japan FTA and open reluctance at least on the Japanese side to embark on FTA negotiations with China.47

1.6 Diversity in Motives: Explaining Cross-Regional Partner Choices

As noted above, East Asian nations are exposed to a number of regional or environ-mental factors which encourage them to consider cross-regionalism as an impor-tant component of their overall FTA strategy. These factors include the weight of extra-regional markets , the persistence of regional security cleavages , historical animosities and territorial disputes and discouragement from the United States to develop an exclusive Asian bloc. Yet the very different choices these East Asian governments have made as they pick their cross-regional FTA partners also reflect an important diversity in motives regarding partner selection. We turn next to a discussion of the most important motivations in the pairing of East Asian countries with extra-regional counterparts as they flesh out their FTA strategies (see Table 1.2).

46 The factors that have led to the souring of the Sino-Japan bilateral relations are many, including the phasing out of Japanese Official Development Assistance (ODA) loans, a bilateral trade imbal-ance and occasional trade wars, the exploration of gas reserves on the East China Sea, pending territorial disputes, the Japanese bid for a permanent seat at the UN Security Council, controversy over the official visits to the Yasukuni Shrine in Japan, approval of history books that downplay wartime atrocities and the anti-Japanese riots in China.47 Authors’ interviews with officials from Japan External Trade Organization (JETRO), Ministry of Economy, Trade, and Industry (METI), and Japanese politicians, summer 2005.


1.6.1 Economic Motives

The search for new and/or expanded market access through preferential trade and investment liberalization is undoubtedly a powerful determinant of partner selection. An FTA can serve as an institutional device to create trade opportunities among economies with a high degree of economic complementarities or to manage highly interdependent economies by lowering transaction costs and providing new rules addressing this deeper level of de facto integration. This is, indeed, the insight of a well established theory of regional integration – neofunctionalism .48 It is a theory of regional integration broadly speaking. The basic idea is that, as flows of intra-regional trade and investment increase, the private sector will call for the creation of supranational institutions that allow them both to reduce the uncertainty and transaction costs surrounding these economic transactions and to reap the benefits of larger markets.49

Others, however, have disagreed with the neofunctionalist argument that govern-ments agree to pool sovereignty mostly to manage the technical issues created by expanding economic transactions. For instance, Grossman and Helpman, in their well-known domestic political economy models of FTA lobbying, underscore a more strategic, if not rent-seeking , rationale for producer groups to demand free trade negotiations. In their view, exporting interests will attempt to use FTA nego-tiations to secure preferential access to higher priced regional markets enjoying the protection of restrictive rules of origin and hefty external tariffs .50

The spread of regionalism in the world economy has largely been interpreted as a defensive reaction to this first-mover advantage that producers within a bloc obtain through their preferential status. This is known as the “domino effect ,” whereby

48 E. Haas (1964) Beyond the Nation-State. Stanford University Press, Stanford. Although economic objectives (managing growing interdependence) are of central importance in explaining the demand for regional integration, neofunctionalism is essentially a political explanation in that it explains how the lobbying activities of interest groups to establish supranational institutions that erode state autonomy will move forward the integration process. We thank an anonymous reviewer for pressing us to clarify this important point.49 See Mattli, The Logic of Regional Integration. In fact, Bhagwati, Greenaway and Panagariya argue that the trade creation effect may be larger in cross-regional FTAs (contrary to the expecta-tions of the natural trading partner hypotheses) due to the reduction in transportation costs and the greater elasticity of export curves with more distant partners. See J. Bhagwatti, D. Greenaway and A. Panagariya (1998) “Trading Preferentially: Theory and Policy,” The Economic Journal 108: 1128–48.50 See G.M. Grossman and E. Helpman (1995) “The Politics of Free-Trade Agreements,” The American Economic Review 85, 4: 667–90. In fact, preferential rules of origin are now considered one of the most pernicious elements of FTAs in that they provide an effective and hidden form of protection for bloc producers. We thank Steph Haggard for pointing this out to us. Some of the best works on rules of origin are by A. O. Krueger (1993) “Free Trade Agreements as Protectionist Devices: Rules of Origin.” Working Paper No. 4352 National Bureau of Economic Research, Cambridge; and A. Estevadeordal and K. Suominen (2005) “Rules of Origin in Preferential Trading Arrangements: Is All Well with the Spaghetti Bowl in the Americas?” Economia: 63–103.


countries seek membership in existing blocs (or, if turned down, they devise their own integration arrangements) in order to minimize the trade and investment diversion result-ing from regional preferences.51 The disadvantages for outsiders include not only higher tariffs but also stiff rules of origin, inability to reap regional economies of scale, deterio-rating terms of trade and stricter investment rules on their multinational corporations. Aid diversion – as wealthy members of the bloc focus their donor activities on less affluent members – has also been flagged by Mattli.52 These disadvantages may generate a strong lobbying response. Baldwin makes the persuasive point that producer groups will lobby harder for FTA membership than to rescue troubled multilateral talks, since failure at the multilateral level results in a missed opportunity for everyone, whereas uncor-rected regional discrimination weighs heavily on non-member producers.53

Table 1.2 Main rationales behind the selection of cross-regional FTA partners matrix of hypotheses

Motive Rationale

Economic

Market access The search for new and/or expanded market access through a preferential trade and investment liberalization

Trade diversion The attempt to avoid exclusion and level the playing field by countering trade and investment diversion effects of existing FTAs

Security

Reinforce security arrangements

The desire to use economic diplomacy in order to cement ties with the main (extra-regional) security guarantor

Avoid diplomatic isolation The desire to exercise “benign” leadership on a wider stage in order to promote foreign diplomatic engagement through collaborative economic projects

Raise international status The desire by elites to increase their states’ diplomatic status by joining a perceived progressive international trend towards trade liberalization agreements

Leverage

Creating precedents (a) The wish by policy-makers to “lock-in” controversial eco-nomic reforms, thereby fending-off domestic opponents and enhancing the international credibility of the state as an intra-regional FTA negotiator

(b) The attempt to establish precedents on negotiation modali-ties to be incorporated in subsequent FTA or WTO negotia-tions

Capacity building The need to develop negotiating techniques and qualified bureaucratic cadres so as to avoid entrapment in disadvan-tageous commitments and/or gain advantage in future FTA negotiations with larger economic partners

51 See Baldwin, “The Causes of Regionalism.”52 See Mattli, The Logic of Regional Integration, p. 60.53 See Baldwin, “The Causes of Regionalism,” p. 879.


Moreover, this focus on the gains to specific industries from cross-FTA initiatives helps explain apparent anomalies, such as when distant nations with modest trade flows are nevertheless willing to pay the costs of negotiating formal trade agreements. In other words, shoring up the interests of a few industries with large extra-regional interests may help account for these FTAs despite lackluster aggregate trade figures.

Economic objectives, therefore, can exert a powerful influence over the cross-regional choices of East Asian nations. Countries in this region that depend heavily on outside markets may wish to reduce transaction costs and market access uncertainty through a new trade governance structure (FTA) with extra-regional partners . Moreover, to the extent that specific industries rely heavily on extra-regional markets, these producer groups will also be very susceptible to any changes in the rules of market operation in that destination country, such as the decision to join a regional bloc. Under those circumstances, Baldwin’s domino effect is likely to unfold as the high trade and investment diversion costs will persuade disadvantaged exporters and investors outside the region to lobby for a cross-regional FTA. Preferential trading therefore is essential to restore the level playing field in terms of market access across regions.

1.6.2 Security and Diplomacy Motives

The use of economic diplomacy to serve larger security interests is an old practice widely studied in international political economy.54 FTAs are inter-governmental negotiations, and as such they not only reflect policy-makers’ response to the demands of business lobby groups but can also be guided by a number of non-economic priorities in a state’s agenda. The desire to overcome distrust among traditional rivals (German-Franco accommodation in the European Community ), to form a common front vis-à-vis external threats (ASEAN ’s anti-Communist stance), to cement security ties with powerful countries, to avoid diplomatic isolation and to acquire greater visibility in world affairs are just a few examples.55 In other words, states’ commercial policies are not only conditioned by the broader security environment they operate in, but states seek to use tools of economic diplomacy to reinforce security arrangements as well.

54 Perhaps one of the most compelling accounts of such practice remains Hirschman’s study of Nazi Germany’s use of economic diplomacy to create webs of asymmetrical dependence to increase its power among neighbors. See A.O. Hirschman (1980) National Power and the Structure of Foreign Trade. University of California Press, Berkeley.55 See Mansfield and Milner, “The New Wave of Regionalism”; Mattli (2000) The Logic of Regional Integration; World Bank, Trade Blocs. Oxford University Press, New York; V.K. Aggarwal (2006) “Bilateral Trade Arrangements in the Asia-Pacific,” In: Aggarwal and Urata, eds., Bilateral Trade Arrangements in the Asia-Pacific. Routledge, New York; S. Hoadley (2002) Negotiating Free Trade: The New Zealand–Singapore CEP Agreement. New Zealand Institute of World Affairs, Wellington.


In addition, FTA talks can be used as a tool to improve the countries’ status and image by allowing them, on the one hand, to display “benign leadership ” through collaborative economic projects. For example, the remarkable rise of China has gen-erated strong concerns about its systemic repercussions in the fields of economics (with Chinese products flooding world markets), energy (with oil prices skyrocketing given China’s voracious consumption needs) and security (with distrust over China’s growing military capabilities). In order to quell these concerns, the Chinese govern-ment has attached utmost importance to the idea of its “peaceful rise.”56 Demonstration of benign leadership, in the form of economic cooperation, is an essential element of such a strategy. China’s first FTA with ASEAN was very much informed by this goal. For example, Kwei shows that political considerations (engaging Southeast Asia) were central to the Chinese decision to negotiate with ASEAN, despite the absence of strong economic complementarities .57 China’s need to stabilize its external environment as it rises to great power status could very well lead to the more active utilization of FTA diplomacy , both within and outside the region.

On the other hand, FTAs can also be used to improve the country’s status by gaining international recognition. The World Bank directly addresses this point when it notes that many countries engage in FTA negotiations in order to “be noticed.”58 Emerging as a “trade hub nation” through a network of FTAs can be a useful venue to raise a country’s international status.59

The desire to achieve security and diplomatic goals, such as reinforcing security ties and developing a tool to improve the country’s image or status in world economic affairs can, therefore, serve as important motivations behind some of the cross-regional initiatives to be analyzed here. Linking FTA policy with the country’s security and diplomatic goals can be critical when dealing with cross-regionalism partners.

1.6.3 Leverage Motives

Cross-regional negotiations do not take place in a vacuum. On the contrary, govern-ments frequently pursue simultaneously inter- and intra-regional negotiations. What happens in one negotiating front can affect what ensues in the other, and states have

56 Z. Bijian (2005) “China’s ‘Peaceful Rise’ to Great-Power Status,” Foreign Affairs. 84, 5: 18–24.57 E.S. Kwei (2006) “Chinese Trade Bilateralism: Politics still in command,” In: Aggarwal and Urata, eds., Bilateral Trade Arrangements in the Asia-Pacific: 133. And Wong and Chan point to lack of complementarities in trade structures between China and ASEAN; see J. Wong and S. Chan (2003) “China–ASEAN Free Trade Agreement: Shaping Future Economic Relations,” Asian Survey 43, 3: 516–23.58 World Bank, Trade Blocs, p. 19.59 A. Ibarra-Yunez (2003) “Spaghetti Regionalism or Strategic Foreign Trade: Some Evidence for Mexico,” Journal of Development Economics 72: 567–84.


not missed this point. In fact, an important motive in embarking early on in cross-regionalism is to acquire leverage over the evolution of intra-regional integration through at least two main mechanisms, capacity building and precedent setting .

Just as East Asia embraced FTA diplomacy for the reasons noted above, the lack of regional know-how in the negotiation of such agreements became readily apparent.60 East Asian governments seeking “on-the-negotiation” training by teaming up with consummate preferential traders had to look beyond the region.61 Therefore, an important motive in the selection of cross-regional FTAs, we posit, is the need to develop negotiating techniques and qualified bureaucratic cadres so as to avoid entrapment in disadvantageous commitments and/or to gain advantage in future FTA negotiations with larger economic partners.

Governments may also embark on cross-regional integration in order to set prece-dents – both domestically and internationally – which can be useful in future FTA negotiations. A powerful insight from the literature on intergovernmentalism is that states favor preferential integration negotiations to gain leverage over domestic inter-est groups.62 States can use selective trade liberalization to minimize the future politi-cal clout of import-competing industries expected to shrink after exposure to international competition.63 FTA commitments can also help lock in these reforms. CRTA negotiations, therefore, allow states to win their political battles at home, pav-ing the way for more vigorous regional integration diplomacy. Internationally, states can use CRTAs to boost their reputation as reliable FTA partners, and to establish precedents in key areas (e.g., exclusion of sensitive sectors, non-application of fair trade remedies) that could increase their leverage when negotiating with intra-regional partners or in larger forums such as the World Trade Organization (WTO) . As these examples reveal, precedent setting can be a double-edged sword, sometimes working in favor of trade liberalization – using foreign pressure against protectionist domestic groups – while other times working against market opening, thereby sending signals to prospective FTA partners that some sensitive sectors are off limits.

Importantly, CRTAs allow East Asian governments to hone their trade negotia-tion skills, to marginalize domestic opponents to trade liberalization and to set precedents on negotiation modalities in a risk-free environment, since they do not fear the security externalities of FTA negotiations with potential regional rivals, and they can also minimize the overall liberalization adjustment burden by negotiating with minor extra-regional trade partners.

60 J. Okamoto (2003) “Introduction,” in J. Okamoto, ed., Whither Free Trade Agreements? Proliferation, Evaluation, and Multilateralization. Institute of Developing Economies, Tokyo.61 Aggarwal and Koo make exactly the same argument when they note that Korea selected Chile as its first FTA partner with the explicit goal of capacity building (for a more expansive discussion of this issue see the article by Park and Koo in this volume). See Aggarwal and Koo, “Beyond Network Power,” p. 7.62 A. Moravcsik (1993) “Preferences and Power in the European Community: A Liberal Intergovernmental Approach,” Journal of Common Market Studies 31, 4: 473–524.63 R. Rogowski (1989) Commerce and Coalitions: How Trade Affects Domestic Political Alignments. Princeton University Press, Princeton.


1.6.4 Interaction Effects

It is important to consider as well the interplay of the economic, security, and leverage motives in a country’s overall CRTA policy. We envision at least two patterns of interaction . First, whether a country adopts an offensive or defensive approach in its CRTA policy will likely influence the specific motivations behind the selection of CRTA partners. A government using CRTAs assertively will pursue a high pro-file FTA diplomacy to enhance its leadership status, and/or will try to maximize the gains from trade or the leverage gains from cross-regional trade agreements both domestically and internationally. In those cases, it is more likely for the country to choose large trading partners in other regions to achieve these goals. On the other hand, a defensive CRTA posture will be consistent with a reactive response to trade diversion, and the goal to overcome the fear of being left behind in the world of preferential trade. In this case, small trading partners will be an appropriate choice, for they are less likely to impose major domestic economic adjustments and might also be easier partners in a negotiation.

Second, the interaction of economic, security and leverage variables will also be influenced by the overriding pressures to which the government is responding through CRTA policy. If in line with realism and intergovernmentalism , the government is mostly concerned with power politics, then CRTAs will seek to advance security interests and prestige through FTAs that cement security bonds or that portray a benign leadership image. If, on the other hand, the government embarks on CRTAs mostly as a response to lobbying efforts from domestic economic actors, then the search for preferential market access, the elimination of trade diversion , and the leverage gains of capacity building and precedent setting will prevail.

1.7 Organization of the Book

This introductory chapter has laid out the analytical framework to explain East Asia’s heavy reliance on cross-regional trade agreements by identifying environ-mental barriers that hinder or delay intra-regional integration, by fleshing out the economic, security and leverage considerations behind the selection of specific cross-regional partners, and by highlighting some possible interaction effects among these variables. The remainder of this book offers five chapters on the cross-regional initiatives of countries spanning across Northeast (Korea , Japan and China ) and Southeast Asia (Singapore , Malaysia and Thailand ). Each of these case studies examines the hypotheses laid out in the introductory chapter, places the cross-regional trade agreements in the broader context of each country’s overall FTA strategy, and assesses the influence of CRTAs on intra-regional initiatives. By structuring the empirical case study chapters in this way, we aim to strike a balance between a unified analytical framework and the rich diversity of country experi-ences. A brief summary of the case studies’ findings follows.


In Chap. 2, Park and Koo analyze Korea’s departure from an exclusive multilateral focus with the selection of Chile as the country’s first-ever partner in a bilateral preferential trade agreement. The authors discuss the multiple reasons for Korea’s shift in favor of FTAs including welfare considerations, the rise of an internationalist social coalition in the aftermath of the Asian financial crisis , the embrace of bilat-eralism in policy circles, and peer pressure from similar moves among Korea’s trade partners. The authors find that political and instrumental factors overshadow economic considerations in the selection of Chile to launch Korea’s FTA policy. This CRTA offered the Korean government a low risk platform to leverage domestic reforms, establish precedents on negotiation modalities, and gain negotiation expertise which would enable the country later on to negotiate more ambitious FTAs capable of elevating Korea to a trade hub status. Through their analysis of the ratification crisis of the CRTA with Chile and the tough negotiations of the Korea–US CRTA , Park and Koo unearth the domestic transformation (presidential succession, bureau-cratic streamlining, and compensation of social actors) that has moved Korea from a timid FTA player to a major cross-regional bridge for East Asia in the map of preferential trading.

Low’s analysis in Chap. 3 of Singapore ’s FTA policy also speaks to the theme of using CRTAs to effect significant domestic changes, in this particular case the consolidation of Singapore as a knowledge-based economy (KBE). While Singapore has quickly amassed a vast FTA network (with 27 such initiatives at dif-ferent stages of progress), the core of the policy has been the negotiation of prefer-ential trade deals with five Organisation for Economic Cooperation and Development (OECD) nations, most of which are outside the region. Singapore’s aim is to sign high standard agreements that incorporate advanced rules on services, intellectual property and foreign investment and that will open on preferential terms large industrialized markets for its knowledge-intensive industries. Because Singapore is already an open economy with no visible political cleavage around trade liberalization, CRTAs are used less to corner opponents of liberalization than as vehicles for the dissemination of new rules and the consolidation of market access. Leverage considerations are, however, very important vis-à-vis Singapore’s regional trade policy. Singapore has used CRTAs to signal its displeasure with the slow process of liberalization in ASEAN , and its CRTA policy choices have been closely emulated by other countries in Southeast Asia.

In Chap. 4, Solís and Katada offer an account of the high stakes involved for Japan in the negotiation of a CRTA with its minor trade and security partner, Mexico . In fact, trade negotiations with Mexico were very important to Japanese electronics, automobiles and general trading companies since they were competitively disadvantaged by the lack of preferential treatment that their American and European rivals enjoyed thanks to NAFTA and the Mexico-EU CRTA . These Japanese industries judged the stakes in signing a CRTA with Mexico to be so high that they were willing to risk the ire of the agricultural lobby. Thus, these industries challenged prevailing views that agricultural concessions would only be negotiated at the WTO . On the other hand, Japanese trade bureaucrats deemed negotiations with Mexico as essential in winning the domestic battle to consolidate the trade


policy shift, and to set precedents on FTA negotiation modalities for subsequent intra-regional trade negotiations. Mexico also offered Japan its first tutorial on how to negotiate a bilateral trade deal with a developing nation that maintains significant tariff barriers, is an agricultural exporter, and has abstained from signing some key WTO plurilateral agreements. The chapter brings to the surface the main fracture lines in the domestic political economy of Japanese FTA policy including polariza-tion of trade demands from industry and agriculture, bureaucratic sectionalism, and selective political intervention from the Prime Minister’s office.

Hoadley highlights the diverse Southeast Asian experience in the area of FTA policy by contrasting the experiences of Thailand and Malaysia in Chap. 5. On the one hand, Thailand was quick in jumping on the FTA bandwagon due to its concern with the sluggishness of ASEAN and APEC and the fear of growing trade diversion in the world economy, as well as driven by its desire to acquire negotiation skills and increase its international status as a country possessing an FTA network across regions. Malaysia , on the other hand, was critical of CRTAs since it feared they could dilute the regional integration project and that they could threaten key priorities of domestic industrial and social policy. Malaysia has slowly warmed up to FTA negotiations, however, as it has learned of the negotiation techniques to preserve the protectionist status quo: rules of origin , exclusions, deferments on tariff cuts, etc. Indeed, Hoadley’s chapter highlights the differences in tempo and reach of Thailand ’s and Malaysia’s FTA policies, but it also identifies a key commonality: both governments have deliberately refrained from using FTA policy to leverage domestic reform; and this is particularly clear in their troubled negotiations of a CRTA with the United States , where issues such as services, intellectual property (and in the case of Malaysia government procurement and automobile industrial policy) have stalled negotiations. The question remains as to whether Malaysia and Thailand will be left behind as other countries in the region hammer out CRTAs with the United States, and if so with what consequences.

In Chap. 6, Hoadley and Yang analyze China ’s eventful decision to open up an FTA track in its international trade policy soon after acquiring significant liberaliza-tion commitments through its 2001 WTO membership. Cross-regionalism has figured prominently in China’s FTA policy with early trade agreements with Chile , New Zealand , and Australia ; while at the same time China uses these trade agreements to achieve important regional objectives: assuaging ASEAN ’s concerns over being eclipsed by a booming Chinese economy, and competing with Japan for regional leadership. Hoadley and Yang underscore a diverse array of motives behind China’s CRTA policy that range from economic (counter trade diversion) to security (promote the notion of China’s peaceful rise through cooperative economic endeavors) and leverage objectives (domestically to stimulate the efficiency of Chinese enterprises, and internationally to use FTAs to advance the recognition of China as a market economy in the WTO). While the specific mix of goals varies with each FTA partner, the underlying rationale for embarking on preferential trade talks cuts across all of them: to enhance China’s comprehensive national power and advance the “peaceful rise” campaign. CRTAs constitute an important component of this key national policy.


The concluding chapter draws systematic comparisons among the empirical cases, highlights the theoretical and policy implications of an explicit focus on the phenomenon of cross-regionalism, and discusses the way in which our findings add to the current understanding of East Asian regional integration. By factoring in the importance of cross-regional trade agreements, we aim to shed light on the origins and implications of East Asia’s permeated regionalism.

Chapter 2Forming a Cross-Regional Partnership: The South Korea–Chile FTA and Its Implications*

S.-H. Park and M.G. Koo

2.1 Introduction

As noted in the lead chapter of this volume, South Korea is not the only country in East Asia which is belatedly attempting to catch up with the global trend of free trade agreements (FTAs).1 Yet the rise of South Korea’s FTA initiatives – particularly its appetite for cross-regional trade agreements (CRTAs) – is truly dramatic in its speed and enthusiasm, thereby offering fertile grounds for testing the hypotheses developed in the introduction by Solís and Katada.

In this study, we focus on the first cross-Pacific FTA, signed between South Korea and Chile in February 2003. Against the background of South Korea’s new trade strategy in the post-Asian financial crisis period, we examine various eco-nomic and diplomatic/security factors that affected the long, halting negotiations and ratification process of the South Korea–Chile FTA . For South Korea, the agreement marked the beginning of its dramatic embrace of trade liberalization methods outside multilateral ones such as the GATT and the WTO . It has also had a significant impact on South Korea’s trading partners in the Asia-Pacific, who are busily weaving their respective webs of bilateral FTAs.

* This chapter is a reprint of the article with the same title published in Pacific Affairs, vol. 80, no. 2 (2007), pp. 259–278. We would like to thank the journal editor and three anonymous reviewers of Pacific Affairs, Mireya Solís, Saori Katada, and other participants of a conference, “East Asian Cross Regionalism” sponsored by the Center for International Studies, University of Southern California, Los Angeles, California, October 14, 2005.

1 East Asian countries’ interest in regionalism has surged dramatically at the turn of the new mil-lennium. In East Asia, the shift toward alternatives to the General Agreement on Tariffs and Trade (GATT)/World Trade Organisation (WTO) and the Asia-Pacific Economic Cooperation (APEC) took its most pronounced turn with the conclusion of Japan’s first post-World War II bilateral FTA, the Japan–Singapore Economic Partnership Agreement (EPA). Other East Asian countries, tradi-tionally loyal supporters and beneficiaries of post-war multilateral trading regimes, are also actively weaving a web of bilateral FTAs, targeting countries both within and outside the region in hopes of securing access to much-needed export markets. See Vinod K. Aggarwal and Min Gyo Koo, “The Evolution and Implications of Bilateral Trade Agreements in the Asia-Pacific,” in Vinod K. Aggarwal and Shujiro Urata, eds., Bilateral Trade Agreements in the Asia-Pacific: Origins, Evolution, and Implications (London: Routledge, 2006).


28 S.-H. Park, M.G. Koo

Since its dramatic economic takeoff in the 1970s, South Korea has benefited from export-oriented industrialization under the auspices of the multilateral trading regime of the GATT/ WTO. However, in the wake of the Asian financial crisis of 1997–1998, the illusion of its unstoppable economic growth was severely shattered. Furthermore, when the 1999 Seattle Ministerial Conference of the WTO failed to launch a new round of trade talks, South Korea came to recognize that the mediocre performance of the WTO and increasing competition in its traditional export mar-kets could hurt export-dependent South Korea, which lacked alternative trade channels.2

As a result, the then-incoming Kim Dae-jung government (1998–2003) began to pursue bilateral FTAs with its trading partners, departing from South Korea’s ear-lier position on trade policy based on global multilateralism. South Korea’s bilateral track record has been remarkable since then. Aside from the South Korea–Chile FTA, South Korea has concluded bilateral and minilateral FTAs with Singapore (April 2005), the European Free Trade Association (EFTA, July 2005), the ASEAN (December 2005) and the US (April, 2007). South Korea has also been negotiating bilateral FTAs with Japan , Canada , Mexico , India and the EU, the successful con-clusion of which would likely facilitate FTAs with its other major trading partners – particularly, China . In addition, a number of feasibility studies are currently under way with South Africa and Mercosur , the regional trade agreement (RTA) between Brazil , Argentina , Uruguay , Venezuela and Paraguay .

An exploration of South Korean motives behind its FTA with Chile raises a number of important questions. Why did South Korea choose Chile as its first FTA partner? In contrast to earlier expectations, why did it take so long for the two countries to conclude and ratify the agreement? What has motivated South Korea to continue to form FTAs with its cross-regional partners?

Among the key economic and diplomatic/security motives identified by Solís and Katada, four are particularly important. First, for both South Korea and Chile, welfare gains from a bilateral FTA with each other loomed large in the post-Seattle era. Second, the socio-economic restructuring in post-financial crisis South Korea promoted a new internationalist social coalition that began to overshadow protec-tionist interests, particularly in agriculture. Third, a new consensus emerged within South Korea’s policy circles that a new bilateral approach is not only complementary to the traditional multilateral strategy but is also a crucial element of South Korea’s economic survival strategy in a world of rising regionalism. The change in political leadership – namely reform-minded Kim Dae-jung ’s rise to the presidency in 1998 in the midst of financial turmoil – was at the heart of this dramatic shift in South Korea’s approach. Finally, growing peer pressure motivated South Korea to surf the growing wave of bilateral FTAs both inside and outside East Asia.

2 Min Gyo Koo, “From Multilateralism to Bilateralism? A Shift in South Korea’s Trade Strategy,” in Aggarwal and Urata, eds., Bilateral Trade Agreements in the Asia-Pacific, pp. 140–141.

2 Forming a Cross-Regional Partnership 29

Section 2 of this chapter provides an overview of South Korea’s shifting trade strategy. Section 3 examines South Korea’s economic and political motivations behind its CRTA initiatives with a focus on the South Korea–Chile FTA. Section 4 analyzes the potential impact of South Korea’s cross-regional initiatives – particularly the recently concluded South Korea–US FTA (KORUS FTA) – on Seoul’s simultaneous effort at promoting intra-regional FTAs. Section 5 summarizes our main findings and draws some conclusions.

2.2 South Korea’s Policy Shift from Multilateralism to Bilateralism

Historically, South Korea has supported the GATT/WTO multilateral trading regime over sub-multilateral options including bilateral and minilateral FTAs. Since its accession to the GATT in 1967, South Korea’s active promotion of its export sector has allowed the once-reclusive country in Northeast Asia to aggressively participate in the global market. As a trade-dependent country, South Korea’s full integration into the world trading system was not a matter of choice but of survival. Under the auspices of the GATT/WTO, South Korea has ensured its access to vital export markets, while implementing market-oriented economic liberalization .3 Until recently, together with Japan and China , South Korea remained one of the very few WTO member countries which did not enter into any regional trading agreements as defined under Article 24 of the GATT/WTO.4

Yet the global trend to forming FTAs began to exact its toll by diverting trade away from South Korea. Furthermore, in the wake of the WTO’s failure to launch a new round of trade talks in Seattle in 1999, export-dependent South Korea increasingly recognized that the mediocre performance of the WTO would not solve its lack of alternative trade channels. For South Korea, therefore, FTAs belatedly came to be seen as a promising alternative avenue.5

3 Koo, “From Multilateralism to Bilateralism,” pp. 142–143; Byung-Nak Song, The Rise of the Korean Economy (Hong Kong: Oxford University Press, 1997), pp. 91–93.4 In 1975, seven Asian countries including South Korea, the Philippines, Thailand, India, Laos, Sri Lanka and Bangladesh met in Bangkok and agreed to a list of products for mutual tariff reduction. The agreement, known as the Bangkok Agreement, was ratified by five of the original seven members (not included were the Philippines and Thailand). China joined the agreement in 2001. Yet the Bangkok Agreement is governed by the Enabling Clause rather than by Article 24 of the GATT/WTO. See “Asia-Pacific Trade Agreement (APTA),” [Online, cited 8 September 2006]. Available from www.srilankabusiness.com/tragreement/APTA/pdf/apta.pdf.5 According to one study, South Korea’s economic opportunity cost due to the exclusion from the global web of regional FTAs would likely amount to at 1east a 1.33% decrease in growth rate and a $34.4 billion decrease in exports per year (Inkyo Cheong, The Economic Effects of A Korea–Japan FTA and Policy Implications, KIEP Policy Paper 01-04 [Seoul: Korea Institute for International Economic Policy, 2001]).


On 16 September 1998, the then Japanese Ambassador to South Korea first proposed that South Korea and Japan launch a joint study group to examine the feasibility of a bilateral FTA between the two countries.6 Presumably, his proposal was motivated by President Kim Dae-jung ’s conciliatory approach to Japan. Although the proposal itself was not warmly received in Seoul due to the South Korean concern about deepening economic dependence on Japan, it did prompt genuine interests in FTAs among South Korea’s policy makers.7

The South Korean government wasted no time. On 5 November 1998, the Inter-Ministerial Trade Policy Coordination Committee formally announced that South Korea would seek an FTA with Chile , followed by economic feasibility studies with other trading partners, such as the US, Japan , New Zealand and Thailand . In the following month, the South Korean government formed a special task force on a South Korea–Chile FTA, which consisted of five working groups, covering market access, trade rules , services, intellectual property and legal procedures.8

Aside from a fear of exclusion from the recent trends of regionalism, the outbreak of the Asian financial crisis catalyzed South Korea’s decision to pursue FTAs. Indeed, the 1997–1998 financial crisis served as a wake-up call to South Korea, making it realize the importance of supplementary trade mechanisms at the sub-multilateral level in safeguarding its economic security. Also, trade and economic liberalization through FTAs came to be recognized as an integral part of South Korea’s long-term economic vitality.9

As a latecomer in the global trend of forming bilateral FTAs between like-minded countries, South Korea has adopted an aggressive FTA strategy. Its current FTA initia-tives can be variously characterized, but four features are particularly important.

First, South Korea’s approach can be dubbed a multi-track FTA strategy with a geographic focus that goes beyond East Asia.10 Currently, South Korea engages in more than 20 FTA initiatives at various stages, ranging from joint feasibility studies to

6 Dong-Han Lee, “Han-Il Ja-yoo-moo-yuk-ji-dae Je-ahn: Ogura Dae-sa (Ambassador Ogura pro-posed a Korea–Japan FTA),” Chosun Ilbo, 17 September 1998. [Online, cited 5 December 2006]. Available from http://srchdb1.chosun.com/pdf/i_service/read_body.jsp?Y=1998&M=09&D=17&ID=9809170210.7 Interviews with South Korea’s FTA negotiators, Seoul, July 2006.8 Hae-Kwan Chung, “The Korea–Chile FTA: Significance and Implications,” East Asian Review, vol. 15, no. 1 (2003), p. 74; Chan-Hyun Sohn, “Korea’s FTA Developments: Experiences and Perspectives with Chile, Japan and the US” (paper presented at Regional Trading Arrangements: Stocktake and Next Steps, Trade Policy Forum, Bangkok, 12–13 June 2001).9 Inkyo Cheong, “Han-Chile FTA eui kyung-je-jeok hyo-gwa mit eui-eui (The economic signifi-cance of the Korea–Chile FTA),” Journal of International Economic Studies, vol. 3, no. 4 (1999), pp. 115–136; Sohn, “Korea’s FTA Developments,” p. 7.10 Ministry of Foreign Affairs and Trade of Korea (MOFAT), “U-ri-na-ra FTA chu-jin: FTA chu-jin jeong-chaek (Our country’s pursuit of FTAs: FTA policy initiatives),” [Online, cited 1 December 2005]. Available from http://www.fta.go.kr/fta_korea/policy.php; Soon-Chan Park, “Recent Changes in World Trading System and Korea’s FTA Strategy” (paper presented at a workshop organized by the Korea Chamber of Commerce and Industry, Seoul, 28 January 2005).


official negotiations. The South Korean government publicly expresses its willingness to pursue FTAs with any countries, either inside or outside of its geographic comfort zone, as long as the partners share mutual interests in exchanging preferential market access.11 As of April 2008, South Korea has concluded bilateral/minilateral FTAs with Chile , Singapore , EFTA , ASEAN and the US, and is conducting negotiations with Japan , Canada , Mexico , India and the EU .

Second, South Korea’s FTA initiatives have multiple purposes, including strength-ening regional economic security , securing market access to its major trading partners and raising national welfare through efficiency gains from trade expansion. As mani-fested in the course of a number of completed and ongoing FTA negotiations, South Korea also wants politically sensitive sectors – such as agriculture – off of the negoti-ation agenda wherever possible.

Third, the South Korean government has set up a roadmap for FTA negotiations with its prospective FTA partners, which are classified into three broad groups: (1) immediate FTA partners, such as Chile, Singapore, EFTA and Japan; (2) medium-term FTA partners, such as Mexico , Canada , ASEAN and China ; and (3) long-term FTA partners, such as the US , the EU and India . Currently, South Korea has con-cluded bilateral FTAs with all countries in the first group with the exception of Japan .12 With respect to the second group, the FTA negotiations with ASEAN has made faster progress than originally expected, as indicated by the conclusion of the South Korea-ASEAN FTA’s Trade-in-Goods Agreement in May 2006. Finally, despite South Korean filmmakers’ protests, the South Korean government made a surprise move in early February 2006 to cut its annual screen quota in favor of the US, thereby removing the last hurdle on the way to the start of KORUS FTA negotiations.13 After frantically working around the clock, both countries success-fully concluded the FTA close to midnight on 1 April 2007, a deadline set by the US Trade Promotion Authority (TPA) which expired in June 2007.14

Fourth, South Korea seeks comprehensive FTAs which cover not only trade in goods and services, but also investment, government procurement, intellectual

11 MOFAT, “U-ri-na-ra FTA chu-jin (Our country’s pursuit of FTAs).”12 After a long gestation period, South Korea and Japan started official negotiations for a bilateral FTA in December 2003. The two countries held six rounds of negotiations by November 2004, but the negotiation has been stalled since then due to disagreements on the speed and coverage of bilateral trade liberalization. In addition, the diplomatic tensions caused mainly by the controver-sial visits by the Japanese Prime Minister Koizumi to the Yasukuni Shrine have heightened bilat-eral tensions, thus undermining the desire for an FTA between the two countries.13 South Korea’s screen quota system was designed to stem a flood of Hollywood blockbusters. South Korea cut the quota from the current 146 days or 40% reserved for domestic films to 73 days or 20% starting 1 July 2006 (“Screen Quota Cut Clears Way for Trade Deal with the US,” The Chosun Ilbo, 26 January 2006. [Online, cited 5 December 2006]. Available from http://english.chosun.com/w21data/html/news/200601/200601260013.html).14 United States Trade Representative, “United States and Korea Conclude Historic Trade Agreement,” 2 April 2007. [Online, cited 21 May 2007]. Available from http://www.ustr.gov/Document_Library/Press_Releases/2007/April/United_States_Korea_Conclude_Historic_Trade_Agreement.html.


property rights and technical standards. It wishes to pursue high-quality FTAs, thus contributing to WTO-plus liberalization. Given that the Asian financial crisis played a pivotal role in forcing the South Korean economy to adopt global standards in many policy areas, liberalizing its trade and economic policy beyond what is com-mitted to the WTO is not regarded as a major problem for South Korea. South Korea’s liberalization of its investment regime, financial services sector and selected other trade-related policy areas has gone far beyond its WTO commitments, making the country feel confident about accepting WTO-plus liberalization .15

In sum, South Korea seeks to form FTAs not only with its neighboring countries in East Asia or major trading partners like the US but also with smaller countries in other regions. South Korea has given equally strong attention to European and Latin American countries. Thus, CRTAs have become a distinctive feature of South Korea’s new FTA strategy. Although South Korea’s pursuit of FTAs does not mean that it has completely abandoned its support for the multilateral trading system, the policy shift is now obvious and important.16

2.3 Why CRTAs? The Case of South Korea–Chile FTA


How and why have CRTAs become a trade policy option for South Korea over the past decade? As Solís and Katada note in their introduction, the search for new and/or expanded market access through preferential trade and investment liberaliza-tion is a powerful determinant of partner selection. Surprisingly, however, very little research exists that offers a clear and consistent rationale for choosing an ideal FTA partner.

From the perspective of neoclassical trade theory, an FTA between two countries with complementary structures of comparative advantage – that is, a capital-abundant and labor-abundant country pair – would most likely foster inter-industry trade, bringing trade benefits in the form of efficient allocation of resources.17 The South Korea–Chile FTA is seemingly consistent with the neoclassical prediction. By con-trast, new trade theories based on the differentiated products model suggest that countries having similar structures of comparative advantage will trade more through product specialization based on intra-industry trade.18 From this perspec-

15 For more details, see MOFAT, “FTA jeong-chaek hyun-hwang gwa hyang-hu gye-hoek (The current status of FTA policy and future plans)” (paper prepared for a special lecture at Korea University, 18 August 2005).16 Koo, “From Multilateralism to Bilateralism,” p. 143.17 Paul Krugman and Maurice Obstfeld, International Economics: Theory and Policy, 7th ed., (Boston: Addison-Wesley, 2006), pp. 24–49.18 Krugman and Obstfeld, International Economics, pp. 121–131.


tive, an FTA between economies with similar factor endowments , such as South Korea and Japan , would likely maximize the gains from trade .19

The so-called gravity model offers an alternative explanation that links geo-graphic distance and economic size to the choice of an FTA partner.20 In order to reduce the costs related to geographic distance and to maximize the benefits from economic size, this model suggests that neighboring countries form FTAs with each other, thereby creating a natural trading bloc .21 While the formation of natural trad-ing blocs improves welfare gains, the formation of unnatural trade blocs between distant and/or small economies arguably has marginal positive effects.22 From this perspective, the South Korea–Chile FTA is a typical example of an unnatural trading bloc, not only because an ocean separates the two countries, but also due to the fact that Chile’s economy is relatively small.23

As noted by Solís and Katada, the gains to specific industries from CRTAs may promote otherwise unlikely FTAs between distant trading partners. As will be dis-cussed in the following section, the sectoral interests in South Korea in fact played an important role by providing political support to their government’s FTA initiative. In July 2002, for instance, the Korea Automobile Manufacturers Association filed a petition that urged its government to conclude the final round of FTA negotiations with Chile sooner rather than later, as well as to launch new negotiations with other Latin American countries.24 In 2003, South Korea’s automobiles and electronics industries further mobilized their resources to lobby for the agreement when they

19 It should be noted, however, that neither neoclassical economics nor new trade theories of dif-ferentiated products offer first-hand explanations for why countries might prefer a bilateral FTA to other types of trading arrangements. The bottom line is that these theories are designed to pre-dict the direction of trade, rather than a certain pattern of trade, between countries.20 A typical gravity model assumes that trade between countries depends positively on their size and inversely on distance. The effect of distance on trade is directly associated with three catego-ries of costs, including shipping costs, time-related costs and unfamiliarity costs. See Jeffrey Frankel, Ernesto Stein and Shang-Jin Wei, Regional Trading Blocs in the World Economic System (Washington DC: Institute for International Economics, 1997), pp. 49–76.21 Paul Krugman, “The Move to Free Trade Zones” (paper presented at a symposium, sponsored by the Federal Reserve Bank of Kansas City, Policy Implications of Trade and Currency Zones, Jackson Hole, Wyoming, 22–24 August 1991).22 Frankel, Stien and Wei, Regional Trading Blocs, pp. 149–153.23 Koo, “From Multilateralism to Bilateralism,” p. 144. In the meantime, gravity model analyses indicate that South Korea would most likely be better off if it removed existing trade barriers by establishing FTAs with Japan and China. According to one study, South Korea’s actual trade volumes with Japan and China, which in terms of economic size and geographic distance present greater advantages, seem to fall short of the theoretical trade intensity – 85% with Japan and 67% with China, as compared to the model’s estimation (Chan-hyun Sohn and Jinna Yoon, “Does the Gravity Model Fit Korea’s Trade Patterns?” KIEP Working Paper 01-01 (Seoul: Korea Institute for International Economic Policy, 2001), p. 29.24 Eui-young Kang, “Joong-nam-mi ja-dong-cha shi-jang gong-ryak eui-hae FTA shi-geup (FTA is urgently needed to win in Central and South American auto markets),” Yonhap New, 1 July 2002. [Online, cited 5 December 2006]. Available from http://news.naver.com/news/read.php? mode=LSD&office_id=001&article_id=0000199056&section_id=101&menu_id=101.


began experiencing trade diversions in Chilean market as a result of South Korean National Assembly ’s inability to ratify the agreement in a timely manner.

Nevertheless, the mixed predictions of trade theories on the one hand and the initial doubts about economic benefits on the other indicate that a South Korea–Chile FTA did not make compelling economic sense at the early stage of negotiations.25 As a result, we argue that the two countries entered an agreement for political and instrumental, rather than purely economic, reasons.

2.3.2 Diplomacy and Leverage Motives

Negotiations for a South Korea–Chile FTA unfolded in three distinct phases: (1) pre-negotiation phase (November 1998–September 1999); (2) negotiation phase (December 1999–February 2003); and (3) ratification phase (August 2003–February 2004). In this section, we analyze the diplomacy and leverage motives behind the South Korea–Chile FTA , respectively, the attempts through FTA policy to raise the country’s status as a major trade hub and/or to push for domestic reform and set negotiation precedents for subsequent negotiations.

Phase 1: November 1998–September 1999

In the early 1990s, the so-called “additive regionalism ” strategy began to shape Chile’s trade policy.26 Soon after President Patricio Aylwin Azocar (1990–1994) entered office, Chile became one of the most active Latin American countries pur-suing FTAs. During his presidency, Chile concluded a series of FTAs with its Latin American neighbors, including Mexico (1991), Venezuela (1993) and Colombia (1993). Under President Eduardo Frei , Jr. (1994–1998), Chile’s pursuit of FTAs was further accelerated, as indicated by the signing of agreements with Canada (1996) and Mercosur (1996). For Chile, the main motive behind this policy shift was to secure market access to its large trading partners.27

25 The share of South Korea–Chile bilateral trade in South Korea total trade remains at less than 1% (IMF, Direction of Trade Statistics Yearbook [Washington DC: International Monetary Fund], various years).26 Chile’s additive regionalism is defined as “the process of sequentially negotiating bilateral free trade agreements with all significant trading partners” (Glenn W. Harrison, Thomas F. Rutherford and David G. Tarr, “Chile’s Regional Arrangements: The Importance of Market Access and Lowering the Tariff to Six Percent,” Working Papers, no. 238 [Santiago: Central Bank of Chile November 2003]).27 Aside from “economic complementation agreements” with Bolivia, Peru, Argentina and Ecuador, as well as a partial agreement with Cuba, Chile has signed FTAs with its major trading partners: the EU (2002), EFTA (2003), the US (2003), South Korea (2003) and China (2005). In June 2005, it also finalized a four-way deal with Brunei, New Zealand and Singapore. Most recently, in June 2006, it signed an FTA with Panama. The Chilean government is presently seeking to negotiate further bilateral deals with Thailand, India and Malaysia. See “Chile,” [Online, cited 8 September 2006]. Available from http://www.bilaterals.org/rubrique.php3?id_rubrique=130.


In sharp contrast, South Korea was a newcomer in a world of FTA negotiations. Although the discussion about FTAs first emerged in South Korea in the late 1980s, it was not until 1998 that the South Korean government began to seriously consider this alternative path. At first, however, the South Korean government had difficulty in choosing its FTA partners. It contacted a number of countries, but only a few of them showed explicit interest in discussing FTAs with South Korea, which had yet to recover from the effects of the Asian financial crisis. As of mid-1998, South Korea received positive responses from only six countries: Turkey , South America , Thailand , New Zealand , Israel and Chile .28 In an inter-ministerial meeting held in November 1998, an FTA with Chile was given top priority, mainly because of that country’s complementary industrial structure and the potentially low level of threat to South Korea’s agriculture due to the seasonal differences. For South Korea, Chile’s experience in FTA negotiations was an additional attraction. Subsequent FTA partners were to be chosen from a list of small and medium-sized countries.29

At the APEC summit meeting in Malaysia in November 1998, South Korea and Chile agreed to push forward an FTA with high-level talks in Seoul and Santiago. At the dawn of official negotiations, several economic analyses predicted that a South Korea–Chile FTA might provide both countries with welfare gains through the expansion of bilateral trade and investment.30 Although the estimated welfare gains from preferential trade between the two countries were not particularly impressive, a South Korea–Chile FTA made broader economic sense because South Korea wished to expand market access in Latin America and Chile in East Asia.31 At the APEC summit meeting in New Zealand in September 1999, the two coun-tries agreed to begin official FTA negotiations in Santiago in December 1999.

Aside from prospective economic gains, a major push factor for South Korea’s policy shift toward FTAs was its change in political leadership and subsequent bureaucratic realignment. In pursuit of ambitious policy initiatives that intended to make South Korea a regional logistics hub and international business centre, President Kim Dae-jung was drawn to FTAs. For him, FTAs also held some political appeal because some non-competitive, politically sensitive sectors could be excluded from FTA negotiations, thus avoiding domestic resistance to trade liberalization.32

In the aftermath of the unprecedented financial crisis that resulted in South Korea’s near economic collapse, the Kim Dae-jung administration had to make fundamental adjustments to South Korea’s trade policy. Up to that point,

28 We thank an anonymous reviewer for this point.29 Sohn, “Korea’s FTA Developments,” p. 7; Chung, “The Korea-Chile FTA,” p. 74.30 For instance, one study estimated that economic gains for South Korea from an FTA with Chile would amount to approximately $950 million, or an additional GDP growth of 0.2% every year, and reported an estimated economic of approximately $10 million, or an additional GDP growth of yearly 0.02% for Chile (Cheong, “Han-Chile FTA,” pp. 123–130).31 Chung, “The Korea-Chile FTA,” pp. 83–84.32 Koo, “From Multilateralism to Bilateralism,” pp. 146–148.


South Korea’s trade strategy had given the country economic success but also left it heavily dependent on a handful of major export markets, including the US and Japan. Whether he could devise a strategy to successfully navigate between stalled multilat-eralism and rising regionalism would determine just how much he could achieve. The president’s advisers recognized the reality in which they found themselves.33

Indeed, South Korea’s policy shift toward FTAs reflects President Kim’s com-mitment to locking in his policy reforms in response to the rising global demand for liberalization and transparency. In the wake of the financial crisis, the Kim Dae-jung government did not sit idle, though it operated with less enthusiasm for state intervention. The Kim government recapitalized banks, set up a public asset-management company to buy up bad loans, oversaw banking reforms, and forced chaebols to purge the debt from their balance sheets by selling entire divisions, resulting, in some cases, in their going out of business altogether. The Kim government also actively promoted a number of promising industries, such as information technology and biotechnology, through various forms of incentives including grants, bank loans on preferential terms, preferential tax treatments and the like.34

The 1998 government reforms were an attempt to consolidate bureaucratic sup-port for President Kim’s reform agenda.35 In particular, the Ministry of Foreign Affairs was reorganized as the Ministry of Foreign Affairs and Trade (MOFAT) and the Office of the Minister for Trade (OMT) was newly established under MOFAT, so as to comprehensively coordinate foreign policies on trade, trade negotiations and international economic affairs. The OMT began to play a pivotal role in both initiating and promoting FTAs.36

During the negotiations with Chile , opposition to the OMT’s initiative came from the Ministry of Agriculture and Forestry and farmers’ organizations such as the Korean Farmers League and the Korean Women Farmers Association . In addi-tion, the OMT’s mission to maneuver through bureaucratic and social opposition was challenged by rival institutions, such as the Ministry of Commerce, Industry and Energy and the Ministry of Finance and Economy . Despite its shaky start,

33 See Sohn, “Korea’s FTA Developments,” pp. 3–6; and Choeng, “Han-Chile FTA (Korea–Chile FTA),” pp. 116–121.34 Koo, “From Multilateralism to Bilateralism,” p. 147. As Solís and Katada note in their lead chapter, countries undergoing the process of economic adjustment often use FTAs for the purpose of locking in their reform agendas in a softer way than multilateral or unilateral liberalization, controlling the extent of new competition by choosing suitable partner(s). Mexico’s participation in the North American Free Trade Agreement (NAFTA) is an oft-cited example. In the context of East Asia, Japan decided to conclude an FTA with Singapore in order to lock in reform policies while protecting vested interests at the same time. See also T.J. Pempel and Shujiro Urata, “Japan: A New Move toward Bilateral Agreement,” in Aggarwal and Urata, eds., Bilateral Trade Agreements in the Asia-Pacific, pp. 84–88.35 For a discussion of South Korea’s bureaucratic realignment in the post-financial crisis period, see Joo-Youn Jung, “Inside the State in Transition: Restructuring Economic Bureaucracies in Korea, China and Japan” (paper presented the Research Workshop Series, Center for International Studies, University of Southern California, Los Angeles CA, 19 October 2005).36 Koo, “From Multilateralism to Bilateralism,” p. 148.


however, the OMT has slowly but steadily institutionalized the idea and practice of promoting economic and strategic partnership through FTAs, thus bringing about a new bureaucratic balance of power in favor of FTA initiatives.37

Phase 2: December 1999–February 2003

Negotiations for a South Korea–Chile FTA continued, acrimoniously and intermit-tently, for almost 3 years and through six official rounds of talks from December 1999 to October 2002. A main reason for the delay was the disagreement on the extent to which agricultural products would be included in the agreement. Initially, South Korea believed that Chile, which is located in the opposite hemisphere of the globe and has thus opposite seasons, would pose a minimal threat to South Korea’s agricultural products. Yet the talks reached a dead end in summer 2000 when South Korea’s proposal, which excluded apples and pears, irritated Chile . Twenty months had to pass before the negotiation resumed in February 2002.38

During the stalemate, the potential winners of the agreement in South Korea, such as automakers and electronics manufacturers, did not mobilize political sup-port for the agreement, whereas South Korea’s farmers successfully made their potential losses a highly salient issue. Engaged in its first-ever FTA negotiation, the South Korean government lacked political skills to garner support from the winners of trade liberalization and to persuade domestic veto players, particularly the farmers who had traditionally been protected from global competition.

Yet a breakthrough came in February 2002 in high-level talks held in Los Angeles. South Korea revised its agricultural liberalization plans and proposed an advanced schedule that was more in line with Chile ’s request, such as lower off-season tariffs to Chilean grapes . Although South Korea insisted on its position to exclude some sensitive items such as apples and pears from its concession list, it agreed to negotiate trade liberalization in seasonings and dairy products after the Doha Development Round is completed. Chile was not completely satisfied but accepted South Korea’s proposal because it did not want to delay the negotiation any longer. In return for accepting South Korea’s request to exclude apples and pears, however, Chile demanded that sensitive manufactured items, such as refrigerators and washing machines , be excluded from the South Korea’s wish list because of local opposition in Chile. South Korea accepted this request, believing that those goods, which already had a firm foothold in the Chilean market, would not be adversely affected.39

37 Seungjoo Lee and Min Gyo Koo, “South Korea’s Multi-Track FTA Strategy: Moving from Reactive to Proactive” (paper presented at the 2006 Annual Meeting of the American Political Science Association, Philadelphia PA, 31 August–3 September 2006).38 See MOFAT, “u-ri-na-ra FTA chu-jin: Han-Chile FTA (Our country’s pursuit of FTAs: the Korea-Chile FTA),” [Online, cited 1 December 2005]. Available from http://www.fta.go.kr/fta_korea/info.php?country_id=11.39 Chung, “The Korea–Chile FTA,” pp. 74–79.


After long, halting negotiations, South Korea and Chile finally concluded an agreement in October 2002 and signed it in February 2003. The South Korea–Chile FTA consists of a preamble and 21 chapters covering a wide range of issues, including national treatment and market access for goods, rules of origin , customs procedures , safeguard and anti-dumping /countervailing measures, investment and cross-border trade in services, telecommunications, government procurements, temporary entry for business people and a dispute settlement mechanism .40

As noted earlier, it was largely political and strategic considerations that moti-vated South Korea to conclude the negotiations without further ado. Before estab-lishing FTAs with larger trading partners, such as the US and Japan , South Korea needed to pursue experimental FTAs with smaller partners in order to minimize possible risks and to gain negotiation skills . South Korea believed that Chile ’s open trade policy and its rich experience in FTA negotiations would make the country an ideal candidate for South Korea’s first FTA partner.41

South Korean negotiators felt relatively confident in dealing with their Chilean counterparts, presumably because of Chile’s small economic size. Yet it did not take long for them to realize that Chilean negotiators were much more experienced and sophisticated than originally perceived.42 Lacking confidence and competence in core negotiation skills, South Korea had to pay a higher political and diplomatic tuition for its first FTA education than it originally thought.43 Nevertheless, South Korea gained valuable training opportunities, which supports the Solís and Katada leverage hypothesis that an important motive for embarking early on in CRTAs is

40 Dong-hyuk Lee, “Han-Chile FTA Seo-myung (The Korea–Chile FTA was signed),” Chosun Ilbo, 17 February 2003. [Online, cited 5 December 2006]. Available from http://srchdb1.chosun.com/pdf/i_service/read_body.jsp?Y=2003&M=02&D=17&ID=0302170206. With regard to trade in goods, both parties agreed that (1) the tariffs for 2,300 items that constitute 66% of items exported to Chile by South Korea, such as passenger vehicles, trucks, computer and mobile phones, would be abolished immediately with the implementation of the agreement; (2) tariffs on South Korean petrochemical products and auto components would also be removed gradually over the next five years; (3) South Korea would immediately abolish the tariffs for all imported indus-trial products excluding items such as electric copper and would get rid of the tariffs for 224 items, including breeding cows and breeding pigs, within the first year after the agreement becomes effective; and (4) South Korea would gradually remove tariffs on Chilean peaches, kiwis, persim-mons and pork over the next 10 years and on Chilean grapes between the months of November and April for 10 years, after which these tariffs would also be completely removed (Woo-seok Choi and In-jung Huh, “Han-Chile FTA 3 nyun-man-eh ta-gyul (The Korea–Chile FTA concluded after 3 years of negotiation,” Chosun Ilbo, 25 October 2002. [Online, cited 5 December 2006]. Available from http://srchdb1.chosun.com/pdf/i_service/read_body.jsp?Y=2002&M=10&D=25 &ID=0210250101).41 See Inkyo Cheong, “Korea’s FTA Policy: Focusing on Bilateral FTAs with Chile and Japan,” KIEP Discussion Paper 02-02 (Seoul: Korea Institute for International Economic Policy, September 2002), pp. 24–32.42 Interview with South Korea’s FTA negotiating team, Seoul, July 2006.43 Byong-kuk Kim, “Reservations on Korea–Chile Free Trade Agreement,” The Korea Times, 21 November 2002.


to acquire leverage over the evolution of intra-regional integration through two principal mechanisms: capacity building and precedent setting .

Phase 3: August 2003–February 2004

The two governments wished to ratify the agreement as soon as possible. However, the Chilean House of Representatives did not pass it until 27 August 2003. Even worse, the South Korean National Assembly had made several failed attempts to vote for the agreement before it was able to agree only on the method of voting on 9 February 2004, which was almost 1 year after the agreement had been signed. The concern about inter-sectoral complementarity between FTA partners was one of the most controversial points of debate.

Most notably, the structural adjustment costs of farming sector were a bone of contention. Although the agricultural sector represents only a fraction of national economy, South Korea’s traditional attachment to rural areas made many South Koreans sympathetic with agricultural protectionism.44 Yet, with the exception of the Ministry of Agriculture and Forestry and a few anti-free trade non-governmental organizations (NGOs), farmers failed to draw broad political support for their demand during the ratification stage.45

In the meantime, South Korea’s traditional protectionist groups, such as labor unions and uncompetitive manufacturing industries, remained disorganized during the ratification process, which indicates that a new dynamic of sectoral politics has

44 The share of agriculture, forestry and fisheries in South Korea’s total employment decreased continuously, from 17.9% in 1990 to 8.1% in 2004. The three sectors’ share in South Korea’s GDP was less than 4% in 2003 (Ministry of Finance and Economy of Korea, Economic Bulletin, vol. 27, no. 11 [22 November 2005]). Yet the relatively short history of South Korea’s industrialization since the 1970s means that many South Koreans still have family roots and ties in rural areas despite large-scale migration to urban areas. Before the Uruguay Round (UR), agriculture had been excluded from the free trade debate, allowing South Korean agriculture to enjoy market pro-tection. But South Korea had to agree to open its agricultural market under the UR agreement, thereby jeopardizing uncompetitive South Korean agricultural products. A significant portion of South Korean farmers suffered varying degrees of losses. South Korean farmers saw their govern-ment’s promotion of FTAs as yet another blow to the agricultural sector and, as a result, opposed the FTA with Chile.45 By contrast, the South Korea–Chile FTA has enhanced public awareness of FTAs and rallied public support in South Korea. According to a Gallup poll, 80% of the opinion leaders in South Korea supported South Korea’s FTA policy in general and the signing of the South Korea–Chile FTA in particular, despite growing concerns of South Korean farmers (Chung, “The Korea–Chile FTA,” p. 83). In a similar vein, according to a survey conducted by the Korea Rural Economic Institute in early 2004, 76.3% of South Korean consumers responded that they would be willing to buy Chilean grapes and wines if they were better than South Korean products in terms of quality and price (Bum-gu Lee, “Han-guk nong-up i-gut-i sal-gil-i-da (2): gyung-jaeng-ryuk hwak-bo ga-neung-ha-da (There is a way for Korean agricultural industry to survive (2): It is possible to improve its competitiveness),” Hankook Ilbo, 27 December 2004. [Online, cited 5 December 2006]. Available from http://news.hankooki.com/lpage/society/200412/h2004122718362521950.htm).


emerged in South Korea. As a result of massive socio-economic restructuring imposed by the IMF ’s austerity program, the South Korean economy experienced huge layoffs as well as wild fluctuations in capital flows until the economy rebounded in 1999. The once rigid South Korean labor market became more flexi-ble – albeit with a high risk of social unrest – as indicated by a growing proportion of temporary and daily workers and the emergence of a two-tier labor market. Indeed, the proportion of non-regular workers increased from 42.5% of total employees in 2000 to 52% in 2002, leading to a temporary disorganization of a number of labor unions across the country.46

In sharp contrast, South Korean manufacturers with a competitive edge became better organized than anti-FTA groups at this stage. As their sales in Chile dropped rapidly in the middle of ratification battle, they became more anxious and raised their voices in support of FTAs, departing from their lukewarm attitude during the previous stage. In 2002, for instance, South Korean automobiles accounted for about 25% of Chile’s automotive market, the second largest only after the Japanese market share. From 2003, however, the US, Mexico, the EU , Brazil and Argentina began to export automobiles to Chile duty free under their respective FTAs with Chile, thereby causing a serious market loss to South Korean automakers.47 South Korea’s top business groups, including the Federation of Korean Industries , pro-business scholars and major news media, expressed their concern that South Korea’s failure to put into effect any FTAs had exposed the country to a wide range of disadvantages and setbacks in the global market.48

Under increasingly heavy pressure, South Korea’s National Assembly finally managed to ratify the agreement on 16 February 2004, when legislators from agri-cultural districts decided not to block the vote as they had done in the previous weeks, acknowledging that they were no longer able to reverse the momentum for bilateral FTAs.49 Yet it was not an unconditional defeat of protectionist interests. In March, the ratification was followed by the passage of a special law designed to make up for the potential financial damages of farming and fishing industries due to FTAs. Despite criticism for the government’s excessive financial commitment to

46 See Koo, “From Multilateralism to Bilateralism,” p. 146.47 Korea Institute of Public Finance, “Chile, Argentina–Brazil ja-dong-cha moo-gwan-se-hyung-jung pal-hyo (The Chile–Argentina–Brazil auto pact comes into force),” [Online, cited 5 December 2006]. Available from http://kipfweb.kipf.re.kr/english/information/default_view.asp?run=??%E4%BA%A6??8&run2=Property%20Tax&class=??%EA%B3%B7%EB%AE%9E&code=H11&tbl=SIGAWIN_CONTENTS&idx=124044&page=&jumenu=.48 Euo-dal Song, “FTA che-gyul ahn-hae han-guk ki-eop keun pi-hae (Big losses to Korean com-panies for not being included in FTAs)” Chosun Ilbo, 24 October 2003. [Online, cited 5 December 2006]. Available from http://srchdb1.chosun.com/pdf/i_service/read_body.jsp?Y=2003&M=10& D=24&ID=0310243501.49 Doo-shik Park and Jong-se Park, “Han-Chile FTA ne-beon-man-eh guk-hoe tong-gwa,” Chosun Ilbo, 17 February 2004. [Online, cited 5 December 2006]. Available from http://srchdb1.chosun.com/pdf/i_service/read_body.jsp?Y=2004&M=02&D=17&ID=0402170101.


declining sectors, over $80 billion of public and private funds have been earmarked for farming and fishing rescue programs over a 10-year period.50

With the implementation of the agreement, South Korea’s exports to Chile – with automobile and electronics exports being the main beneficiaries – rose dramatically by over 50% in 2004, as compared to the previous year. According to a survey among South Korean firms exporting to Chile, more than 50% of the respondents said that exports increased with the implementation of the South Korea–Chile FTA and 88% of these positive respondents attributed export expansion to the agreement.51

In contrast to earlier fears, the growth of South Korea’s imports of agricultural products, except for wines, from Chile slowed to a 2.6% increase. Meanwhile, South Korea’s imports of copper ingots and ores, pork and wines from Chile increased sharply. The South Korean government prepared a fund of $1.3 billion for year 2004 in anticipation of side payments to domestic agricultural sectors, but actual losses turned out to be far smaller than originally feared.52

In sum, the economic crisis at the end of the 1990s contributed to the rise of reform-minded Kim Dae-jung and the downfall of many domestic veto holders that had plagued South Korea’s economic policy in general and trade policy more specifically. As one observer notes, the economic crisis shocked South Korea out of traditional policy patterns and practices, disrupting interest groups that used to veto policy reform, and generating pressure for politicians to change the failed policies.53 Furthermore, although some farmers’ groups and labor unions remain militant, their political influence has been significantly eroded, as both their absolute and relative shares in the economy continue to decline. By contrast, competitive manufacturing sectors largely welcomed the government’s FTA policy.

2.4 Implications of South Korea’s Cross-Regional Initiatives

The dramatic policy shift toward FTAs was undertaken as part of President Kim’s ambitious vision and strategic goals for regional cooperation. At the first ASEAN Plus Three (APT) summit meeting in Kuala Lumpur in December 1997, he made

50 See MOFAT, “Ja-yoo-moo-yuk-hyup-jeong che-gyul-eh dda-reun nong-eo-eop-in deung-eui ji-won-eh gwan-han teuk-byul-beop,” [Online, cited 8 September 2006]. Available from http://www.fta.go.kr/inc/html/down.php?board_id=81&file_id=1.51 Trade Research Institute, “Korea’s Exports to Chile Surge 58.7% After FTA,” TRI Research Paper. [Online, cited 1 December 2005]. Available from http://www.kita.net/tri/eng_tri/tri_research_viw.jsp?no=445.52 Trade Research Institute, “One Year after Implementation of Korea–Chile FTA – Appraisal and Tasks,” TRI Research Paper. [Online, cited 1 December 2005]. Available from http://www.kita.net/tri/eng_tri/tri_research_viw.jsp?no=445.53 Jongryn Mo, “The Politics of Economic Reform,” in Carnegie Economic Reform Network, The Politics of the Economic Crisis in Asia: Consensus and Controversies (Washington DC: Carnegie Endowment for International Peace, 1999), p. 53.


public South Korea’s aspiration to become a hub country of East Asia by playing a balancer role between regional powers.54 Yet the Kim government’s FTA policy was inherently reactive and passive to the extent that it aimed at minimizing potential losses rather than maximizing gains from FTAs. Although the policy shift toward FTAs under President Kim marked a dramatic departure from South Korea’s tradi-tional trade policy, it was not until President Roh Moo-hyun entered office in 2003 that a comprehensive roadmap and detailed procedures for FTA negotiations were put in place.55 In contrast to its rather peripheral status in President Kim’s economic and strategic agenda, the FTA policy has now become a core element of President Roh’s neoliberal policy reform and regional vision.

Upon its inauguration in February 2003, the Roh government launched an initiative aimed at creating a peaceful and prosperous Northeast Asia.56 From the beginning, however, President Roh’s agenda encountered unfriendly regional geopolitics, since none of the great powers surrounding the Korean Peninsula were supportive of Roh’s wishful thinking, which lacks the same degree of diplomatic and moral attraction as his predecessor Kim once enjoyed. With its ambitious regionalist vision in trouble, the Roh government therefore realized that FTAs might serve as a better policy tool to achieve its strategic goals.57

South Korea’s recent move toward another CRTA, namely the KORUS FTA , is one of the most promising examples of South Korea’s proactive FTA strategy. As noted earlier, the Roh government made a surprise move in February 2006 to cut South Korea’s annual screen quota in favor of the US. In addition, it lifted the ban on US beef (the response to an incident of mad cow disease in the US), proposed modifications to its pharmaceutical pricing system and revised an automobile remissions regulation to provide a grace period for imported vehicles, thereby paving the way for KORUS FTA negotiations.58

After eight formal negotiating rounds since June 2006, the two governments successfully concluded a landmark agreement on 1 April 2007. The KORUS-FTA represents America’s most commercially significant FTA after the conclusion of NAFTA in 1993, as South Korea represents America’s seventh largest merchandise trading partner. For South Korea, the KORUS FTA is the largest FTA ever, as the U.S. is South Korea’s third largest trading partner. In 2006, their bilateral trade valued at approximately $72 billion. Aside from prospective economic gains, this FTA will

54 Richard Stubbs, “ASEAN Plus Three: Emerging East Asian Regionalism?” Asian Survey, vol. 42, no. 3 (2002), pp. 440–455.55 Lee and Koo, “South Korea’s Multi-Track FTA Strategy,” pp. 27–28.56 Presidential Committee on Northeast Asian Cooperation, Toward a Peaceful and Prosperous Northeast Asia (Seoul: Government of Republic of Korea, 2004).57 Lee and Koo, “South Korea’s Multi-Track FTA Strategy,” pp. 11–12.58 United States Trade Representative, 2006 National Trade Estimate Report on Foreign Trade Barriers: Korea (Washington DC: USTR 2006), pp. 393–417. [Online, cited 5 December 2006]. Available from http://www.ustr.gov/assets/Document_Library/Reports_Publications/2006/2006_NTE_Report/asset_upload_file682_9188.pdf.


strengthen the more than 50-year-old alliance between the US and South Korea and will underscore the substantial US engagement in East Asia.59

By all means, the negotiation process was not an easy one and the two governments expect an even tougher legislative ratification process. From one perspective, the current debate in South Korea about the KORUS FTA indicates that social cleavages may be much wider and deeper than previously thought. South Korea’s protectionist interests, which are slowly recovering from the upheavals caused by the financial crisis, have now been galvanized by their coalition of convenience with anti-capital labor unions and anti-American NGOs, whereas pro-liberalization business lobbies are not actively mus-tering enough political support for the government.

Amid shifting interest group demands, however, South Korea’s FTA strategy maintains its top–down momentum that is centered on presidential leadership and government institutions. Under President Kim, strong executive power and public support for neoliberal restructuring allowed the introduction of new FTA initiative. Under President Roh, the OMT has taken over the driver’s seat from the president who currently suffers low popularity even among his once-loyal supporters.60

The KORUS FTA has the potential to alter not only the cross-Pacific economic relations between the US and South Korea but also the dynamics of East Asian economic relations. With respect to spillover effects , many in Japan and China have already expressed concern that the US–South Korean accord could put their coun-tries at a competitive disadvantage in the US and South Korea market. Such recog-nition might motivate both Tokyo and Beijing to seek an FTA with Seoul and Washington.61

59 United States Trade Representative, “United States and Korea Conclude Historic Trade Agreement.”60 The OMT’s neoliberal policy orientation has been further highlighted by the appointment of its third trade minister, Kim Hyun-Chong, in July 2004 as well as the promotion of its first trade minister Han Duk-soo (1998–2004) to deputy prime minister and minister of finance and econ-omy. The OMT’s authority has been expanded as indicated by the abolition of the Foreign Economic Council under the Presidential Committee for National Economy in early 2006 after its operation as a monitoring body for the past two years. In addition, a presidential committee to facilitate a KORUS FTA and to win over its opponents was set up in August 2006 under the leader-ship of the former OMT minister and the former deputy prime minister Han Duk-soo, who is most likely to shield the OMT from its critics. For more details, see Lee and Koo, “South Korea’s Multi-Track FTA Strategy,” pp. 25–26.61 Lee and Koo, “South Korea’s Multi-Track FTA Strategy,” p. 16; “Chinese Premier Hopes for FTA with Korea ‘Soon’,” Chosun Ilbo, 6 April 2007. [Online, cited 21 May 2007]. Available from <http://english.chosun.com/w21data/html/news/200704/200704060013.html>. In addition, China showed keen interest in the South Korea-EU FTA negotiations, which had been launched in May 2007 with a common commitment to conclude a comprehensive, high-quality FTA. The EU is South Korea’s second-largest trading partner after China. According to South Korean statistics, the trade volume between South Korea and the EU totaled $79.4 billion in 2006. Xinhua, China’s official news agency, reported that the prospective cross-regional FTA would boost South Korea’s exports by 5%, implicitly warning against its adverse impact on China’s exports to the EU (“S. Korea-EU FTA predicted to boost S. Korean exports by 5 pct,” People’s Daily Online, 15 May 2007. [Online, cited 9 October 2007]. Available from http://english.peopledaily.com.cn/200705/15/eng20070515_374823.html).


As a matter of fact, the dynamics between Japan and China as regional rivals and South Korea as a bridge between them are of great importance not only to the Northeast Asian region itself but also to the rest of East Asia.62 Although these countries have yet to act vigorously to institutionalize economic relations, the new dynamics of rivalry between Japan and China are currently playing a critical part in shaping the newfound rush to preferential arrangements.63

This point was driven home most dramatically with regard to ASEAN . At the APT meeting in Brunei in 2001, China proposed an ASEAN–China FTA and signed a surprise agreement in February 2003 with the 10 ASEAN countries pledging free trade by 2010. Challenged to do the same, Japan proposed a Japan–ASEAN FTA at the ASEAN summit of 2002. It also hosted the ASEAN–Japan Commemorative Summit in December 2003, confirming its enthusiasm for promoting collaboration with ASEAN members.64 The framework agreement between South Korea and ASEAN reached in December 2005 puts additional pressure on Japan to strike a similar deal with ASEAN.65

Indeed, South Korea’s FTA initiatives would likely reinforce the burgeoning effort to form the East Asian Community in various proposed forms. In this respect, the negative impact of regionalism on multilateralism resulting from a diversion of interest, does not seem to hold in the case of South Korea’s pursuit of FTAs at both intra-regional and cross-regional levels.

2.5 Conclusion and Policy Implications

CRTAs are a main feature of South Korea’s newfound enthusiasm for a multi-track FTA strategy. In this study, we examined the rise of South Korea’s aggres-sive FTA initiatives with a special focus on the first cross-Pacific FTA, namely the South Korea–Chile FTA , and drew implications of South Korea’s cross-regional initiatives for its effort at intra-regional FTAs.

62 As noted above, South Korea–Japan FTA negotiations have been stalled since November 2004. Meanwhile, the feasibility of a South Korea–China FTA has been studied by private/semi-private research institutions in both countries. The opinion about a South Korea–China FTA is divided in South Korea. From one perspective, a bilateral FTA with China will enhance South Korea’s eco-nomic presence with its largest trading partner. From other perspective, potential adverse effects on agricultural and some low-end manufacturing sectors would be much greater than those of prospective FTAs with the US and Japan.63 Vinod K. Aggarwal and Min Gyo Koo, “Beyond Network Power? The Dynamics of Formal Economic Integration in Northeast Asia,” The Pacific Review, vol. 18 no. 2 (2005), pp. 205–206.64 Pempel and Urata, “Japan: A New Move Toward Bilateral Agreement,” p. 78; Aggarwal and Koo, “Beyond Network Power,” pp. 212–213.65 It should be noted that the South Korea–ASEAN agreement is not yet complete. Thailand backed out of the deal because of South Korea’s persistent demand to exclude rice from the list of items for market liberalization.


From an institutional point of view, South Korea’s embrace of FTAs has been shaped by a top–down political initiative rather than a purely bottom–up demand from various interest groups and the general public. In the aftermath of the 1997–1998 Asian financial crisis , a new consensus emerged within South Korea’s policy circles that FTAs are crucial to South Korea’s economic survival in a world of economic uncertainties. The political leadership of President Kim Dae-jung turned new policy ideas into action. Amid sweeping socio-economic restructuring, Kim’s decision to pursue preferential trade liberalization through FTAs went unchallenged, if not unnoticed, by traditional protectionist interests in South Korea. This point was proven by the fact that it was not until 2003 that a heated debate started over the ratification of South Korea–Chile FTA.

South Korea’s motivations to pursue CRTAs are complex. These include eco-nomic, political and diplomatic/leverage motives. South Korea’s policy departure from its long-standing support for the multilateral trading system began with its FTA negotiations with Chile, a country located on the opposite side of the globe. Aside from the South Korea–Chile FTA , South Korea has been negotiating a number of other CRTAs. Most importantly, the recently concluded KORUS FTA will have significant economic and strategic repercussions not only for South Korea but also for its neighboring East Asian countries.

We found that South Korea’s choice of Chile as its first FTA partner had a lot to do with the potentially minimal costs for South Korea’s uncompetitive sectors such as agriculture . More broadly, South Korea’s CRTA initiatives reflect its concerns about inter-sectoral complementarities with its FTA partners. In addition, South Korea needed to gain experience in bilateral FTA negotiations. As such, it wanted to use South Korea–Chile FTA negotiations as a litmus test of the country’s capability to pursue trade liberalization outside and beyond the WTO ’s multilateralism. Before establishing FTAs with larger trading partners, South Korea chose to pursue strategic FTAs with smaller partners in order to minimize the risk and possible losses and to gain negotiation skills. Chile’s open trade policy and its accumulated experience in FTA negotiations made the country an ideal candidate for South Korea’s first FTA partner. Although South Korea had to pay expensive tuition for its learning experience with Chile, it certainly acquired negotiating skills and technical know-how that contributed to its fast-growing list of FTAs.

This leverage argument can be applied to South Korea’s new CRTA initiative with the US. Undoubtedly, a successful KORUS FTA would increase South Korea’s diplomatic and economic leverage in East Asia, especially vis-à-vis Japan and China. Aside from prospective economic gains, it will greatly improve the troubled alliance between South Korea and the US in a region where the balance of power is shifting due to the rise of China. At the same time, it will prompt both China and Japan to form an FTA with South Korea, either bilaterally or trilaterally, in order to maintain their foothold in the US market, in which the three Northeast Asian coun-tries continue to compete with one another. The same is true of South Korea’s next major cross-regional initiative vis-à-vis the EU .

To conclude, the economic and strategic motivations of the political leadership as well as the new bureaucratic balance of power centered on OMT have played a


significant role in South Korea’s rush toward RTAs in general and CRTAs more specifically. South Korea attempts to strike the right balance between intra-regionalism and cross-regionalism. South Korea’s CRTA initiatives will strengthen its intra-regional policy goals, in particular the wished-for balancing role between China and Japan. Although its pursuit of FTAs does not necessarily mean that it has completely abandoned the multilateral trading system, the policy departure is becoming increasingly obvious and significant.

Chapter 3A Case Study of Singapore’s Bilateral and Cross-Regional Free Trade Agreements

L. Low

3.1 Introduction

Singapore is a pioneer in bilateral free trade agreements (FTAs) in East Asia as then known in the 1990s. Most of its FTAs or regional trade agreements (RTAs) are in fact, cross-regional free trade agreements (CRTAs)1 as defined in this book’s frame-work chapter. Small, open and resource-deficient, Singapore is aware of the momentum of the tandem processes of political regionalism and economic regionali-zation and therefore uses these CRTAs to accomplish the following objectives: open specific sectors with distinct comparative advantages, change the terms of bilateral trade, and/or facilitate business visas which are not easy to procure on the WTO/GATS track.

Theoretically, small economies should prefer most-favored-nation (MFN) first-best free trade. The WTO make-over from the GATT and the General Agreement on Trade in Services (GATS) 2 mirror Singapore’s interests. However, dysfunctional multilateralism) leaves the poor worse off3 and has spurred FTAs (both regional and

1 Rajan Ramkishen, S Sen Rahul, Siregar Reza (2001) Singapore and FreeTrade Agreements: Economic Relations with Japan and the United States. Institute of Southeast Asian Studies, Singapore and Low Linda (2003a) “Policy Dilemmas in Singapore’s RTA Strategy”, The Pacific Review, 16, 1: 99–127.2 GATS’ horizontal commitments provide ground rules for market access and national treatment for trade in service, country-specific and runs across sectors and territories, relating to four modes: mode 1 cross border supply is proxied by balance of payments (BOP) commerce minus travel, mode 2 consumption abroad by BOP travel, mode 3 commercial presence by foreign affiliates trade in service and mode 4 presence of natural persons by BOP compensation of employees.3 The Cancun WTO Meeting characteristically failed; and the triad is at fault in agriculture subsi-dies (US for cotton, EU farm products and Japan’s rice). A successful pro-poor DDA round could raise global income by US$500 billion a year by 2015 according to World Bank. Over 60% of that gain would go to poor, pulling 144 million out of poverty.


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cross-regional). These are preferential (see framework chapter) and second-best vehicles for liberalization.4

Typically proactive, Singapore has taken advantage of this trend. One-on-one RTAs/CRTAs. Singapore is eager to capitalize on these additional market access opportunities in line with its industrial restructuring . The city-state’s lifeline is trade, and it has historically evolved from a traditional entrepôt to a contemporary service hub and knowledge-based economy .5 A knowledge-based economy is defined as one that utilizes the dynamic aspects of knowledge and technology to change the way international trade is conducted specifically overcoming distance and time, as well as spawning new growth poles. Cross regional trade agreements can facilitate this process.

Knowledge-based growth sectors encompass more than mere raw materials turned into manufactured goods, focusing instead on creative value-added innova-tions from telecommunication, logistics, other information technology services to research and development networks. The knowledge-based economy encompasses qualitative non-price factors: quality assurance, standard, productivity, timeliness, turnaround time, product and service delivery and other socio-political economy factors including safety and security.

Singapore’s interest in CRTAs reflects its extra-regional dependence, notably on the OECD as major sources of trade, direct foreign investment via multinational cor-porations for technology to leverage up its competitiveness. These considerations of trade and investment expansion are important for cross-regional trade partnerships, as posited in the framework.

Beyond the benefits of market expansion, CRTAs are important to Singapore in two specific ways. They allow the government to leverage reforms essential to reengineer further into a knowledge-based economy which also implies reinventing Singapore Inc. and its government-linked companies (or state-owned enterprises as called elsewhere, defined later) to be more competitive, especially in the new knowledge services.

Singapore has to come up to speed with how information communication technology is changing the way goods and services cross borders, adapting to geoeconomics and geopolitics. Thus, crafted FTAs/CRTAs concessions like public access to telecommunication and greater market access via movement of professionals across borders are in concert with industrial restructuring initiatives.

4 FTAs follow neither GATT’s most-favored-nation multilateralism nor its non-discrimination principle, but are WTO-consistent. FTAs abide by GATT reciprocity, market access for fair com-petition and cover “substantial” trade, that is, they disallow carve-outs of controversial sectors such as agriculture or services under GATS.5 The details of this restructuring are discussed at length elsewhere (Low, 2006a) Low Linda (2006a) The Political Economy in a City-state Revisited. Marshall Cavendish International, Singapore.

3 A Case Study of Singapore 49

This chapter connects Singapore’s CRTAs to the book’s hypotheses on cross-regionalism in Sect. 2. It shows and explains Singapore’s FTAs/CRTAs as pertinent to its interests and political economy. Section 3 highlights the US–Singapore FTA (USSFTA) as a key CRTA which allowed Singapore to flesh out its FTA network and define its modus operandi for preferential trade negotiations. Section 4 evaluates the elements in the framework chapter as applied to Singapore’s foreign economic policy and CRTAs.

3.2 Singapore’s FTAs and CRTAs: Interests, Strategies and Politics

3.2.1 FTAs/CRTAs

This section rationalizes Singapore’s FTA/CRTA strategy through its partner selec-tion, leading to the USSFTA as a case-study in Sect. 3. It also shows how Singapore’s CRTA interests are directly relevant to, as well as central to reshape its domestic political economy. Intra-Asian FTAs are included for a well-rounded picture of how Singapore deploys FTAs/CRTAs for its knowledge-based economy reengineering and reinvention of Singapore Inc. (these key terms are defined in Sect. 2.2); focusing on CRTAs alone is insufficient.

Singapore’s CRTAs fit the framework chapter’s observation that East Asia pursued CRTAs simultaneously with intra-regional arrangements. Its CRTAs are motivated by similar regional factors such as economics, security and diplomacy. As one of Singapore’s key foreign economic policy tools, FTAs plus latticed-CRTAs as observed6 evolve in a strategic pattern.

Officially, FTA is the standard terminology used for all agreements regardless of geography (Table 3.1) until CRTAs emerge which are of course, more attractive given Singapore’s extra-regional orientation, despite it being an ASEAN/Asian constituent. With slow-moving ASEAN and other Asian intra-trade development in progress, Singapore’s CRTAs demonstrated how it used the leverage of extra-regional negotiations to influence intra-regional trends. Its interests are enhanced as ASEAN-based CRTAs follow (listed in Table 3.1 as 7, 12, 16, 17, 18 and 25).

A full list of FTAs and CRTAs encompasses intra-regional involving Asian part-ners, cross-regional as outside Asia and plurilateral like the Trans-Pacific Strategic Economic Partnership Agreement involving Chile , New Zealand , Singapore and Brunei

6 Dent Christopher M (ed.) (2005) Economic Security and Security Cooperation: New Regional Agendas. Palgrave Macmillan, Houndmills New York and Dent Christopher M (2006) New Free Trade Agreements in the Asia-Pacific. Palgrave Macmillan, Houndmills New York.

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Table 3.1 Chronological listing of Singapore FTAs/CRTAs and their progressa

FTA Launch Signed In force

Concluded/under implementation

1 ASEAN FTA 1992 2 New Zealand–Singapore 1999 2000 2000 Closer Economic Partnership 3 Japan–Singapore 2000 2001 2002 Economic Partnership Agreement4 Singapore–Australia FTA 2000 2002 20035 European Free Trade 2001 2002 2003 Association-Singapore FTA6 United States–Singapore 2001 2004 2005 FTA7 ASEAN–China Free 2001 Trade Area8 Trans-Pacific Strategic 2002 2005 Economic Partnership Agreement9 India–Singapore 2003 2005 2005 Comprehensive Economic Cooperation Agreement10 Singapore–Jordan FTA 2003 2004 200511 Singapore–Korea FTA 2003 2005 200512 ASEAN–Korea Free 2003 2004b Trade Area13 Singapore–Peru FTA 2006 2006

Under negotiation

14 Singapore–Mexico FTA 2000 15 Singapore–Canada FTA 2001 16 ASEAN–Japan 2003 FA 2003 Comprehensive Economic Partnership17 ASEAN–India Regional 2003 FA 2003 Trade and Investment Area18 ASEAN–Australia and 2004 New Zealand FTA19 Pakistan–Singapore FTA 2004 20 Singapore–Peru FTA 2004 21 Singapore–China FTA 2006 22 Singapore–Gulf 2006 Cooperation Council FTAc

23 Singapore–Morocco FTA 2007 24 Singapore–Ukraine FTA 2007

(continued)


joining latterly. The ASEAN Free Trade Area (AFTA) 7 may be a historical devel-opment, but this regional project for trade liberalization proved a laggard to Singapore’s free port and desire to break off into CRTAs to go even faster.

CRTAs are meant to hedge against regional economic uncertainty and security risks, especially when East Asia in general, and ASEAN in particular, are volatile and unstable relative to the OECD -five FTA partners. As insurance or “fallback” FTA positions,8 Singapore’s FTAs are typically fast, and in the views of some, disloyal to ASEAN’s integration goals, in particular when they establish preferential cross-regional ties.

Singapore’s selection first of five OECD trading partners (all outside the region except Japan) is a defining move in its launch of FTA policy. Quintessentially, the selected OECD-five FTA partners are its main trade and direct foreign investment partners. More than classical GATT variety, these are new-age FTAs aimed at issues of quality, standards, benchmarks and best practices, deeper economic integration with GATS and four Singapore issues (investment, competition, govern-ment procurement and trade facilitation).


FTA Launch Signed In force

25 ASEAN–EFTA FTAd 26 Singapore–Sri Lankad 2003 27 Singapore–Egyptd 2004 a By year when a FTA is launched. Note that the process and timing vary enormously, from initiating, signing of framework agreement (FA) in some cases, negotiation, signing of FTA and implementa-tion following ratification by respective governments. ASEAN-based FTAs are dual-tracked in a 10-year span for ASEAN6 (Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand) and 15-year for Cambodia, Laos, Myanmar and Vietnam)b Signed chapter on goods and the chapter on services under negotiationc Bilateral FTAs with Bahrain, Kuwait, Qatar and the UAE are reconstituted under the Gulf Cooperation Council (GCC) which includes Saudi Arabia and Omand As per the Asian Development Bank: Inaugural discussions on the Comprehensive Economic Partnership Agreement between Sri Lanka and Singapore (CEPASS) were held from 20 to 21 October 2003 in Colombo. This follows the agreement on 29 August 2003 between HE Ravi Karunanayake, Commerce and Consumer Affairs Minister, Sri Lanka and BG (NS) George Yeo, Trade and Industry Minister, Singapore to launch negotiations on a bilateral FTA. Prime Minister Goh Chok Tong visited Egypt from 11 to 14 February 2004 at the invitation of His Excellency, Atef Ebied, Prime Minister of the Republic of Egypt, during which they agreed to launch negotia-tions to conclude a FTA

Sources: http://aric.adb.org, http://www.bilaterals.org, http://wto.org and http://www.ies.gov.sg.

7 The AFTA, initiated in 1992, graduated from the ASEAN Preferential Trading Arrangement (PTA) formed in 1977, a decade after ASEAN itself evolved in 1967 as a political security net-work comprising Indonesia, Malaysia, Philippines, Singapore and Thailand with Brunei joining in 1984. Strictly speaking, AFTA covers only in 15 major commodity groups and is dual-tracked, taking 10–15 years or ASEAN10-X to accommodate the least willing members (Cambodia, Laos, Myanmar and Vietnam). By 2003, the older ASEAN6 had reduced tariffs to between 0 and 5% for 99.6% of all product lines, with non-tariff barriers in place; see Low 2004 and 2006b and Hew ed. 2006 for history and development, including the ASEAN Economic Community by 2020 into a single market and production base, consolidating fuller integration of the ASEAN Framework Agreement for Services, ASEAN Investment Area and ASEAN Industrial Cooperation.8 Rajan Ramkishen et al.(2001): 4

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For non-OECD FTA partners, the issues of FTA negotiations vary from information communication technology and human resources development to trade facilitation. What is patently clear is that globalization , digitization, lower transport costs and improved supply chain management are increasingly recognized to have a role and impact on cross-border trade more than mere lower tariffs as products, especially for services.

The first signed FTA was the Agreement between New Zealand and Singapore on a Closer Economic Partnership (ANZSCEP ). Equally small, both countries aspire to deregulate and open to Asian Pacific growth. The benefits of bilateral trade may not be as significant, but the agreement gives two small, open economies the opportunity to learn and test the political economies of a CRTA. With New Zealand’s domestic reforms and interest in tapping into Asian’s growth, Singapore offers a practical starting point.

But for Singapore this CRTA also raised some issues of regional sensitivity which had to be addressed. As both prime ministers intended to announce the ANZSCEP during the 1999 the APEC meeting in Auckland, Singapore took the pre-caution to inform Malaysia 9 first, out of courtesy to preempt misunderstanding.

From the point of view of Singapore this was not a concession on its sovereign prerogative to launch FTA talks, but it wanted to make sure that it would not be held back by ASEAN’s rhetoric and was prepared to explore other (cross-regional) trading partnerships. Malaysia claimed it was not unhappy but it was “puzzled” and concerned, arguing that ASEAN must look into whether Singapore’s move was inconsistent with ASEAN goals. Singapore reiterated that there would be no reneging of its AFTA commitments.10

The ANZSCEP drew the attention of other Asian countries to New Zealand . For instance, Hong Kong selected New Zealand as its only other FTA besides that with China . The Singapore–New Zealand CRTA also put pressure for the ASEAN–Australia and New Zealand FTA initiatives to gain traction with Thailand ’s support. It is indeed revealing that ASEAN replicated all of Singapore’s OECD-five CRTAs and more. Singapore seems to be a leading indicator of sorts in CRTA partner selec-tion for the other Southeast Asian countries.

Singapore’s second FTA – the Japan–Singapore Economic Partnership Agreement (JSEPA) – was not cross-regional, but it was as opportunistic as the first one for Japan. The late Prime Minister Obuchi was anxious to use FTA to lock-in globalization and domestic reforms , and negotiations with Singapore provided an opportunity to do so. The JSEPA pioneered a tripartite public–private–academic study group for a

9 Immediately after Singapore’s Minister for Trade and Industry, George Yeo briefed his counterpart Rafidah Aziz in Singapore only just before the formal announcement, she called a press briefing.10 After the short political union in 1963, Singapore–Malaysia relations ended in 1965 with sovereign Singapore charging ahead with an independent foreign economic policy. This history makes CRTAs extra sensitive. It is as telling that Singapore only considered Malaysia to give advance notice, not the rest of ASEAN; Thailand is generally as open and Indonesia too preoccu-pied with domestic crises. In the end, as ASEAN-based CRTAs evolved and have become more acceptable, Singapore has been quietly vindicated.


feasibility study to foreshadow a negotiating document by chapters.11 Some econo-metric trade modelling12 was important in convincing Japanese consumers and business, more than Singapore stakeholders comprising Singapore-based multina-tional corporations, business, consumers, workers and government, on the merits of proceeding with negotiations. Media awareness helped to diffuse Japan’s sensitivity to ASEAN agricultural imports via entrepôt Singapore as a backdoor in the AFTA as other non-agricultural benefits were highlighted to stress Singapore as a knowl-edge-based economy .

As per the leveraging hypothesis, Singapore utilized JESPA, a non-CRTA, to gain confidence and credibility. It was then able to negotiate other OECD CRTAs where the issues of market access to innovative industries such as telecommunication and information technology were critical to the completion of the deal.13

The JSEPA opened traditionally conservative services: Japan’s unprecedented 86% compared to its WTO 65%, notably in maritime transport, testing and analysis, research and development, medical and dental and education. Greater financial investment opportunities in Japan include its pension fund liberalization. Investment trust managers can set up offices in Japan as branches rather than as subsidiaries in order to reduce set-up costs.

Better market access was obtained for Singapore-based businesses supplying information communication technology products and services, liberalization of courier markets and tariff-free treatment for 21 information communication tech-nology products. Singapore is the first country in the world to enjoy an increased 33% foreign equity limit on Japanese telecommunication incumbent, Nippon Telegraph and Telephone Corporation .

Ease of supplying telecommunication services is achieved through the lowering of technical barriers and improved interoperability. The agreement includes provisions for telecommunication suppliers to provide a Reference Interconnection Offer, broadband multimedia services, advanced telecommunication networks, e-government and postal services. Mobility of business visitors and employees is conditionally guaranteed. Companies in Singapore can deploy staff to work in Japan with greater certainty.

After hammering out the intra-regional agreement with Japan , Singapore’s attention concentrated on a string of cross-regional FTA with several industrialized nations. Negotiations with Switzerland , Iceland , Liechtenstein and Norway in the EFTA proceeded relatively fast. The CRTA covers generically the four Singapore issues, protection of intellectual property rights , marine products and processed

11 The study group’s public–private partnership contained government officials and selected pri-vate sector business and academic representatives for rather than lobby groups.12 Hertel Thomas, W Walmsley Terrie, Itakura Ken (2001) “Dynamic Effects of ‘New Age’ Free Trade Agreement between Japan and Singapore”, Center for Global Trade Analysis, Purdue University, Mimeo, August.13 With business globalization owing as much to private sector innovations in technology that allow modernizing trading rituals to match trading realities, it may be arguable whether the need for trade pacts may be lessening (see Financial Times, 19 September 2007, p. 11). Certainly, however, trade ministers signing these pacts must bring along business groups both for their industry and market insights and as the potential beneficiaries of the negotiated FTA concessions.

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agricultural products . Singapore opted for the EFTA as the EU categorically wants to negotiate on an ASEAN basis, with little headway due to the human rights issue in Myanmar . This example vividly illustrates Singapore’s dilemma as it strives to move on its own to seize opportunities that seem unavailable at the regional grouping level.

The Singapore-Australia FTA (SAFTA) liberalized legal services to promote more joint law ventures and formal law alliances with Australian law firms. Stronger bilateral linkages in the financial sector include unimpeded transfers and processing of financial information. Singapore financial institutions can supply new services that previously only Australian firms could supply.

The Australian telecommunication supplier Telstra is subjected to strong pro-competitive disciplines. Business certainty and level playing field for telecommu-nication and e-commerce services come with provisions to resolve interconnection disputes within 6 months. Enhanced mobility enables business visitors to enter, stay for business purposes for up to 3 months and intra-corporate transferees for up to 14 years.

The India–Singapore Comprehensive Economic Cooperation Agreement (CECA) study group structured an integrated package of agreements. It included a FTA, inter alia trade in goods and services, and investment; bilateral agreement on investment pro-motion, protection and cooperation; improved double taxation avoidance agreement; liberal air services agreement and open skies for charter flights and work programs for movement of natural persons. It created an India–Singapore Fund , a second India Center in Singapore and tourism cooperation.

The Korea–Singapore Free Trade Agreement’s (KSFTA) joint study group was an ice-breaker as Korea found it difficult to conclude an ASEAN-wide FTA. Like most FTAs initiated alongside WTO Ministerial Conferences or APEC meetings, the study provided a negotiating framework. Like Korea, Singapore has ambitions and interest in information communication technology , human resources develop-ment and broadcasting. Even as another non-CRTA, it is relevant in the greater scheme of opening the right sectors globally.

Three more CRTAs comprising the Trans-Pacific Strategic Economic Partnership Agreement ,14 Jordan and Peru seem to cover every continent except Africa. These may reflect the security/diplomacy dimension more than the economics or any leveraging as with the OECD-five.

3.2.2 Singapore’s Political Economy, Government-Business-Labor Relations

Moving on to the centrality of FTAs/CRTAs in Singapore, Table 3.2 highlights service-producing industries in a knowledge-based economy while Tables 3.3 and 3.4 (later) cover trade and investment.

14 Originally Pacific Three (P3FTA) as three-way differentiated approach to handle sensitive dairy issues between Chile and New Zealand, invoking APEC open regionalism, flexible to allow others from or outside of APEC to join.


Table 3.2 Gross domestic product (GDP) at current market price and industrial restructuring in Singapore

1996 2001 2006

GDP S$m 130,502.0 153,164.7 209,990.9% share of resident foreigners & 33.1% 41.9% 39.6%

resident foreign companies in GDPGDP S$m 130,502.0 153,164.7 209,990.9Good producing industries, % share 32.8% 31.0% 32.9%Manufacturing 23.5% 22.9% 27.6%Construction 7.3% 5.7% 3.6%Utilities 1.8% 2.3% 1.7%Other goods industriesa 0.2% 0.1% 0.1%Services producing industries 61.9% 64.5% 63.2%Wholesale & retail 13.3% 12.8% 15.1%Transport & storage 9.2% 9.0% 9.6%Hotels & restaurants 2.6% 2.2% 1.9%Information & communication 3.1% 4.4% 3.8%Financial services 10.7% 12.1% 11.1%Business services 13.5% 12.7% 11.5%Other service industries 9.6% 11.3% 10.2%aAgriculture, fishing & quarrying

Source: Singapore Department of Statistics, http://www.dos.gov.sg

Table 3.4 Foreign investment commitments in manufacturing by country of origin

Compound annual growth rates, %, First half 2007 2002–2006 S$ million % share

Total foreign 1.50 4,849.1 100.0US −6.78 1,765.2 36.4Japan −1.34 614.6 12.7Europe 4.07 2,008.9 41.4Asia Pacific & others 50.82 460.4 9.5

Source: Singapore Economic Development Board

Table 3.3 Compound annual growth rates of Singapore’s trade with selected trade partners

Merchandise goods 2001–2006 Services 2000–2005

Domestic Selected Countries Total Export Export Import Export Import

Total 13.34 14.63 13.93 12.78 15.27 15.36China 30.59 34.53 30.05 27.34 26.86 27.70Japan 3.95 7.14 5.20 1.90 15.59 17.97Korea 14.90 10.58 7.05 19.44 19.14 26.30Europe 9.80 9.58 11.74 10.0 16.08 24.46US 5.94 5.01 3.45 6.82 9.24 5.83Australia 17.29 23.28 26.03 6.62 20.15 21.25New Zealand 21.56 25.13 25.97 11.55 24.36 31.16

Sources: Singapore Department of Statistics (DOS) and DOS International Trade in Services Survey

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Economic conditions have fostered election victories for the one-party People’s Action Party government since 1959.15 Political lobbying is patently missing. The People’s Action Party government with Singapore Inc. and government-linked companies underscores the government’s economic primacy, which spills over into the creation of jobs and homes. Profit-maximizing multinational corporations prefer the orderliness supported by other local business and small and medium-sized enterprises. Singapore ranks relatively corruption-free as measured in the Transparency Index.

The combination of proactive policy-making by highly paid ministers and bureaucrats, multinational corporations and government-linked companies along with a disciplined and skilled labor force equates to a productive and resilient political economy capable of charting new policy directions to meet competitive challenges (such as cost-competition with China and India ). Reinventing Singapore Inc. implies the privatization of government-linked companies for private sector-led growth and expansion abroad with an image that is less linked to the government.16 The developmental state is between a rock and a hard place.17 It is hard to reinvent a developmental, government-made state without real privatization which would reduce state economic dominance and control. It needs more than traditional entrepôt restructuring to aim for more far-reaching reengineering.18 Mindset change means social and political economy in strategic fit with industrial clusters and niches,

15 Low, Linda (2006a) The Political Economy in a City-State Revisited. Marshall Cavendish International, Singapore gives in-depth analysis as well cites other corroborating relevant works Vasil, Raj (2000) Governing Singapore St Leonards New South Wales Allen & Unwin and Tan Tarn How (ed.) (2007) Singapore Perspectives: A New Singapore. Singapore Institute of Policy Studies, Singapore on Singapore’s political economy while this section crystallizes salient features in policy-making including foreign economic policy and CRTAs which have implications for the trade negotiations and government-business-labor relations to restructure into the knowledge-based economy.16 Low, Linda (2006a).17 Low Linda (ed.) (2004) “Developmental States: Relevancy, Redundancy or Reconfiguration?” Nova Science, New York.18 Reengineering is defined as a fundamental rethinking and radical redesign, not more of the same for dramatic result and improved performance and business process reengineering further reorganizes purchasing, marketing, distribution for synergies, not traditional corporate silos based on products, geography and psychology; see Hamel and Champy 1993, Champy J (1995) “Reengineering Management: The Mandate for New Leadership” Harper Business, New York. For globalization and the attendant new economy, see Giddens Anthony (2000) Runaway World: How Globalisation is Reshaping Our Lives. Routledge, London and New York.and Castells M (1996, 2000) The Information Age: Economy, Society and Culture, Volume 1: The Rise of the Networked Society. Blackwell, Oxford, Castells, M. (1997) The Information Age: Economy, Society and Culture, Volume 2: The Power of Identity. Blackwell, Oxford and Castells, M. (2000) The Information Age: Economy, Society and Culture, Volume 3: End of Millennium. 2nd edn. Blackwell, Oxford.


benchmarked against international/global competitiveness indicators and best practices.19

Strategic pragmatism 20 identifies weakness (small, resource-deficit physical size) and strength (stability, efficient and effective policy-making). It minimizes threat to turn into opportunity or seizes opportunity in line with long-term sustainability. It is hardwired into the genetic make-up of the People’s Action Party government and corporate developmental state. The People’s Action Party government – synonymous with party and Singapore Inc. – threaded the knowledge-based economy , government-linked companies and FTAs together to shake, but not stir, the status quo.

Singapore Inc. encompasses Temasek Holding Limited , Government of Singapore Investment Corporation and government-linked companies in and outside Singapore. Counting beyond first-tier government-linked companies and offspring-generations of subsidiaries and associated companies is difficult due to the unavailability of data. State secrecy, for example, insulates the former defense-related Sheng-li military-industrial cluster. Its government-linked companies morphed into Singapore Technologies for aerospace, electronics, engineering, kinetics, marine, telemedia, et al.

Singapore Inc.’s reinvention implies some privatization and a new image as less government-controlled. The Report of the Public Sector Divestment Committee (Singapore, Ministry of Finance (1987) has Category A listing non-privatizable government-linked companies for national and security reasons and Category B is more ready for “graduation”. Government-linked companies are growth engines in their own rights from petrochemical, specialty chemicals and electronics to services in information communication technology, media, education, health, entertainment and other lifestyle products. They are primed with mergers and acquisitions to give Singapore Inc. economic space and size.

One such example of a significant government-linked company is the Development Bank of Singapore , which needed to grow in size to regionalize. It absorbed PosBank which was then a statutory board with large depositor base and assets in a non-contested but politically incorrect merger. The cozy relationship between government and government-linked companies is an internal expediency,

19 Singapore monitors religiously its relative ranking in two Economic Freedom Index, respec-tively by Heritage Foundation and Fraser Institute, International Management Development’s (IMD) World Competitiveness Yearbook, World Economic Forum’s Global Competitiveness Report, AT Kearney’s Globalization Index, United Nations Development Program’s (UNDP) Human Development Index, Berlin-based Transparency International’s Corruption Perception Index and Business Environment Risk Intelligence (BERI) among others. These benchmarks are used for internal maintenance and sprucing as well as external publicity and marketing.20 Schein E H (1996) Strategic Pragmatism: The Culture of Singapore’s Economic Development Board. Massachusetts Institute of Technology, Cambridge, Massachusetts.

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but lacks transparency to outsiders.21 The Development Bank of Singapore-PosBank merger typifies Singapore Inc. gearing up sequentially and aggressively to tap into market access won in information communication technology -service-oriented FTAs.

The political economy finesses government-employer-labor tripartism in wage negotiation to ensure harmonious labor and industrial relations, drilled down to a symbiotic parallel of government-linked companies, multinational corporations and small, medium-sized enterprises. They reinforce each other, leverage up into higher value-added and logistics supply chains to ensure competitiveness as even round-the-clock information communication technology erodes Singapore’s traditional location advantage.

This is demonstrated in the political economy of cross production networks22 which involves co-location of leading multinational corporations and indigenous enterprises in Singapore headquarters and others in ASEAN as cost-effective pro-ducers.23 Cross production networks enable outward processing which is built into rules of origin in CRTAs to allow Singapore to specialize in higher value-added goods and services, research and development product design, finance, marketing, transport, insurance and legal services.24

21 Temasek as the fifth largest sovereign-wealth fund reported a 29% fall in net profits in 2006 to S$9 billion (US$6 billion) even as its market value of portfolio rose by 35% to S$164 billion. It is concerned that the global investment climate could become tougher in next few years as result of rising protectionism in the US and Europe against state-owned funds. Consequently, it will adopt a cautious investment outlook because of “medium-term geoeconomic risks and signs of bubbly market conditions”. Transparency may not be Temasek’s strong suit even if it is accounta-ble in corporate governance terms. It is a thin gray line between the new image for true share-holder value and commercial interests necessary for global M&As and not “national service” to serve Singapore’s political economy interests.22 Borrus Michael, Dieter Ernst Dieter and Stephan Haggard (eds) (2000) International Production Networks in Asia: Rivalry or Riches. Routledge, London and New York.23 Alvesson Mats (2004) Knowledge Work and Knowledge-Intensive Firms. University Press, Oxford; Caves Richard E (2007) Multinational Enterprise and Economic Analysis. 3rd edn. Cambridge University Press, Cambridge.24 Outward processing entails rules of origin for a change in tariff classification (CTC) or heading-origin is granted if after transformation a product is classified under a different customs nomen-clature-heading than before. A value-added (VA) criterion for a specified percentage of value-added in the last production process is necessary to confer an originating status. Both crite-ria apply in all Singapore FTAs to establish substantial transformation occurrence, adopted by AFTA too. For fungible goods and materials, two additional criteria are (a) the origin of fungible originating materials and fungible non-originating materials commingled in an inventory used to produce a good is determined by an inventory management method under the Generally Accepted Accounting Principles in the territory of the party and (b) same commingled in an inventory for exports do not undergo any production process or operation in the territory of the party where they were commingled other than unloading, reloading or operation to preserve them in good condition.


Singapore’s outward processing maintains competitiveness via inter-firm open systems.25 FTA-cultivated market access and ASEAN relationships based on profit maximization, efficiency and productivity. ASEAN governments with similar aspirations may not be as politically keen to help Singapore reshape and rebalance its production. They may grudgingly admire how Singapore’s Economic Development Board does it all with the International Enterprise (former Trade Development Board) mandated to assist Singapore-based companies to globalize.

Singapore’s Ministry of Foreign Affairs and Ministry of Trade and Industry championed and presided over FTAs from the start steered by economic efficiency as the competitiveness compass. By early 2000s, the IE took over the FTA mast from its parent Ministry of Trade and Industry, but still works in conjunction with Ministry of Trade and Industry as the economy-wide umbrella. The FTA network is touted as the superhighway on which Singapore-based exporters and investors can link up with FTA partners and rethink the way to do business.

Living by its wits, deploying every sovereign policy tool, Singapore harnessed FTAs/CRTAs into its restructuring. Exports are ramped up with greater market access as well as the movement of all factors, from capital, technology to people, are deliberately crafted into its CRTA negotiations. The USSFTA for Singaporean business and trade visitors, inter-corporate transferees and professionals in an annual quota of 5,400 visas far exceeds what the typical WTO agreement achieves. Human resources development opportunities attract multinational corporations, and in turn, the direct foreign investment and global talents sustain the knowledge-based economy in a virtuous and widening circle.

Government-made Singapore Inc. mobilizes investors, local business or foreign multinational corporations, employers and employees. The workforce can no longer be taken for granted as compliant. Jobs and income may be less secure due to forces outside the government’s control. Renewed competitiveness via effective FTA outreach needs national teamwork in capability-building. The Singapore sys-tem generally works for residents who prize economic performance with reputation and credibility as its national brand.

3.3 The US–Singapore FTA (USSFTA)

The USSFTA was signed by then Prime Minister Goh Chok Tong and President George W. Bush in 2003 in Washington. After approval by the House of Representatives and Senate in 2003, it entered into force in 2004. It was deemed a

25 Best Michael H (2001) The New Competitive Advantage: The Renewal of American Industry. Oxford University Press, Oxford.

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landmark agreement, as its scope includes WTO-plus and NAFTA -plus with intel-lectual property rights , e-commerce and information communication technology , government-linked companies’ services, advanced rules of origin and customs cooperation for trade facilitation. It is up to traders and investors from both sides to seize the business opportunities which are more explicit and targeted than any yet-to-be WTO Doha deal.

Despite the fact that closed-door politics preclude details of the negotiation dynamics behind this agreement26, what may be deduced is that CRTAs with Canada and Mexico as NAFTA members and therefore “backdoors” to the US may be less urgent to Singapore. More than multilateral or unilateral liberalization, the USSFTA features nuanced rules of origin and concessions premised on four princi-ples of market access , national treatment, domestic regulation and transparency. As its first Asian FTA partner, Singapore helped the United States consolidate its competitive liberalization FTA policy where the goal is to secure concessions unavailable at the WTO , but a strategy that could marginalize the Doha round and accelerate CRTAs further.27 And fortuitously, negotiated before 9/11, Singapore gained on US visas and escaped accusation of being rewarded like Australia .

On the other hand, the USSFTA satisfies many of Singapore’s CRTA foreign economic policy criteria. Singapore has sequenced its FTA talks to learn first from other first-world OECD partners, and in this sense negotiations with the US are paramount. However, the world’s largest economy has complicated domestic politics too. The USSFTA was too complex to conclude before the Clinton admin-istration ended. More time was needed. The US political economy of layers of interested parties and lobbying groups is immense.28

26 One middle-of-the-road edited volume Koh Tommy and Chang Li Lin (eds) (2004) The United States–Singapore Free Trade agreement: Highlights and Insights. Institute of Policy Studies, Singapore with contributions from the chief negotiators as ambassadors from both sides, others negotiators and observers cover the rationale, FTA process, benefits, impact on ASEAN, APEC and WTO. The views reflect Singapore treated as a full and equal partner to the US in a very cor-dial negotiating process. Benefits are all good, good for the two countries, good for US–ASEAN, good for APEC and good for global trade liberalization under the WTO aegis with the US to help restore confidence.27 The US has threatened it “will act alone” in some 14 bilateral FTAs if the WTO fails; Singapore Straits Times, 6 September 2003; see also Gordon 2003. Such US ambition is neither new nor region-specific. In the early 1990s, US Trade Representative William Brock attempted the US-ASEAN Initiative to negotiate FTAs with any party to maintain forward momentum toward trade and investment liberalization. In the Middle East, the US envisions a Middle East FTA by 2013.28 FTAs with the US are far more complicated elsewhere as in Korea where domestic lobby groups are unhappy over US beef imports for instance; see Financial Times, 3 May 2007. The US–Bahrain FTA was illustrative of the US competitive liberalization strategy did upset the Gulf Cooperation Council (GCC) where despite the customs union since 2003, a 5% duty remains and benefits more than what GCC members give each other did not go down well.


Clinton had failed to get the fast-track trade promotion authority from Congress to open new FTAs or enlarge existing ones. Talks resumed in January 2001 under the Bush administration which had many other FTA plans to be prioritized.29 Bush won the trade promotion authority in 2002 in time for the USSFTA.

Some US business groups and other ASEAN neighbors, especially Malaysia , are wary of labor and environmental issues in the USSFTA.30 The US pushed them as a template in the US–Jordan FTA signed in October 2000. The US is known to use FTAs to externalize its concepts of democracy and other non-economic objectives. FTA partners negotiate and balance “market access ” for ideas, technology, finance, people and values to move with the politics, social relations and ecology of globali-zation . The US-Jordan FTA as a template had labor and environment clauses, but questions of democracy never entered the USSFTA negotiations.

Politically correct and cordial, both Singapore and the US claimed that as sover-eign states, they were equal as FTA partners. That said, negotiation is always highly interpretive, with politics and economics often becoming both means and ends. What is clear is the Singapore Embassy in Washington did extra due diligence to soften every possible opposition. It tapped native legal expertise and technical advice, media, lobbyists, trade unions, environmentalists and others, scoured eco-nomic and non-economic issues learnt from the NAFTA and other FTAs.

A memorandum of understanding was signed by the American Federation of Labor-Congress of Industrial Organization (AFL-CIO) and its counterpart National Trades Union Congress to preempt traditional opposition to the USSFTA. Traditional labor union opposition is a strong influence in the US Congress despite the fact that a Singapore deal posed no real labor threat.

The USSFTA liberalizes sectors such as biotechnology , tourism , maritime storage and warehousing, vessel maintenance and repair, and logistics. More business opportunities from US government procurement projects are provided. Singapore service suppliers may bid for general government procurement projects worth more than US$56,190 and construction projects worth more than US$6,481,000 in the US. Singapore’s quota on qualifying full bank and wholesale bank licenses for US banks is lifted within 1.5 and 3 years, respectively.

Mutual access to public telecommunication network means service suppliers from both sides have access including cable-landing stations. Robust competitive safeguards are in the areas of interconnection, co-location, resale and access to rights of way. Promotion of e-commerce lies in mutual commitments to grant permanent duty-free status to products delivered electronically, as well as non-discriminatory treatment of digital products.31

29 These included the pan-American FTAA (International Herald Tribune, 8 January and 22 April 2001 and Asian Wall Street Journal, 22 April 2001) and other FTAs like with Chile.30 See Malaysian Business Times, 11December 2000.31 This is the first time in trade history that e-commerce commitments are part of a trade agreement.

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Mutual recognition agreements ,32 as a chapter with sectoral annexes in the USSFTA, eased local requirements through recognition of law degrees from four US law schools. Coupled with greater flexibility, US firms can enter into joint ventures with local firms with relaxing of board of directors’ requirements for architectural and engineering firms and capital ownership requirements for land surveying services in Singapore.

The most politically sensitive prize is greater mobility in the US for Singaporean business visitors and professionals for up to 90 days without need for labor market tests. The US provides an additional grant of 5,400 work visas for Singapore pro-fessionals, not subjected to labor market tests or the 6-year maximum limit. Like Australia, Singapore accepts the stiff intellectual property rights protection as a price to pay in FTA negotiations with the United States , and also believes it is beneficial for research and development activities of multinational corporations .33

As the treaty was negotiated pre-9/11, Singapore citizens secured greater mobility benefits and are thus envied by other US FTA partners.34 Intra-corporate transferees with L1A and L1B visa can stay an initial 1–3 years with a maximum extension up to 7 years and a total term not exceeding eight. Traders with E1 or E2 visa have a 2-year maximum, and professionals with H1-B1 visa have an 18-month maximum; both categories enjoy indefinite extension. All visas fall under the annual quota of 5,400 visas for Singaporeans. Price differences are primarily driven by immobility, so such mobility helps where face-to-face interaction is important for certain cross-border activities.

32 A mutual recognition agreement (MRA), also referred to as Mutual Recognition Arrangement, is an agreement between two or more parties to mutually recognize or accept each other’s con-formity assessment results (e.g., test reports, certificates and inspection results). With MRAs, duplicative testing, certification and accreditation for products before entering the importing coun-try are avoided, saving time and cost and greater certainty of market access. Conformity assess-ment provides a means for a manufacturer or trader to comply with standards and technical regulations for a product for sale in the intended market using third party conformity assessment body to certify compliance. Accreditation is an audit function to provide added assurance that the conformity assessment body or laboratory has the expertise to undertake the conformity assess-ment for compliance with the specified standard and technical regulation for which the product has to comply with. International Enterprise Singapore has conformity assessment and accredita-tion support for cosmetic products, electrical and electronic equipment, food and horticultural goods, pharmaceutical products and telecommunication equipment.33 Long before the USFTA, Singapore’s 1989 copyright law was to appease graduation from the US Generalized Systems of Preferences (GSP), to no avail. Singapore knows better that knowl-edge-based economy and research and development ambitions need intellectual property rights for multinational corporations. Australia allocated US$10.5 billion to combat intellectual property theft with changes to increase criminalization of copyright infringement. However, Australian pork producers are bullied in the 1,000-page US-Australia FTA to change quarantine protection for disease prevention to US-styled disease management.34 Post-911, the US Trade Representative advices other FTA partners to try Capitol Hill for similar immigration benefits as Australia did.


The Singapore International Enterprise ’s webpage on the USSFTA has an online tariff calculator to help exporters figure complex tariff-saving rules of origin, preferential market access, intellectual property protection and benefits. The USSFTA webpage is designed for business-use and computes automatically when a product code is entered. The end-user does not worry about which rules of origin a product must qualify with outward processing in ASEAN . Hands-on technical support is more than an administrative detail with a FTA panel of advisors experi-enced in FTA-related matters and domain expertise to complement FTA advice provided by International Enterprise’s FTA consultants.

Traders are always confused with technical rules of origin, commitments or benefits, more so when they deal with many different trading partners and FTAs, worse if contradictions arise. Success with easy rules of origin and tariff computa-tion ensures political acceptance with taxpayers’ money expended on FTAs to yield export growth, jobs and income keeping voters happy. Such attention to details and outcomes cannot be taken for granted. Singapore bureaucrats go the extra mile to ensure results.

Singapore’s gain in the USSFTA is clear, benefiting many US Singapore-based multinational corporations too. The US seems to gain less economically. This asymmetry may be balanced by other US political economy signals. For instance, this is the first the US’ FTA in Asia and might give the US leverage to bargain one-on-one with other smaller powers on difficult labor and environmental issues.

Although it may be implicit, the rationale behind the USSFTA is economics rather than security. Consolidating via economic ties is as good as, and must imply cooperative quid pro quo in all areas to ensure prosperity and progress including political stability and security as a prerequisite. It is on such an understanding that Singapore air and sea bases are offered to the US for its defense activities in the region as well as cooperation and compliance to US cargo container security under the US Customs and Border Protection since the 9/11 acts of terrorism.

Singapore is clearly atypical rather than exemplary or as model to other dualistic ASEAN economies, but has locked others in by default by being first. The US would consider Singapore embracing regionalism and globalization as compatible to US interests at large. Singapore’s sovereignty allows all policy tools including the de facto exclusionary USSFTA, albeit at some cost to ASEAN neighborliness. It is the biggest insurance policy Singapore has for its OECD -five target. Singapore has to weigh allies and hedges, as insurance is never costless.

3.4 Evaluating Singapore’s CRTA

Singapore’s CRTAs with the OECD-five first engendered a learning curve. Invaluable lessons and leeway set templates more suited to its industrialization and knowledge-based economy than for others like ASEAN with different industrial structures and levels of development. It takes its FTA policy to a locus standi or state-of-the-art not because it is characteristically smart and efficient, but out of sheer survival and sustainability.

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Singapore’s CRTAs go beyond neofunctionalism and trade diversification across regions as posed in the framework chapter. Like others sensitive to trade diversion arising from exclusion, Singapore’s CRTA restores a level playing field in market access across regions. Unlike others facing opposition from trade unions to environmentalists, Singapore’s domestic politics of FTAs are hardly register.35

With more CRTAs than RTAs, Singapore may have unwittingly nudged others along with its aggressive and intrepid “fallback” FTA positions).36 Other ASEAN FTAs/CRTAs follow Singapore’s OECD-five selection (Table 3.1). The larger dualistic ASEAN economies may not appreciate Singapore’s template for multiple WTO-plus commitments in its FTAs, given their less internationalized economic struc-tures and much more significant opposition to market openings. Singapore’s precedents in norms and principles, especially in rules of origin adopted by ASEAN are elaborated in the USSFTA later. The right ASEAN path is critical for Singapore due to its geographical value as a buffer for East–West and East Asian dynamics.

Singapore’s CRTAs remind Asia’s intra-regional efforts not to neglect extra-regional OECD partners. Even if East Asia including China and Japan become less needful of the US or the EU , Singapore cannot do so, giving its lack of an equivalent domestic base. Trade is Singapore’s lifeline and must seek market access wherever possible, especially in light of its frustration with AFTA’s collective paralysis and the two-track convoy or ASEAN way.

Singapore’s CRTA insurance policy stirred the pot and converted the rest of ASEAN, including Malaysia . China and India launched into FTAs after Japan and Korea . Singapore’s entrepôt character, now refurbished by its network of FTAs, gives its CRTA partners’ entry to AFTA , and conversely could facilitate access for ASEAN products. Such is the nature of the spaghetti-bowl effect37 prevailing in all FTAs.

How CRTAs forces pull East Asian nations away from a coherent regional inte-gration project begs another observation: Asian integration and regionalism seem as clear as mud, without a clear regional integration agenda gaining dominance. The East Asia Summit (EAS) is larger than the ASEAN plus Three (APT), and may go beyond the APT-Chiang-Mai Initiative for currency swaps which came into

35 Unlike the US or other OECD’s civil society movement, Singapore’s non-government organiza-tions are more like civic societies; however acquiescence is interpreted for the greater good. With scant policy options apart from aggressive globalization, liberalization and competitiveness grounded on political and social stability and efficient infrastructure, it may be hard for non-Singaporean observers to accept how winners and losers seem so passive to changes in develop-ment strategy ordained from above.36 Rajan et al. (eds) (2001): 437 Baldwin, Richard E (2007) “Managing the Noodle Bowl: The Fragility of East Asian Regionalism”, Asian Development Bank, Working Paper Series on Regional Economic Integration, No. 7, February and Plummer Michael G and Wignaraja Ganeshan (2007) “The Post-Crisis Sequencing of Economic Integration in Asia: Trade as a Complement to a Monetary Future”, Asian Development Bank, Working Paper Series on Regional Economic Integration, No 9, May.


place after the collapse of the politically sensitive Asian Monetary Fund proposal.38 However, its proposed East Asia FTA (EAFTA) has a ways to go.

Despite the fact that the APEC is cross-regional39 (Rulan et al. eds.), it does not offer mandatory liberalization commitments , and no formal APEC FTA has yet materialized. The APEC’s booming membership proved too unwieldy and the negotiation approach was ill-equipped to deliver painful liberalization commit-ments. Post-1997, Asia has been disenchanted with APEC’s marginal role in pro-moting regional dynamism, while the US has been distracted with NAFTA and FTAA and is busy in conflicts in Iraq , Afghanistan , North Korea and elsewhere. The Bush administration earned notoriety by canceling scheduled ASEAN visits and meetings.40 Ironically, small states, notably Singapore uphold open regionalism to keep the international market open but are prepared to pursue alternative FTAs and CRTAs given the dim prospects of APEC or the lack of commitment in US policy to the region.

Next, even ASEAN engages its extra-regional dialogue partners in post-ASEAN Ministerial Meetings. The EU, the US, Japan , Australia , New Zealand became dialogue partners, joined gradually by the rest of East Asia, India and even Russia . Subregional groupings in the Indian Ocean are less effective in mimicking ASEAN or engaging the rest of Asia. In the end, Singapore is very clear and strategic in its own FTA/CRTA policy, but has no grand intra-Asian project design in precisely how intra-regionalism or EAFTA may work, much as it wants to exert some influence.

Finally, for all other forms of East Asian integration, Singapore’s CRTAs would like to be exemplary to prevent an inward-looking East Asian economic bloc, so that instead they work as truly “building-blocs ” toward global free trade. Realistically, first-best free trade economics seem no match for first-best domestic politics.

The Singapore case may offer some hope that the EAFTA may seize opportuni-ties in choosing like-minded building-bloc partners. Singapore definitely favors

38 APT is ASEAN, China, Japan and Korea; EAS includes India, Australia and New Zealand. See Takashi 2003 for EAEG, APT and Robertson, 2002 for APT and Chang, et al., 2006 for EAFTA; East Asian integration in general, Levy, 1997, Scollay, et al., 2001, Wee 2002, Hill, ed., 2002, Urata, 2002, Liu and Regnier, 2003, Jayasuriya, ed., 2004, Krum, et al., 2004, Pomfret, 2003, Low 2003b, 2004c and 2004d, Dent, ed., 2006 and Dent, 2006; and Henning, 2002, Mo and Okimoto, eds., 2006 and Plummer and Wignaraja, 2007 for proposed monetary arrangements. None is politically akin to the EU for single market, exchange rate-cum-monetary union, however defined (Moon and Andreosso-O’Callaghan, eds, 2005).39 Rulan Jurgen, Eva Manske and Werner Draguhn (eds) (2005) Asia-Pacific Economic Cooperation (APEC): The First Decade. Routledge Curzon, London and New York.40 Two meetings in three years have been cancelled by US Secretary of State Condoleezza Rice. Her Middle East follow-up of the US peace initiative meant a no-show at the ARF Manila meeting in August 2007, and President Bush’s cancelled a trip to Singapore for the 40th ASEAN anniver-sary on his way to the Asia-Pacific Forum in Australia in September 2007. This sends a “wrong signal” to ASEAN, which worries that the US business community is uneasy about China’s high-profiled projects (Gulf News, 26 July 2007).

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more the expansive definition of EAFTA to include India , Australia and New Zealand as checks-and-balance given the history of Sino-Japan or Japan–Korea relations. Apart from size and diversity of the EAFTA expansive view, it ties in with Singapore’s concern to avoid dividing the world into closed economic blocs.

The other side of the coin is how EAFTA might affect Singapore’s CRTAs. The EAFTA seems a mixture of APEC ’s failure, Singapore’s CRTAs as momentum and Asia’s coming of age and significance. It is as cross-regional as it can possibly man-age for now. Temporized political expediency has India, Australia and New Zealand generously defined as East Asia. The Indian subcontinent, Middle East, Latin America and Africa are in some CRTAs involving Asia which suits Singapore.

Truly EAFTA building-bloc seems an after-thought post-1997. Neither the APT nor EAS/EAFTA has any NAFTA-style hub-and-spokes motivations. Evolving EAFTA is the potential mother-of-all FTAs, assumed to be an all-inclusive building-bloc. It needs simple rules of origin ,41 a flexible tariff concession structure, trade and investment measures, cooperation-dispute settlement mechanism s alongside “green” or human rights sensitivity to be proactive and credible, not be imposed upon by NAFTA -like conditions.

Singapore may utilize the CRTA nature of EAFTA to develop science and technology and research and development capabilities and prowess. This could lock in extra-Asian links in multinational corporations, direct foreign investment and technology42 (Lall and Urata, eds. 2003). Total sustainable EAFTA integration in East Asia may spawn a new generation of high technology products apart from textiles and automobiles . A high-quality EAFTA is a race-to-the-top to preempt the race-to-the-bottom FTAs that traditionally characterize low technology trade.

Such a technology-centric EFTA need not be elitist and should, in fact, be inclu-sive of less developing states. EAFTA advanced states can champion science and technology and research and development on the supply side. Others are demandeurs. Trade liberalization as a growth engine pumps up purchasing power and prosperity. Asian culture, diet, genetic and epidemiology of Asian disease pattern generate trade in high-end health services. The EAFTA facilitates movement of natural persons as consultants or patients and room for knowledge-building.

Asian leadership in EAFTA is muddier. Should China or Japan lead, or ASEAN10 as a group, and how would India, Korea or Australia sit with such leadership?

41 Given the CRTA web in East Asia, diagonal cumulation is suggested in Chang Jae Lee, Hyung-Gon Jeong, Han Sung Kim and Ho Kyung Bang (2006) “From East Asian FTAs to an EAFTA: Typology of East Asian FTAs and Implications for an EAFTA”, Korea Institute for International Economic Policy (KIEP) Policy Analyses 06-01, December to integrate the production side, as difficult as it is with different country perspectives to command political will and commitment. It may be an intermediate EAFTA target. FTA comparison is also compounded by different use of classification systems: Korea uses Harmonized System (HS) 10-digit codes, Japan and Malaysia use HS 9-digit codes, and China and Philippines use HS 8 digit codes with some sectors only HS 6-digit data were available.42 Lall Sanjaya, Urata Shujiro eds., (2003) Competitiveness, FDI and Technological Activity in East Asia. Edward Elgar, Cheltenham.


As APEC tries to engage both sides of the Pacific, it has wisely rotated leadership by region. Any de facto alliance in the China–Japan–Korea FTA in the first instance is indispensable to regional integration. Like Japan since the 1970s, China’s technical and economic assistance and market accessibility earn ASEAN-wide goodwill.43 Some political scientists44 claim that a successful and stable regional integration project requires a hegemon . What constitutes stability is unclear for EAFTA given its wide diversity across the Asian continent and subcontinent given the differences in political systems and lack of a hegemon.

Finally, FTA as trade policy is not a subsidiary policy tool, but rather it is a criti-cal policy to reengineer Singapore’s modern entrepôt economy into a knowledge-based economy with science and technology and research and development, inter alia reinvent Singapore Inc. and government-linked companies. The two-in-one fell swoop was in motion before the 1997 crisis, growing more aggressive with serial crises from 9/11 to severe acute respiratory syndrome (SARS) as the regional dynamism languished and new competitive growth engines via government-linked companies have yet to be found. How Singapore CRTAs get what WTO multilateralism cannot get was made clear in specific elements negotiated in the USSFTA, namely, the annual visa quota and the US government procurement, neither of which are in the WTO domain.

Hindsight provides 20–20 vision, but results may be too premature with FTAs signed between 2000 and 2006 (Table 3.1). Growth in trade of goods and services may appear high for New Zealand from a low base in contrast to mature trade with the US (Table 3.3). Another caveat is with or without a FTA, bilateral trade with China surges on, probably more with both the ASEAN-China FTA and Singapore-China FTA as double insurance.

Negative direct foreign investment growth for the US may reflect relocation to China and elsewhere, lending credence to the USSFTA to grow new areas (Table 3.4). Hard core FTA values remain, like economics first and foremost to lock-in reforms, however empirical evidence is interpreted over a longer-term.

Singapore is not reversing back into the region per se. It balances rules-based OECD with relations-based ASEAN way and Asia way in its network of CRTAs and RTAs. It monitors any natural leverage gained by East Asian CRTAs’ influence and dynamics as generally beneficial, mindful too of tensions from domestic cross-strait, Sino-Japan and Sino-US to ASEAN territorial disputes, from Spratly Islands 45 to a Singapore lighthouse.

43 China’s “crown jewel” ASEAN–China Information Superhighway’ feasibility study report opens a “new world” for partners, likewise the China–ASEAN Expo in Nanning in October 2007.44 Mattli, Walter (1999) The Logic of Regional Integration: Europe and Beyond. Cambridge University Press, Cambridge.45 The ARF notes an urgent wake-up in the Spratly Islands claimed by China, Taiwan and several ASEAN states, drawing in the US on protection of global shipping lanes. Spratly Islands hold 17.7 billion tonnes of oil and natural gas reserves, more than Kuwait’s 13 billion tonnes. Spratly as the world’s fourth largest reserve bed is strategic importance for all. China would seek compromise rather than military conflict with other claimants.

68 L. Low

Further partner selection has focused on the Middle East which is a FTA late-comer with newfound wealth and markets.46 The industrial diversification of Middle Eastern countries into petrochemical downstream and non-oil service projects and their search in the East for strategic partners with market-opening reforms has captured the attention of Singapore. The Arabs are interested in Asian mergers and acquisitions as growth opportunities. Government-linked companies are as open to corporate takeovers or be as easily “Arabized”.47

Singapore’s FTAs have captured the bulk of its trade partners and concerns including services especially intellectual capital and knowledge-based economy strands. Human resources mobility and capacity with information communication technology to facilitate and deliver efficiency, effectiveness or productivity in FTA commitments are stressed with minimal emotive politics on labor per se tinged with human rights . The same pragmatic sentiment pervades environmental protection to the extent that the OECD FTA partners and non-government organizations may demand it.

3.5 Conclusion

The Singapore case-study generally validates this book’s themes and hypotheses of the broader phenomenon of East Asian cross-regionalism, despite Singapore’s own idiosyncrasies. Singapore’s challenges and responses are image, credibility, reputa-tion, safe haven-harbor for one and all. Imbued with survival and competitiveness, spirit de corps is all for one, one for all, never mind that it is always top-down government-knows-best as the one. A consensual reinvented Singapore Inc. wants to win back people and private sector creativity for knowledge-based economy, as well as neighbors to manage financial contagion or health pandemic. Trade seems the ideal conduit, thus the passion for FTAs/CRTAs and Singapore follows the economic raison d’etre in FTA partner selection and design as much as politics, security, leveraging and on-the-negotiation hypotheses. It is, however, important to underline three connected clusters of findings from the analysis of Singaporean CRTA cases.

46 Visionary UAE is exemplary in most aspects. Oil-wealth reinvested into hard and soft infrastruc-ture is needy of HRD quality and technical assistance with 80% non-nationals in its workforce. It is not about labor mobility per se, but technology transfer, capability-and capacity. FTA-retrofit-ting is crucial as Singapore adapted its FTA from Singapore–UAE to Singapore–GCC FTA. It is among the UAE’s 13 FTAs under negotiation, joining the EU, EFTA, Australia, New Zealand, India, Pakistan, China, Japan, Korea, Malaysia, Mercosur and Turkey in GCC-wide FTAs; UAE–US FTA is the only bilateral and EU–GCC FTA the longest-standing dialogue since 1990, resumed earnestly in 2001 and 2004.47 Temasek’s eye-opening experience Dubai Ports World’s (DP World) prowess in the 2006 tussle for UK’s Peninsula & Oriental Steam Navigation Co (P&O) should serve in its FTA policy craft-ing. As part of economic defense, Temasek Government-linked companies are in strategic partner-ships with Abu Dhabi Inc and Dubai Inc companies, in the first instance, for obvious reasons. Understandably, Temasek is as concerned of growing chariness toward it and other much larger Arabic sovereign-wealth funds as shown in the DP World’s quick sale of six US ports acquired under the P&O deal, another story unto itself.


First, Singapore’s CRTAs with the OECD-five are part and parcel of the reengineering of the developmental state to a knowledge-based economy and reinventing of Singapore Inc. In particular, the USSFTA , the first in Asia with clear economic gains, has market access in many knowledge-based economy sectors including enhanced visa quota which are one-on-one and not as easily negotiated at multilateral WTO . Thus, Singapore succeeded in competitive and innovative pioneering information communication technology and human resources development as its pillars in the domestic political economy.

Second, the regional leverage was essential in Singaporean CRTA strategy. As indicated by the USSFTA, other ASEAN “big brothers” may grudgingly use its de facto FTA template and agenda. More than formal WTO-like trade liberalization, reciprocal cuts manufacturing and agricultural import tariffs and restrictions on foreign ownership of companies, the USSFTA focused on knowledge-based services and deals for direct impact to business.

Singapore’s leveraging up via the USSFTA to restructure its economy may not suit others not as globalized or as knowledge-based, and each Asian economy cus-tomizes its own FTAs based on its domestic politics and through hard bargaining. But the demonstration effects of Singapore’s CRTA policy in Southeast Asia are undeniable, as Singapore’s lessons from OECD-five FTA partners got it on par for global protocols. Malaysia and Thailand are fully converted, though others lag behind, mostly due to lack of capability rather than interest.48 In addition, Singapore even managed to leverage those gains from its CRTAS with OECD economies vis-à-vis the Asian giants like Japan , China and Korea .

Finally, Singapore’s FTAs and the FTA momentum has definite connection to a dysfunctional WTO from Cancun to the Doha Ministerial Rounds. It is clear that Singapore’s CRTAs are the bedrock of its foreign economic policy. Unlike the large East Asian CRTA actors, Singapore’s case-study demonstrates that, for a small and permeated economy, CRTA building-bloc as a second track does need to anchor the traditional triad of the US, EU and Japan as CRTA partners of choice, plus China. It has the requisite political will, none of the domestic opposition to its CRTAs as seen in Japan or Korea. Instead, its institutions and mechanisms right down to state-business-labor relations as well as technical details in rules of origin are all meant to win support and desired outcomes.

In short, Singapore’s proactive CRTA policy is a huge part of its foreign economic policy. Economic primacy driving the CRTA is unquestionable and all other non-economic and security motives follow as complementary and supplementary. The leverage argument builds them together as a whole, as well as leveraging externally to influence neighbors to do the same for trade and cooperation. The Singapore CRTA case-study in general, and the USSFTA in particular, underscore the extra-regionally dependence to move ahead while the WTO or AFTA recharges or EAFTA evolves.

48 For all FTAs in various stages, Brunei has 11, Cambodia 8, Indonesia 14, Laos 10, Malaysia 18, Myanmar 9, Philippines, 11, Thailand 24 and Vietnam 9; all ASEAN are party to the first 8 as for Singapore in Table 3.1. Australia has 16, China 20, Hong Kong 2, India 28, Japan 18, Korea 20, New Zealand 13, Pakistan 23, Sri Lanka 8 and Taiwan 8; sources as in Table 3.1.

Chapter 4The Japan–Mexico FTA: A Cross-Regional Step in Japan’s New Trade Regionalism

M. Solís and S.N. Katada

4.1 Introduction

To most observers, Japan and Mexico seem distant economic partners, with only a modest volume of bilateral trade and foreign direct investment and a large geo-graphical and cultural gulf between them. By this account, the Japanese decision to negotiate with Mexico is puzzling if not downright nonsensical. Why would Japan invest so much political capital in the negotiation of a complex free trade agreement (FTA) with a nation accounting for such a minuscule share of its international eco-nomic exchange?1

We challenge this interpretation of Japan’s second FTA ever and demonstrate that far from irrational or insignificant, the stakes involved in the Japan–Mexico FTA were very high. This cross-regional initiative stands to exert powerful influence over the future evolution of Japan’s turn towards economic regionalism.2 For a number of Japanese industries (automobiles , electronics , and government procure-ment contractors), negotiating with Mexico was essential to level the playing field vis-à-vis their American and European rivals already with preferential access to the Mexican market based on their FTAs. For the Japanese trade bureaucrats, housed in the Ministry of Economy, Trade and Industry (METI) , the stakes of the trade agreement with Mexico were also very high; not only would it enable Japan to use bilateral trade deals as an instrument to counter trade diversion abroad, but it would also be crucial in setting precedents on negotiation modalities regarding issues such as service liberalization or rules of origin (ROO). In addition, it would

1 And contrary to other economically insignificant FTAs, there was no security rationale behind this inter-governmental agreement, either. Neither Japan nor Mexico stood to make geostrategic gains from proceeding with this negotiation.2 A clarification of terms is in order here. The official title of the free trade agreement is Japan–Mexico Economic Partnership Agreement (JMEPA). The Japanese government uses the term EPA because it includes an economic cooperation chapter. However, in keeping with the use of terms proposed in the analytical framework of this book, we use cross-regional trade agreement (CRTA) to refer to the Japan–Mexico free trade agreement (and will discuss the economic cooperation chapter as appropriate), unless we make specific reference to the official title of this bilateral trade agreement. The term FTA will be used to make reference to free trade agreements in general.



be all-important in helping the ministry tip the domestic balance in favor of an active FTA diplomacy despite the opposition of the agricultural lobby.3 The FTA negotiations with Mexico were in fact conceived from the beginning as an integral part of Japan’s regional overtures in Asia in that they would constitute the litmus test both for the Japanese government and in the eyes of potential FTA partners in Asia on whether Japan could offer a satisfactory liberalization package to prospec-tive FTA partners to make these negotiations worthwhile.

Mexican trade officials also assigned a high priority to a preferential trade agree-ment with Japan, both to achieve long-standing goals and to deal with pressing current issues. For a long time Mexico has attempted to diversify its economic rela-tions in order to ameliorate its heavy reliance on the American market.4 As the North American Free Trade Agreement (NAFTA) intensified the concentration of economic exchange with the United States , the Mexican government embarked on the negotiation of multiple FTAs in order to expand Mexican exports in new markets.5 The trade agreement with Japan was deemed especially important in that it would constitute the first bridge into Asian markets and would address two press-ing concerns: the need to promote foreign direct investment and to restore Mexico’s competitiveness vis-à-vis other emerging economies, notably China .6

Despite the significance of bilateral trade talks for both countries, these negotia-tions did not proceed smoothly and were characterized instead by many false starts and major disagreements that at times looked almost irresolvable. Chronologically, the negotiations unfolded in three distinct phases. In late 1998 and 1999, Japan and Mexico seriously considered for the first time the possibility of negotiating an FTA and commissioned studies analyzing the feasibility of such an endeavor.7 This early interest, however, soon petered out due to a major disagreement over the Japanese proposal to exclude agriculture entirely from the negotiations. However, interest in going forward with a cross-regional FTA resurfaced in 2000 and 2001 for two main

3 Naoko Munakata, “How Trade Agreements Can Reform Japan,” The Globalist. [Online, cited July 10, 2002] Available at http://www.theglobalist.com, [The story is dated July 10, 2002 and we last accessed it on May 17, 2007].4 Jorg Faust and Uwe Franke (2002), “Attempts at Diversification: Mexico and Asia Pacific.” The Pacific Review, 15, 2: 299–324.5 Gerardo Bracho, “Mexico’s Foreign Trade Strategy in Trouble: The impact of China.” [Online, cited 29 September 2006]. Available at: http://www.mexico.ox.ac.uk/working_papers_files/TheplightofMexico2.doc.6 Robert Donnelly (2002). “Dealing with the Rising Sun. Mexico eyes a Japanese trade deal.” Mexico Connect. [Online, cited 29 September 2006]. Available at: http://www.mexconnect.com/mex/travel/bzm/bzmjapan.html.7 Japan External Trade Organization (JETRO), “Report of the Committee for Closer Economic Relations between Japan and Mexico.” [Online, cited 12 February 2003] Available at http:www//jetro.org.mx/JetroMXJPFTAFullEng.doc. Mireya Solís, “Mexico and Japan: The Opportunities of Free Trade,” Report commissioned by Mexico’s Ministry of Trade and Industry, 1999,” [Online, cited 12 February 2003]. Available at http://www.economia-snci.gob.mx/sphp_pages/publicaciones/mex-japesp.pdf.

4 The Japan–Mexico FTA 73

reasons: the negotiation of a bilateral investment treaty came to naught after Mexico refused to extend national treatment to Japanese multinationals in the absence of a broader free trade agreement, and the enactment of the Mexico–European Union FTA (MEUFTA) sent the encouraging message that sensitive commodities could be excluded from an FTA which nevertheless claimed WTO consistency.8 The final stage (2002–2004) involved the actual negotiations which were highly contentious. In fact, in October 2003 at the time of the heads of state summit scheduled to coincide with the original deadline to sign the agreement, an open rift brought a suspension in trade talks. After a major effort to patch up these differences, spurred by political intervention at the highest level, the agreement itself was reached in March and signed in September 2004. The Agreement between Japan and the United Mexican States for the Strengthening of the Economic Partnership entered into force in the spring of 2005.

This chapter is organized as follows. Section 2 offers an overview of Japan’s FTA diplomacy in order to place negotiations with Mexico in the broader context of Japan’s preferential trading initiatives. Section 3 discusses the motivations of the Japanese business sector for demanding the negotiation of a cross-regional trade agreement (CRTA) with Mexico. In Section 4, we discuss the position of key political and bureaucratic players in Japan regarding the pros and cons of moving forward with this free trade negotiation. Section 5 focuses on the most critical period in the CRTA negotiation process, as disagreements over agriculture and Japanese bureaucratic sectionalism threatened a successful outcome. Finally, we assess the significance and implications of the Japan–Mexico CRTA for the future of Japanese FTA policy.

This case study of Japan’s CRTA with Mexico corroborates several of the hypotheses laid out in the analytical framework in the introduction of this book. It shows the very real regional constraints that Japan has experienced in fleshing out its FTA diplomacy, given the rising frictions with China and the concern about a possible American backlash against a closed Asian trade bloc. Region-wide Japanese FTA initiatives have stalled partly for these reasons.

Moreover, this chapter also draws from the analytical framework to explain the specific Japanese motives in selecting Mexico as its first cross-regional partner. In essence, we trace Japan’s willingness to invest significant political capital in order to achieve an FTA with Mexico to the desire of its business community to counter trade diversion and to the attempt of the Japanese trade bureaucracy to leverage this negotiation to promote Japan’s regional FTA policy by building its trade negotia-tion capacity and setting precedents on liberalization scope and modalities. As we show, negotiations with Mexico generated a very heated domestic political process of accommodation between different bureaucracies and the interest groups under their jurisdiction precisely because it was widely understood that the credibility of Japan to engage in intra-regional FTA negotiations was also at stake.

8 Mireya Solís (2003), “Japan’s New Regionalism: The Politics of Free Trade Talks with Mexico,” Journal of East Asian Studies 3: 377–404.


4.2 The Birth of Japanese FTA Diplomacy

Japan’s decision, in the late 1990s, to negotiate preferential trade agreements on a bilateral or minilateral basis represented a major departure in its foreign economic policy.9 For close to 50 years, Japan had pursued a single-track approach, focusing its trade negotiating efforts exclusively on the multilateral forum and had shunned regionalism as harmful to the GATT/WTO system. However, the 1997 Asian finan-cial crisis , the proliferation of FTAs in the world economy and the difficulties experienced in launching a new round of multilateral trade negotiations persuaded policy makers and business executives in Japan alike of the need to develop a multi-track trade diplomacy through FTA negotiations.10 Through these preferential trade negotiations, the Japanese government is attempting to hedge against a breakdown in the WTO negotiation process,11 to pursue deep liberalization issues that go beyond tariff elimination, such as liberalization of foreign direct investment12 and to carve sectoral exclusions for sensitive sectors . In these ways, regionalism has not displaced WTO policy but rather has become an additional avenue through which the Japanese government can advance its trade interests.13

Preferential liberalization has, therefore, received a high priority in Japan’s over-all trade policy. Japan launched FTA talks with Singapore in January 2001, with Mexico in November 2002, and with Korea in December 2003 (still incomplete). As of the summer of 2007, a flurry of Japanese FTA initiatives had resulted in three FTAs in force (Singapore , Mexico , and Malaysia ), signed final agreements with the Philippines , Chile , and Thailand ; and basic agreements with Indonesia and Brunei . FTA negotiations are currently under way with the ASEAN , Vietnam , the Gulf Cooperation Council (GCC), India , Switzerland , and Australia . Broader regional

9 We use the term minilateral to designate any agreement with more than two parties and fewer than the entire WTO membership.10 T.J. Pempel and Shujiro Urata (2005), “Japan: A New Move toward Bilateral Trade Agreement,” in Vinod Aggarwal and Shujiro Urata, eds., Bilateral Trade Agreements in the Asia-Pacific (London: Routledge); Naoko Munakata (2001) “Evolution of Japan’s Policy toward Economic Integration,” Working Paper, Center for Northeast Asian Policy Studies (Washington DC: The Brookings Institution); Shujiro Urata (2004) “Towards an East Asia Free Trade Area,” Policy Insights, no. 1 (Paris: OECD).11 Edward D. Mansfield and Eric Reinhardt (2003) “Multilateral Determinants of Regionalism: The Effects of GATT/WTO on the Formation of Preferential Trading Arrangements.” International Organization 57,4: 829–862.12 Shujiro Urata (2004) “Towards an East Asia Free Trade Area.”13 Pekkanen, Solís, and Katada (2007) characterize the dynamics of Japan’s trade forum shopping as a tradeoff between gains from trade maximization (through the multilateral system) and control over the negotiation agenda to push for WTO plus commitments and/or sectoral exclusions (through regional and bilateral agreements with smaller countries). S.M. Pekkanen, M. Solís and S.N. Katada (2007) “Trading Gains for Control: Forum Choices in International Trade and Japanese Economic Diplomacy.” International Studies Quarterly. 51, 4.


initiatives, such as a trilateral FTA with Korea and China, a regional one with ASEAN+3 , and a broader ASEAN+6 (India, Australia, and New Zealand ) have progressed at a very cautious pace with no substantive official action taken at the time of this writing.

Notably, Japan’s regional integration initiatives in Northeast Asia have pro-ceeded very slowly, if at all. The current deadlock in FTA negotiations with Korea, the refusal so far to consider bilateral negotiations with China, and disagreements over the membership of a proposed East Asian Community , are a reflection of many of the regional constraints identified in the analytical framework paper of this book. Historical (Yasukuni shrine and textbooks), territorial (Dokdo/Takeshima and the Senkaku islands), and geopolitical factors (competition with a rising China) cloud the prospects of East Asian regional integration.14 Moreover, Japan is still very hesitant to endorse any regional integration initiative that hints US exclusion.15 Although Japan eventually lost the argument to incorporate the United States as an observer in the first East Asian Summit that took place in December 2005, part of its acquiescence to go forward with the meeting has been the result of the muted reaction of the United States, especially compared to its resolute opposition to Mahathir ’s 1990 East Asian Economic Caucus .16

While these political hurdles continue to complicate the task of building broad East Asian regional integration institutions, Japan has moved more swiftly with bilateral agreements in Southeast Asia and cross-regional partnerships. Significantly, in none of Japan’s CRTA initiatives (Mexico , Chile , India , Australia , GCC or Switzerland ) will historical, territorial, or geopolitical considerations impact the prospects of negotiation. But in the particular case of Mexico (Japan’s second FTA partner) the impetus to negotiate went much beyond the absence of such structural barriers to include the need to defend substantial interests of Japanese industries and to consolidate domestic support in Japan in favor of FTA diplomacy .

14 Gilbert Rozman (2004) Northeast Asia’s Stunted Regionalism: Bilateral Distrust in the Shadow of Globalization (Cambridge: Cambridge University Press): 220, 234.15 UPI, “Walker’s World: Battles around the New Asia Summit,” 4 April 2005. [Online, cited 10 November 2005]. Available at http://washingtontimes.com.16 Lincoln (2005) believes the United States has not reacted strongly this time because, among other reasons, it heavily discounts the possibility of an East Asian bloc developing and is signing its own FTAs with Asian countries to avoid the possibility of discrimination from ongoing bilat-eral initiatives. Edward Lincoln, “The Bush Second Term and East Asian Economic Regionalism.” [Online cited 10 November 2005]. Available at http://www.jcer.or.jp/eng/rep/opinions/EJ.Lincoln0503.pdf. Munakata (2006), on the other hand, argues that the prospects for integration are much brighter, and that East Asian regional integration will enhance US interests by boosting regional economic growth and diminishing security dilemmas. Naoko Munakata (2006) Transforming East Asia: The Evolution of Regional Economic Integration (Washington, DC: Brookings Institution Press)


4.3 On the Demand for a CRTA with Mexico

4.3.1 Economic Interests at Stake

At first glance, it seems difficult to explain the Japanese interest to negotiate a free trade agreement with Mexico. Aggregate trade and investment flows between these two countries are very low and do not reveal a substantial intensification over time. Although the trade balance in Japan’s favor increased markedly between 1990 and 2004 (mostly due to the reduction of Mexican oil exports to Japan), the overall position of the Mexican market in Japan’s foreign economic relations is miniscule to say the least. Exports to Mexico have consistently represented between 0.8 and 1.1% of total Japanese exports. The same is true for foreign direct investment, where Mexico’s share of total Japanese FDI has fluctuated below 1% with two exceptional years at 1.5% (1994) and 2.2% (1999).

However, these overall figures disguise the fact that for some specific Japanese industries the Mexican market is in fact very important. As can be seen in Table 4.1, for the automobile industry , Mexico is a much more important export market than any of the Asian nations with which Japan has negotiated or is currently negotiating free trade agreements. In the case of electronics , exports to Singapore are much larger, but exports to Mexico are roughly equivalent to exports in the other selected Asian nations. In the case of steel, Mexico ranks third in importance as an export market in this nascent Japanese FTA network. Moreover, the Japanese business sector pressed harder to negotiate with Mexico because Japanese companies were

Table 4.1 Japanese industrial and agricultural interests in FTA counterpart nations

Unit: millions of US dollars, %

Average exports (1999–2004) Foodstuff imports as a share of bilateral importsa (%)Automobile Electronics Metals

Mexico 816.0 1,526.5 493.7 21.8Singapore 698.9 6,218.8 954.9 4.0Korea 252.5 1,290.9 241.4 8.5Malaysiab 294.6 1,506.0 281.7 1.1Philipines 343.7 1,757.0 328.6 10.6Thailand 400.9 2,049.9 383.4 20.2Indonesiab 467.8 2,391.5 447.3 5.6

Sources: JETRO: Japanese Trade in 2004; handout of Ministry of Finance trade statistics with Mexico received by authors, summer 2005a These percentages were also estimated using average imports between 1999 and 2004b The shares for Malaysia and Indonesia are very small because the main primary products these nations export to Japan are lumber and oil, respectively


actually reporting losses from NAFTA’s trade and investment diversion effects.17 These industrial interests were not deterred by the well-understood challenge of negotiating with a large agricultural exporter. Indeed, Table 4.1 also shows that Mexico is the country with the highest share of foodstuff imports over bilateral Japanese imports among this group of Japanese FTA partners (21.8%).

4.3.2 Countering Trade Diversion

Mexico has had one of the most extensive FTA networks in the world: 11 agree-ments with 32 countries at the dawn of the 21st century. Of these numerous FTAs, two in particular concerned Japan: NAFTA, which entered into force in 1994, and the Mexico–EU CRTA, which became effective in 2000. Japanese exporters and investors in Mexico felt at a disadvantage vis-à-vis their American and European rivals on several fronts. First, external tariffs in Mexico are relatively high: in the year 2001 the MFN average tariff stood at 16.5%, in sharp contrast to the 0.7% tariff applied to the United States. Within manufacturing, some of the highest applied tariffs were in footwear (31.8%), textiles (23.6%), prepared foods (26.5%), transport equipment (17.1%), and machinery (14.3%). Mexico’s tariff policy, led the WTO to conclude that its “MFN protection is significant and has risen since 1997.”18

The advantages of FTA preferential treatment extended not only to the reduction or elimination of tariffs on goods and components but also to greater liberalization of services and foreign investment, the availability of a strong investment protection regime, and more transparency and certainty to business transactions as the Mexican government relinquished in many ways its ability to effect discretionary changes in policy. For example, Japan noted with concern that the Mexican deci-sion in 1999 to raise tariffs by 3–10% points on 10,000 items, but exclude from this provision its FTA counterparts, had damaged Japanese trade interests.19

Although the disadvantages of remaining outside Mexico’s FTA network were numerous, specific Japanese industrial sectors with very large interests in the Mexican market felt those negative effects more keenly. These sectors constituted the bedrock of support for a Japan–Mexico CRTA: government procurement , auto-mobiles , and electronics .20

17 Mark Manger, (2005) “Competition and Bilateralism in Trade Policy: The Case of Japan’s Free Trade Agreements,” Review of International Political Economy, 12,5: 804–828. For the more general argument on the impact of trade diversion on FTA proliferation see Richard E. Baldwin (1997), “The Causes of Regionalism,” The World Economy 20,7: 865–888.18 World Trade Organization, Trade Policy Review: Mexico 2002. [Online, cited 10 October 2005]. Available at http://www.wto.org/English/tratop_e/tpr_e/tp190_e.htm.19 JETRO, Report of the Committee for Closer Economic Relations: 4.20 Whether NAFTA generated net trade diversion for non-member countries is in fact a point of con-troversy. Hufbauer and Schott empirically tested the trade performance of the NAFTA member coun-tries and concluded that there has not been trade diversion, and in absolute terms Japan–Mexico


4.3.3 Government Contracts

Since Mexico is not a signatory to the WTO’s government procurement agreement, Japanese companies bidding for government contracts suffered many additional costs from operating outside a preferential trade framework in Mexico. For instance, Japanese firms complained that the tariffs applied to Japanese imported inputs inflated the costs of its plant exports and bids for government contracts, since their American and European rivals could import duty free most components.21 Moreover, the lack of national treatment for Japanese companies became more onerous as the Mexican government introduced in the year 2000 a 10% discount policy on the bids of Mexican suppliers when competing against foreign suppliers from non-FTA partners (in these situations foreign firms within the FTA network also qualified for the 10% discount on their bids).22 It should, therefore, be no sur-prise that Japanese general trading companies were among the first to publicly voice the need for an FTA with Mexico.23

Developments during the actual FTA negotiations in fact confirmed the worst fears of Japanese companies. Mexico’s abrupt decision in May 2003 to restrict government procurement bids to firms headquartered in its FTA partners shocked Japan.24 However, with the new provision, Japanese companies would effectively be shut out of this market. Japanese trade negotiators tried to persuade the Mexican government to return to the status quo ante, arguing that since Japan was in the midst of FTA negotiations with Mexico, this important market should not be closed to its enterprises.25 Mexican officials were unmoved, however, probably realizing the important incentive this gave to the Japanese to speed up the FTA negotiations.

trade remained stable (we thank Mark Manger for pointing this to us). See Hufbauer, Gary Clyde, and Jeffrey J. Schott. 2005. NAFTA Revisited: Achievements and Challenges. Washington, DC: Institute for International Economics. However, as will be discussed in more detail below, METI’s assessment of NAFTA’s trade diversion effects was based on relative terms: the loss of market share for Japanese companies in Mexico. The Japanese government’s decision to embark on free trade negotiations with Mexico was fueled by METI’s aggregate estimates of relative losses for Japan’s exports to Mexico as well as by the specific complaints of Japanese industries discussed next.

21 JETRO, Report of the Committee for Closer Economic Relations: 4.22 Takao Nakahata (2005) “Nichiboku EPA to Nihon Kigyô [The Japan–Mexico EPA and Japanese firms],” In JETRO, Shinkôkokuno taigai keizai senryaku (FTA nado) to nihon kigyô March: 320.23 Author’s interview with JETRO official, Tokyo, Summer 2005.24 Until then and despite the restrictions mentioned above, Japanese firms had a solid presence in supplying Mexican government procurement. For instance, until the year 2000, Japanese firms had captured more than 40% of electric power plant construction projects in Mexico (“Corporate influence looms behind Mexico trade talks,” Nikkei Net News, 15 October 2003).25 Interview with Mexico’s FTA negotiating team, Mexico City, July 2004.


4.3.4 Automobiles

Japanese automobile companies strongly supported an FTA with Mexico in order to reverse some of the losses brought about by the move towards regional integra-tion in North America. The first of these initiatives, the 1989 US–Canada free trade agreement , had meant the loss of preferential tariff treatment (as Canada had to phase out the duty remissions program it had implemented to attract Japanese auto-mobile investment) and the added burden of complying with content rules in order to qualify for preferential treatment. In fact, Japanese compliance with these rules became a controversial issue as many US automobile firms complained that Japanese auto firms engaged in “roll-up” practices to inflate their regional content levels,26 and Honda came under investigation by the US for improperly including overhead costs in its regional content estimates.27

The Big Three auto companies regarded the NAFTA negotiations as a second chance to push for stricter ROOs and more demanding monitoring systems to ensure compliance with these rules.28 NAFTA not only raised the required regional content level to qualify for duty-free status (from 50 to 62.5%) but also adopted a much tougher tracing system whereby the possibilities of roll-up were eliminated as the system traces the value of third-country auto parts throughout the production chain. Japanese companies with less developed subcontracting networks in the region were, therefore, hard pressed to meet the stricter NAFTA rules.

Moreover, Mexico’s high tariffs on imported finished vehicles (20–30%) have seriously constrained Japanese exports. The size of Mexico’s overall import market for finished vehicles grew rapidly from 250,000 units in 1999 to 700,000 in 2004. However, most of these imports came from Mexico’s FTA partners (namely the United States and Europe) whose companies enjoyed duty-free access. For Japanese companies, the only possibility of gaining duty-free access to the Mexican market rested on local production, since the Mexican government allowed for duty-free imports of finished vehicles, equivalent to 10% of their local production, for foreign assemblers in Mexico.29 Three Japanese auto manufacturers, Nissan , Honda , and Toyota , enjoyed such benefits. The size of their duty-free imports of finished

26 With roll-up, a component’s origin is attributed to the country of majority content, so that a part with 51% US content is considered 100% American when it crosses the Canadian border. American companies accused Japanese car makers with plants on both sides of the US–Canada border of taking advantage of multiple cross-border shipments to artificially boost their content levels (Alain De Remes, Timothy Fitzpatrick and Antonio Ortiz, “NAFTA and the Automotive Industry,” in Van R. Whiting, Jr., ed., Regionalization in the World Economy (Delhi: Macmillan India, 1996), p. 125.27 Paul Magnusson and James B. Treece, “Honda: Is It an American Car?” Business Week, 18 November 1991.28 Mireya Solís, “Sharing the Spoils of Economic Integration? Japanese Direct Investment in North America,” in Whiting, Jr., Regionalization in the World Economy.29 NAFTA’s stiff ROO also made it difficult for Japanese companies in the United States to export finished vehicles to Mexico that qualified for duty-free treatment.


vehicles was, however, rather modest: 35,000 units or 5% of total imports.30 The merits of an FTA with Mexico from the point of view of the Japanese automobile industry were indeed substantial: the elimination of tariffs and performance requirements to level the playing field vis-à-vis American and European rivals in the Mexican market.

4.3.5 Electronics

By the late 1980s, Japanese electronics companies were manufacturing mostly through the maquiladora program31 whose advantages included tariff exemptions, low-cost labor, proximity to the main market of destination in the United States and the operation of twin plants on both sides of the US–Mexico border. The rush of Japanese investment in the maquiladora sector had generated some friction with the United States as some voices were raised that Japan was using Mexico’s maquila program as a back door into the US market. The ballooning US trade deficit vis-à-vis Japan made this charge a politically sensitive one. For instance, in 1987 at a Congressional hearing in San Diego, two proposals were made that clearly reflected this negative sentiment towards Japanese maquiladora industries: to restrict partici-pation in the maquila sector to Western Hemisphere firms or to demand a 60% regional content level.32 Although neither of these initiatives materialized then, the negotiation of NAFTA did bring about a major change to the rules of the game for the majority of Japanese electronic firms operating in Mexico.33

NAFTA’s provision (Article 303) to phase out the duty drawback benefits of the maquiladora program as of 2001 constituted a significant handicap for Japanese companies because this represented the loss of very important tariff benefits: the duty exemption on importation of machinery (since the agreement forbids import duty exemptions for equipment conditioned to an export requirement) and the zero tariff charged by Mexico on inputs to be assembled into an export good.34 However,

30 Nakahata, “Nichiboku EPA to Nihon Kigyô,” : 307.31 This program had in fact originated much earlier (in the mid-1960s) when Mexico and the United States devised a preferential tariff program to foster industrialization in border cities after the elimination of the US guest worker program. Through the maquiladora program, Mexico eliminated tariffs on inputs and machinery for production goods to be exported to the United States. In turn, the United States exempted US components incorporated in such products from tariffs when they crossed the border. Although devised primarily as a bilateral cooperation pro-gram, it is important to note that the maquiladora program was open to the participation of enter-prises from third countries.32 Solís, “Sharing the Spoils of Economic Integration?”:210.33 By the late 1990s, the Japanese Chamber of Commerce in Mexico (1998) reported that 53 out of 59 Japanese electronic companies in Mexico were established in the maquila sector (p. ii) [1998 Mekishiko Nikkei Kigyô Shinshutsu Ichiran [A Glance at Japanese Companies in Mexico]. Mexico City: Japanese Chamber of Commerce in Mexico].34 Solís, “Mexico and Japan.”


to moderate the negative impact of the NAFTA phase-out of duty drawbacks on third countries’ maquilas (and concerned about possible disinvestments), the Mexican government adopted a special sectoral promotion program (PROSEC) to award duty-free treatment to machinery and inputs from selected industries.35 For the Japanese business community, however, the shift from maquila duty drawback to PROSEC has never been satisfactory. The largest concern is of course that PROSEC remains a unilateral liberalization measure by the Mexican government, subject to discretionary changes. The Japanese team in the joint study group on FTA negotiations noted for instance that in December 2000 the Mexican govern-ment had eliminated more than 2,500 electronic items from the PROSEC program and concluded that “even at present, prospects for continuation of the system as well as its revision, are unstable, causing serious restrictions to corporate activities.”36 For the Japanese electronic sector, the costs of remaining marginalized from Mexico’s FTA network were therefore very tangible.

In sum, the impact of NAFTA and the MEUFTA on Japanese companies in Mexico became an issue of great concern to the private sector and government offi-cials in Japan. METI estimates the costs of trade diversion to be in the order of 395.1 billion yen (approximately $3.2 billion), arguing this represented a GDP decrease of 521 billion yen (approximately $4.3 billion) and a loss of 31,824 jobs in Japan.37 These losses derived from the declining market share of Japanese com-panies in the aftermath of NAFTA. For example, between 1987 and 1993, Japanese products had represented 6.2% of total Mexican imports, but their share of the Mexican market fell to 4.1% between 1994 and 1999. This was especially true for the automobile industry, whose exports to Mexico dropped from $713.5 million in 1994 to $415.1 million in 1996, and had not recovered by 1999 at $485.9 million.38 Japan also lost ground as a foreign investor in the Mexican market. During the 1980s, Japan’s flows of direct investment to Mexico had represented 6.4% of total incoming FDI. In the years 1994–1999, Japan’s share of total FDI into Mexico shrank to 4.8%.39 Investments from the Japanese electronics industry in Mexico basically

35 Manger (p. 33) notes that, with PROSEC, the Mexican government was trying to walk a fine line of responding to the concerns of Japanese investors, but also of offering some protection to Mexican domestic producers by not eliminating MFN tariffs on all components. In the end, how-ever, neither the Japanese MNCs nor the Mexican producers were satisfied, and both groups pre-ferred renegotiation of NAFTA’s Article 303, which was politically unfeasible. Mark Manger. “Competitive Liberalization: The Proliferation of Preferential Trade Agreements.” (unpublished manuscript).36 Japan–Mexico Joint Study Group on the strengthening of bilateral economic relations. “Final Report.” [Online, cited 16 February 2003]. Available at http://www.economia.gob.mx/work/snci/negociaciones/japon/pdfs/japon_completo.pdf (2002) p. 15.37 Japan–Mexico Joint Study Group, “Final Report,” p. 14. Yen figures converted to dollars by authors with the average exchange rate for 2001.38 Statistics from Japan’s Ministry of Finance.39 Statistics from Mexico’s Ministry of Economy.


dried up due to concern over the future of the maquiladora industry with only $8 million of fresh investments between 2000 and 2004.40

Japanese manufacturing and commercial trade interests mobilized swiftly in the wake of dwindling export and investment opportunities in Mexico to negotiate a CRTA. For instance, the Japan Foreign Trade Council (representing the interests of the general trading companies) noted that “the non-existence of FTA with Mexico will bring about considerable disadvantages to Japan and majority of its indus-tries.”41 Keidanren , the umbrella organization for Japanese industry, also flexed its political muscle.42 It argued poignantly that while the United States and the EU had actively pursued FTA negotiations, “Japan, however, has yet to undertake a single free trade agreement. As a result, Japanese companies are losing out on business opportunities in the international arena, and also finding themselves placed at a competitive disadvantage in doing business with countries that have already con-cluded FTAs elsewhere.”43 METI rallied behind these efforts to use an FTA with Mexico to correct for ongoing trade and investment diversion .

4.4 On the Supply of a CRTA with Mexico

4.4.1 The Pivotal Role of METI

METI has undoubtedly played the catalytic role for Japan’s FTA initiatives and, early on, attached great importance to an FTA with Mexico. As the promoter of this CRTA initiative, METI launched a campaign to convince the political leaders and the Japanese public the importance of negotiating with Mexico. A first step in the campaign was to publicize the tangible losses (including potential job losses) incurred by Japanese industries if the country did not sign an FTA with Mexico. Because the concern for employment was high in the Japanese political agenda at that time, these concrete numbers (see above) struck a nerve among major political figures.44

40 As noted before, Mexican trade officials worried that the loss of duty drawback benefits and rising labor costs in the maquiladoras could produce an exodus of Japanese companies from Mexico to China. Restoring competitiveness vis-à-vis China in order to retain and promote Japanese direct investment became a major source of Mexican interest in a preferential trade agreement with Japan. See Robert Donnelly, “Dealing with the Rising Sun.”41 Japan Foreign Trade Council. 2001. “Toward the Japan–Mexico Free Trade Agreement (An Appeal by Japan Foreign Trade Council).” [Online, cited 21 August 2002]. Available at http://www.jftc.or.jp/english/news/2001_02/2001_02.htm.42 For a good analysis of Keidanren’s lobbying activities on behalf of free trade agreements see Hidetaka Yoshimatsu (2005)“Japan’s Keidanren and Free Trade Agreements: Societal Interests and Trade Policy,” Asian Survey 45, 2: 258–278.43 Keidanren, “Urgent Call for Active Promotion of Free Trade Agreements. Toward a New Dimension in Trade Policy.” [Online, cited 31 October 2001]. Available at http://www.keidanren.or.jp/english/policy/2000/033/proposal.html, p. 1.44 Indicated by a METI official at the time of author’s interview, Tokyo, July 2005.


By emphasizing the negative impacts of not having the bilateral agreement, METI advocated the notion of “mamori no [defensive] FTA” in the case of Mexico.45 For METI, the distance and weak political connections of the extra-regional partner were not central to its FTA initiatives. As long as Japanese economic and business interests spread across geographical regions, there were economic gains to be made by engaging in cross-regionalism.

METI also engaged in an advocacy campaign to garner strong support from the private sector across a broad range of industries. For instance, METI enticed Japanese businesses to increase their support for this negotiation by including a section on “Improvement in the Business Environment.” The purpose of this chapter in the Japan–Mexico FTA is to make sure that Mexico provides a hospitable envi-ronment, in terms of safety and orderliness, for Japanese businesses operating there. This was important to many Japanese businessmen living in Mexico who had been affected by the growing incidence of crimes or kidnappings over the past 10 years.46

METI’s strong commitment to the negotiation with Mexico derived from its estimation that this agreement was vital for the pro-FTA forces within the Japanese government to demonstrate Japan’s seriousness and ability to engage in FTAs with the rest of the world. Japan had first negotiated a FTA with Singapore , a country which is already quite liberalized with low or no tariffs on most manu-factured goods, and with a very limited agricultural sector. Therefore, many saw the FTA with Mexico as the first “real” negotiation since it included a substantial agricultural component, essential to establish Japan’s credibility for future FTA negotiations.

Domestically, a successful negotiation with Mexico was expected to support a key priority for then-Prime Minister Jun’ichiro Koizumi , domestic economic reform , and in particular agricultural restructuring .47 Although for most of the post-war period, the strong protectionist position of the agricultural lobby was supported

45 The distinction between “defensive (mamori no) FTA” and “offensive (semeno) FTA” is often made by METI officials. Asahi Shimbun, 19 April 2004.46 In 1996, the President of Sanyo Video Components that operates maquiladora in Tijuana was kidnapped for $2 million ransom. This was widely reported news that alerted the maquila-based businesses for the possible personal risk in operating businesses in Mexico. (Financial Times, 17 August, 1996, p. 3).47 The negotiation with Mexico was also deemed important to expose to international competition manufacturing sectors traditionally protected. A case in point is the concessions in leather and the rapid increase in shoe imports from Mexico. Mexican shoe manufacturers rapidly expanded their exports to Japan from 3,500 thousand pairs before the agreement to 126 thousand by September 2006, making Japan their third top export destination (Reforma, September 22, 2006), More gen-erally, FTAs are expected to contribute to structural reform in Japan in a number of ways. For example, Japan’s protected service sector, including medical and education services, will have to go through a reform in order to make the system compatible with Japan’s FTA partners if mutual recognition agreements are reached (Urata, “Towards an East Asia Free Trade Area,” pp. 394–395).


by its visibly political presence among the Liberal Democratic Party (LDP) nôgyô zoku (agricultural tribe) and rural-area based LDP politicians, some important domestic changes have begun to affect the clout of the agricultural lobby: a new electoral districting system (which requires a winning politician to appeal to wider constituents and not just to appease special interest groups), generational changes with a dwindling farming population, and a more influential processed food industry willing to second foreign petitions for more open markets, enabling them to import cheap materials.48 Moreover, having risen to power supported by an unprecedented popularity as a politician from the ruling LDP willing to oppose its own party’s “old guard,” Prime Minister Koizumi was not afraid to confront the LDP’s agricultural interests . Yet the agricultural lobby continued to stubbornly resist market liberalization.49

Champions of economic reform in Japan believed the agreement with Mexico would help circumscribe the influence of the agricultural lobby on trade policy since Japan would have to make its first-ever WTO-plus agricultural concessions for the CRTA to be in compliance with WTO rules regarding “substantial liberalization.”50 In short, Japan’s pro-FTA forces represented by METI and supported by Koizumi aimed to gradually lock in Japan’s agricultural reform through this FTA with Mexico to fend off future domestic opposition to other (mostly intra-regional) FTAs and to increase Japan’s leverage and credibility.

4.4.2 Overcoming yonshô taisei

The attainment of these important international and domestic goals in the FTA negotiation with Mexico rested, however, on the ability to reach a basic consensus among political and bureaucratic actors in Japan on the basic contours of the con-cession package offered to Mexico. This coordination process proved extremely difficult, giving credence to existing work on the importance of inter-bureaucratic politics in Japanese foreign economic policy making.51 It was quite evident from our interviews that the tug-of-war and coordination challenges among Japanese

48 ‘ “Hogo” dakeja dame: “shoku no anzen” de jimin to, nosui zoku, henbo no toki’ Asahi Shimbun, 31 March 2004, p. 4.49 Christina Davis (2003) Food Fights Over Free Trade: How International Institutions Promote Agricultural Trade Liberalization (Princeton NJ: Princeton University Press); Aurelia George (2002) “The Politics of Interest Representation in the Japanese Diet: The Case of Agriculture,” Pacific Affairs 64, 4: 506–528.50 Munakata, “How Trade Agreements Can Reform Japan.”51 See, for example, on foreign aid, Alan Rix, Japan’s Economic Aid: Policy-making and Politics (New York: St. Martin’s Press, 1980); on trade liberalization Leonard J. Schoppa (1997) Bargaining with Japan: What American Pressure Can and Cannot Do (New York: Columbia University Press); on capital outflow liberalization, Mireya Solís (2004), Banking on Multinationals: Public Credit and the Export of Japanese Sunset Industries (Stanford: Stanford University Press).


powerful ministries significantly shaped Japan’s FTA policy towards Mexico. Officially, the Japanese government engages in FTA negotiations in the form of yonshô taisei (four-ministry structure) involving METI, the Ministry of Foreign Affairs (MOFA), the Ministry of Agriculture, Forestry, and Fisheries (MAFF) and the Ministry of Finance (MOF). Thus, it fell upon METI to bring on board other bureaucracies with different perspectives in order to collectively present a pro-FTA position vis-à-vis talks with Mexico and subsequent FTA initiatives.

Concessions on Japan’s agricultural market access to Mexican products were critical to the success of FTA talks, so that the Fox Administration could score political points at home, and justify the opening of import markets to Japanese manufacturers. Obviously for Japan, too, agricultural liberalization held the key to future FTAs. Against this backdrop, the saliency of MAFF in the FTA process increased since it emerged as the bureaucratic player defining the upper limits on the liberalization package offered in this CRTA. MAFF defended its guarded posi-tion on FTAs and agricultural liberalization with the following three premises: First, exemptions on sensitive commodities must be made, while maintaining con-sistency with the WTO’s Article 24 ; second, in tandem with liberalization through WTO and FTAs, the government must protect food security through sanitary and health requirements; third, the Japanese government must select appropriate FTA partners to avoid compromising Japan’s food security and agricultural future.52

As MAFF reluctantly came on board after the release of the joint study on a possible Japan–Mexico FTA in July 2002, it began to establish through its item-by-item negotiations with agricultural interests, a domestically and politically acceptable position regarding the level of agricultural liberalization before the Japanese government negotiated with the Mexican government. The purpose was, according to a MAFF official, to avoid political turmoil at the time of ratification as seen in the case of the South Korea–Chile FTA .53 It became obvious, however, that the compromise MAFF and the Japanese agricultural sector were willing to make on the five most important items for Mexico—pork , beef , chicken , orange and orange juice —was insufficient, and the disagreements over the volume of these tariff-rate quotas (TRQs) produced a breakdown in the negotiations in October 2003.54

On the other hand, MOFA unenthusiastically played its role as official coordina-tor of the FTA with Mexico. MOFA’s shift from its multilateral-only position to endorse FTA initiatives in the early 2000s was due in part to the expected payoff on Japan’s regional diplomacy in Asia from engaging in economic agreements based on reciprocal cooperation.55 Therefore, MOFA had insisted that “the first Japanese

52 Interview with MAFF official in charge of FTA negotiations for several years, Tokyo, July 2005. See also Masaki Sakai, “Wagakuni no Shokuryô Anzenhoshô to Jiyûbôeki kyôtei [Our country’s Food Security and FTAs],” Nôgyô to Keizai (February, 2003), pp. 57–66.53 Interview with a MAFF official Tokyo, July 2005.54 Akio Fujiwara (2004) “Nichiboku FTA Kôshô no Uchimaku [Inside story of Japan–Mexico FTA Negotiation],” Gaikô Forum: 54–59.55 Diplomatic Blue Book 2001 Tokyo: MOFA, 2001 [Online, cited 22 August 2005]. Available at http://www.mofa.go.jp/policy/other/bluebook/2001/chap1-e.html.


FTA ought to be concluded with an Asian neighbor.”56 MOFA saw the agreement with Mexico more like an ordinary FTA with fewer benefits in terms of strategic or diplomatic gains of increasing regional cooperation. Therefore, the ministry was not so keen on this negotiation, particularly when it was seen as undermining Japan’s overall efforts to support trade and economic multilateralism under the WTO .57 Nevertheless, MOFA came on board keenly aware that failure in talks with Mexico would have a negative impact on Japan’s intra-regional efforts.58

Finally, MOF’s interest in pursuing FTA negotiations revolves around the issue of trade facilitation , particularly streamlining of customs procedures . MOF officials insist that inefficient or corrupt custom systems can be more onerous than trade barriers in hindering market access for foreign products. Although the goal of trade facilitation is also pursued in broader forums (the WTO and APEC ), the advantage of bilateral FTAs for MOF officials is that they allow Japan to selectively target its technical cooperation on streamlining custom procedures.59 Regarding FTA negoti-ations with Mexico, MOF’s main responsibilities revolved around overseeing the complex tariff-rate quota system on various agricultural goods, and hence the min-istry was represented by its tariff bureau, not the international bureau. Another important issue that the ministry faced for the first time was the design of a manage-able system of preferential ROO . For MOF, the ROO on steel became the point of tension with the Mexican negotiators when they insisted on applying its ROO to the original supplier of iron ore. This would have amounted to a de facto exclusion of Japanese steel (since there are no iron ore deposits in Japan), and eventually Mexico had to relinquish its proposed ROO.

The contrast among the promoter METI, the resister MAFF and the reluctant MOFA in FTA negotiations with Mexico could not be starker. As the failure of October 2003 Japan–Mexico negotiation demonstrates, the contrasting positions of responsible ministries could sometimes seem insurmountable. The incoherence among the four ministries was deemed the fundamental obstacle in reaching an agreement with Mexico by Japanese observers.60 Interestingly, the fiasco of October led to institutional changes, since three of the main ministries responded to the

56 Mark Manger (2005) “Competition and Bilateralism in Trade Policy,” : 815. Yoshimatsu: 269; Yoshimatsu also notes that MOFA official questioned why Japan should conclude an FTA with an extra-regional partner like Mexico.57 This explains MOFA’s uneasiness when the Mexican government insisted (and later on secured) a negative list approach for service trade. This was not only incompatible with Japan’s FTA with Singapore (which adopted the positive list), but was also incompatible with the WTO. Interview with a MOFA official, Tokyo, July 2004.58 Moreover, MOFA was not impervious to the needs of Japanese industries. For example, Yanagihara notes that MOFA was also heavily influenced by the business community when it published its FTA strategy in 2002. Toru Yanagihara (2004) “Nihon no ‘FTA senryaku’ to ‘kantei shodô gaikô’ [Japan’s FTA strategy and Prime Minister-led Diplomacy],” Kaigai jijô April: 92–108.59 Interview with MOF official, Tokyo, June 2005.60 Nihon Keizai Shimbun, 11 October and 13 November 2003.


failed summit with Mexico by establishing their own “FTA headquarters” and began to allocate more personnel to the division.61 It was after the October show-down that a top–down intervention from Japan’s prime minister was necessary to break the bureaucratic logjam.

4.5 Showdown Time: The October 2003 CRTA Crisis

4.5.1 Slow Progress on Agriculture and Failed October Meeting

The clout of the agricultural lobby was felt at all stages of the negotiation process with Mexico. In fact, the agricultural lobby effectively chilled the FTA talks when they were first proposed in 1999. At that time, the Japanese delegation in charge of producing a report on prospects of negotiating with Mexico candidly admitted that a hard core group in Japan remained determined to completely exclude agriculture from negotiations with Mexico. Mexico found this unacceptable, and the FTA negotiation process stalled.62 Even after the FTA talks had been reactivated, the Japanese team in the joint study group questioned whether there were complemen-tarities in agricultural trade between Mexico and Japan citing the substitution effect ,63 and it made reference to the LDP’s policy of not negotiating agricultural concessions bilaterally but only at the WTO.64

The Mexican team, on the other hand, replied that while some flexibility could be offered in specific commodities, “agricultural products are indispensable in the final package of the bilateral agreement.”65 These important differences in negotiating stands turned into an unbridgeable gulf at the time of exchanging the offer-request list for agricultural products in the fall of 2003. The Mexican FTA team, keenly aware that the opportunities to increase exports to Japan lay in the primary sector, pushed for the elimination of tariffs and quotas on agricultural commodities . Japan, however, was not prepared to entertain this possibility and offered instead conces-sions on a very limited amount of tariff lines and multiple exclusions of products of great interest to Mexico, such as pork , beef , bananas , etc.66

As the date for the visit of Mexico’s president, Vicente Fox , to Japan to sign a basic FTA accord approached in the fall of 2003, most of the agricultural negotiations

61 Nihon Keizai Shimbun, November 13, 2003. MOFA had established the FTA office much earlier than the other two in November of 2002, but the number of staff was increased threefold from 30 in October 2002 to 90 in January 2003 (Nihon Keizai Shimbun, 29 November, 2003).62 Mireya Solís, “Japan’s New Regionalism,”: 395.63 The argument is that if the Japanese people consumed more tropical fruits they would decrease their consumption of fruits harvested in Japan.64 Joint Study Group, “Final Report,”: 18, 22.65 Joint Study Group, “Final Report,”: 22.66 Information provided to author by Consejo Nacional Agropecuario, May 2005.


focused on the tariff rate quotas for Mexican products sensitive to Japan: pork, beef, chicken , oranges and orange juice (the so-called “five fingers”). The gaps to bridge with this controlled liberalization formula were nevertheless still substantial. Pork, for example, represents half of all Mexican exports of primary goods to Japan or 10% of total exports. The Japanese were offering a low-tariff quota of 80,000 tons (effectively doubling Mexico’s exports), while the Mexicans demanded a duty-free quota of 250,000 tons (which they believed more accurately reflected the industry’s export potential).

Bilateral agricultural negotiations, therefore, turned into a tense exercise of defining import quotas that both sides could sell domestically to their respective farming interests. As discussed below, Japanese negotiators were also concerned about the ratification process when many rural-based LDP politicians might try to sabotage this FTA. Although some progress had been made, substantial differences still remained at the time of President’s Fox trip to Japan. Despite four days of intense negotiations, the negotiators could not overcome the impasse over the five fingers. Deep divisions within the Mexican delegation were also responsible for this outcome. While some favored the signing of an agreement despite the absence of significant agricultural concessions , others refused to do so arguing that such trade package could not gain domestic support in Mexico. In the end, Fox sided with the latter group.67 The Mexican minister of the economy, Fernando Canales , hinted that the timing of the Fox–Koizumi meeting was all wrong by remarking that on the eve of Japanese national elections (scheduled for three weeks later) agricul-ture had inevitably become a political issue.68 In Japan, the mirror argument was made by officials suggesting that the source of the negotiation breakdown could be found in President Fox’s domestic political interests.69

Along with differences among four ministries involved, the agricultural resistance created a major impasse in Japan’s FTA negotiation with Mexico. It took a top–down intervention by the prime minister to engineer a breakthrough.

4.5.2 Koizumi’s Political Intervention

Koizumi had supported FTA negotiations with Mexico since taking office in May 2001 as he met with President Fox and agreed to reactivate the bilateral FTA nego-tiation which had been shelved earlier. Koizumi’s top–down governing style and his commitment to carry out economic reform in Japan, led his cabinet and the Cabinet Office to take a strong initiative in this FTA negotiation. As Japan’s FTA negotiation

67 Roberto Zamarripa, “Harakiri” Reforma, 21 October 2003. Author interviews with officials of Mexico’s Ministry of Economy, and with representatives of COECE and CAN, Mexico City, May 2005.68 Hussain Khan, “Mexico Free Trade Founders on Japan’s Farmers” Asia Times, 23 October 2003.69 Nihon Keizai Shimbun, 17 October 2003.


with Mexico began in earnest in fall of 2002, Koizumi made several appointments to pave the way for FTA diplomacy. He appointed as METI minister a leading LDP reformer, Shoichi Nakagawa , who had a strong influence over the agricultural tribe. Koizumi also nominated Fukushiro Nukaga , the head of LDP’s FTA committee, as the chairman of the Policy Affairs Research Council (a key internal organ in draft-ing the party’s policy positions). In this fashion, the Koizumi Cabinet tried to quell opposition to the FTAs, especially from the agricultural lobby within the LDP party.70

With such support, the failure of October 2003 negotiation came as a major shock to the Koizumi cabinet. In order to amend the situation in the immediate aftermath, a mission representing the cabinet was sent to Mexico in November; and with the aim of increasing coordination among ministries, an FTA Kankei Shôchô Renraku Kaigi (meeting on FTA-related ministries and bureaus) was set up in December. The direct leadership taken by the Koizumi cabinet helped lower the barriers between the four ministries involved, and such political consensus made the MAFF take a more accommodative position toward agricultural liberalization than before.71 Some additional compromise on agriculture finally led to the agree-ment on the FTA between Japan and Mexico in March 2004. The Japanese govern-ment collectively took the conclusion of the FTA as a success on many levels, since it constitutes the first case where agricultural liberalization , though limited, was explicitly included and because MAFF and the agriculture lobby showed some flexibility. Both provided good precedents to increase Japan’s leverage in future trade negotiations with Asian nations.

Nevertheless, Table 4.2 summarizes the main features of the agricultural deal and offers a picture of only modest Japanese liberalization. Although the volume of trade covered seems impressive (99.6% of agricultural trade volume), in terms of tariff lines actually covered the results are not as impressive. More than 56.7% of the tariff lines were left aside as exclusions or items for future renegotiation (with no binding agreement to effectively renegotiate). For the five sensitive products mentioned above, the tariff quotas will remain in place, and in the case of chicken , beef and oranges , the preferential rate will not be decided until a few years after the implementation of the treaty.

To sum up, the Japanese agricultural lobby did make a substantial concession from its original position of negotiating exclusively at the multilateral level. But the agricultural sector was also able to tailor its agreement with Mexico to avoid sub-stantial adjustment costs on sensitive items . For these reasons the Japanese agricul-tural lobby has become much more comfortable with Japan’s ongoing intra-regional FTA initiatives. The CRTA with Mexico established a political compromise on

70 Nihon Keizai Shimbun, 17 October 2003.71 Interview from a METI official, Tokyo, July 2005; Pempel and Urata (2005, p. 88) note that METI had a difficult time exerting pressure on the MAFF toward agricultural liberalization in support of Japan’s FTA efforts, for under METI itself there are many uncompetitive industries that resist liberalization.


agricultural issues whereby subsequent Japanese FTA negotiations with Asian nations will allow the agriculture sector to be included, but with some sensitive farm products clearly set as off-limits.

4.6 Conclusions: Significance and Implications of the Japan–Mexico CRTA

The CRTA with Mexico was a high-stakes negotiation not only because it was necessary to eliminate discriminatory treatment for Japanese companies operating in the Mexican market, but also because it became a crucial battleground between industrial and agricultural lobbies on the direction of Japan’s trade policy, because it helped the Japanese bureaucracy’s FTA capacity-building efforts, and because it established significant precedents on negotiation modalities influencing Japan’s subsequent negotiations with many Asian nations. These findings, therefore, cor-roborate Solís and Katada’s hypotheses laid out in the framework chapter regarding the importance of economic defensive motives (trade diversion ) and of leveraging cross-regional talks to score points in intra-regional negotiations (through capacity building and precedent setting ).

As discussed above, some Japanese industries reported tangible losses from the trade and investment diversion effects of NAFTA and the Mexico-EU CRTA .

Table 4.2 Modest agricultural liberalization in the Japan–Mexico FTA

Volume of trade covered 99.6%Tariff lines covered 796 or 43% of totalLiberalization schedule Immediate 511 tariff lines (27.8%) Medium term (3–5 years) 113 tariff lines (6.1%) Long term (7–10 years) 92 tariff lines (5%)Quota items 80 tariff lines (4.3%)Five fingers Pork: Initial quota of 38,000 to grow to 80,000 in

5 years with 2% tariff (half of 4.3%) Chicken: 10-ton quota to grow to 8,500 in year five.

Tariff rates to be discussed in first year of entry into force

Beef: 10-ton quota to grow to 6,000 tons in year 5. Tariff rates to be discussed in the second year of entry into force

Oranges: 10-ton quota to grow to 4,000 tons in year five. Tariff rates to be discussed in second year of entry

Orange juice: 4,000-ton quota in first year to grow to 6,500 tons in 5 years with halved tariff

Exclusion or renegotiation 1,044 tariff lines (56.7%) Examples: rice, sugar apple, pineapple, wheat, nectarines, potatoes, sausages

Sources: Prepared by authors with data provided by Mexico’s Consejo Nacional Agropecuario


These industrial interests (government procurement contractors , auto companies and electronic firms ) demanded an FTA with Mexico in order to level the playing field, and for the most part their concerns were addressed in the final agreement. In the area of government procurement, Japanese companies are now eligible to par-ticipate in the bidding process and enjoy national treatment status. In the case of automobiles, there are some immediate gains from 42.4% increase in exports to Mexico in FY 2005 (with a duty-free quota equivalent to 5% of the domestic mar-ket), but the big payoff will be realized in the medium term with the phase-out of all tariffs in a 7-year period. For Japanese electronic firms, the benefits of the agree-ment were twofold: to consolidate the tariff preferences that had previously been offered unilaterally (PROSEC); and to introduce the improvement of the business climate as an issue to be addressed bilaterally. Japanese firms seem to be capitaliz-ing on these advantages. Though preliminary, a JETRO report published one year after the enactment of the JMFTA notes that there was 22.7% increase in Japan–Mexican bilateral trade during the Japanese Fiscal Year 2005 (April 2005–March 2006), where Japan’s exports to Mexico account for the increase of 15.4%.72

Furthermore, the CRTA with Mexico helped many Japanese companies strengthen their export operations in North America. Japanese consumer electronics firms are likely to retain their position as key suppliers of televisions and other audiovisual products in the United States by consolidating the duty-free status of the multiple components imported for their maquiladora operations. And Japanese automobile companies in Mexico will be able to increase their regional integration levels (essential to clear NAFTA ’s ROO ) to the extent that the investment protection chapter in the FTA encourages investment in Mexico from Japan’s small and medium-sized auto part suppliers.

Although the benefits accrued to Japanese companies in Mexico from this bilateral trade agreement were clear, the domestic political battle in Japan between champions and detractors of its FTA policy yielded no clear winners. As noted before, METI bureaucrats considered the FTA with Mexico easier to sell at home given that Japanese industries were actually reporting losses from lack of preferen-tial access. They hoped that an FTA with Mexico would help them lay the basis of political support for the unfolding Japanese FTA diplomacy and weaken the clout of the agricultural lobby over trade policy. However, the heated and protracted negotiations with Mexico show that far from being marginalized, the agricultural lobby has adapted well to the new trade diplomacy and has learned how to carve exclusions and deferments in sensitive sectors in this era of trade bilateralism. The negotiation of these liberalization opt-outs has in fact dominated Japan’s FTA talks with Asian countries.

On the other hand, for Japan – a country trying to catch up with the worldwide FTA bandwagon – successfully engineering a free trade agreement with a consummate

72 JETRO (2006). “Nihon Mekishiko Keizai Renkei Kyotei (Nichiboku EPA) Hakkou Ichinenme no Kouka.” 26 June. [Online, cited July 2007]. Available at http://www.jetro.go.jp/biz/world/cs_america /reports/05001225.


FTA negotiator was a major boost to its confidence and credibility. Obviously, the FTA with Singapore had had a similar effect in lifting the morale of Japanese officials,73 but Mexico represented a unique challenge and learning opportunity. With Singapore, agricultural trade was minimal, no preferential ROO were required given the duty-free status of most commodities and WTO rules acted as the key benchmark on important issues such as service liberalization and dispute settlement procedures. None of this was true in the negotiation with Mexico, and this helped prepare Japan to negotiate with other Asian countries with large agricultural exports, high external tariffs and non-WTO commitments on important areas such as government procurement.

A very intense process of “on-the-negotiation training” is reported by Mexican and Japanese officials whereby Mexico transferred a fair amount of “FTA know-how” to Japan. Mexican officials noted that a main reason behind the lengthy negotiation process was the numerous queries from their Japanese counterparts on every detail of the agreement.74 Perhaps the single most important piece of evidence regarding the training effect of this cross-regional initiative on Japan’s FTA diplo-macy is that the Japanese government is using the FTA treaty with Mexico as the benchmark text with which it initiates negotiations with Asian countries.75

Because the Japan–Mexico FTA is such a key reference point in Japan’s FTA diplomacy, this cross-regional initiative stands to exercise a large influence over Japan’s forthcoming free trade agreements with Asian partners. Japanese officials believe that the FTA with Mexico enhances Japan’s position on important issues. For instance, Japan now has under its belt an FTA with a positive list for service liberalization (Singapore), and one with a negative list (Mexico). The shift to the negative list came about because the Mexican government’s insistence to maintain NAFTA ’s consistency. The Japanese government, nevertheless, saw it as an oppor-tunity to introduce an effective tool to deal with Asia. Since the Japanese govern-ment can now “go either way” with the service agreement, it will be able to use this flexibility as the basis of negotiation.76 Furthermore, the “business environment ” clause is considered an innovation that Japanese business actively welcome as a

73 Naoko Munakata (2002) “Whither East Asian Economic Integration?” CNAPS Working Paper Topic (Washington DC: Brookings Institution, June): 34.74 Interviews with officials from Mexico’s FTA team, [Mexico City] May 2005, and with METI and MOF officials, Tokyo June and July 2005.75 Interview with MOF official, Tokyo, June 2005.76 Interview with a METI official, Tokyo, July 2005. This leverage is evident in Japan’s service negotiations with the Philippines. By stating an initial preference for a negative list, Japan was able to obtain from the Philippines a standstill provision in the level of service liberalization in exchange for adopting in the end the positive list approach. Japanese officials regard this outcome as a victory in the substance. See Tomochika Uyama (2005) “FTA no okeru sabisu bôeki jiyukano hôshiki: nihon-filipin kosho no hyôka (The Method of Liberalization in Trade in Services through FTA: Evaluation of Japan–Philippines FTA Negotiations).” Bôeki to Kanzei (Trade and Customs): 44–56.


part of the Japanese FTA negotiations with many of the developing countries in the region.77

The significance of the FTA with Mexico for Japan’s Asia policy derived as well from a demonstration effect . Japan could not let negotiations with Mexico flounder because, as noted above, this was the first FTA negotiation that actually included the agricultural sector, and failure to conclude this agreement would have sent a clear message to Asia that Japan was either not serious about FTAs or the agricul-tural opposition was so strong that the Japanese government would be unable to open the sector at all. Because many Asian nations are mostly interested in accessing Japan’s agricultural market, the FTA with Mexico presented itself as a litmus test. The need to pass this test explains the visible intervention of Prime Minister Koizumi to rein in bureaucratic infighting and to hammer out an acceptable agree-ment for Mexico.

The cross-regional agreement between Japan and Mexico convincingly demon-strates that, more than geographical proximity , those two countries were “dominoes” connected by specific Japanese industries with large interests in Mexico and that in negotiating with Mexico, the Japanese state never lost sight of the importance of going cross-regional in order to boost its regional integration efforts.

In the aftermath of the trade agreement with Mexico, Japanese FTA policy con-tinues to have a strong dose of cross-regionalism, as Japanese bilateral trade initia-tives have reached countries in Latin America, Europe , Australia , South Asia , and the Middle East . Japan has also pushed forcefully for a blueprint of a broader East Asian Community to encompass countries outside the narrow confines of East Asia, such as India , Australia , and New Zealand . Less than a decade after its first consideration of a preferential trade agreement option, Japanese FTA policy is facing a turning point. While pushing forward FTA negotiations with regional partners such as Malaysia , Philippines and Thailand , and ASEAN , interest groups and policy makers in Japan are intensely debating the merits of two crucial CRTAs: one with the United States and the other with the European Union. In many ways, this heated domestic debate has been propelled by Korea ’s swift CRTA policy, as it signed an FTA with the United States in April 2007 and quickly opened trade talks with the EU. Given the size of the economies involved and the competitiveness of American agricultural exports, the Japanese CRTAs with Europe and the United States – if they ever materialize – stand to exert enormous influence on Japan’s trade policy, liberalization of the Japanese domestic market, and patterns of trade governance in the world economy. And undoubtedly, they would also enhance Japan’s leverage vis-à-vis its regional partners through the leverage dynamics high-lighted in this book.

77 Interview with a METI official, Tokyo, July 2005.

Chapter 5Thailand’s and Malaysia’s Cross-Regional FTA Initiatives

S. Hoadley

5.1 Introduction

This chapter explores recent free trade agreement (FTA) initiatives by Thailand and Malaysia. It is shaped with reference to the concept of cross-regional trade agree-ments (CRTAs) developed by Mireya Solis and Saori Katada in the framework chapter of this book. It notes that each government, while remaining committed to the regional trade liberalization processes manifest in the APEC , the ASEAN AFTA, and the ASEAN plus Three (ATP) talks, has recently begun bilateral free trade negotiations. And each has reached beyond the Asian region to find negotiat-ing partners. Their declared motive for going cross-regional was expectation of economic gain. This is evident in their efforts to secure access to the American, South Asian, Middle Eastern, and Australian markets and to attract investment from these economies. But this rationale must be qualified because the markets and investment sources of many Asian governments’ extra-regional partners are rela-tively small in Asian terms, and their trade and investment barriers are already amongst the lowest in the world. This is especially true of New Zealand and Chile , which are popular extra-regional partners for Asian governments.

Accordingly, using Thailand and Malaysia as illustrations, this chapter explores alter-native rationales posed in the framework paper of this collection that might be attributed to Asian governments, leading them to commit leadership energy and administrative resources to detailed and sometimes arduous bargaining with small distant trade partners. While this chapter acknowledges that national and sectoral economic motives are signifi-cant if not predominant, it casts new light on additional motives – diplomatic, political and bureaucratic – that could account for these trade negotiation initiatives.

5.2 Hypotheses

The theoretical literature on Asian trade liberalization as surveyed by Mireya Solis and Saori Katada has yielded a number of hypotheses as to why Asian governments engage in liberalization and why they sometimes seek


96 S. Hoadley

distant partners.1 These hypotheses can be used to give shape to scattered bits of evidence and to bridge empirical gaps in our understanding of active CRTA initia-tives among East Asian governments. They are distilled by Solis and Katada into three broad categories: (1) economic motives ; (2) security and diplomatic motives ; and (3) leverage motives . A summary of the elaborating hypotheses is presented in Table 5.2 of the framework chapter of this volume. Underlying the hypotheses is the observa-tion that Asian governments, at a fairly early stage in their exploration of bilateral free trade agreements (FTAs), have been willing to reach outside their region to find FTA partners. This outreach stands in contrast to the European states and the North American, Caribbean, and South American governments that until recently negoti-ated mainly with neighbors. This observation calls attention to the underdeveloped character of Asian regionalism and the historical tensions between neighbors that retard easy cooperation.

This chapter employs these insights to explore why Thailand and Malaysia have recently added FTAs, and in particular CRTAs, to their trade policy agendas. These two countries show contrasting behavior in their FTA policy, with Thailand embarking on multiple negotiations with enthusiasm, and Malaysia remaining more regionally focused and moving at a more cautious pace. Furthermore, neither strat-egy is identical to those of their regional neighbors, for their experiences differ from those of Singapore , South Korea , Japan and China , as other analyses in this volume, and collections of previous scholarly surveys, demonstrate.2 Nevertheless, this author is confident that an examination of Thailand and Malaysia will illuminate important dimensions of the emerging FTA phenomenon in Asia and facilitate the identification of useful generalizations about its causes, modes and consequence.

5.3 The Singapore Precedent

Trade liberalization initiatives by Thailand and Malaysia did not arise in isolation. They must be seen in the context not only of on-going AFTA negotiations but also of the innovative examples set by significant neighbors. A prominent influence

1 Mireya Solis and Saori Katada’s chapter “Permeated Regionalism in East Asia: Cross-Regional Trade agreements in Theory and Practice,” in this volume.2 Vinod K. Aggarwal and Shujiro Urata, eds., Bilateral Trade Arrangements in the Asia-Pacific: Origins, Evolution, and Implications, (New York, NY: Routledge, 2006); Christopher Dent, New Free Trade Agreements in the Asia-Pacific (Basingstoke, Hampshire; New York: Palgrave Macmillan, 2006); Jiro Okamoto, ed., Whither Free Trade Agreements? Proliferation, Evaluation, and Multilateralization (Tokyo: Institute of Developing Economies, 2003); ASEAN Economic Bulletin, vol. 22, no. 1 (April 2005), special issue on Southeast Asian FTAs, especially the over-view by Sally and Sen pp. 92–116. Also see Ramkishen Rajan and Rahul Sen, “The New Wave of FTAs in Asia: Implications for ASEAN, China and India,” Asian Economic Cooperation and Integration, (Manila: Asian Development Bank, 2005), pp. 123–160.

5 Thailand and Malaysia 97

bearing on the thinking of Southeast Asian leaders contemplating FTA negotiators is the brisk pace set by Singapore.3 As early as 1999 Singapore agreed to begin free trade talks with New Zealand, kicking off Southeast Asia’s first bilateral FTA proc-ess. These negotiations were concluded expeditiously, and an agreement was signed in November 2000, Singapore’s first and New Zealand’s second.4 Soon thereafter Singapore completed FTAs with Japan, then subsequently with Australia , the United States , South Korea , India , Jordan and Panama . Six other bilateral FTAs are under negotiation, with China , Mexico , Canada , Pakistan , Peru and Egypt , and studies of possible FTAs with Sri Lanka and Ukraine are in progress. In addition, Singapore has completed or is negotiating 12 multilateral FTAs, mainly in the ASEAN framework, with partners as far-flung as Europe , India, the Persian Gulf, and Chile .5 Table 5.1 identifies FTA bilateral partners and the value of their trade with Singapore.

This table confirms Singapore’s reputation as a cosmopolitan player. Of particu-lar relevance to the theme of this book is the fact that 12 of the 15 listed bilateral FTA partners lie outside the East Asian region.

Singapore’s broad aims were clear. As summarized by Low in this book, Singapore’s leaders were frustrated by the failure of global and regional trade to produce substantial liberalization, and sought alternate ways to advance Singapore’s economic interest in building up its knowledge-based economy . Not only better market access but also the ability to avoid future protectionist measures (such as American anti-dumping penalties) and to secure the advantage of dispute settle-ment mechanisms were also among their goals. Furthermore, Singapore created a “demonstration effect ” whereby a first mover sets new standards for multilateral and regional agreements and stimulates others such as Thailand and Malaysia to follow suit with complementary trade liberalization initiatives .6 The Singapore Department of Trade and Industry has forthrightly cited its Trans-Pacific Strategic Economic Partnership (with New Zealand , Chile and Brunei ) as “an ambitious and

3 This point is underscored by an anonymous reviewer who asserts that Singapore exerts an influ-ence that few Asian leaders care to admit to in public.4 Stephen Hoadley, Negotiating Free Trade: The New Zealand-Singapore CEP Agreement (Wellington: New Zealand Institute of International Affairs, 2002), pp. 21–23.5 The most comprehensive work on Singapore FTAs is Rahul Sen, Free Trade Agreements in Southeast Asia (Singapore: Institute of Southeast Asian Studies, 2004). Also see Margaret Liang, “Singapore’s Trade Policies: Priorities and Options,” ASEAN Economic Bulletin, vol. 22, no. 1 (April 2005), pp. 49–60; Seungjoo Lee, “Singapore’s Trade Bilateralism: A Two-Track Strategy,” in Aggarwal and Urata, eds., Bilateral Trade Arrangements in the Asia-Pacific, pp. 184–205; Koh and Chang Li Lin, eds., The United States Singapore Free Trade Agreement Highlights and Insights; Also see Michael Leifer, Singapore’s Foreign Policy: Coping with Vulnerability (New York, NY: Routledge, 2000) and N. Ganesan, Realism and Interdependence in Singapore’s Foreign Policy (New York: Routledge, 2005).6 Ramkishen S. Rajan, Rahul Sen and Reza Y. Siregar “Singapore and the New Regionalism: Bilateral Trade Linkages with Japan and the US,” The World Economy 26, 9 (2003), pp. 1325–1356.

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high-standard FTA [that] will serve to complement the WTO and hasten progress towards global trade liberalization.”7

However, the export figures in Table 5.1 suggest that trade access was not the only driver of Singapore’s FTA projects, because nine of the 15 current and prospective partners accounted for less than 1% each of Singapore’s exports in 2006. As hypothesized by the editors in their framework chapter, diplomatic acceptance , security , and capacity-building aims must be considered to account for the varied choices of negotiating partner. And although in the case of the USSFTA economic gains are expected to be significant, Singapore’s chief negotiator Tommy Koh (after detailing ten economic benefits to arise from this FTA), also pointed to other broader diplomatic gains:

Singapore’s interest in the U.S., however, transcends business and economics. Singapore wishes to entrench the presence of the U.S. in the region because it underpins the security of the whole Asia-Pacific region. Singapore regards the U.S.-Singapore FTA as a symbol of continued U.S. commitment to the region…the USSFTA…is about enhancing the prospects of peace and stability in the region.8

Table 5.1 Singapore exports to FTA partner and prospective partner countries 2006

FTA partner Value US$ million % Total exports

USA 27,634 10.2China 26,490 9.7Japan 14,857 5.5Australia 10,192 3.8South Korea 8,740 3.2India 7,662 2.8Panama 2,696 1.0New Zealand 1,395 0.5Mexicoa 1,010 0.4Sri Lankab 922 0.4Canadaa 819 0.3Pakistana 771 0.3Egyptb 292 0.0Ukraineb 89 0.0Jordan 42 0.0Perua 15 0.0World 198,632 100.0FTAs % world 38.1

Sources: Republic of Singapore trade information at http://app.fta.gov.sg/asp/fta/ourfta.asp accessed 25 September 2006; United Nations Statistics Division, Commodity Trade Statistics Database (CMTRADE), online at http://unstats.un.org/unsd/comtrade, accessed 12 September 2007; Asian Development Bank Asia Regional Integration Center, accessed at <http://www.aric.adb.org/FTAbyCountryAll.php> on 12 September 2007. Partners in multilateral FTAs are omitteda FTA still under negotiationb FTA under study

7 http://app.fta.gov.sg/asp/fta/ftapage.asp?id=8 accessed 25 September 2006.8 Tommy T. B. Koh, “The USSFTA: A Personal Perspective” in Tommy B. Koh and Chang Li Lin, eds., The United States Singapore Free Trade Agreement Highlights and Insights (Singapore: Institute of Policy Studies, 2004), p. 8.


Leaving to Linda Low a detailed exploration of the Singapore case, this author now turns to the experiences of Thailand and Malaysia, which are less well-known but nonetheless valid illustrations of important FTA and CRTA themes.

5.4 Thailand’s Emerging FTA Policy

Thailand’s bilateral FTA policy emerged into view in 2002 when Thailand signed a framework trade liberalization agreement with Bahrain and began negotiations for a full FTA.9 The following year Thailand concluded a selective FTA with China and frame-work agreements to launch FTA negotiations with India and Peru . Also in 2003, Thailand began free trade negotiations or feasibility studies with Australia , New Zealand , Japan , Laos and the United States , and with the BIMSTEC group,10 the EFTA ,11 and the Mercosur 12 countries. During this period Thailand participated in a growing variety of talks within ASEAN and other multilateral frameworks. By mid-2007 these initiatives had resulted in five completed bilateral FTAs and five bilateral FTAs under negotiation. In addition Thailand was undertaking study of a further two potential bilateral FTAs and engaged in study or negotiation of ten multilateral FTAs or trade liberalization initiatives, mainly in the ASEAN context (see Tables 5.2 and 5.4).13

It should be noted, however, that the burst of FTA activity initiated by Thailand was preceded by a lengthy gestation period. The protectionist inclinations of the traditional elite, embedded in the dualistic nature of the Thai economy,14 were only slowly countered by the rise of a new class of urban entrepreneurs.15 Traditionalism notwithstanding, the 1980s saw Thailand’s economy grow and trade policy progres-sively liberalized, and Thailand was hailed as the next Asian “tiger” after South Korea, Hong Kong, and Singapore.16 But then overexposure of Thai banks to dollar-denomi-

9 Fumio Nagai, “Thailand’s FTA Policy: Continuity and Change between the Chuan and Thaksin Governments,” in Okamoto, ed., Whither Free Trade Agreements? p. 263.10 Its members are Bangladesh, India, Myanmar, Sri Lanka, and Thailand, hence the acronym BIMST with EC, Economic Cooperation, added. It is sometimes called the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation, which also fits the acronym.11 European Free Trade Association, whose members currently are Iceland, Liechtenstein, Norway and Switzerland.12 MERCOSUR or Common Market of the South includes Brazil, Argentina, Paraguay and Uruguay.13 Fumio Nagai, “Thailand’s FTA Policy: From ‘Dual Track’ Policy to ‘New Asian’ Policy,” in Siriporn Wajjwalku, ed., Japan-ASEAN Comprehensive Economic Partnership: Asian Perspectives (Bangkok: Thammasat University Press for the Thammasat University Institute of East Asian Studies and the Japan Foundation, 2004), p. 98.14 Michael J. G. Parnwell, ed., Uneven Development in Thailand (Aldershot: Avebury, 1996).15 Andrew MacIntyre, Business-Government Relations in Industrializing East Asia: South Korea and Thailand (Nathan: Griffith University Centre for the Study of Australia-Asia Relations, 1990).16 Robert J. Muscat, The Fifth Tiger: A Study of Thai Development Policy (Tokyo: United Nations University Press, 1994) and Anek Laothamatas, Business Associations and the New Political Economy of Thailand: From Bureaucratic Polity to Liberal Corporatism (Boulder: Westview Press, 1992).

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Table 5.2 Thailand’s bilateral and multilateral FTA partners (and status of agreements) in 2007

• ASEAN Free Trade Area (Under Implementation)• ASEAN-Australia and New Zealand Free Trade Agreement (Under Negotiation)• ASEAN-China Free Trade Area (Under Implementation)• ASEAN-EU Free Trade Agreement (Proposed/Under consultation and study)• ASEAN-India Regional Trade and Investment Area (FA signed/FTA Under Negotiation)• ASEAN-Japan Comprehensive Economic Partnership (FA signed/FTA Under Negotiation)• ASEAN-Korea Free Trade Area (Signed)• Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation

(BIMSTEC) Free Trade Area (FA signed/FTA Under Negotiation)• East Asia Free Trade Area (Proposed/Under consultation and study)• India–Thailand Free Trade Area (FA signed/FTA Under Negotiation)• Japan–Thailand Economic Partnership Agreement (Under Implementation)• Korea–Thailand Free Trade Agreement (Proposed/Under consultation and study)• Laos–Thailand Preferential Trading Arrangement (Under Implementation)• Pakistan–Thailand Free Trade Agreement (Proposed/Under consultation and study)• People’s Republic of China-Thailand Free Trade Agreement (Under Implementation)• Thailand–Australia Free Trade Agreement (Under Implementation)• Thailand–Bahrain Free Trade Agreement (FA signed/FTA Under Negotiation)• Thailand–Chile Free Trade Agreement (Proposed/Under consultation and study)• Thailand–European Free Trade Association Free Trade Agreement (Under Negotiation)• Thailand-MERCOSUR Free Trade Agreement (Proposed/Under consultation and study)• Thailand–New Zealand Closer Economic Partnership Agreement (Under Implementation)• Thailand–Peru Free Trade Agreement (FA signed/FTA Under Negotiation)• United States–Thailand Free Trade Agreement (Under Negotiation)

Source: Asian Development Bank Asia Regional Integration Center, accessed at http://www.aric.adb.org/FTAbyCountryAll.php on 5 September 2007

nated borrowing precipitated the 1997 Asian financial crisis .17 That shock did not turn Thailand’s leaders inward, as was feared; they accepted the IMF prescriptions and their application led the country to quick recovery.18 This experience confirmed in Thai leaders’ minds the utility of trade liberalization despite its risks and the evident hard-ships to lagging sectors of the Thai economy.19

During this period, the potential of FTAs to further stimulate Thai economic growth was under study by cosmopolitan elites. An investigation by Fumio Nagai of the origin of Thailand’s FTA policy found early discussion of an ASEAN free trade agreement in a report drafted as early as 1982.20 Significantly, the chair of the

17 Pasuk Phongpaichit and Chris Baker, Thailand’s Boom and Bust (Chiang Mai: Silkworm Books, 1998).18 On the characteristics of the economy at present see the Thailand country chapter in World Bank, “Countries and Regions.” Webpage at http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/0,,pagePK:180619∼theSitePK:136917,00.html accessed 5 September 2005.19 Peter Warr, ed., Thailand Beyond the Crisis (Abingdon: Routledge Curzon, 2005).20 Nagai, “Thailand’s FTA Policy”; Fumio Nagai, Thailand’s Trade Policy: WTO Plus FTA? APEC Study Centre Working Paper Series 01/02 – No. 6 (Minahama: Institute of Developing Economies, 2002).


task force writing the report was Anand Panyarachun . Anand was a significant player not only because as later Prime Minister he became a powerful advocate of the AFTA idea, but also because he was chair of a textile conglomerate, that is, he represented the emerging class of cosmopolitan business elites .21 This converges with the fact that the Prime Minister that inaugurated FTA talks in the early 2000s, Thaksin Shinawatra , was also a “tycoon in computer appliances and telecommuni-cations” with international connections.22 Anand and Thaksin, and also Supachai Pantichpakdi , Minister of Commerce and Deputy Prime Minister 1997–2001 and later Director-General of the World Trade Organization, were exemplars of the modern-izing and internationalizing sector of the Thai economy. Starting from careers in commerce, these individuals moved into government in the past decade, overrode the traditional inclination to protect domestic producers, promoted export-led growth , and spearheaded Thailand’s liberalization initiatives.

As Minister of Commerce in the mid-1990s, Supachai at meetings of the Pacific Economic Cooperation Council (PECC) and the ASEAN Economic Ministers meet-ings emerged as a persistent advocate of the deepening of AFTA, and he earned inter-national recognition of Thailand as a regional leader in trade liberalization. Furthermore, in a visit to Australia, Supachai and Prime Minister Paul Keating in 1994 agreed to explore how to link AFTA with CER.23 Later in the decade, Supachi traveled to Europe and suggested linkages between AFTA and Central European Free Trade Agreement (CEFTA) ,24 and in 2000 he made preliminary inquiries about bilateral FTAs with Czech Republic and Croatia .25 While none of these proposals regarding European partners has borne fruit, each was indicative of the expansive thinking of the Thai entrepreneurial elite despite the temptation to turn inwards during the Asian financial crisis .

5.4.1 Objectives of Thailand’s FTAs

Prime Minister Thaksin, who assumed office in 2001, carried on where Anand and Supachai left off.26 In subsequent years, he elevated the priority of FTAs and focused the administration of trade negotiators to give them more direct ministerial support.27 By 2005, Thailand had not only completed or made preparations for FTA negotiations with those countries and groupings named in Table 5.2, but it also considered talks

21 Nagai, Thailand’s Trade Policy, p. 5.22 Nagai, Thailand’s FTA Policy, p. 265.23 Australia New Zealand Closer Economic Relationship and Trade Agreement (ANZCERTA or more commonly CER), in operation since 1983.24 CEFTA, whose members comprised Czech Republic, Slovakia, Hungary and Bulgaria.25 Nagai, “Thailand’s FTA Policy,” p. 259.26 Chris Baker, “Pluto-populism: Thaksin and Popular Politics,” in Warr, ed., Thailand Beyond the Crisis.27 Pawin Talerngsri and Pimchanok Vonkhorpom, “Trade Policy in Thailand: Pursuing a Dual Track Approach,” ASEAN Economic Bulletin, vol. 22, no. 1 (April 2005), pp. 60–75.

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with prospective partners as distant as Russia and South Africa .28 The objectives for each were as varied as the locations of the partners and the opportunities each offered Thailand. They stressed market opening, particularly for Thailand’s tropical agricul-tural and light manufactured products, and also sought access to the EU , supply of Middle East ern oil, and promotion of tourism . Table 5.3 summarizes these varying objectives as they appeared to decision-makers and commentators in 2002.

But Thailand’s vigorous FTA policy cannot be attributed solely to the leadership of a few modernizing entrepreneurs-turned-politicians who, their critics alleged, were pursuing their own vested and specific interests29 and exercising corporate-style top-down leadership.30 Nor is a purely rational market strategy an adequate explanation.31 Other motives must be explored.

A more complete picture emerges from an examination of the regional context and international influences shaping Thailand’s policies. Analysts have identified wider motives underpinning Thailand’s initiation of far-flung economic agreements in gen-eral and of regional and bilateral FTAs in particular. These include responses to:

● The looming threat of trade blocs posed by the consolidation of the Europe market in the Treaty of European Union in 1992

● The completion of the NAFTA in 1994, and subsequently● Washington’s Free Trade Area of the Americas (FTAA) initiative.32

Also, in the early 1990s the GATT Uruguay Round stalled, and although it reached completion by 1994, it did not significantly reduce barriers to agricultural commod-ity exports from Thailand and other members of the Cairns Group . The next round was slow to start due to anti-globalization protests in Seattle in 1999 and suffered a setback at Cancun in 2003. Because multilateralism appeared to be producing lit-tle liberalization, regional alternatives began to look more attractive by contrast. However, after ambitious goal-setting in 1994, APEC made little progress, and not much more appeared likely before the date of prospective developed-country liber-alization – 2010 – neared.33 Likewise, the ASEAN regional FTA, constrained by exclusions and lengthy phase-ins with no breakthrough in sight, was disappointing. Throughout the 1990s, Thailand had focused on the regional AFTA liberalization project first proposed by Prime Minister Anand but found that progress was slow due to Indonesia’s general resistance, Malaysia’s fencing off from liberalization of

28 Nagai, “Thailand’s FTA Policy” (2004), p. 98.29 Connors, “Thailand.”30 Nagai, “Thailand’s FTA Policy,” p. 129.31 Nagai, “Thailand’s FTA Policy,” p. 271.32 Suthiphand Chirathivat and Sothitorn Mallikamas, “Thailand’s FTA Strategy: Current Developments and Future Challenges,” ASEAN Economic Bulletin, vol. 21, no. 1 (April 2004), pp. 37–53.33 At the July 2007 APEC meeting the leaders did not agree to pursue a regional free trade agreement.

Table 5.3 Benefits to Thailand expected from selected FTAs

Trading partner Benefits expected from FTAs Sources

Australia Rationalization of quarantine inspection system

Bangkok Post, April 7, 2001

“Apart from the automotive industry, Thailand and Australia also have complimentary trade patterns in the textiles and garment as well as agricultural industries”

Thaksin’s speech at the Australia–Thailand Business Council on May 31, 2002

Bahrain Co-operation in banking, financing and distribution, increase in oil trade, establishment of Thai trade centers in Bahrain, beginning of direct flights between Thailand and Bahrain.

Nihon Keizai Shimbun, June 24, 2002

Croatia and Czech Republic

“Back door” market access to the EU JETRO 2001

Entry for agricultural products D-G of DBE, The Nation, November 28, 2000.

CIEP meetingChina “China has a high potential to expand

both trade and the domestic market”

(Boontipa, DG of DBE) in Krungthep Thurakit, April 9 2002

Access for fruits, rice, shrimp, and food products

(Chairperson, Thai Chamber of Commerce). In Matichon, April 30, 2002

“Thailand could conclude a faster framework than the ASEAN-China FTA”

Kanitsom, Deputy PS of Commerce, Matichon, August 2, 2002

India Access “in the areas of science, technology and IT”

Cooperation in information technology, medium-sized industries, educational institutions, tourism, textiles and clothing, automobiles and parts, gems and jewelry

Thaksin’s speech at the Confederation of Indian Industry and the Federation of the Indian Chambers of Commerce and Industry on November 27, 2001Bangkok Post, June 20, 2002

Japan Access for the Thai agricultural sector

Bangkok Post, November 19, 2001 & Nihon Keizai Shimbun, September 20, 2002

South Korea Purchase of industrial goods from and selling of agricultural goods to South Korea

MOC official, March 18, 2002

United States “If trade barriers were excluded, steel, canned tuna products, and textiles and clothing could enter the US market more easily”

“[I]n particular, we would like to stress that we are ready to carry out trade liberalization in such sectors as agricultural products”

Commerce Minister Adisai, Krungthep Thurakit, January 4, 2002

Commerce Minister Adisai in Krungthep Thurakit, April 4, 2002

MOC is Ministry of Commerce. DBE is Department of Business Economics. DG is Director General. CIEP is Committee for International Economic Policy.

Source: Fumio Nagai,“Thailand’s FTA Policy: Continuity and Change between the Chuan and Thaksin Governments,” in Jiro Okamoto, ed., Whither Free Trade Agreements? Proliferation, Evaluation, and Multilateralization (Tokyo: Institute of Developing Economies, 2003), p. 271, edited by present author.

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its automobile industry, protection of petrochemicals in the Philippines , and resid-ual anti-Westernism and xenophobia in former Indochina and Burma .34

5.4.2 Thailand Reaches Out

The “push” of frustration in achieving consensus within the APEC and AFTA frameworks and the “pull” of a positive alternative exemplified by Singapore’s initiatives induced Thai leaders to reach beyond the neighborhood to explore closer economic relations with distant but like-minded states. An additional influ-ence came from East Asia in the form of decisions by China , Japan , and South Korea to explore FTAs with Thailand’s neighbors and with bilateral partners in other parts of the world. There is little doubt that Thai fears of being “left out,” sparked initially by European and North American regional FTAs in the early 1990s, were reinforced by incipient East Asian initiatives in the early 2000s. To these contextual influences must be added the domestic and political factors such as the movement of Thailand’s economic centre of gravity from rural agriculture to urban manufacturing , the coming to prominence of a new generation of interna-tionalized entrepreneurs , and the shift of government policy from import substitu-tion towards export promotion .35

The convergence of these factors led to the decision by elites to weather the Asian financial crisis by means of further liberalization in the late 1990s. Consistent with this broad policy shift, Thailand has adapted to the challenges presented by the changing international environment by:

● Participating energetically in a wide variety of multilateral and regional economic groupings, including WTO , IMF , APEC , ASEAN , and AFTA

● Organizing new regional groupings with Thailand at their centre including ACD, BIMSTEC, the Irrawady-Chao Phraya-Mekong Economic Cooperation Strategy framework, and the Emerald Triangle Group

● Encouraging inter-group links such as AFTA with CER and AFTA with MERCOSUR● Engaging in bilateral FTAs and framework economic arrangements with willing

partners to supplement the regional initiatives

In short, Thailand has pursued a policy that has been variously described as “omni directional ,” “concentric ,” “layered ,” and “networked .”36 One might contrast Thailand’s omnibus approach to the ostensible clarity of directionally-focused policies

34 Nagai, cited above Clark Neher, “Burma,” in Patrick Heenan and Monique Lamontagne, eds., The Southeast Asia Handbook (London: Fitzroy Dearborn Publishers, 2001), pp. 157–166.35 Phongpaichit and Baker, Thailand’s Boom and Bust, pp. 67–72; Phongpaichit and Baker (2002), cited above, pp. 162–167.36 Christopher M. Dent, “Networking the Region? The Emergence and Impact of Asia-Pacific Bilateral Free Trade Agreement Projects,” The Pacific Review, vol. 16, no. 1 (2003), pp. 1–28.


pursued by others in recent decades, for example Malaysia’s “Look East ” (to Japan), Taiwan ’s “Go South ” (to Southeast Asia) policies, or Australia ’s and New Zealand ’s emerging “Look North ” (to Asia) orientations.37

5.4.3 Economic Motives and Beyond

Orthodox economists and trade theorists would highlight the following motives as predominant in Thailand’s FTA initiatives:

● Improved penetration of goods , services or investment markets● Better access for specific products currently suffering discrimination● Avoidance of exclusion from new or prospective preferential tariff zones ● Lowering of technical barriers ● Minimizing of transaction costs

These motives are certainly manifest, as shown in the declared aims excerpted in Table 5.3. However, one might question the economic benefit to Thailand of agree-ments with small distant trade partners such as Bahrain , Croatia , Czech Republic , New Zealand , and Peru . As shown in Table 5.4 below, in 2004 none of these coun-

37 Thaksin’s keynote policy has been called the “Dual Track” policy or Tahksinomics, but this is little more that a label for a rhetorical balancing of external economic liberalization on the one hand and a collection of domestic economic relief initiatives, such as aid to villages, on the other. Chris Baker labels this “pluto-populism.” See Chris Baker, “Pluto-populism: Thaksin and Popular Politics.”

Table 5.4 Thailand exports to FTA partners or prospective partners 2005


USAa 17,025 15.5Japan 15, 029 13.7China 9,134 8.3Australia 3,161 2.9Koreaa 2,250 2.0Indiaa 1,519 1.4Laos 769 0.7Pakistanb 590 0.6New Zealand 519 Chileb 122 0.1Bahraina 66 0.1Perua 45 0.1World 110,110 100.0FTAs % World 45.9

Source: United Nations Statistics Division, Commodity Trade Statistics Database (CMTRADE), online at http://unstats.un.org/unsd/comtrade, most recent statistics available, accessed 5 September 2007. Partners in ASEAN, BIMSTEC, EFTA, and MERCOSUR are omitteda FTA still under negotiationb FTA under study

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tries figured prominently as trade partners of Thailand. The value of Thai exports to New Zealand was only US$329 million, representing one-third of 1% of the value of all Thai exports that year. Exports to Bahrain , Croatia , Czech Republic and Peru were less, none making the list of top 35 export destinations.38 One econometric study showed that an FTA with Australia , a middle-ranking economy, would yield a gain to Thailand’s GDP of only 0.34%; by extrapolation an FTA with New Zealand would yield a gain of less than 0.1%. This contrasts with potential gains of 4.6% following from an FTA with the United States and 6.37% from an FTA with Japan.39 The centrality of Thailand’s economic motives may be qualified by noting that, with the exception of the United States , Thailand has enlisted mainly small partners as CRTA counterparts. Admittedly there are sectional benefits to specific exporting industries to be gained by negotiating small cross-regional free trade agreements, as implied by Table 5.2. Bangkok elites with interests in manufacturing , information technology (IT), and food processing have lobbied for sectoral access negotiations with partners with complimentary economies, many of which lie outside Asia. More generally, cross-regional bilateralism is Thailand’s alternative response to the sluggishness of the ASEAN and APEC liberalization processes.

The conceptual framework posited by Solis and Katada acknowledges that trade access is always an important motive for undertaking FTA talks, but it goes beyond this rationale to suggest additional motivations including security , diplomatic status , international leverage , and domestic reform . In the case of Thailand, the most powerful motives for seeking cross-regional partners seem to be three fold: to avoid trade diversion , and to raise the country’s international status through more active trade diplomacy . Thailand also seeks, less importantly, to increase the negotiation skills of Thai trade negotiators. Each of these is considered below.

First, a prominent driver of Thailand’s FTA policy (both regionally and cross-regionally) is the avoidance of potential trade diversion from the proliferation of economic blocs in the world economy. FTA policy is perceived strategically as a “hedge mechanism ” whereby Thailand can be better prepared to respond in case multilateral trade negotiations continue to stagnate and discriminatory economic blocs coalesce further, jeopardizing Thailand’s export interests . Thai trade offi-cials are well aware that economic regionalism and protectionist impulses persist in Europe and North America, and that FTAs are proliferating around the world, and Thai leaders are committed to either neutralizing, balancing, or joining these manifestations. Furthermore, China ’s imminent entry into the WTO in the early 2000s “was interpreted [by Thailand] as the emergence of a strong competitor in world trade and a more attractive destination for FDI,” and this galvanized the Department of Business Economics to initiate studies of possible FTAs to give Thailand other options.40

38 International Trade Center, “Comparison of Thailand’s Export Statistics,” found at http://www.intracen.org, accessed February 8, 2006.39 Chirathivat and Mallikamas, “Thailand’s FTA Strategy,” p. 48.40 Nagai, “Thailand’s FTA Policy,” p. 258.


Second, Thailand’s FTA policy is also linked to broader foreign policy interests, whereby the government seeks to enhance its overall diplomatic status by pursuing vigorous trade diplomacy . This was deemed the external side of Thaksin’s dual-track development strategy, and free trade agreements were considered to be an integral component of the Thaksin administration’s “forward engagement diplo-macy .” Thus Thailand has undertaken to negotiate numerous FTAs in order to establish broader relations of cooperation with key partners.41 The political aims of Thailand’s FTA policy have been discerned by several observers. For example, Tulyanond noted that trade deals with India and China are “more significant politi-cally than economically” and were completed “so as to provide Thailand with “political credit” prior to the APEC leaders summit in late-2003.”42 Chirathivat and Mallikamas observed that “Prime Minister Thaksin aspires for Thailand to become the centre of the [trade liberalization] network of the future.”43 And Thaksin himself asserted that “Thailand and Australia will become the best of examples for the Asia and the Pacific cooperation.”44

Finally, this chapter suggests another motive: administrative and negotiating capacity building . It may be noted that Supachai’s early proposals to initiate FTA talks with the Czech Republic and Croatia were aimed not just to gain a “back door” to the EU but also, as Nagai found, to get “the flexibility for subsequent policy adjustment that entering into FTAs with small states allows. Thailand…might have picked small countries as experimental cases to guide later FTA policy.”45 Even though these specific FTA initiatives did not materialize, Supachai’s remarks call attention to the need for “on-the-negotiation” learning by governments at the early stages of their FTA policy initiatives. Further evidence comes from two Thai trade officials who believe that engaging in early FTA negotiations has made Bangkok negotiators more “accommodative” on liberalization of investment and inclusion of environmental protection provisions in FTAs.46 To begin a series of FTA talks with negotiations with small partners initially offers the advantages of relative freedom from risk as well as opportunities for learning. This deliberate early sequencing of FTA talks with partners that are of minor value in strictly economic terms was seen in the case of Thailand’s first FTA with Bahrain , Singapore’s first FTA with New Zealand , and China ’s choice of New Zealand for its first CRTA. The hypothesized motive of capacity building is thus supported increasingly by the Thai case and other Asian examples.

41 Speech by Prime Minister Dr. Thaksin Shinawatra, “Forward Engagement: The New Era of Thailand’s Foreign Policy.” Delivered at the Inaugural Lecture of the Saranrom Institute for International Affairs, March 12, 2003, Bangkok, Thailand. Available at: http://www.thaiembdc.org/pressctr/statemnt/pm/sifa031203.html (accessed on March 20, 2006).42 Jirayu Tulyanond, “Thailand’s Trade Policy: Progress and Purpose” [n.d. 2004?] At http://www.thailandoutlook.com accessed 25 August 2005.43 Chirathivat and Mallikamas, “Thailand’s FTA Strategy,” p. 51.44 Thaksin, “Forward Engagement.…”, cited above.45 Nagai, Thailand’s Trade Policy, p. 10.46 Talerngsri and Vonkhorpom, “Trade Policy in Thailand.”

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A further attraction attributed to FTAs is their utility as leverage to stimulate or reinforce domestic reforms . Domestic liberalization and opening to international competition are logically entailed by a comprehensive FTA policy, particularly when FTA partners are more cosmopolitan. However, the Thai government has not displayed a strong appetite for reform, but rather has sought “breathing room” in its FTAs. For instance, the WTO Trade Policy Review: Thailand in 2003 stated that “Thailand views free trade agreements as stepping stones towards free trade at the multilateral level as it allows [sic they allow] gradual increase in market access for FTA partners, while granting domestic industries time to adjust and exposure to gradual increase in the level of competition” (emphasis mine).47 The Thai Department of Trade Negotiations homepage states that FTAs can “ensure the bet-ter use and allocation of existing resources, as well as encourage the restructuring and reform process both in the private and public sectors” and encourages “the reform and restructuring of the public sector” but also advocates measures that would “prevent/annul the negative effects on domestic industries” and “ensure that Thailand’s national interests are protected”.48

Despite some progressive official rhetoric, Thailand’s cosmopolitan elites have not consistently used their international negotiations to leverage domestic reforms . Thailand’s FTAs have displayed a flawed quality, favoring a few industrial sectors , mainly those concentrating on electronics , IT products, and moderately transformed manufactures, while otherwise in sectors such as finance, services and textiles and clothing manufacture “preserving the domestic-protectionist status quo.”49 Sally concluded that Thai leaders’ political will to “lock in domestic reform” appears weak at best.50 Chirathivat and Mallikamas observed that Thailand’s FTA strategy was “highly motivated by politics and may not be compatible with the WTO and AFTA liberalization schemes.”51 In this context “motivated” may be taken to mean constrained.

One possible exception to this “FTA lite” approach (to use Sally’s term)52 is the negotiation with the United States . Here, the Thai government is confronted with strong demands for financial liberalization and intellectual property protection, to name just two key issues. Thai officials have not concealed the fact that there are

47 Trade Policy Review: Thailand 2003 (Geneva: World Trade Organization, 2003), at para 133 of “Report by the Government” accessed at http://www.wto.org/english/tratop_e/tpr_e/g123_e.doc accessed 24 November 2005.48 Thailand, Department of Trade Negotiations, “FTA Potential Benefits and Costs”, available at http://www.thaifta.com/english, accessed 17 July 2007.49 Razeen Sally, “Analysis/Thailand’s Trade Policy. Too Many Free Trade Agreements, Far Too Little Domestic Reform,” ISEAS Viewpoints (Singapore: Institute of Southeast Asian Studies, 21 September 2005) Found at http://www.iseas.edu.sg/viewpoint/rs21sep05.pdf accessed 24 November 2005.50 Sally, “Analysis/Thailand’s Trade Policy.”51 Chirathivat and Mallikamas, “Thailand’s FTA Strategy,” p. 51.52 Sally, “Analysis/Thailand’s Trade Policy.”


many contentious issues in the negotiations still keeping these countries from concluding an agreement. For example, Thailand’s then chief negotiator with the United States, Ambassador Nitya Pibulsonggram (later to become Foreign Minister), noted that concern with patent protection in pharmaceuticals and liberalization of the capital account in a post-crisis context remain divisive issues in the negotiations.53 In addition, Thai critics have put forward the following objections54:

● The prospective FTA will require domestic law changes and lead to extensive foreign ownership of land, thus compromising Thai sovereignty.

● Foreign capital may take over the newly privatized Thai corporations, eliminat-ing government subsidies, raising prices, and cutting jobs.

● US-subsidized and genetically-engineered (GE) foods will flood the Thai mar-ket and drive out small farmers.

● Intellectual property rules will allegedly stop the Thai government’s distribution of cheap anti-HIV/AIDS drugs, prevent local labeling of Thai silk and jasmine rice, and speed up what the critics call “bio-piracy” by foreign corporations.

● The US Congress will oblige the US Trade Representative to negotiate agricultural carve-outs and long phase-ins, as happened in the US–Australia FTA, which will reduce the benefits of the deal to Thailand.

● Deeper US ties with Bangkok will worsen tensions in the Muslim south and isolate Thailand from its Asian neighbors, especially pro-Muslim Malaysia.

Confronted with increasing domestic opposition in the form of street demonstra-tions, mobilization of NGOs such as FTA Watch 55 and NGO Network for Political and Social Reform to publicize the detrimental changes that might flow from the negotiations, protests by disadvantaged economic actors, and critiques by intel-lectuals and even officials,56 the negotiations with the United States reached an

53 “The importance of the FTA to Thailand.” Available at http://www.bilaterals.org/article.php3?id_article=2826 (accessed on March 17, 2006).54 Aziz Chaudry, “Fighting the US-Thailand Free Trade Agreement,” Scoop Independent News, Online: http://www.scoop.co.nz (accessed on 10 June 2006); Woranuj Maneerungsee, “Trade Pacts May Lead to Legal Changes: NGOs Oppose Threat to Thai Sovereignty,” Bangkok Post, 25 January 2005); Rebecca Buckman, “Next U.S. Deal? Try Thailand,” Far Eastern Economic Review, 28 August 2003), pp. 18–19; Shawn W. Chrispin and Murray Hiebert, “Thais Punt on Trade Talks,” Far Eastern Economic Review, 4 March 2004, pp. 16–18.55 The FTA Watch homepage is found at http://www.ftawatch.org/en/, accessed on 17 July 2007. See a report on the NGO Network for Political and Social Reform in The Nation, 24 September 2006, at http://www.bilaterals.org/article.php3?id_article=6015, accessed 17 July 2007.56 The Thai Human Rights Commission issued a critical impact assessment. See Sanya Smith, “Thai Human Rights Commission attacks FTA with US”, North–South Development Monitor, Issue 6176, 25 January 2007, found at http://www.bilaterals.org, accessed 17 July 2007. Pawin Talerngsri, director for Agriculture and Environment at the Department of Trade Negotiations, reported that FTAs hurt small farmers and recommended government intervention. The Nation (Bangkok), 7 May 2007, found at http://www.bilaterals.org/article.php3?id_article=8159 accessed 17 July 2007.

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impasse even before the tumultuous political events of 2006. Subsequently, talks were postponed until the results of the 2 April 2006 snap election called by Thaksin were to become known.57 That election produced an ambiguous outcome and was annulled by Thaksin, who then set up a caretaker government that proved deeply unpopular.

In September 2006 the Thai military displaced Thaksin’s government and set up its own caretaker government. In response, the US government declined to negoti-ate further until the Thai military set out a credible plan to return the country to democracy. The expiry of President Bush’s “fast track” authority in July 2007 made achievement of a US–Thai FTA agreement by the end of the year even more remote. Furthermore, commentators speculated that the military-led regime, sensi-tive to adverse public opinion and NGO skepticism, was reluctant to negotiate FTAs at the same pace as the Thaksin regime. The new draft constitution indeed devoted six paragraphs to FTAs and stipulates that “wide-ranging” FTAs that “sig-nificantly bind the state’s trading, investment and budget” must be approved by the Thai parliament.58 On the other hand, the military-led regime approved the signing of an Economic Partnership Agreement with Japan in April 2007 and an FTA with India was reported as imminent. And critics have decried constitutional loopholes that may allow evasion of parliamentary scrutiny of future FTAs.59 One may conclude that Thailand may be more cautious in future but will not reverse Thailand’s international orientation and liberalizing tendencies.

On a more general plane, the Thai experience illustrated not only the depth of opposition that ambitious FTAs generate among the public and some official circles but also the political disincentives and obstacles that national leaders must overcome in order to leverage domestic reforms by means of external FTA commitments.

5.4.4 Thailand: Concluding Observations

The available evidence bearing on the Thai case suggests that Thailand’s leaders have been fairly ambitious in initiating FTA talks but more often pragmatic than visionary in concluding and implementing them. Thai leaders have served their

57 James Hookway, “Thailand Delays Free-Trade Moves: U.S. Talks, Japan Pact Put on Hold as Turmoil Deals Blow to Thaksin’s Agenda,” The Wall Street Journal Online, March 3 2006, Online: http://www.wsj.com, accessed on 4 June 2006; “Thailand Suspends US Free Trade Talks Due to Poll.” Available at http://www.bilaterals.org/article.php3?id_article=3973, accessed on 17 March 2006.58 “Fine-tooth Comb Needed for Clauses” The Nation (Bangkok, 16 August 2007), accessed at www.bilaterals.org on 5 September 2007.59 “Thai–Indian FTA ‘in six weeks” Bloomberg News citing comment by Commerce Minister Krirk-krai Jirapaet as reported in Bangkok Post (12 June 2007), found at www.bilaterals.org on 5 September 2007.


own interests by shifting domestic structural and political dynamics in the direction of international negotiations that extend beyond their region. They have responded also to examples of FTA initiatives in other Asian countries, sought bilateral trade access opportunities wherever they seemed available, and attempted to position Thailand at the centre of a number of economic consultation networks to avoid becoming isolated. They have reacted adaptively to the formation of regional trade agreements in Europe and the Americas and to the rising competitiveness of China . Granted, some of the proposed FTAs seemed impulsive, the result of tourism by Thai leaders, for which the preparatory staff work had not been done,60 and several prospective partners targeted by Thailand, mainly in Europe, have declined to nego-tiate further with Bangkok. Nor have Thai leaders followed through at home. The “spaghetti bowl ” or “patchwork quilt ” of FTA protocols with disparate partners has reportedly been poorly linked to bureaucratic capabilities and domestic structural reforms .61 And the quality of Thai FTAs appears dubious. Carve-outs to protect Thai agriculture , services , and state enterprises and weak investment, procurement , sanitary and phytosanitary measures (SPS), and labor and environment provisions are arguably not up to the WTO standards.62 For example, in the FTA with New Zealand, Thailand was able to defer for later consultation the liberalization of services and government procurement, delay selected manufacturing and agricultural tariff reductions for as long as 10 years, and subordinate labor and environment safeguards to non-binding side agreements.63

Nevertheless the purpose of this chapter is not to assess overall quality of Thailand’s FTAs but to explore the motivation behind regional and extra-regional FTAs. The foregoing suggests that Thailand’s FTAs have been motivated by trade access aims but also by the need to protect Thailand from exclusion of rival preferential trade agreements. Thailand has also used FTAs and other economic agreements to demonstrate its cosmopolitanism , raise its diplomatic profile , and assert leadership in its region and neighborhood. Early FTAs were used as learning experiences. However, the hypothesized motive of promoting and locking in domestic liberalization reforms , so prominent in US aims for NAFTA for example, appears absent in the Thai case. The explanation of this exception lies in the unique features of the Thai political economy.

60 Chirathivat and Mallikamas, “Thailand’s FTA Strategy,” p. 42. Also Tulyanond, “Thailand’s Trade Policy,” and Sally, “Analysis/Thailand’s Trade Policy.” offer similar critiques.61 Nagai, “Thailand’s Trade Policy,” p. 276; Nagai, “Thailand’s Trade Policy” (2004) p. 131; Sally, “Analysis/Thailand’s Trade Policy.”62 Sally, “Analysis/Thailand’s Trade Policy.”63 New Zealand Ministry of Foreign Affairs and Trade, “National Interest Analysis: New Zealand-Thailand Closer Economic Partnership Agreement” Wellington, March 2005, accessed at http://www.mfat.govt.nz/tradeagreements/thainzcep/nia/thainiaindex.html on 8 February 2006.

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5.5 Malaysia: A Study in Contrast

The posture of Malaysia’s leaders stands in contrast to that of their Thai counterparts as regards enthusiasm for bilateral FTAs and CRTAs. Paradoxically, the two were initially comparable inasmuch as both governments have promoted international trade and investment, frequently intervened to regulate the economy, nurtured a class of native crony capitalists sometimes at the expense of Chinese entrepreneurs , pur-sued protectionist policies, and rhetorically privileged Southeast Asian regional eco-nomic cooperation above non-Asian partners.64 They both lead countries that are exporters of agricultural and light manufactured goods that face First World trade barriers abroad, and they share membership in the Cairns Group , an intergovernmen-tal lobby dedicated to gaining better trade access via WTO disciplines. But the simi-larities have shrunk in the past two decades as Thailand’s reforms, admittedly partial, took effect and the Bangkok economic elite, many of them ethnic Chinese such as Thaksin, won political leadership roles. Whereas Thailand’s new class of leaders became more cosmopolitan, Malaysia’s Prime Minister Mahathir proffered his “Look East ” policy, which explicitly rejected dependency on British and Western partners and took Japan as a model for Malaysia to emulate. Unlike Thailand, Malaysia reacted to the Asian financial crisis by rejecting IMF advice and imposing currency conversion and capital repatriation controls and other restrictive methods of manag-ing its finances.65 When Singapore and then Thailand began to explore FTAs further abroad, Malaysia’s leaders expressed skepticism on grounds that these initiatives would undermine Southeast Asian regionalism, specifically the nascent AFTA project.66 But Malaysia consistently refused to remove automobile products from the exclusion list of the AFTA protocol. This protectionism hampered economic region-alism and emerged as one of the reasons why Singapore and Thailand began to look beyond AFTA for trade liberalizing relationships.67

But when it became apparent to Malaysia’s leaders that they could manage the domestic effects of FTAs by negotiating suitable rules of origin , exclusions,

64 Fiona Yap, “Malaysia,” in Patrick Heenan and Monique Lamontagne, eds., The Southeast Asia Handbook (London: Fitzroy Dearborn Publishers, 2001), pp. 64–65; Edmund Gomez and Kwanme Jomo, Malaysia’s Political Economy: Politics, Patronage, and Profits (Cambridge: Cambridge University Press, 1999).65 Helen Nesaduri, “In Defense of National Economic Autonomy? Malaysia’s Response to the Financial Crisis.” The Pacific Review, vol. 13, no. 1 (2000).66 Prime Minister Mahathir was reported by the Bangkok Post on 27 February 2001 as expressing suspicion that Singapore’s FTAs would evade the AFTA rules of origin: “We have to watch this very carefully because this can be a backdoor entry into AFTA.” And Trade Minister Rafidah Aziz was reported by The Nation on 6 July 2002 as having said: “In the case of free trade agreements where you bargain on tariff concessions…then it is going against AFTA rules and cannot be done.” See Nagai, Thailand’s Trade Policy, p. 1. In response to Singapore’s FTA with New Zealand, Malaysia’s foreign minister in 2000 said, “When we do something outside the ASEAN context which could weaken the organization, we must think twice.” See Suzuki, “Linkage between Malaysia’s FTA Policy and ASEAN Diplomacy,” p. 298.67 Prema-chandra Athukorala, “Trade Policy in Malaysia: Liberalization Process, Structure of Protection, and Reform Agenda” ASEAN Economic Bulletin, vol. 22, no. 1 (April 2005), pp. 19–30.


prolonged phase-ins, conditional certifications and other government-imposed lim-itations, Malaysia’s official concerns about FTAs moderated. Moreover, Mahathir’s East Asia Economic Group or Caucus (EAEG or EAEC) scheme, vetoed by Japan and stillborn in the 1990s, re-emerged in two new institutional forms: ASEAN plus Three (China , Japan , and South Korea ) and the East Asian Summit . These, and the vision of an Asian Economic Community (which was to include Australia , New Zealand , and India ), were initiatives of which Malaysia could claim indirect parentage. Embedded in the ASEAN Plus Three notion were three possible multi-bilateral FTAs, one by ASEAN with each of the three Northeast Asian economies. Approval of these three multi-bilateral FTAs implicitly legitimized other bilateral FTAs as long as they were consistent with AFTA, ASEAN Plus Three, and WTO rules. By this associative reasoning, Malaysian officials became more comfortable with the notion, and even the virtues, of bilateral FTAs. In December 2002, after an ASEAN-Japan summit, Mahathir is reported to have shown “a positive response towards a bilateral FTA between Malaysia and Japan,”68 marking a significant change of policy.69 It is true that this possible bilateral FTA was conceived very much in the context of the regional and multilateral arrangements that Malaysia preferred to support, and possibly as a stand-alone agreement. But the leadership in Kuala Lumpur were increasingly aware that their neighbors Singapore and Thailand, and important partners such as Japan, China and the United States, were adding FTAs to their economic diplomacy arsenals. Consequently Malaysia risked finding itself outside the barriers of thickening networks of preferential trade deals. The retirement of Mahathir and the accession of his foreign minister Abdullah Badawai to the prime-ministership in 2004 provided the opportunity to adjust Malaysia’s trade approach.

The year 2005 proved to be a turning point for Malaysian trade policy, comparable to Thailand’s in 2002 and Singapore’s in 1999. In January 2005 the Minister of International Trade Rafidah Aziz delivered a speech on Malaysian trade policy which, for the first time, included FTAs as a policy element. Consistent with Malaysia’s long-standing policy, she devoted the majority of the speech to regional trade arrangements; these included AFTA, a newly mooted ASEAN Economic Community (to be established by 2020), ASEAN Plus Three , and FTA negotiations between ASEAN and China , India , and Japan .70 She also devoted time to the nego-tiation to link the AFTA and CER groupings, thereby bringing Australia and New Zealand into Malaysia’s conceptual circle. Significantly, she pointed out that multilateral negotiations take time. She then presented an inventory of the advantages of FTAs, and followed this by an announcement that Malaysia was in the process of negotiating the following bilateral deals:

68 Suzuki, “Linkage between Malaysia’s FTA Policy and ASEAN Diplomacy,” p. 305.69 Yumiko Okamoto, “The Reluctant Bilateralist: Malaysia’s New Trade Strategy,” in Aggarwal and Urata, eds., Bilateral Trade Arrangements in the Asia-Pacific, pp. 232–252.70 Datuk Seri Rafidah Aziz, “Malaysia and Free Trade Agreements.” Speech by Minister of International Trade and Industry of Malaysia, Kuala Lumpur, 27 January 2005. Found at http://www.miti.gov.my/speech-27jan05.html accessed on 5 September 2005.

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● An Economic Partnership Agreement with Japan leading to an FTA in goods, services and investment

● A Comprehensive Economic Cooperation Agreement with India, in reality a prospective framework agreement “including the feasibility of an FTA”

● A Trade and Investment Framework Agreement with the United States● Feasibility studies on possible bilateral FTAs with Australia and New Zealand71

In August 2005 the Malaysian Ministry of International Trade and Industry (MITI) announced that it was negotiating FTAs with not only Australia and New Zealand but also India and Pakistan. The following year Chile was added to the list. Furthermore, agreement on key issues had been reached in FTA talks with Japan. MITI reiterated that the Trade and Investment Framework Agreement with the United States contained provisions for a possible FTA between Malaysia and the United States.72

Trade Minister Rafidah Aziz subsequently announced that she expected to sign a Japan-Malaysia Economic Partnership Agreement (JMEPA) in December 2005, initiating, she said, Malaysia’s first bilateral FTA. JMEPA was to cover a range of economic activities including intellectual property , competition policy , enhance-ment of business environment, and bilateral cooperation in the fields of agriculture , forestry , fisheries and commodities , education and human resource development , information and communications technology , science and technology , small and medium enterprises, tourism and the environment . It was to pave the way for Malaysia to lift heavy tariffs on Japanese cars and for Japan to eliminate tariffs on most farm and fishery products within 10 years.73

Thus, by 2005 bilateral negotiations potentially leading to FTAs had become a new element of Malaysia’s trade policy. The current status of negotiations is sum-marized in Table 5.5.

But it appears that Malaysia’s leaders have not embraced a bilateral FTA policy with any enthusiasm, retaining its preference for regional (APEC , AFTA , ATP, AEC,) and multilateral (WTO ) trade liberalization arrangements. In 2007 Malaysia was engaged in eleven such multilateral discussions but only eight bilateral talks, of which only one, with Japan, had come to fruition as an FTA and three were still in the feasibility study or pre-negotiation phase.74 Possible explanations include ideology, habit, conservation of negotiating resources, reluctance to put current

71 Malaysia agreed on 31 March 2005 to begin FTA talks with New Zealand and on 6 April 2005 to begin talks with Australia. All parties hoped to complete the talks by mid-2006 but disagreements surfaced, progress stalled, and talks were virtually suspended throughout the early part of 2007.72 Bernama, “MITI Invites Inputs for FTA Negotiations” (Kuala Lumpur: Bernama News Agency, 29 August 2005). Found at http://www.bernama.com/bernama/v3/news_business.php?id=152727 accessed 7 September 2005.73 Jackson Sawatan, “Rafidah Says Japan-M’sia FTA May Be Signed In December (Kuala Lumpur: Bernama News Agency, 29 August 2005). Found at http://www.bernama.com/bernama/v3/news_business.php?id=152799. The agreement came into force in the summer of 2006.74 Figures derived from data presented by Asian Development Bank Asia Regional Integration Center, accessed at http://www.aric.adb.org/FTAbyCountryAll.php on 5 September 2007.


protections under scrutiny, and satisfaction with Malaysia’s currently successful global trade policy. Malaysia’s long-standing leadership of Southeast Asian region-alism also retards a decisive shift to bilateralism.

Furthermore, comprehensive FTAs cannot be expected, as the Malaysian govern-ment shows no signs of negotiating away protection of the state-mentored automo-bile and steel industries, the Bumiputra (Malay) enterprises and the services sector generally, government procurement, and regulation of foreign direct investment.75 For example, the JMEPA at this stage could be characterized as an Early Harvest Agreement rather than an FTA; while it ostensibly liberalizes trade in some goods and services with provisions for investment and economic cooperation, it is riddled with major exclusions requiring future negotiations to resolve and its execution is delayed by a ten-year phase-in period to allow adjustment of domestic industries. Malaysia is familiar with this device since Malaysia participated in ASEAN’s nego-tiation of a similar sort of Early Harvest Agreement with China in 2004, leaving large exceptions to future talks. Those FTAs under consideration with India , Pakistan , and the United States appear to be leading either to Early Harvest Agreements or to trade and investment framework agreements (TIFAs) similar to dozens Malaysia has signed with partners since as early as 1958. For example, talks with the United States are likely to stall on the issue of access for US rice , which Malaysia opposes, and rice may be put on a deferral list. In July 2007 President Bush’s “fast track” authority lapsed and the pace of talks with the United States was expected to lag. Of the bilateral negotiations now under way, only those with Australia and New Zealand promise to become true FTAs because of the insistence of those partners that an FTA must comply with WTO criteria. But these talks have stalled because of Malaysian caution on liberalization of services, government procurement and safeguards for labor and the environment. FTA talks with Chile , which began in early 2007, are likely to run into similar obstacles.

5.5.1 Malaysia and Cross-Regionalism

In her various announcements, Rafidah Aziz has not made any distinction between the intra-regional (Japan ) and cross-regional (India , United States , Australia , New Zealand ) negotiations. This suggests that Malaysia will pragmatically explore economically advantageous opportunities so long as they do not undermine the commitment to Southeast Asian regionalism or erode protection of Malaysia’s sensitive sectors . In 2006 the Japan and Korea markets accounted for 12.5% of Malaysia’s exports (see Table 5.6). But the cross-regional markets of currently identified potential FTA partners – the United States, India, Australia, Pakistan , New Zealand, and Chile – were twice as valuable, totaling 25.8% of Malaysia’s exports. While the intra-AFTA market has remained static at around 20% despite

75 Edmund Terence Gomez and Jomo K. S., Malaysia’s Political Economy: Politics, Patronage and Profits (Cambridge: Cambridge University Press, 2nd ed 1999).

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Table 5.5 Malaysia’s bilateral FTA negotiations, March 2007

Country Status

Japan Japan–Malaysia Economic Partnership Agreement (JMEPA) was launched on 11 December 2003

The Agreement was signed on 13 December 2005 and came into force on 13 July 2006

The Agreement covers: Trade in goods Trade in services Investment Economic cooperation With the implementation of JMEPA, products entering Japan

beginning 13 July 2006 and thereafter will be eligible for preferential tariffs and will have to be accompanied with a Certificate of Origin (form MJEPA) endorsed by the Ministry of International Trade and Industry

Both countries agreed to implement the FTA over a 10-year period to enable domestic industries to adjust to gradual increase in competition

Pakistan Malaysia–Pakistan Free Trade Agreement (MPFTA) was launched in February 2005

Malaysia and Pakistan signed an Agreement on Early Harvest Programme (EHP) on 1 October 2005 which came into force on 1 January 2006

Tariffs on products identified for the EHP have been reduced to 0–5% Under the EHP, Malaysia offered a total 114 products covering yarn,

clothing and textile products. Pakistan offered 125 products covering electrical appliances and machinery, plastics, chemicals, rubber and timber products

Negotiations are on-going with outstanding areas on modality of trade in goods, product specific rules, services and investment

Negotiations are expected to be completed by end-2007New Zealand On 30 March 2005, Malaysia and New Zealand agreed to launch

bilateral FTA negotiations At the end of April 2006, discussions on six areas have been

concluded: Economic cooperation Rules of origin Sanitary and phyto-sanitary measures Customs procedures and cooperation Technical barriers to trade Intellectual property rights Since then, negotiations have been temporarily suspended due to

divergence between Malaysia and New Zealand on the inclusion of an automatic MFN provision for services, Government Procurement, and Labor and Environment in the FTA

Australia Malaysia–Australia Free Trade Agreement (MAFTA) talks were launched on 7 April 2005

Both sides are currently negotiating a comprehensive FTA covering liberalization of trade in goods, services and investment and cooperation activities

(continued)


decades of regional trade cooperation and liberalization proposals, the large extra-regional markets offer much potential for increasing trade. So too does the China market, but it lies outside Malaysia’s current FTA negotiating agenda (except via ASEAN ) and thus outside the scope of this chapter. Still unexplained is why Malaysia is undertaking negotiations with small markets such as Pakistan, New Zealand and Chile. Here one must entertain other possibilities, such as the hypotheses posited in the framework chapter of this book that Malaysia is aiming to raise its diplomatic profile or is using negotiations with non-threatening small partners as a training experience before embarking on negotiations with large partners.

Four Trade Negotiating Committee meetings have been held. Negotiations are on-going on:

Trade in goods Trade in services Investment Customs procedures Rules of origin Sanitary and phyto-sanitary (SPS) measures Technical barriers to trade Intellectual property Economic cooperation On 30 November 2006, both Prime Ministers also agreed to no time

frame to conclude the FTAUnited States Malaysia–US Free Trade Agreement (MUSFTA) was launched on

8 March 2006 and negotiations started on 12–15 June 2006 The negotiations cover 19 issues. The issues that are of interest to

Malaysia are: Market access for industrial goods, especially textiles and apparel

and agriculture products Sanitary and phyto-sanitary measures Technical barriers to trade Capacity building programmes Negotiations are ongoingChile A Joint Study Group was established on 19 January 2006 to study

the feasibility of a Malaysia–Chile Free Trade Agreement The report was finalized at the end of November 2006 and both

countries agreed to commence FTA negotiations in early 2007India On 17 January 2005, Malaysia and India agreed to conduct a joint

feasibility study for a Malaysia–India Comprehensive Economic Cooperation Agreement (CECA)

The Joint Study Group has finalized the study on 3 January 2007 for consideration of both governments

Based on the findings of the study, there is merit for both countries to negotiate CECA

Source: Malaysia, Ministry of International Trade and Industry, “Status of Malaysia’s Bilateral and Regional FTA Negotiations” dated March 30, 2007. On-line at www.miti.gov.my accessed on July 17 2007


Country Status

118 S. Hoadley

5.5.2 Convergence of Aims and Means

Malaysia’s trade policies may, in the future, begin to converge with those of Thailand and Singapore. Malaysian officials already have substantial experience in negotiating trade and economic cooperation agreements, having concluded them with 136 countries around the world so far.76 They have explored free trade principles and practicalities in the regional, sub-regional, and multilateral contexts through APEC , AFTA and the WTO .77 Malaysia’s negotiators can study examples of bilat-eral FTA negotiations conducted by neighboring Singapore and Thailand. Malaysians have a long association with New Zealand and Australia through common history in the British Empire, common membership in the Commonwealth, and deep diplo-matic, security, trade, aid, education, and tourism ties.78 Consequently Malaysian officials will find in Wellington and Canberra sympathetic counterparts experi-enced in FTA management (CER has been in operation for more than two decades)

Table 5.6 Malaysia’s exports to potential FTA partner countries 2006


USAa 30,186 18.8Japan EPA 14,244 8.9Koreab 5,808 3.6Indiab 5,124 3.2Australia 4,559 2.8Pakistana 843 0.5New Zealanda 675 0.4Chileb 88 0.1World 160,669 100.0FTA % World 38.3aUnder negotiationbUnder study

Source: United Nations Statistics Division, Commodity Trade Statistics Database (CMTRADE), online at http://unstats.un.org/unsd/comtrade, most recent statistics available, accessed on 5 September 2007. Partners in multilateral liberalization negotia-tions, mostly in the ASEAN context, are not included

76 Since 1958 Malaysia has signed 65 bilateral trade agreements, 6 of them with ASEAN countries, 4 with East Asian countries, 3 with South Asian countries, and 52 with other countries throughout the world. Malaysia has signed economic cooperation agreements of various sorts, for example on investment guarantees, double taxation, payments, and air services, with a total of 136 countries, only 23 of which are in Asia. This record strongly qualifies any judgment that Malaysia is a paro-chial trader. See Malaysia, “List of Agreements Between Malaysia and Foreign Countries” (Kuala Lumpur, Ministry of International Trade and Industry, 2005), webpage accessed on 5 September 2005 at http://www.miti.gov.my/trd-bilateral.html77 Suzuki, “Linkage between Malaysia’s FTA Policy and ASEAN Diplomacy,” p. 305.78 Mark Rolls, “Growing apart, New Zealand and Malaysia” in Anthony Smith, ed., Southeast Asia and New Zealand: a History of Regional and Bilateral Relations (Singapore: Institute of Southeast Asian Studies, 2005).


with whom to sharpen their negotiating skills before tackling the tough negotiators of Japan , India , the United States , and Chile .

Malaysia’s objectives in seeking FTAs, whether regional or bilateral, are straightforward. They include:

● Better market access by addressing tariffs and non-tariff measures● Further facilitation and promotion of trade, investment and economic

development● Enhancement of the competitiveness of Malaysian exporters● Strengthening of capacity in specific targeted areas through technical coopera-

tion and collaboration79

Beyond these market-rationalist reasons, one may discern strategic reasons such as avoidance of exclusion from proliferating preferential trade agreements (PTAs) in Europe and the Americas, projection of Malaysia’s influence, and keeping up diplo-matically with Singapore and Thailand. Inasmuch as the initiative in considering FTA talks was taken by Japan , Australia and New Zealand , Malaysia’s leaders may have responded initially to each in order to be courteous, and only later did Malaysia’s negotiators became engaged and substantively committed to the endeavor.

But in none of the ministerial speeches or MITI press releases on Malaysia’s trade relations are strategic or diplomatic rationales expressed. Nor is an explicit distinction made between intra-regional and extra-regional FTA partners. Such a distinction between East Asia and the rest of the world, particular the English-speaking West, is implicit in Mahathir ’s “Look East ” policy and his privileging of the EAEC-EAEG concept and later the ASEAN Plus Three grouping. But declaratory evidence is lacking on the question of why, specifically, Malaysia turned to Australia, New Zealand, India and Pakistan for four of its five first FTAs. Plausible reasons can be found for each, such as the long-standing Commonwealth and security ties with Australia and New Zealand, sympathy with the Islamic inclinations of Pakistan matching Malaysia’s own Islamic heritage, and large market and technology opportunities in India. The latter two states are also fellow Commonwealth members. The motive of access to a large, technologically sophisticated market would apply also to an FTA with the United States. A facilitating reason lies in political succession: the retirement of Mahathir from the prime ministership in 2004 doubtless freed up his more cosmopolitan associates to reassess and reach beyond the confines of Mahathir’s region-centered paradigm.

Confirmation of these speculations and indications of the future trajectory of Malaysia’s FTA and CRTA policies may have to await the outcome of feasibility studies currently being conducted by trade officials in Kuala Lumpur and a clarifi-cation by political leaders of their trade and concomitant domestic economic reform priorities. As one academic analyst expressed it in 2005, the future of Malaysia’s international trade diplomacy “is still shrouded in uncertainty and ambiguity.”80

79 Malaysia, “Malaysia and Free Trade Agreements, ” (Kuala Lumpur: Ministry of International Trade and Industry, 2005), webpage accessed on 7 September 2005 at http://www.miti.gov.my80 Athukorala, “Trade Policy in Malaysia.”

120 S. Hoadley

5.6 Singapore, Thailand, and Malaysia Compared

On a spectrum of trade and economic liberalization in general and bilateral FTA negotiations in particular, Singapore lies at one end, characterized by willingness to innovate; Malaysia lies towards the opposite end, reluctant to depart from tra-ditional institutions and policies; and Thailand lies in the centre, displaying enthusiasm abroad but not following up with necessary structural reforms at home. Nevertheless, it can be argued that all three cases are useful illustrations of the themes on which this collection on Asian CRTAs focuses: the multifaceted motives driving the employment and geographic outreach of FTAs as new trade policy instruments devised in the past half-decade. They confirm that the aim of better access for goods, services, and investment is the primary motive, as typi-cally stated by governments. But they show also that other motives stimulate and shape the FTA policies. These include avoidance of exclusion , enhancement of diplomatic profile , display of cosmopolitanism and leadership , and sharpening of specialized negotiation skills .

The motive of inducing and locking in domestic reform , which was extrapo-lated from the NAFTA case and hypothesized by the framework chapter in this volume, was not sustained by the case studies. Thailand’s and Malaysia’s economies retain elements of protectionism and both display persistent ele-ments of elite dominance , crony capitalism , and state direction if not outright ownership. Their recent FTAs have not yet been employed to alter these illib-eral structures. When negotiating its FTAs Singapore, too, deflected efforts by New Zealand , Australia , and the United States to liberalize its state-owned enterprises , government procurement , strategic reserve , and protection of selected financial and services sectors , although it did take steps to render these practices more transparent and less trade distorting.81

5.7 Conclusion: FTAs and Regionalism

Finally, recalling that most of Singapore’s, Thailand’s, and Malaysia’s FTAs engage partners outside the East Asian region, one is led to ask what effect they may have on Asian region-building. This question is addressed directly by analysts such as Christopher Dent, who finds that FTAs and related cross-regional connections will not necessarily undermine current regional arrangements but may produce a hybrid he characterizes as “lattice regionalism .”82 In a similar vein three further observations

81 Hoadley, Negotiating Free Trade, pp. 65–66.82 Christopher Dent, “Bilateral Free Trade Agreements: Boon or Bane for Regional Co-operation in East Asia,” European Journal of East Asian Studies, vol. 4, no. 2 (December 2005), pp 287–314 and “The New Economic Bilateralism in Southeast Asia: Region-Convergent or Region-Divergent?” International Relations of the Asia-Pacific, vol. 6, no. 1 (2006), pp 81–111, and “The International Political Economy of ASEAN Economic Integration and Bilateral FTAs,”


may be made. First, the adoption by Asian negotiators of WTO goals and agree-ments as the common benchmark can induce convergence of aims, standards, and processes, and probably outcomes as well. Second, the dynamics of bilateral nego-tiations with a common partner that demands consistent concessions, notably the United States, will produce further convergence. To adapt a popular analogy, the requirements of fitting into the “hub” can induce significant similarity among the “spokes”. Third, the ASEAN partners are in the midst of joint negotiations with Australia , New Zealand , China , Japan , Korea , India and the EU . As the ASEAN negotiators establish joint positions vis-à-vis the cross-regional partners, convergence of negotiation modes and outcomes is likely to deepen and spill over into regional dialogues. These observations suggest that cross-regional FTA negotiations will not necessarily lead to regional dissonance and dissolution but on the contrary, could contribute to trade policy harmonization, the evolution of a set of standards and modalities constituting an epistemic regime , and thus to incremental progress towards deeper regional cooperation.

Until compelling evidence emerges otherwise, one may provisionally conclude that bilateral cross-regional FTAs will continue to emerge alongside Asian sub-regional, regional, and multilateral liberalization initiatives and organizations. Driven by the economic and diplomatic interests of the negotiating governments, pragmatic accommodation rather than ideological confrontation or structural dissonance will persist as the norm.

Sudostasien Aktuell (Journal of Current Southeast Asian Affairs), Institute of Asian Studies, Hamburg, Issue 1, 2007, pp. 16–51. For his book-length treatment of this important theme see Dent, New Free Trade Agreements in the Asia-Pacific.

Chapter 6China’s Free Trade Negotiations: Economics, Security, and Diplomacy

S. Hoadley and J. Yang

6.1 Introduction

Since the late 1980s and the advent of reforms led by Deng Xiaoping , China has pursued an increasingly export-oriented trade policy . This trend has been accompanied by selective domestic agricultural and industrial restructuring , privatization and interna-tionalization .1 But while China has long been a vigorous global trader and has entered into numerous trade and economic agreements with partners around the world, Beijing’s leaders are relative newcomers to free trade agreements (FTAs). This is particularly so compared with counterparts in Europe, North America, Australia and New Zealand , and some of China’s Asian neighbors such as South Korea , Thailand and Singapore . For example, when Pangestu and Gooptu in mid-2003 listed 36 Asian FTAs completed or contemplated, that list included 12 entries involving Singapore, ten involving South Korea, and five involving Japan, plus more than a half-dozen arrange-ments involving Thailand, Hong Kong , Taiwan and the Association of South East Asian Nations (ASEAN) group. However, China appeared only twice on the list. One entry concerned a possible China-ASEAN FTA and the other related to the ASEAN Plus Three discussions.2 No bilateral FTA was on China’s agenda at that time.3

1 On China’s evolving trade policies and accompanying domestic reform see Sylvia Ostry, ed., China and the Long March to Global Trade (New York: Routledge, 2002); David Zweig, Internationalizing China: Domestic Interests and Global Linkages (Ithaca: Cornell University Press, 2002); Tianbiao Zhu, “Building Institutional Capacity for China’s New Economic Opening,” in Linda Weiss, ed., States in the Global Economy: Bringing Domestic Institutions Back In (Cambridge: Cambridge University Press, 2003), pp. 142–160; Yaotian Wang and Guiquo Wang, “China,” in Patrick F. J. Macrory, Arthur E. Appleton and Michael G. Plummer, eds., The World Trade Organization: Legal, Economic and Political Analysis, Volume III (New York: Springer, 2005), pp. 47–72.2 Mari Pangestu and Sudarshan Gooptu, “New Regionalism: Options for China and East Asia,” in Kathie Krumm and Homi Kharas, eds., East Asia Integrates: A Trade Policy Agenda for Shared Growth (Washington, DC: The World Bank, 2003) p. 83. Also available in a World Bank report entitled “East Asia Integrates: A Trade Policy Agenda for Shared Growth,” available at <www.worldbank.org>, accessed 5 September 2005.3 China’s trade leaders are reported to regard the China-ASEAN talks as bilateral. But following Zhang Fan below we will term these talks “intra-regional bilateral” and reserve the term “bilat-eral” for negotiations between two sovereign governments.


124 S. Hoadley, J. Yang

Since then, China has become more vigorous in its pursuit of free trade agree-ments. By the mid-2000s it was talking with 27 countries and regions regarding the establishment of nine FTAs or Closer Economic Partnership Agreement (CEPA), covering over one-fifth of China’s total trade.4 China has now signed FTAs with the ten-member ASEAN group, Chile, Pakistan and New Zealand. It is in FTA negotia-tions with the six-member GCC and with the five-member South African Customs Union , and with Australia as well. China is also investigating the feasibility of an FTA with Iceland . Beijing has also proposed FTAs with members of the Shanghai Cooperation Organization (SCO) , Singapore and even with India . In addition, Chinese analysts are looking into the feasibility of China–Japan–South Korea, China–Japan and China–South Korea FTAs.

This chapter traces these recent developments and describes selected FTA talks China is currently engaged in or has recently concluded. Further, it reviews the Chinese literature about Chinese leaders’ interest in and strategy regarding FTAs. Finally, it employs a set of hypotheses put forward by Mireya Solís and Saori Katada in the framework chapter of this book to analyze China’s motives for engaging in FTAs in general, and cross-regional FTAs in particular. The purpose of our chapter is thus threefold: first to summarize China’s FTA initiative, second to assess China’s motives, and third to explore the usefulness of Solís and Katada’s conceptual frame-work regarding Asian cross-regionalism. While not denying China’s undoubted uniqueness, this essay presumes that China’s FTA policies may usefully be com-pared with the trade policies of its Asian neighbors and other major economic actors outside Asia, and that a common framework of cross-regional FTA analysis can have descriptive and analytic value for scholars of Asian trade policies. It concludes that the China case supports the hypotheses distilled by Solís and Katada regarding governments’ motives in FTA negotiations. China’s recent interest in FTA negotiations appears to be consistent with hypothesized economic and leverage motives. Furthermore, the cross-regional FTAs also serve China’s security and diplomatic interests. Inasmuch as enhancing the country’s “comprehensive national power” is central to Beijing’s long-term strategy, economic initiatives like FTA negotiations are valued in Beijing for their positive political and security implications.

6.2 A Late Arrival to FTAs

China’s relatively late arrival in the vibrant FTA negotiating arena may be explained by two possibilities. As suggested by Elaine S. Kwei, the first possibility is that China’s leaders saw China’s interests served best by participation in global and

4 The nine FTAs/ECPAs were as follows. FTA with ten-member ASEAN (Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam), FTA with six-member Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates), FTA with five-member South African Customs Union (Botswana, Lesotho, Namibia, South Africa and Swaziland), FTA with Australia, FTA with Chile, FTA with New Zealand, FTA with Pakistan, CEPA with Hong Kong (Special Administrative Region of China) and CEPA with Macao (Special Administrative Region of China).

6 China’s Free Trade Negotiations 125

regional trade frameworks rather than bilateral arrangements.5 China’s assiduous pursuit of World Trade Organization (WTO) membership and its strong leadership role in the APEC forum give support to this hypothesis. Thus Premier Zhu Rongji ’s agreement in November 2000 to an ASEAN proposal for a possible FTA took China-watchers by surprise because it seemed to constitute a departure from China’s previous multilateralism in trade talks.6 However, from another perspective this agreement could be construed as consistent with China’s growing interest in Asian regionalism. As Chinese analyst Liu Changli summed up, “the speed of trade liberalization (under the WTO) is determined by the slowest boat,” and China was signaling its intention to join a potentially faster regional convoy.7 According to another analyst, China’s leaders have come to appreciate that “economic regionali-zation affects China more than economic globalisation.”8

Furthermore, China’s negotiators developed a realistic understanding of their limited influence in multilateral talks. This is the case not only in the WTO but also in APEC and the Asia Europe Meeting (ASEM) , fora which encompassed some of the world’s largest economies such as the United States , Japan and the EU . But APEC was not making much progress,9 and ASEM, as an informal dia-logue forum, seemed even less effective in facilitating trade talks. With its trade growing more than 40 times from US$20.6 billion in 1978 to US$851.2 billion in 2003, China was determined to pursue trade liberalization. Having noted the slow progress and its limited influence in multilateral talks, China became increasingly interested in the potential for regional liberalization, an arena in which it could play a stronger and more effective role. This partly explains why China embarked on its FTA with ASEAN and launched other regional cooperation proposals.10

On the other hand, in the early part of the decade, China moved cautiously in developing the FTA with ASEAN and in the interim did not undertake bilateral FTAs, not least because Beijing’s policy makers were preoccupied with adjusting

5 Elaine S. Kwei, “Chinese Trade Bilateralism: Politics Still in Command,” in Vinod K. Aggarwal and Shujiro Urata, eds., Bilateral Trade Arrangements in the Asia-Pacific: Origins, Evolution, and Implications (New York, NY: Routledge, 2005), p. 117.6 He Fan, “Regional Economic Cooperation: China’s Perspective,” background paper for World Bank EAS Country Unit (Washington, DC: The World Bank, June 2002).7 Liu Changli, “Shijie shuangbian ziyou maoyi fazhan de yuanyin tedian yu woguo de duice” (The Causes and Characteristics of the Development of Bilateral Trade Liberalisation in the World and China’s Policy) Sijie Jingji Yanjiu (World Economics Studies) no. 4 (2005), p. 7.8 Bi Xiaohong and Zhuang Rui, “Dongya quyu jingji hezuo: Zhongguo de zhanlue yu celue” (Economic Cooperation in East Asia: China’s Strategy and Policy), Yatai Jingji (Asia-Pacific Economic Review) no. 4 (2005), p. 45.9 J. Rüland and E. Manske, eds., Asia-Pacific Economic Cooperation (APEC): The First Decade (London: Routledge Curzon, 2002).10 Song Wei, “Quyu zhuyi dongyin he Zhongguo de xuanze” (Causes of Regionalism and China’s Choice) Dangdai Yatai (Contemporary Asia Pacific) no. 3 (2005), pp. 76–79. See also Zhang Fan, “Lun goujian Zhongguo de FTA zhanlue” (On the Construction of China’s FTA Strategy) Kaifang Daobao (China Opening Herald) no. 116 (October 2004), p. 75.


China’s economy to the consequences of accession to the WTO in November 2001. Indeed, a commentator on China’s FTA talks complained that although China’s enterprises and government departments had made significant adjustments to com-ply with requirement for China’s membership in the WTO, they were still inade-quately prepared when China’s leaders decided to speed up involvement in regional trade liberalization talks.11 Thus Kwei’s first hypothesis is only partially borne out by the China-ASEAN FTA project and China’s renewed interest in regional eco-nomic cooperation that commenced in 2000.

Kwei’s second hypothesis posits that China until recently did not need bilateral FTAs to achieve its trade aims. This was because its negotiators could use the attractiveness of the country’s vast market to secure favorable trade deals without having to commit to formal FTAs. However, many of China’s trade partners had begun erecting subtle new barriers or engaging in preferential trade agreements that excluded China. As China’s trade scope and volume increased, China faced more tariff discrimination , technical barriers to trade and administrative protec-tionism such as anti-dumping cases. The WTO had proved ineffectual in curbing these tariff and non-tariff trade barriers , so China’s policy makers downgraded their reliance on the WTO, particularly after the stalemate of the 2003 Cancun meeting. It was at this time that the possibility of pursuing FTAs was considered by China’s trade policy community. Thus Kwei’s two hypotheses, both of which assumed that China found multilateral frameworks and informal trade deals more advantageous than formal FTAs in the 1990s, no longer applied to developments in the new century. They did not anticipate China’s recent enthusiasm for regional FTAs and also the reaching out by China to begin bilateral FTA talks with non-Asian states.

6.3 China’s Interest in FTAs

A survey of scholarly literature on China’s policy making yields more nuanced and accurate explanations of China’s growing interest in FTAs. Bin Yu noted that although more think-tank and civil society actors had become involved in China’s foreign policy making since the 1980s, the role of the officials of the Ministry of Foreign Affairs remained central. He suggested that China’s official foreign policy makers tended to distrust scholarly writing on foreign policy.12 However, that obser-vation, like those of Kwei above, is out of date. While a gap does exist between specialists and policy makers, it is narrowing as a more pragmatic Chinese foreign policy and a more bureaucratic policy-making process evolves. Bonnie Glaser and Phillip Saunders argue that “[a] more pluralistic and competitive policy environment

11 Wang Qin, “Yazhou quyu jingji yitihua yu Zhongguo” (Asian Economic Integration and China), Guoji Wenti Yanjiu (International Affairs Studies) no. 4 (2005), p. 59.12 Bin Yu, “The Study of Chinese Foreign Policy: Problems and Prospect,” World Politics, vol. 46, no. 2 (January 1994), p. 254.


has given analysts at think tanks more influence.”13 David Lampton also notes that the complexity of foreign policy issues has resulted in the professionalization of China’s foreign policy making, which has given Chinese analysts the opportunity to make significant inputs. Lampton emphasizes that “[i]n the economic arena … the need for specialized research has become increasingly pronounced,”14 and there is a “growing reliance on internal and external research.”15

In the past few years, Chinese analysts have come to accept the widespread (although contested) notion that bilateral FTAs will help China deal with these issues and that FTAs are complementary to multilateral trade agreements, or “building blocks .”16 They acknowledge that joining the WTO has accelerated marketization of the Chinese economy, but that China must further widen and deepen its partici-pation in regional economic integration by means of regional and bilateral trade liberalization agreements.17 China’s leaders should be less wary of the potentially disruptive effects of FTAs at home because they can bargain for prolonged phase-in periods that give domestic industry time to adjust. Chinese commentators often point out reassuringly that according to the rules of the WTO , a transition period of up to ten years is permissible in an FTA between a developing country like China and a developed country.18

Furthermore, Chinese analysts became concerned about China’s exclusion from preferential arrangements. They noted that by the end of 2004, 307 regional trade agreements (RTAs) had been or were being negotiated, and that most of them were FTAs. More importantly, over 80% of these FTAs were negotiated in the past dec-ade. In 2004 alone, 16 FTAs were concluded…but none with China.19 Chinese ana-lysts also noted that, although the number of FTAs in East Asia remained small, the Asia-Pacific as a whole seemed to be entering into new FTAs faster than many other regions, with many more to come.20 The Chinese government was advised to

13 Bonnie S. Glaser and Phillip C. Saunders, “Chinese Civil Foreign Policy Research Institutes: Evolving Roles and Increasing Influence,” The China Quarterly 171 (September 2002), p. 597. Some other articles in the same issue are also informative, including David Shambaugh, “China’s International Relations Think Tanks: Evolving Structure and Process,” pp. 576–596; and Bates Gill and James Mulvenon, “Chinese Military-Related Think Tanks and Research Institutions,” pp. 617–624.14 David M. Lampton, “China’s Foreign and National Security Policy-making Process: Is It Changing and Does It Matter?” in David M. Lampton, ed., The Making of Chinese Foreign and Security Policy in the Era of Reform (Stanford, CA: Stanford University Press, 2001), p. 8.15 Lampton, “China’s Foreign and National Security Policy-making Process,” p. 10.16 Bi Yujiang, “WTO kuangjia xia shijie FTA de fazhan yu Zhongguo de maoyi zhanlue tiaozhen” (The Development of FTA within the Framework of WTO and Strategic Adjustments of China’s Trade) Yatai Jingji (Asia-Pacific Economic Review) no. 3 (2005), p. 15.17 Wang Qin, “Asian Economic Integration and China,” p. 59.18 Liu Changli, “Bilateral Trade Liberalisation,” p. 9.19 Li Xia, “Shijie FTA fazhan qushi yu woguo de quyu jingji hezuo zhanlue” (The Trend of FTA Development in the World and China’s Regional Economic Cooperation Strategy) Nanfang Jingji (Southern Economy) no. 8 (2005), p. 62.20 Liu Changli, “Bilateral Trade Liberalisation,” p. 6.


follow the trend and to join the “small group” of FTAs after joining the “big group” of the WTO in order to avoid being marginalized.21

Besides this defensive motive – to avoid discrimination – two other economic rea-sons were put forward in favor of FTAs. First, FTAs might help alleviate China’s energy problem and enhance energy security , a key strategic goal .22 Closer economic relations with oil producers would help ensure more secure and diverse sources of energy. Second, FTAs might enhance the efficiency and productivity of China’s somewhat old-fashioned command enterprises, partly because of the scale effect and partly because rationalization and modernization would be stimulated by the new competition. Both would make China more competitive in the changing world economy.23

Against this background, it is no surprise that China began three bilateral FTA negotiations in 2004, first with New Zealand and then with Australia and Chile . It is significant that all of these were cross-regional FTAs (or CRTAs). China’s trade leaders made no secret of their intention to use the impending CRTA with Chile as a “bridge” to talks with the Mercosur (the Common Market of the South, which included Brazil , Argentina , Paraguay and Uruguay ) and other Latin American countries. In Beijing’s view, Mexico would be an especially attractive partner, given its market size, oil resources and membership in the NAFTA . China’s premier also launched a Trade Policy Dialogue with the EU trade commissioner in 2004, setting up a direct channel to EU counterparts distinct from that of the more ponderous ASEM process.24

China has also endorsed the ASEAN Plus Three vision of an East Asian Community that might lead to a regional free trade arrangement. It has also broached the idea of a Northeast Asia trilateral FTA with South Korea and Japan and has engaged in trade talks with India , Pakistan and the GCC , each of which has the potential to lead to fur-ther CRTAs. While it is true that many of these talks may progress no further than trade and investment framework agreements or sector-specific (“early harvest ”) liberaliza-tion deals, such as the recent bilateral agreement with Thailand , they provide bases on which China may set up FTAs when Beijing judges domestic and international circum-stances to be favorable.

6.4 China’s FTA Strategy and Partners

China’s leaders have not publicly announced their official FTA strategy or their cri-teria for choosing FTA partners. However, Chinese academics and analysts from influential policy research institutions have had substantial discussions on these

21 Zhang Fan, “On the Construction of China’s FTA Strategy,” p. 74.22 David Zweig and Jianhai Bi, “China’s Global Hunt for Energy,” Foreign Affairs, vol. 84, no. 5 (September 2005), pp. 25–38.23 Bi Yujiang, “The Development of FTA,” p. 15.24 “China-Trade: Launch of EU-China Trade Policy Dialogue,” news releases no. 72-04, 6 May (Brussels: European Commission, 2004), available at www.eurounion.news/press/2000072, accessed 28 August 2005.


issues. Some focus on economic aspects, others on political dimensions. Generally speaking, although economic benefits constitute the basis of China’s FTA strategy, a number of non-economic considerations have been factored in, particularly dip-lomatic and security strategy implications.

Regarding economic motives, Bi Yujiang believes that China’s leaders follow four guidelines when choosing FTA partners. First, an FTA should open a market and thereby create economies of scale . Second, an FTA should facilitate China’s outward foreign direct investment (FDI) in the economy of the FTA partner and also attract inward investment to China from that partner and indirectly from other investors. Third, the FTA should contribute to the achievement of a dominant mar-ket share by specific Chinese products alongside those of the FTA partner, so China can influence world prices and standards in that product line. Fourth, an FTA should exploit and neutralize the hub-and-spoke s syndrome inasmuch as it enables China (within the constraints of the agreed rules-of-origin regime) to increase its trade with third countries with which the new FTA partner has existing FTAs.25

Other guidelines for choosing FTA partners are not always clear-cut and can be contradictory. On the one hand, analysts in China concur that Beijing should start with easier FTAs, so that officials can gain more experience.26 On the other hand, they note that in the long term, developing countries can gain more from FTAs with large developed countries, and so China should make developed partners a priority.27 Similarly, according to gravity model of trade , two geographically adjacent economies tend to trade with each other more actively. Also, economic relations could help strengthen political relations. China therefore should pay more attention to its neighbors. At the same time, however, Chinese analysts acknowledge that in today’s globalized world geographic separation is no longer a major obstacle to close trade and political relations.28

On the diplomatic and security fronts, it is argued by analyst Zhang Fan that an energetic FTA strategy should help China “enhance its influence in the international political economy and expand its political and security space.”29 Likewise, Liu Changli has written that China should make FTAs “an important tool for both eco-nomic diplomacy and political diplomacy.”30 With regard to China’s strategic rivals in the region, Liu argues that it has become imperative for China to “break up the encirclement of Japan’s FTA strategy.”31 He worries that Japan will move ahead of China in negotiating FTAs or EPAs (Economic Partnership Agreements) with

25 Bi Yujiang, “The Development of FTA,” p. 16. See also Wang Qin, “Asian Economic Integration and China,” p. 59.26 See for example Wang Qin, “Asian Economic Integration and China,” p. 59; Bin Jiancheng and Chen Liuqin, “Shijie shuangbian FTA de fanzhan yu woguo de duice yanjiu” (The Development of Bilateral FTAs in the World and China’s Policy) Shijie Jingji yu Zhengzhi Luntan (World Economics and Politics Forum) no. 4 (2005), p. 66.27 Liu Changli, “Bilateral Trade Liberalisation,” p. 10.28 Li Xia, “The Trend of FTA Development in the World,” p. 62.29 Zhang Fan, “On the Construction of China’s FTA Strategy,” p. 75.30 Liu Changli, “Bilateral Trade Liberalisation,” p. 10.31 Liu Changli, “Bilateral Trade Liberalisation,” p. 10.


China’s neighbors, and that this would have ominous political implications. Those countries with closer economic relations with Japan will inevitably improve their political relations with Tokyo, which may dilute China’s regional leadership poten-tial. Chinese analysts note furthermore that Taiwan has been trying to play the FTA card to advance its political acceptance in Asia and elsewhere, a trend that must be countered by Beijing.

In this context, the China-ASEAN FTA talks have potential strategic signifi-cance. Analysts interviewed in Beijing in 2005 pointed out that China’s decision to enter into FTA talks with ASEAN was, to a great extent, a politically driven move.32 China’s leaders were keenly aware that Japan’s warming economic relations with members of the ASEAN was “one of the outstanding achievements of post-war Japanese diplomacy.”33 The significance of Southeast Asia to China is obvious to Beijing analysts. First, with a population of 450 million and growing GDPs, Southeast Asia is economically of rising importance to China. Second, Southeast Asia is key to China’s regional influence. As a Chinese strategist bluntly expressed it, as long as China is able to prevail over Japan in Southeast Asia and the Korean Peninsula, Japan will be in no position to compete with China in Asia as a whole.34 Third, Southeast Asia has great geopolitical significance for China, not only because much of its trade and oil from the Middle East passes through the region but also because of conflicting maritime claims and the presence of foreign armed forces in the region.

Southeast Asia’s importance to China also stems from other considerations:

● ASEAN is crucial to the Chinese strategy of promoting multipolarity. Sheng Lijun notes that an FTA with ASEAN would strengthen regionalism in East Asia, and China can “use this new regionalism as a precautionary measure to dilute potential U.S. unilateralism.”35

32 Interviews in Beijing and Shanghai in October and November 2005 by co-author. Also see Qiu Danyang, “Zhongguo-Dongmeng ziyou maoyiqu: Zhongguo heping jueqi de diyuan jingjixue sikao” (China-ASEAN Free Trade Area: Geo-economic Consideration of China’s Peaceful Rise) Dangdai Yatai (Contemporary Asia-Pacific) no. 1 (2005), pp. 8–13; Li Xia, “The Trend of FTA Development in the World,” p. 62.33 Yoichi Funabashi quotes Gerald L. Curtis in Yoichi Funabashi, “Tokyo’s Depression Diplomacy,” Foreign Affairs, vol. 77, no. 6 (November–December 1998), p. 29.34 Jin Xide’s comments on Japan in Yan Xuetong, “9.11 hou women de chujing: bian yu weibian” (China’s Situation after 9.11: Changes and Continuity) Shijie Zhishi (World Knowledge) no. 1 (2002), pp. 39–40.35 Sheng Lijun, “China-ASEAN Free Trade Area: Origins, Developments and Strategic Motivations,” Singapore: ISEAS working paper no. 1 (2003), p. 19, available at www.iseas.edu.sg/vr32002/pdf, accessed 24 November 2005. See also Naoko Munakata, “Talking Regional, Acting Bilateral – Reality of ‘FTA’ Race in East Asia,” English version of article in Japanese in the November 2002 issue of Jiji Top Confidential, p. 3, available at www.rieti.go.jp/en/papers/contribution/munakata/01, accessed 16 August 2005; Michael Vatikiotis and Hurray Hiebert, “China’s Tight Embrace,” Far Eastern Economic Review, 17 July 2003, p. 30; Axel Berkofsky, “China’s Asian Ambitions,” Far Eastern Economic Review, vol. 168, no. 7 (July/August 2005), pp. 20–23.


● Southeast Asia is important in China’s effort to counter a perceived US containment-of-China strategy.36 China has used the ASEAN Regional Forum (ARF) as a venue to question US bilateral alliances in the region.37

● FTAs with Southeast Asia offer another opportunity for China to discredit the “China threat” theory. Malaysian Prime Minister Mahathir Mohamad ’s state-ment that “China should be viewed as a country with enormous opportunities rather than perceived as a threat” is the message China endeavors to send.38

● Southeast Asia could be China’s ally in resisting the West’s pressure regarding issues such as political liberalization and human rights .39

● Closer Chinese relations with Southeast Asian nations would make it harder for Taiwan to strengthen its political ties with these governments and thus consoli-date its autonomy from Beijing.

It might be added that China’s use of trade to advance its political and strategic interests is not new, nor is it a particularly sinister or unique move. As other chapters in this book argue, other Asian states such as Singapore perceive diplo-matic and strategic benefits in FTAs. The United States, too, is reaching into unfamiliar corners of the globe such as Morocco , Jordan , Southern Africa and the Persian Gulf states to set up CRTAs that reinforce its security policy.40 So diplomatic and strategic motives should be kept in mind when assessing why China has added bilateralism to its former multilateral trade policy and reached beyond its immediate neighborhood to negotiate FTAs cross-regionally with small partners.

However, FTAs are time- and energy-consuming endeavors to negotiate and implement, so discrimination by China’s trade leaders is necessary. Chinese analyst Zhang Fan attempts to prioritize China’s potential FTAs at four levels. These levels are:

● Regional multilateral (da quyu duobian) FTAs, such as APEC● Sub-regional multilateral (ci quyu duobian) FTAs, such as those based on

ASEAN Plus Three or linked to the Shanghai Cooperation Organization (SCO)● Intra-regional bilateral (quyu nei shuangbian) FTAs, such as a China-ASEAN

FTA and those between China and individual members of ASEAN, as well as a China-South Korea FTA

36 N. Ganesan, “ASEAN’s Relations with Major External Powers,” Contemporary Southeast Asia, vol. 22, no. 2 (August 2000), p. 271.37 Ralf Emmers, “The Influence of the Balance of Power Factor within the ASEAN Regional Forum,” Contemporary Southeast Asia, vol. 23, no. 2 (August 2001), p. 287.38 As quoted in Dana R. Dillon, “Contemporary Security Challenges in Southeast Asia,” Parameters, vol. 27, no. 1 (Spring 1997), p. 129.39 Jie Chen, “Human Rights: ASEAN’s new importance to China,” The Pacific Review, vol. 6, no. 3 (1993), pp. 227–237; Michael Vatikiotis, “Mixed Motives: Fear and Prospect of Profits Colour Asean View of China,” Far Eastern Economic Review, 24 June 1993, p. 13.40 Greg Mastel, “The Rise of Free Markets,” Challenge, vol. 47, no. 3 (July/August 2004), pp. 41–61.


● Cross-regional bilateral (kua quyu shuangbian) FTAs (CRTAs), such as the prospective agreements with New Zealand, Australia and Chile41

Zhang then notes that APEC is unlikely to evolve into a regional FTA in the near future and should not be the focus of China’s FTA strategy. On the other hand, China as the traditional central power in East Asia has a fundamental interest in a possible East Asian FTA . Therefore an East Asian FTA should be the focal point of China’s FTA strategy. The SCO is also important to China because Russia and Central Asia are crucial to China’s energy security. The Central Asian region may also become an important pathway for China to enter European markets. In that sense, an FTA with the SCO should be another element of China’s FTA strategy. However, these sub-regional multilateral FTA talks are complicated and may take years to bring to fruition. For this reason, Zhang concludes that China should explore the potential for bilateral FTA talks with compatible members.

6.5 CRTAs with New Zealand, Australia and Chile

Thus far we have argued that cross-regional free trade agreements have emerged as a prominent dimension of China’s trade strategy because they will allow China’s traders to avoid barriers erected by proliferating FTAs in other regions. They will also contribute to China’s intensifying global network of trade links that parallel and reinforce China’s diplomatic initiatives.42 In the following section we review Beijing’s CRTA policy generally, then trace three ongoing CRTA talks.

The AFTA initiative aside, China began its first trade liberalization negotiation with New Zealand in 2006. Talks with Australia and then Chile followed soon there-after. What motivated the Chinese leadership to reach beyond the Asian region to engage these bilateral FTA partners? The Chinese analysts reviewed above, as well as Solís and Katada in their framework chapter article in this book, all make the point that not only economic aims but also diplomatic and strategic motives were in play. For example, in their early forays into free trade negotiations, Beijing’s leaders may have wished to avoid intimate dealing with a neighbor of which China was his-torically suspicious or which would provoke public protest if accommodated. That neighbor was of course Japan. In China’s view, South Korea , too, may appear too closely aligned militarily with the United States and too deeply enmeshed economically with Japan to be an optimal partner at the early stages. Also, both Korea and Japan have protected their economies stubbornly in the face of United States pressure, so gaining concessions, or even reciprocity, from them would prove difficult for China. Other potential extra-regional partners may have been temporarily set aside on grounds of unpromising economic opportunities, too close an association with the

41 Zhang Fan, “On the Construction of China’s FTA Strategy,” pp. 75–76.42 Bin Jiancheng and Chen Liuqin, “The Development of Bilateral FTAs in the World and China’s Policy,” p. 65; Zhang Fan, “On the Construction of China’s FTA Strategy,” pp. 75–76.


United States , unacceptable demands, or unfamiliarity. In which countries, then did the opportunities present themselves for expeditious FTA negotiations with developed, experienced and accommodating partners? New Zealand, Australia and Chile fulfilled these requirements. The following sections explore why each of these three countries was an attractive partner from China’s point of view.43

6.5.1 New Zealand

From Beijing’s perspective, three considerations made New Zealand an appealing choice. First are the economic motives of easier access to markets as well as deeper cooperation in agricultural technology . These motives are not determinative, how-ever, because the New Zealand market is small and already open to China’s products, services and investment, and New Zealand currently gives technical assistance to China and its technology is readily accessible on the open market. The two countries already enjoy good economic relations. At the time when FTA talks were mooted, the trade between China and New Zealand had been growing annually by an average of 12% during the past decade. In 2004, it reached NZ$5.12 billion, an increase of 21.5% over 2003.

More importantly, the two economies were complementary. China’s exports to New Zealand were mainly clothing, textiles , footwear , toys , furniture , plastic prod-ucts and, recently, household appliances (see Table 6.1). China’s imports from New Zealand were largely concentrated in the areas of agricultural and forestry products. In 2004, the two accounted for 60.7% and 20.4%, respectively, of New Zealand’s total exports to China (see Table 6.2). In addition, trade in services was worth US$1.075 billion in 2004. Regarding investment flows, there was a strong potential for growth as China regarded New Zealand as an important investment target and New Zealand historically welcomed foreign investment.44 Moreover, there was little likelihood that the volume of goods, services or investment from New Zealand would be large enough to disturb the Chinese economy. In 2003, the size of the New Zealand economy was just 4.8% of the size of the Chinese economy, although the smaller country had a higher GDP per capita than China.45 An FTA with New Zealand was therefore unlikely to pose a risk to China’s economy or disturb its leaders’ economic policy settings.

43 For more details of China’s FTAs with New Zealand and Australia, see Agata Antkiewicz and John Whalley, China’s New Regional Trade Agreements, National Bureau of Economic Research working paper no. 10992 (December 2004), available at http://www.nber.org/papers/w10992.pdf, accessed 17 April 2007.44 Fan Ying, “Zhongguo-Xinxilan ziyou maoyiqu de jingji zhanwang” (Possible Economic Effect of China–New Zealand Free Trade Area) Waijiao Pinglun (Foreign Affairs Review) no. 4 (2005), p. 86.45 Fan Ying, “China–New Zealand Free Trade Area,” p. 86.


Table 6.1 2004–2006 New Zealand top 20 imports from China

NZ$000 (CIF)

Description 2004 2005 2006

Computers 258,202 418,496 495,192Transmission apparatus 73,980 107,362 143,345Suits; women’s or girls 106,551 113,463 132,802Seats 71,099 84,039 98,370Television receivers 58,468 89,125 97,339T-shirts etc 77,517 81,842 96,486Toys; models 78,296 79,890 95,552Jerseys etc 73,587 85,621 90,196Footwear; rubber, plastic, etc (Code 6403) 76,490 79,651 87,457Furniture and parts 50,329 65,145 86,410Suits; men’s or boys 55,559 60,907 75,100Machinery; parts 44,182 68,045 75,054Trunks and cases 58,335 64,728 73,241Telephone equipment 63,007 81,003 72,956Electric heaters and dryers 61,341 63,427 69,864Bed linen, table linen 45,303 50,507 57,073Footwear; rubber or plastic (Code 6402) 34,460 43,897 56,703Knitted garments 35,383 36,562 54,155Lamps, light fittings 41,678 45,757 51,088Photocopying apparatus 37,521 43,838 50,802Total 20 subtotal 1,401,288 1,763,305 2,059,185NZ’s total imports from China 3,376,103 4,033,419 4,965,541Top 20 as % of total 42 44 41 imports from China

Source: Statistics New Zealand, New Zealand External Trade Statistics, December 2006, p. 106. Available at http://www.stats.govt.nz/NR/rdonlyres/B9A12F01-F041-43FA-9A9F-6A22A 7295AC6/0/December2006forweb.pdf, accessed 1 August 2007

Table 6.2 2004–2006 New Zealand top 20 exports to China

NZ$000 (FOB)


Milk powder 306,928 242,126 312,927Wool 151,093 151,635 179,504Logs 65,591 61,602 105,036Chemical wood pulp 102,537 79,166 98,765Timber 57,133 54,500 95,242Offal 78,281 84,252 82,519Malt extract 20,549 55,313 73,416Frozen fish 57,796 62,921 73,053Fats of animals 64,289 52,035 63,675Wood pulp 0 284 47,041Raw skins, sheep 67,150 53,855 44,515Sheep meat 40,808 42,252 41,762Fibreboard 35,697 33,123 40,929

(continued)


The second and perhaps more important consideration in Beijing’s eyes was a diplomatic fact: New Zealand had advocated WTO membership for China while the United States was still resisting, and then officially recognized China as a “market economy” earlier than any other Western state. When China’s leaders decided to begin bilateral FTA negotiations with a developed Western state, they named New Zealand first. That announcement was strategically influential and advanta-geous to China inasmuch as Singapore and Malaysia were apparently induced to recognize China’s “market economy” status immediately afterwards, and Australia followed four months later. Subsequently Chile , India , Pakistan , Egypt , South Africa and then France indicated that they were considering the “market economy” issue favorably. Furthermore, the United States and EU set up working groups to study the matter seriously.46 While it may be a tenuous proposition in light of China’s realist approach to international relations to say that China was “rewarding” New Zealand, it is not inconsistent to say that China turned first to New Zealand as a signal to more powerful players, notably the EU and the United States, that similar rewards might accrue to them if they recognized China’s “market economy” status. This would be of particular value in avoiding anti-dumping (AD) confrontations, since China would become eligible for AD assessments on the basis of local pro-duction costs of exports rather than the Department of Commerce’s notoriously biased surrogate-country method of calculating “fair value .”47


Butter 23,481 26,871 34,125Copper; waste and scrap 8,881 17,890 33,196Aluminium; waste and scrap 17,542 19,253 28,135Meat or fish meat 28,644 21,712 27,174Casein 15,533 14,766 24,869Slag, dross 22,617 49,978 23,818Cheese 11,887 15,844 20,230Total 20 subtotal 1,176,437 1,139,400 1,449,931NZ’s total exports to China 1,745,445 1,565,536 1,874,893Top 20 as % of total exports to China 67 73 77

Source: Statistics New Zealand, New Zealand External Trade Statistics, December 2006, p. 106. Available at http://www.stats.govt.nz/NR/rdonlyres/B9A12F01-F041-43FA-9A9F-6A22A 7295AC6/0/December2006forweb.pdf, accessed 1 August 2007


46 Dai Yan, “Efforts ‘Paying Off’ on Market Status,” China Daily, 5 June 2004, p. 1, avai lable at http://www.chinadaily.com.cn/english/doc/2004-06/05/content_336730.htm, accessed 27 April 200747 Stephen Green, “China’s Quest for Market Economy Status,” Royal Institute for International Affairs briefing note (London: May 2004), available at www.riia.org, accessed 5 September 2005; The Jamestown Foundation China Brief, vol. 4, issue 16 (5 August 2004), available at www.jamestown.org, accessed 5 September 2005.


A third consideration may have led China’s leaders to choose New Zealand for a trial negotiation before initiating FTAs more widely. New Zealand was clearly a non-threatening and modern Western state with substantial experience to share in setting up FTAs. This motive was indirectly confirmed by New Zealand’s Trade Minister Jim Sutton, who in February 2005 said that New Zealand was “safe ground” for China’s first foray into talks: “[China] clearly wants to gain experience in bilateral agreements and we are a risk-free option.”48 A New Zealand trade diplomat also surmized that, in the view of China’s leaders,

[p]olitical and cooperation reasons are as important if not more so as market access for Asian countries getting into FTAs with us. New Zealand has good liberalization credentials so having an agreement with us looks good internationally—we are often seen as a useful first step to learn some lessons on the way to the bigger fish. For China recognition as a market economy is a key objective for both trade and political reasons.49

6.5.2 Australia

Australia was economically attractive to China, much more so than New Zealand. Like New Zealand , Australia is a developed economy, but it is six times richer, making it the 15th-largest economy in the world. It also maintains good economic relations with China. The trade between China and Australia has grown over 10% annually since 1990. In 2005, it reached US$27.26 billion. From 1998 to 2005, the two-way trade grew by 540% (see Table 6.3). Also like New Zealand, the Australian economy is complementary to the Chinese economy. The two countries are at “markedly different stages of economic and social development,” notes the 2005 Australia–China Free Trade Agreement Joint Feasibility Study. The key indicators include:

Table 6.3 The development of trade between China and Australia

US$ million

China’s exports China’s importsYear Total volume to Australia from Australia

1998 5,047.48 2,364.96 2,682.521999 6,311.61 2,704.41 3,607.202000 8,452.88 3,428.88 5,024.002001 8,995.38 3,569.45 5,425.932002 10,435.61 4,585.04 5,850.572003 13,563.65 6,263.58 7,300.072004 20,390.74 8,838.25 11,552.492005 27,255.13 11,061.50 16,193.63

Source: National Bureau of Statistics of China, China Statistical Yearbook, 2000–2006

48 “China’s Trade Dance with NZ,” Bilaterals: Everything That’s Happening at the WTO, 21 February 2005, available at www.bilaterals.org, accessed 16 August 2005.49 Not-for-attribution comment by email to the principal author dated 19 August 2005. Emphases added.


● China’s per capita GDP in 2003 was around 4.4% of Australia’s.● Over two-thirds of China’s total population remain in rural areas and agriculture

contributes around 15% of China’s GDP. In Australia, only 3% of the population are occupied in the agricultural sector producing around 4% of GDP.

● Manufacturing is the key driver in China’s economic growth and development and contributes around 35% of GDP. In Australia, manufacturing accounts for 12% of GDP and services for 71% of GDP.50

Australia predominantly exports unprocessed rural and resource commodities to China. China in turn exports mainly labour-intensive or processing-derived manu-factured goods to Australia (see Tables 6.4 and 6.5). In terms of economic structure, Australia is much more developed in the tertiary sector, which occupies about 70%

Table 6.4 China’s top ten merchandise imports from Australia, 2001–2004

US$ million

Imports 2001 2002 2003 2004

Iron ore 945 995 1,632 3,346Alumina 523 589 998 1,103Wool 639 682 588 900Crude petroleum 154 242 445 467Coal 28 146 208 387Wheat 8 10 1 364Gases 74 87 127 273Aluminium 96 135 196 261Barley 211 229 133 239Manganese ores 46 56 104 227

Source: Australia–China Free Trade Agreement Joint Feasibility Study, p. 14.

Table 6.5 Australia’s top ten merchandise imports from China, 2001–2004

US$ million

Imports 2001 2002 2003 2004

ADP machines 303 476 735 1,273Video and digital cameras 67 104 250 501Women’s or girls’ suits 191 212 272 324Office machines 100 169 229 298Toys 177 205 246 297TV and videos 47 74 122 280Footwear 141 183 210 265Travel goods 144 157 191 252Furniture 69 102 156 245T-shirts 119 123 163 219

Source: Australia–China Free Trade Agreement Joint Feasibility Study, p. 14

50 Australia–China Free Trade Agreement Joint Feasibility Study, p. 9. Available at http://www.acbc.com.au/acbc/acbc.nsf/aframed?openpage&U=http://www.acbc.com.au/acbc/acbc.nsf/vaAllWebEn/home, accessed 1 August 2007.


of its GDP, whereas in China this sector accounts for only 33.1% of GDP. Australia is relatively weak in manufacturing; while in China this sector accounts for 52.3% of its GDP. China is “the factory of the world” with 91% of its exports comprised of manufactured goods, and it is predicted that China will one day overtake the United States in this regard. In 2002, manufactured goods accounted for more than 80% of China’s exports to Australia.51

The complementary nature of the two economies is evident in other comparisons noted by Chinese economists. First, Australia is more advanced in agricultural and livestock husbandry technology. Second, Australia is much richer in those mineral resources which are essential to the rapidly growing Chinese economy. Third, there is a huge gap between labor costs in the two countries. And finally, Australia has vast tracts of cheap land available to host greenfield investment enterprises.52

Regarding the political and strategic motivations for FTA negotiations with Australia, China made it clear that recognition of China’s “market economy” status by Canberra was a prerequisite to initiating talks. Canberra resisted at first but finally complied in April 2005, whereupon China agreed to begin FTA talks. What were Beijing’s motives? In strategic analyst Alan Dupont’s assessment, China con-siders the two countries to have the following mutual interests:

● Maintaining a prosperous and stable Asia Pacific● Developing pan-regional political and economic institutions● Intensifying intra-regional (Asia-Pacific) trade

Regarding strategic interests , Dupont believes that China sees Australia “as a country which has the ear of the US, is an influential player in Southeast Asia and the Southwest Pacific and is a natural trading partner and provider of the energy resources China needs for its long term development.” Both countries are also increasingly interested in counter-terrorism and in the halting of weapons of mass destruction (WMD) proliferation.53

6.5.3 Chile

China’s third CRTA negotiating partner is Chile . Like New Zealand , Chile has a few firsts in its relations with China. It was the first Latin American country diplomatically

51 Wang Suqin, “Tuidong ZhongAo jingmao hezuo fazhan de jichu, qiji yu sikao” (Promoting China–Australia Economic and Trade Cooperation and Development: Basis, Opportunities and Thought) Shijie Jingji Yanjiu (World Economics Studies) no. 5 (2005), pp. 74–75.52 Wang Suqin, “Tuidong ZhongAo jingmao hezuo fazhan de jichu, qiji yu sikao” (Promoting China–Australia Economic and Trade Cooperation and Development: Basis, Opportunities and Thought) Shijie Jingji Yanjiu (World Economics Studies) no. 5 (2005), p. 75.53 Alan Dupont, “The Political and Strategic Implications of a Free Trade Agreement with China,” Paper for Australia–China Free Trade Agreement Conference (Sydney: Australia APEC Study Centre, 12 August 2004), p. 2, available at www.apec.org.au/docs/China04Dupont, accessed 7 September 2005.


to recognize the People’s Republic of China, the first Latin American country to acknowledge China’s “market economy” status and the first Latin American coun-try to conclude WTO membership accession negotiations with China. With the signing of an FTA on 18 November 2005, Chile has become the second participant in an FTA with China, after ASEAN . In contrast, talks with New Zealand and Australia have been slowed by the need to manage political and technical difficul-ties such as textile and dairy access, rules of origin and SPS issues, worker visas and conformity with WTO standards.54 Chile’s attractiveness arises from a combi-nation of factors similar to those found in Australia and New Zealand. First, the Chilean economy is relatively small, open and easy to work with. Chile has the best-performing economy in South America; from 1985 to 2004, Chile’s average annual economic growth was about 6%. In 2005, its GDP grew by 6.3%. Chile’s GDP per capita was US$5,898 in 2004, three times higher than in 1985. In 2006, it jumped to US$8,875.55 Chile is now one of the freest economies in the world and the government aims to achieve developed economy status by 2010. Second, the two economies are complementary. Chilean imports from China are mainly textiles, chemical materials and hardware, light industry products, and recently household appliances and machinery. Its exports to China are mostly timber, nitrates, fish powder, copper and fruit. The trade between the two countries has increased sub-stantially. From 2000 to 2004, China’s exports to Chile increased by 22% while China’s imports from Chile increased by 42% annually.56 In 2004, China’s exports to Chile grew by 32% while its imports from Chile jumped 64%.57 China thus became Chile’s second-largest trading partner after the United States which, signifi-cantly, also has an FTA with Chile. On current trends the FTA will boost Chile’s trade with China above that with the United States in a few years.

What attracts China perhaps as much as trade opportunities is the fact that Chile is a liberal, cosmopolitan state that has already negotiated full or partial

54 Liu Weiling and Jiang Wei, “Free Trade Deal with Chile in the Pipeline,” China Daily, 16 August 2005, p. 9, available at http://www.chinadaily.com.cn/english/doc/2005-08/16/content_469255.htm, accessed 27 April 2007. Also “Greens wary of deal on Chinese labour,” New Zealand Herald, 5 October 2006, p. A6.55 Gao Chao and Wang Juan, “Zhili: Nanmei shichang de zhongzhuanzhan” (Chile: The Transfer Station of South American Market) Zhongguo Duiwai Maoyi (China’s Foreign Trade) no. 8 (2005), p. 71; Guo Delin, “Cong Zhongguo yu Zhili qianshu ziyou maoyi xieding zhong xiqu Zhili jianli kaifang de duiwai maoyi tixi de jingyan” (To learn from Chile’s experience of establishing an open foreign trade system with the signing of China–Chile FTA), Ladingmeizhou Yanjiu (Journal of Latin American Studies), Vol. 28, no. 6 (December 2006), pp. 56–60; Guo Delin, “Yi Zhli wei pingtai fazhan yu Lamei diqu jingmao guanxi” (Use Chile as a platform to deepen eco-nomic and trade relations with Latin America), Guoji Jingji Hezuo (International Economic Cooperation), no. 6 (2007), pp. 37–40.56 Ministry of Commerce of the People’s Republic of China, “Zhongguo he Zhili qianshu ziyou maoyi xieding” (China and Chile Signed Free Trade Agreement), 18 November 2005, available at http://gjs.mofcom.gov.cn/aarticle/Nocategory/200511/20051100867786.html, accessed 6 December 2005.57 Gao Chao and Wang Juan, “Chile: The Transfer Station of South American Market,” p. 71.


FTAs with over 30 partners in four continents, and that it has a special relation-ship with the United States. In that respect, Chile is a Latin American counterpart of Singapore ; both have become FTA “hubs” in their respective regions.58 A good example is Chinese exports of toys to Latin America. Latin America was believed a most difficult market for Chinese toy exporters. It was the only region where Chinese toy exporters faced dumping charges. After the signing of China-Chile FTA in 2005, Chinese toy exports to Chile, Mexico, Argentina and Brazil increased by 50 %, 33 %, 23 % and 58 % respectively. This is despite the fact that the China–Chile FTA did not come into effect until 1 October 2006. The increase was so dramatic that Chinese analysts are calling for self regulations to avoid repercussions.59

Moreover, China is concerned that the proposed Free Trade Area of the Americas (FTAA) will generate more competition from Latin American economies in the US market. The Chinese still remember the tariff discrimination that their country suf-fered after NAFTA came into effect in the 1990s. Before NAFTA, China had the largest share of the US textile products market. When the NAFTA preferential tariff came into effect, Mexico quickly expanded its market and replaced China as the largest exporter of textile products to the United States by 1998. It is predicted that the FTAA will have an even stronger impact on China’s exports. An FTA with Chile will give China’s traders a beachhead from which to expand their economic activi-ties into the Latin America region and make the FTAA work for China rather than against it.60

Furthermore, the Chilean government is the least corrupt in South America. It therefore provides a good investment environment for China.61 Finally, among the 23 or so governments that recognize Taiwan as a sovereign state in the world, a dozen are in the Latin American region. Beijing may have calculated that an FTA with Chile would strengthen China’s influence in its rivalry with Taiwan in the region.

To sum up, economic considerations were major factors in China’s decision to negotiate FTAs with New Zealand , Australia and Chile . All three economies are complementary to the Chinese economy. They are also open, liberal and relatively small and therefore non-threatening. In addition, all three countries are politically stable and good investment havens. China’s specific motives in each case varied, though. Wellington’s early recognition of China as a market economy was the decisive factor in choosing New Zealand as the first developed-country partner for FTA talks. In Australia, China sees strategic value because this middle power has close relations

58 Peter Lloyd and Donald Maclaren., “Gains and Losses from Regional Trading Agreements: A Survey,” Economic Record, vol. 80, no. 251 (2004), pp. 445–467.59 Zeng Ruicheng, “Ta Zhili tiaoban tingjin Lamei dalu” (Chile, a springboard to jump into Latin America), Zhongwai Wanju Zhizhao (Toy Industry), no. 6 (2007), pp. 12–13.60 Yang Zhimin, “FTAA: Chongji Zhongguo” (FTAA: Impacts on China) Shijie Zhishi (World Knowledge) no. 6 (2004), pp. 48–50.61 Liu Bo, “Zhongguo qiye zai Zhili de xin jiyu” (New Opportunities for Chinese Enterprises in Chile) Taisheng (September 2005), pp. 36–37.


with some Southeast Asian countries and perhaps can serve as a diplomatic bridge between Beijing and Washington. Chile, in contrast, is crucial to China’s economic strategy of penetrating the FTAA and also deflecting Taiwan’s diplomatic efforts.

6.6 Hypothesizing China’s Motives

The study of China’s FTAs is relatively new. Antkiewicz and Whalley noted in 2004 that the focus of analysts from outside China, has been mainly on China’s WTO accession and that less attention had been given to “the network of post-WTO acces-sion regional trade agreements” that China was in the process of negotiating.62

Antkiewicz and Whalley take a different tack by concentrating on the political implications of China’s recent FTA initiatives. After examining China’s CEPA with Hong Kong and its FTAs with ASEAN , Australia and New Zealand , they conclude:

[A]symmetries in size and power in the trading system seemingly produce an inevitable two tier system of large power non-discriminatory arrangements reflected in common multilat-eral disciplines, and regional agreements negotiated by large powers with smaller countries going beyond these disciplines where the large power has the dominant interest.63

Against this background, Antkiewicz and Whalley note some striking features in China’s FTAs. One of them is their diversity, both in form and coverage, which appears to reflect “a pragmatism in recognizing differences across partners.” They then go further to speculate that China appears to be establishing “clear linkages … between seemingly conventional trade interests and China’s interests in wider eco-nomic, diplomatic and strategic relationships.”64 This line of enquiry converges with that of analysts such as Kwei and Shen, cited above, who have become increasingly interested in China’s political and security motives . For example, Kwei observes that, given China’s large economy and many suitors, “bilateralism is not as economically imperative as it is for other trade-dependent Asia-Pacific countries,” and goes on to speculate about Beijing’s political aims.65 Alan Oxley is more blunt, asserting that “what China has done so far is generally bad economics …[but] its shabby trade policy is enabling it to politic as a regional leader.”66 The views of these analysts support those of the authors of this chapter, that China’s motives may be primarily economic but are influenced and reinforced by political, diplomatic and strategic considerations.

62 Antkiewicz and Whalley, China’s New Regional Trade Agreements, introduction.63 Antkiewicz and Whalley, China’s New Regional Trade Agreements, concluding remarks.64 Antkiewicz and Whalley, “Evaluating regional and multilateral objectives in China’s trade policy,” China’s New Regional Trade Agreements.65 Kwei, “Chinese Trade Bilateralism: Politics Still in Command,” p. 117.66 Alan Oxley, “Turning Tides of Influence.” APEC Currents, September 2006, available at http://www.apec.org.au/docs//currents0906/currents0906.html, accessed 27 April 2007.


In accordance with this emerging theme, this chapter presents a more inclusive summary of Chinese FTA motives, corresponding to the inventory presented in the framework chapter of this book. Solís and Katada in their survey of the theoretical literature on Asian preferential trade liberalization have developed a number of hypotheses as to why Asian governments engage in bilateral trade liberalization arrangements such as FTAs and why they sometimes seek distant partners.67 They suggest that hypotheses gleaned from international relations, foreign policy analysis, diplomatic bargaining and bureaucratic politics may have utility in supplementing economic theories. These hypotheses can be used to give shape to evidence and observations regarding China’s overt trade initiatives. They can also provide a basis, albeit tenuous, for speculating about China’s aims when definitive policy declarations and reliable knowledge of China’s decision-making processes are not available.

According to Solís and Katada, hypotheses regarding drivers of FTA negotiations in general and cross-regional FTAs in particular are grouped into three broad categories: economic motives; security and diplomatic motives; and leverage motives. The following section analyzes the China case in light of these hypotheses.


In most cases, China’s FTA talks are motivated by economic considerations. With a rapidly growing economy, China has been looking for overseas markets. Market access was sought through multilateral agreements in the WTO and APEC contexts in the 1990s, but in the first decade of the twenty-first century, China’s emphasis has shifted first to preferential Asian regional agreements and then to bilateral and cross-regional agreements. Key motivations include frustration at the lack of progress in multilateral trade organizations and forums, anxiety regarding the increasing momentum of FTA talks in other parts of the world, and the risk of dis-crimination against China’s exports. Without countermeasures, China would find itself in a disadvantageous position, as its trade partners erect new trade barriers or indulge in protectionist activity, such as initiating anti-dumping cases. China learned painfully from the NAFTA experience that exclusion from existing or new FTAs can be costly. One of the most important reasons why China signed an FTA with Chile was fear of being excluded by the proposed FTAA .

6.6.2 Security and Diplomatic Motives

China’s concept of security has been broadening in parallel with similar reconceptuali-zation in Western states. Chris Brown has noted that in the post-Cold War world,

67 Mireya Solís and Saori Katada, “Permeated Regionalism in East Asia: Cross-Regional Trade Agreements in Theory and Practice,” in this book. See especially Table 1.2.


“as concern over military security becomes less pressing, so a wider conception of security has come to the fore.”68 In the West, more attention is being paid to non-military security threats , such as global warming, mass unemployment, drug and people trafficking, refugee flows, illegal migration, pandemic disease and terrorism.

The evolution of the security debate in the West has influenced Asian under-standings of national security.69 Chinese analysts too have begun to assert that security now means “comprehensive security ” (zonghe anquan). It no longer sim-ply equals national defense and preventive diplomacy and is no longer limited to the protection of national sovereignty and territorial integrity. In addition to tradi-tional military security, national security now includes, among other things, eco-nomic, political, societal, environmental, human and technological security.70 One Chinese analyst concludes that, “[b]asically, every aspect of human life can be regarded as a part of national security.”71 Most fundamental is the realization that without a strong economy, the military dimension of national security is not sus-tainable. This understanding contributed to China’s concept of “comprehensive national power ,” which now constitutes the foundation of China’s foreign and domestic policies. Against this background, we argue that China’s FTA talks are related to China’s security strategy inasmuch as the talks are aimed at strengthening China’s economic security. As Richard C. Chambers sums it up,

China is currently engaged in a process of strategic economic development that will enhance the PRC’s comprehensive national power. The purpose of this development is to … provide the economic basis for China’s emergence as a regional and global great power. Towards these ends China has sought to develop an economic interdependence with its regional neighbours.72

In a more traditional sense, China’s security motives in its FTA talks vary from case to case. As suggested above, strategic considerations were prominent in China’s decision to enter FTA negotiations with ASEAN . China’s interest in FTA talks with Australia relates to its security strategy , given that Australia could be an intermediary between the United States and China. Specific security motives are less obvious in the cases of New Zealand and Chile . In general, however, China regards FTAs as contributing to harmonious security relations between the trading partners. By the

68 Chris Brown, Understanding International Relations, second ed. (Basingstoke, England; New York, NY: Palgrave, 2001), p. 238.69 Stephen Hoadley and Jürgen Rüland, eds., Asian Security Reassessed (Singapore: Institute of Southeast Asia Studies, 2006), especially “The Evolution of Security Thinking: An Overview,” pp. 3–36.70 Jian Yang, “China’s Security Strategy and Policies,” in Hoadley and Rüland, eds., Asian Security Reassessed, p. 87.71 Lin Limin, “Dui 21 shiji chu Zhonguo guojia anquan zhanlue de jidian sikao” (A Few Points on China’s National Security Strategy in the 21st Century) Jiangnan Shehui Xueyuan Xuebao (Journal of Jiangnan Social College) no. 2 (2002), p. 23.72 Michael C. Chambers, “Rising China: The Search for Power and Plenty,” in Strategic Asia 2006–07: Trade, Interdependence and Security (National Bureau of Asian Ressearch, 2006) avail-able at http://nbr.org/publications/strategic_asia, accessed 5 October 2006.


same token, FTAs among rivals appear threatening because they potentially disad-vantage China by excluding it from preferential markets and reduce China’s diplo-matic influence. Moreover, Chinese leaders worry about Japan ’s efforts to negotiate bilateral FTAs with ASEAN members with which China already has agreements.

More importantly, China’s FTA interests are consistent with China’s desire to be perceived as a responsible great power. Based on its declared aims of “peaceful rise ” and “peaceful development ”, China is keen to join the world economic system and to demonstrate that China’s growing prominence is an opportunity instead of a threat. The initiation of FTA talks with ASEAN is a case in point. Chinese analysts Xia Liping and Jiang Xiyuan emphasize that “China’s peaceful rise will contribute to the world’s long-term prosperity and stability” because “China’s development will provide every country with development opportunities and practical interests.”73

6.6.3 Leverage Motives

There is evidence that China has been using FTA negotiations with New Zealand , Australia and Chile as leverage , both domestically and internationally. Because these trading partners are relatively small and therefore harmless, the three coun-tries are believed to be ideal initial match-ups for China, allowing it to gain FTA negotiation experience and train its bureaucratic cadres. More importantly, Beijing intends to stimulate reforms of Chinese enterprises by inducing competi-tion by means of the new CRTAs. This may carry risks of social and political instability. However, as Liu Changli noted above, the government can use FTAs selectively to manage economic consequences rather than allow “big bang” (abrupt) liberalization along the lines followed by New Zealand or Chile in the 1980s that produced hardship for those in non-competitive sectors. A good example is the issue of dairy trade in the FTA negotiations between New Zealand and China.

Dairy trade has been a sticking point in China-New Zealand FTA trade. New Zealand became the biggest dairy products exporter to China in 1999 and its share of Chinese dairy market has been increasing steadily (see Table 6.6). Analysts believe that New Zealand’s dairy exports to China are likely to increase dramatically with the signing of the FTA, undercutting China’s incipient dairy industry.74 The issue has profound political implications for China, particularly regarding the risk of worsening the wealth gap between urban and rural areas. According to the World Bank , in about a decade the urban/rural wealth gap in

73 Jiang Xiyuan and Xia Liping, Zhongguo Heping Jueqi (Peaceful Rise of China) (Beijing: Zhongguo shehui kexue chubanshe [China Social Sciences Publishing House] 2004), p. 107.74 Liu Lifeng, “Zhongguo-Xinxilan naizhipin maoyi xianzhuang,tezheng ji qianjing” (China–New Zealand Dairy Trade: Status, characteristics and the future), Zhongguo Nainiu (China Milk Cow), no. 7 (2006), pp. 52–53.


China is likely to widen considerably.75 The Chinese themselves do not hesitate to acknowledge the problem. A September 2005 survey by the Chinese Academy of Social Sciences shows that China’s urban/rural wealth gap is already as large as 1:6, perhaps the worst in the world.76 Consequently, the “three rural problems” – peasants, agriculture and rural areas – have posed a major challenge for China’s leaders. Beijing fears that removing dairy tariffs would jeopardize its efforts to boost incomes in the countryside by fostering and protecting small dairy enterprises.

The reason why Beijing has been so reluctant to reduce dairy tariffs is not just the perception that New Zealand has a world-class dairy industry that might flood the China market. More importantly, Beijing is keenly aware of the leverage effect of its CRTAs. Its caution on dairy tariffs reflects its desire to avoid establishing precedents of liberalizing sensitive sectors. Meanwhile, Beijing has effectively used its FTA negotiations with New Zealand as leverage in its trade negotiations with other countries. One of the most important achievements in China’s negotiations with New Zealand is New Zealand’s recognition of China’s “market economy” status. Beijing used it to counter increasing dumping charges against Chinese exporting companies and to open other lucrative markets for these companies. Indeed and as discussed, a number of countries soon followed New Zealand’s example. The Chinese were pleased with this achievement, so much so that Bo Xilai , the Chinese Commerce minister, described New Zealand’s move as “visionary,” “courageous” and “wonderful.”77

75 David Murphy, “The Dangers of Too Much Success,” Far Eastern Economic Review, 10 June 2004, p. 29.76 “Diaocha baogao xianshi Zhongguo chengxiang shouru chaju guan quanqiu” (Survey report shows China’s income gap between urban and rural areas the widest in the world), Duoweinews, 4 September 2005, available at http://www7.chinesenewsnet.com/gb/MainNews/SinoNews/Mainland/2005_9_3_17_39_42_954.html, accessed 12 February 2006.77 Fran O’Sullivan, “Gold Medal from a Friend on High,” New Zealand Herald, 2 June 2004, p. A20.

Table 6.6 New Zealand dairy exports to China

US$ million

Year Total imports From NZ Percentage Increase (%)

1998 84.7 20.8 24.6 168.71999 158.9 62.9 39.6 202.02000 214.7 85.7 39.9 36.22001 216.1 88.0 40.7 2.72002 268.6 112.9 42.1 28.42003 346.5 173.9 50.2 54.02004 444.3 234.4 52.8 34.8

Source: Liu Lifeng, China–New Zealand Dairy Trade, p. 52


6.7 Conclusions

Despite being a latecomer, China’s leaders have moved forward briskly in FTA negotiations, thanks to their new appreciation of the utility of FTAs to complement multilateral negotiations, which have progressed very slowly. While economic motives are primary, it is no coincidence that China began its FTA initiatives in Southeast Asia, where China has had a historical influence and aspires to re-establish its position, particularly in the context of its rivalry with Japan. Observations regarding China’s FTA initiatives thus appear to support the hypotheses put for-ward by Solís and Katada. China uses FTAs to open new markets, avoid exclusion from or discrimination in established markets, and leverage reforms in domestic enterprises by exposing them to competition, albeit in a controlled fashion. And China has chosen its initial FTA partners deliberately, beginning with ASEAN neighbors and moving on to small developed extra-regional states with which China’s negotiators can gain experience with minimum risk. China also has been using earlier FTA negotiations as precedents for later negotiations, showing the ability of officials to learn and apply the experience gained.

In terms of security and diplomatic motives, FTAs are designed to strengthen China’s economic security. They also aim to consolidate China’s regional influence and ability to engage in strategic competition with other great powers, such as Japan and the United States. At the same time, FTAs can also be useful vehicles for China to promote its “peaceful development” vision and the notion that China’s development is an opportunity rather than a threat to other countries. All these motives are intertwined, since economic development is so closely related to China’s internal stability and external security. Indeed, it has been widely accepted in China that developing its economy offers the “ultimate solution” (genben chulu) to all internal and external problems.78

In conclusion, the initiation of CRTAs – preferential trading links with extra-regional partners – allows China’s leaders not only to speed up economic develop-ment and to pursue domestic reform at their own chosen pace but also to hedge against future trade diversion in other regions of the world, to develop negotiating expertise in a less tense political environment, and to advance core interests in for-eign economic and security policy by validating the concept of a peaceful rise to power. China’s recent pursuit of CRTAs is thus significant not only for the eco-nomic benefits they promise, but also for their enhancement of China’s national power and capacity for international leadership without provoking conflict. As a supplement to China’s diplomacy, CRTA negotiations must be recognized as an important new element of China’s long-term international strategy

78 Chu Shulong and Wang Zaibang, “Guanyu guoji xingshi he wo duiwai zhanlue ruogan zhongda wenti de sikao” (Some Thoughts on Several Major Issues about International Situation and Our External Strategy) Xiandai Guoji Guangxi (Contemporary International Relations), no. 8 (1999), p. 6; Yan Xuetong, “Guoji huanjing ji waijiao sikao” (International Environment and Thoughts on Diplomacy) Xiandai Guoji Guangxi (Contemporary International Relations), no. 8 (1999), p. 10.

Chapter 7Cross-Regional Trade Agreements in East Asia: Findings and Implications

S.N. Katada and M. Solís

7.1 Permeated Regionalism in East Asia

This book on East Asian cross-regionalism has sought to answer three important questions. Why have East Asian countries embarked on cross-regionalism in an early stage of their FTA ventures? Why have East Asian governments selected spe-cific extra-regional partners? And, in which ways are cross- and intra-regional trade initiatives linked? Throughout the chapters, we discussed both common and unique motivations behind the region’s CRTAs. In this concluding chapter, we examine the global trade environment for the region, summarize several patterns of East Asian CRTAs, and finally discuss their implications to our conceptual understanding of the process of regional integration and the policy implications of FTA proliferation. The analysis from the country case chapters, based on the framework discussed in the introduction chapter, provides a gateway into understanding the region’s FTA boom. Before summarizing the findings from the country analyses, however, it is important for us to lay out the regional and global political economic context of East Asia’s CRTA interests.

East Asian economies are highly dependent on external markets and vulnerable to the global economic environment. Securing access to extra-regional markets , and attempting a modicum of control over unpredictable economic and political forces exogenous to the region, are the fundamental impetus behind East Asia’s CRTAs. Beyond defensive motives , however, East Asian countries often use extra-regional links proactively, to strengthen their own relative positions within the region. Therefore, the region’s connection with the outside world is not only a way to ensure East Asia’s access to the global market, but also an opportunity for the region to engage in competitive trade liberalization in a controlled manner.1

East Asia has seen the living standard of its people increase at an unprecedented speed, and economies in the region have expanded multiple-folds in the last several decades. Consequently, the region’s secret for economic success has been discussed for the last few decades, generating important academic and political debates

1 “Competitive liberalization” became a part of US FTA strategy under the Bush Administration, as former USTR Robert Zoellick put this idea forward in 2002. Robert Zoellick (2002) “Special Report: Unleashing the trade winds” The Economist. December 7, 2002. Vol 365, Issue 8302: 26.


148 S.N. Katada, M. Solís

regarding the foundation of such positive economic performance.2 Little consensus has emerged on how East Asia achieved its rapid economic growth; but most accounts point to the ability of several countries in the region, at various stages in their respective economic development, to participate in the world economy through export-oriented development strategies.3 Historically, the region was first incorporated into the capitalist world economy during the seventeenth and nineteenth centuries through the powerful forces of trade and colonization,4 and the region’s outward orientation was further consolidated through its intense relation-ship with the “American imperium” since the end of World War II.5 In the process, exports became the mainstay of the region’s economic growth. But contrary to the expectation of the dependency theorists, who identified economic integration with the industrialized world as the fundamental source of “underdevelopment” in the periphery,6 East Asia has proven the benefits of its much more permeated region.

The external economic dependence of countries in East Asia was heavily managed by the “strong” states in the region, which generally played the role of “gatekeepers” to monitor and control the entry and exit of goods, enterprises, and capital.7 Nonetheless, over time both home-grown and foreign-owned enterprises, increased their international competitiveness and political clout, and acquired more sway over state policies in order to create a more supportive environment for their production and sales. Consequently, these outward-looking sectors, with their ability to influence governments, are now pitting themselves against the uncompetitive, protected and/or inherently import-competing sectors of each economy, allowing external pressure for liberalization to permeate into domestic politics as a result.

In the most recent decade since the Asian financial crisis of 1997, such permeation of global economic forces into East Asia has exhibited increasingly complex features. With the goal of preventing the recurrence of financial and monetary crises, East Asian governments managed to establish a relatively structured and exclusive regional arrangement in the form of the Chiang Mai Initiative , and they have also begun to

2 The most well-publicized of which, of course, is the World Bank publication of “East Asian Miracle” in 1993. The World Bank (1993) East Asian Miracle: Economic Growth and Public Policy. Oxford University Press, Oxford.3 The most notable work on this discussion is by Stephan Haggard (1991) Pathways from the Periphery: The Politics of Growth in the Newly Industrializing Countries. Cornell University Press, Ithaca, NY.4 Immanuel Wallerstein’s (1980) develops this long-term historical perspective. The Modern World-system II: Mercantilism and the Consolidation of the European World-Economy. Academic Press, New York, 1600–1750.5 Peter Katzenstein (2005) A World of Regions: Asia and Europe in the American Imperium. Cornell University Press, Ithaca NY.6 Representative work includes Andre Gunder-Frank (1985) The Development of Underdevelop-ment. Monthly Review. 41, 2. Henrique Cardoso and Enzo Faletto. (1979) Dependency and Development in Latin America. University of California Press, Berkeley.7 Wade (2004) discusses the Taiwanese state’s role as gatekeeper. Robert Wade (2004) Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization. Princeton University Press, Princeton.

7 Findings and Implications 149

discuss the creation of a regional currency unit. These efforts, however, have had little bearing on the creation of a coherent intra-regional preferential trade area where bilateral trade agreements and overlapping FTA networks have been most prevalent.8 Other scholars concur that East Asia is not evolving into a self-encapsulated regional bloc. By calling East Asia’s regionalism “porous,” Katzenstein explains that the simultaneous forces of Americanization, Japanization of the East Asian manufactur-ing process, along with the increasing influence of Sinicization have intensified a hybrid regionalism whereby national models of development are obsolete.9

In short, when East Asia joined the FTA frenzy in the late 1990s, it did so in this context of a permeated regional economy, and for the reasons highlighted above, CRTAs have become an essential element of the region’s early FTA efforts.

7.2 Importance of East Asia’s Shift in Trade Policy

As discussed in the introduction, formal regional integration did not make much headway in East Asia for most of the postwar period contrary to developments elsewhere. Europe and other countries in the Western Hemisphere had established regional and bilateral FTAs in the late 1980s and early 1990s, when the multilateral trade liberalization process under the GATT Uruguay Round was moving ever so slowly. In this environment, many East Asian governments began to take actions to ensure market access and to increase their bargaining power , and the region’s out-ward orientation is evident from the fact that the first initiative to gain traction was a cross-Pacific project: the APEC forum established in 1989, whose members com-mitted to a loose structure of concerted unilateral efforts to liberalize and facilitate trade amongst each other without excluding outsiders.10 Soon thereafter in 1992, the only purely regional institution in the region, ASEAN, began consolidating its internal trade liberalization efforts in the form of the AFTA , first in order to create an intra-regional cluster for enhanced bargaining power within the APEC, but per-haps more importantly, to compete against the rising China out of concern with the possibility of investment diversion.11 Though quite successful in establishing a

8 For a contrast on the different paths that trade and financial integration are adopting in East Asia see Saori N. Katada and Mireya Solís (2008) “Under Pressure: Japan’s Institutional Response to Regional Uncertainty.” In: Vinod Aggarwal, Min Gyo Koo, Seungjoo Lee, and Chung-in Moon (eds.). Northeast Asian Regionalism: Ripe for Integration? Springer Berlin.9 Katzenstein (2006) In: Peter J. Katzenstein and Takashi Shiraishi (eds) Beyond Japan: The Dynamics of East Asian Regionalism. Cornell University Press, Ithaca: 4–14.10 APEC’s approach is described as “open regionalism.” For a discussion of the defensive attitude of Asian member countries that pervaded APEC, see John Ravenhill (2001) APEC and the Construction of Pacific Rim Regionalism. Cambridge University Press, Cambridge: 79–84.11 Naoko Munakata (2006) Transforming East Asia: The Evolution of Regional Economic Integration. Brookings Institute Press, Washington DC: 77–79.


political core of regional integration dynamics, AFTA has not born much fruits as a free trade agreement due to exclusions and carve-outs.

Despite the lack of formal regional integration institutions in the critical years from the late 1980s through the Asian financial crisis in 1997, de facto regional eco-nomic integration developed dramatically spurred by intra-industry trade in sectors such as electronic machinery and general and precision machinery.12 Such intra-firm trade arose first from massive foreign direct investment by Japan since the mid-1980s. By the 1980s, Japanese industries were already highly globalized, and had faced pro-tectionist pressure from the United States and Europe. In addition to Japan’s own ris-ing domestic costs for production, the rapid appreciation of the yen, after the Plaza Accord (September 1985) encouraged Japanese manufacturing firms to produce in many parts of East Asia where the land/labor costs and the value of currencies were low.13 Japanese firms began to produce, for example, “made in Thailand ” Sony walk-mans that were then exported to the United States .14 Furthermore, since the late 1980s the operation of Japanese regional trade production networks encouraged Southeast Asian countries – and later China – to reduce barriers across borders, in order to facilitate MNCs intra-firm trade and entice more investment.15

Finally, the trade giants in Northeast Asia began to establish their own network of FTAs by the late 1990s, as APEC failed to offer either a congenial trade forum or an effective way to deal with the Asian financial crisis . By this time, countries like Japan and South Korea were ready to leave their long-time tradition of “multilateral-only” in favor of a multitrack approach to trade liberalization. In addition, the less developed countries of Southeast Asia had already lowered their tariffs on manufactured goods thanks to their unilateral trade liberalization of the previous several years.16 As each set of countries began to formalize what were

12 For a discussion of the dramatic increase in economic regionalization in East Asia through verti-cal and horizontal intra-industry trade, see Munakata, Chap. 3.13 Many scholars have discussed the phenomenon of Japan-led regionalization and globalization of East Asia since the 1980s. The most representative works are by Hatch and Yamamura (1996) Asia in Japan’s Embrace: Building a Regional Production Alliance. Cambridge University Press, Cambridge and Katzenstein and Shiraishi (1997) Beyond Japan: The Dynamics of East Asian Regionalism. Cornell University Press, Ithaca NY.14 Tachiki (2005) argues, however, that the push for FDI into Southeast Asia had already started before 1985. Dennis Tachiki (2005) Beyond Foreign Direct Investment and Regionalism: The Role of Japanese Production Networks. In: T. J. Pempel (ed) Remapping East Asia: The Construction of a Region. Cornell University Press, Ithaca: 149–169.15 Baldwin (2006) especially Fig. 3 on page 8 and Fig. 4 on page 9. Richard E. Baldwin (2006) Managing the Noodle Bowl: The Fragility of East Asian Regionalism. Center for Economic Policy Research Discussion Paper 5561.16 For example, Kimura, Takahashi and Hayakawa report that applied MFN tariffs on machinery and transport equipments were reduced from above 10% in 1988 to below 5% in 2001 for most of Southeast Asian countries. Kuranari Kimura, Yuya Takahashi and Kazunobu Hayakawa (2005) “Fragmentation and parts and components trade: a comparison of East Asia and Europe,” Mimeo: http://www.apeaweb.org/confer/hito05/papers/kimura_etal.pdf (accessed October 14, 2007) cited in Baldwin (2006): 9.


already de facto trade liberalization promises, a one-on-one spoke FTA arrange-ment emerged, thus giving rise to a phenomenon some experts call the “noodle bowl ” of Asian FTAs.17 The fact that these “noodles” and “spaghettis” were not self-contained in regional bowls (i.e. there were multiple cross-regional trade agreements) led Baldwin to characterize current regional trade blocs as leaky and fuzzy.18 And as the summary of our findings below shows, the impact of cross-regionalism has been particularly strong in East Asia.

7.3 Findings: Environmental Factors and Country Case Studies

A central finding in this book is that several environmental factors in the East Asia encourage the development of cross-regional initiatives. Governments in this region frequently find it easier to negotiate with extra-regional partners where the security hurdles are not high, and where issues of regional exclusion or the “history card” do not cloud the prospects of successful negotiation. Despite these common regional factors and outside market-dependence, the motives behind the selection of cross-regional partners have varied widely as is evident in the analysis of the specific cases of East Asian cross-regionalism undertaken by the contributors to this book. Park and Koo seek to explain the motivation behind South Korea’s choice of Chile as its first preferential partner and the emergence of a more proactive FTA strategy enabling the country to engage the United States in FTA talks. Low discusses Singapore’s deliberate decision to pursue high standard FTAs with five OECD partners in order to leverage domestic reforms and support the transition to a knowl-edge-based economy. Solís and Katada explain why Japan felt a keen interest in negotiating with Mexico despite a modest overall volume of trade and sharp opposi-tion from the farm lobby. Hoadley probes into the motivations behind Thailand’s numerous cross-regional initiatives and Malaysia’s more guarded approach to CRTAs. Finally, Hoadley and Yang underscore the rationales behind China’s recent jump into the FTA bandwagon and its interest in several cross-regional partners.

Collectively, the chapters in this volume speak not only of distinct national reasons for embarking on cross-regionalism but also of commonalities in these

17 Of course, Bhagwati (1995) coined the original label “spaghetti bowl” to describe the phenome-non of complex web of overlapping bilateral FTAs in the world. Jadish Bhagwati (1995) “US Trade Policy: The Infatuation with Free Trade Areas.” In: J. Bhagwati and Ann O. Krueger (eds) The Dangerous Drift to Preferential Trade Agreements. Washington DC: American Enterprise Institute for Public Policy Research. Baldwin (2004) adopted the term to East Asia, calling the same phenomenon “noodle bowl.” Richard E. Baldwin (2004) “The Spoke Trap: Hub and Spoke Bilateralism in East Asia.” Korea Institute for International Economic Policy, Seoul.18 Baldwin (2006) used the term “fuzzy” to describe how the three apparent trading “blocs” of EU, NAFTA and East Asia have very undefined boundaries. Richard E. Baldwin (2006) “Multilatera-lising Regionalism: Spaghetti Bowls as Building Blocs on the Path to Global Free Trade”. The World Economy. December: 1451–1518.


cross-regional trade initiatives. A number of contrasts are worth highlighting. China has a unique objective in its FTA policy: to assure others that its economic rise does not entail a zero-sum game, but rather it opens the possibility of maxi-mizing joint gains through FTAs and CRTAs. On the other hand, an important motivation to pursue CRTAs for Thailand and Korea, as well as Singapore is to increase their economic visibility and clout by reinventing themselves as FTA hubs. Just as some Latin American nations had done before them, CRTAs allowed these smaller countries to market themselves as “bridge countries ” linking different regions.

Trade diversion has also played differently as a motivation for several East Asian nations in cross-regional partnerships. In the cases of Thailand, Malaysia, and China, it appears as a diffuse concern about the possibility of not having preferen-tial trade agreements in a world of proliferating FTAs. China’s prime reason for negotiating a CRTA with Chile has been to avoid trade discrimination from further regional integration in the Americas and to gain access to the countries that are within Chile’s large FTA network. However, the benefits of the Chilean springboard to other markets will be tempered by the need to comply with rules of origin,19 and China has not yet responded with a CRTA initiative with Mexico, Canada or the United States to counteract the one case where it suffered greatly from trade diversion: NAFTA’s strict origin rules for textiles. In sharp contrast, trade diversion was the driving force behind Japan’s negotiation of a CRTA with Mexico. When specific Japanese industries (government procurement, automobiles, and electronics) suf-fered tangible losses as Mexico’s FTAs altered the rules of market operation, they mobilized to secure similar preferences through a CRTA.

These differences aside, many of the CRTAs analyzed in this book share some important common traits. One important trend is the decision of some East Asian countries to negotiate a CRTA with the United States. This move did constitute a serious challenge for Korea, Singapore, and Thailand. Park and Koo argue that the Roh administration in Korea launched and successfully concluded the KORUS FTA, despite potentially massive domestic adjustment costs, in order for the country to strengthen its security ties with the United States and to gain political leverage over the intra-regional FTA dynamics, particularly in the context of Japan-China rivalry. Low notes that the conclusion of the USFTA in 2003 gave Singapore the opportunity to ink a high-quality WTO-plus FTA with the largest and most advanced country, which will be advantageous in its future intra-regional FTA negotiations. On the other hand, as Hoadley reports, Thailand and the US are at loggerheads over crucial issues, such as intellectual property protection, and talks have been suspended amid domestic political backlash and the collapse of the Thaksin administration. For other East Asian countries such as Japan and China, the FTA with the United States is still a very difficult proposition given the domestic fear of US liberalization pressures. Therefore, despite the major prospective welfare

19 The same reservation applies to the efforts of Thailand and Korea noted above to position them-selves as trade hubs: access to their FTA network is contingent on the compliance with different rules of origin.


gains, the jury is still out on how the FTAs with the United States will impact East Asia’s intra- and cross-regional FTA dynamics.

At the other end of the spectrum, there are numerous other cross-regional initia-tives which actually only promise modest aggregate economic benefits, and so it is necessary to explain the motives behind these “low-yield” CRTAs. We argue that leverage gains arising from cross-regionalism are crucial to understand the motiva-tions of East Asian nations to negotiate with small cross-regional economic partners(see Table 7.1). All the East Asian nations studied here have used their cross-regional FTA initiatives for capacity-building purposes in a low-risk environ-ment. By teaming up with consummate FTA negotiators from outside the region, countries like Korea, China, and Japan could learn the ropes of negotiating pref-erential market access without incurring large economic and security costs. The small overall volume of trade between countries in these CRTAs meant fewer adjustment costs from trade liberalization, but geographical distance and the absence of security rivalries also meant that these CRTAs would minimize negative security externalities, such as the oft-noted concern of strengthening through eco-nomic cooperation a potential military foe. These CRTAs were considered advanta-geous as well in that they constituted relatively self-contained trade negotiation exercises unlikely to be “contaminated” by the volatility of intractable historical, territorial, or leadership disputes.

In fact, these East Asian governments’ interest in leverage emerges as the key analytical variable linking cross-regional overtures with simultaneous negotiation processes at the WTO and intra-regional levels. This is true not only because bureaucratic cadres in East Asia receive on-the-job training from extra-regional FTA counterparts which influence their subsequent FTA behavior, as observed when Japan switched to negative list for service liberalization after negotiations with Mexico, but also because of the benefits of precedent-setting. These prece-dents can be both international and domestic. For instance, China deliberately used CRTAs to reward countries endorsing its status as a market economy. As Hoadley and Yang point out, achieving such a designation is an important goal for China at the WTO , given its large implications for antidumping procedures. Singapore also used its CRTAs to stimulate the subregional integration process, as several ASEAN members were concerned that in the absence of more substantial liberalization progress, Singapore’s attention would shift to other negotiation fronts. For Korea and Japan, CRTAs with their Latin American counterparts were considered the litmus test on their credibility as FTA negotiators since they would represent the first cases of WTO-plus liberalization in agricultural markets. Passing such a test was considered essential to lure other large agricultural exporters in East Asia to sit at subsequent FTA negotiation tables.

Trade bureaucrats in Korea and Japan also deemed these CRTAs key to disman-tle the hold of the farm lobby on trade policy, and they used them as tools to win domestic political battles. However, agricultural interests in both countries fiercely resisted proposals for substantial trade liberalization, and political compromises were worked out to rescue these negotiations. As Park and Koo note, in the case of Korea, the agricultural lobby’s opposition to the CRTA with Chile was bought out


Table 7.1 Explaining East Asian CRTA: Regional Factors and Country-Specific Motives

Regional Factors Favoring Cross-Regionalism

Economic (1) Continued reliance on extra-regional economic partners as export outlets and investment sources

Security (2) Hub-and-spoke alliance system and discouragement by extra-regional hegemon of exclusive Asian regional blocs

(3) Unabated historical and regional tensions among neighbors in East Asia

Factors Influencing the Choice of Cross-Regional Partners

Economic

Market access Thailand, Singapore and Korea: Gain access to the key American and other advanced markets

Trade diversion Japan: Avoid the losses Japanese companies reported from operating in Mexico without preferential FTA access

China: Negotiate with countries possessing a large FTA network (Chile) in order to position itself to avoid trade discrimination and gain access to third markets

Security

Reinforce security arrangements

Singapore and Korea: Use FTA negotiations with the United States to strengthen security partnership

Avoid diplomatic isolation China: Emphasize through FTA policy the cooperative aspects of China’s economic rise

Raise international status Thailand, Singapore and Korea: Emerge as trade hubs through the development of an FTA network

Singapore: Engage in FTAs with advanced countries in search for high quality WTO-plus agreements

Leverage

Capacity building Korea, Japan, China, Malaysia: Learn from consummate FTA nego-tiators in a risk-free environment due to modest liberalization adjustment costs. This “on-the-negotiation” training for bureau-cratic cadres deemed useful to engage later on in FTA negotia-tions with larger economic partners

Creating precedents Korea and Japan: Use FTA negotiation to win domestic battles on economic reform and agricultural liberalization and gain international credibility as an FTA negotiator. On the other hand, Thailand has emphasized an FTA “lite” approach to minimize domestic restructuring

China: Use CRTAs to advance recognition of China as a “market economy,” a precedent that could be of consequence in WTO’s antidumping proceedings

Singapore: Use high-quality CRTAs to stimulate the subregional integraiton process in ASEAN

through a huge monetary compensation deal. In the case of Japan, the compromise involved no cash payments, but substantial carve-outs in the agricultural liberaliza-tion package. The difference in the side payments offered by these governments to appease their agricultural sectors may be due to the timing of the agricultural


mobilization against the trade negotiations. The Korea–Chile CRTA essentially entailed a ratification crisis, whereas in the Japan–Mexico CRTA, the mobilization of the agricultural lobby to block substantial trade concessions in agriculture took place earlier. These differences aside, for both the Korean and Japanese govern-ments, the success of their CRTAs with Chile and Mexico respectively was deemed essential to demonstrate to the potential regional FTA partners that they could sign FTAs with agricultural exporters.

In short, though somewhat preliminary, we identify the following three pat-terns as emerging from the collective findings of the country case studies. These emerging patterns might in fact open new lines of inquiry, for example, on how developmental models affect the choices made by East Asian countries regarding regionalism and cross-regionalism.

In the first pattern, economies with a large internationalized business sector but heavily protected agricultural sector, such as Japan or South Korea, use FTAs to level the playing field in overseas markets for their internationally competitive industries while hammering a political compromise on some form of shelter or compensation for sensitive sectors. The second pattern tells us that smaller countries in Southeast Asia like Thailand and Malaysia that are heavily dependent on foreign economic exchange but have sizable vested interests are climbing aboard the FTA bandwagon in hopes of securing an inflow of foreign direct investment, but they are shying away from acquiring liberalization com-mitments that threaten core political interests, such as the position of Thai con-glomerates or the Bumiputra policy in Malaysia. The third pattern applies to more institutionally-advanced countries with mature capitalist economies, such as Singapore or Japan, which attempt to use CRTAs for standard-setting in East Asia. These countries aim to sign WTO-plus agreements with like-minded nations outside the region to disseminate these standards in their subsequent FTA negotiations in East Asia.

We find it difficult, however, to place China within any of the three above-mentioned patterns. China has pursued “easier” and more informal FTAs, so standard-setting (other than further recognition of its status as a market economy) does not seem to be a main objective of Chinese FTA policy. On the other hand, as a socialist economy in transition, the Chinese government does not face the tug and pull of conflicting domestic interest groups than more pluralistic societies do, so our explanations above on the use of CRTAs to appease domestic constituencies seem less relevant. Chinese FTA policy, therefore, seems to be more top-down with the government’s objectives to achieve diplomatic leverage as paramount. China has used FTA diplomacy to meet its energy needs and to assure others of the posi-tive externalities of China’s “peaceful” rise.

In short and as demonstrated on Table 7.1, there is a variety of country-specific motivations explaining East Asian CRTAs ranging from market access concerns to security – and diplomacy-based motivations. Behind these diverse motives, a central motivation does cut across all cases examined here: the keen interest to use CRTAs to gain solid leverage in future trade negotiations as these East Asian governments build preferential trade negotiation capacity and establish domestic and international precedents.


7.4 Conclusion: Implications for Theory and Practice

The above findings from our collective research efforts suggest two theoretical implications: one regarding the nature of domestic and regional political economy in East Asia; and the other regarding the links and dynamics between bilateral FTAs and regional and multilateral trade arrangements. The discussions of these theoretical implications also extend into policy implications at the levels of domestic politics, regional arrangements, and the global system.

As discussed above, the East Asian economy is permeated because of the region’s high external trade and investment dependence. The very nature of extra-regionally dependent economies encourages these governments to pursue CRTAs. It is important, however, to note that East Asian countries did not begin to partake in the FTA frenzy until quite late in the game, when important extra-regional partners were already solidifying their preferential trade arrangements. Thus, there is quite obviously a defensive incentive at work in their sudden interest in FTAs, especially in order to catch up with the partners from outside of the region.

At the level of domestic trade politics, then, industries that have more to lose from exclusion from rapidly expanding FTA networks (trade-diversion fear) will mobilize to support the launch of an FTA policy. In so doing, they will confront the opposition of import-competing sectors (e.g. agriculture in Japan and South Korea) for whom opening through an FTA can represent a “life-or-death” proposition (competition fear). The combination of these two opposing fears pressures the government to prioritize “control” over the selection of partner and sector coverage of preferential trade agreements, rather than focusing exclusively on the “gains” to obtain through trade liberalization talks with either larger partners and/or regional and multilateral forums. Hence, East Asian government are likely to engage actively in FTA negotia-tions with CRTA partners whose markets are of great importance to internationalized business sectors and who do not pose a significant threat to import-competing industries, either because of the composition of bilateral trade or because of the willing-ness to exclude sensitive commodities from liberalization commitments.20 Once again, the permeated nature of the East Asian region propels many of those govern-ments to engage in cross-regional negotiations to balance those domestic demands.

On the political economy of regionalism, the distinction of CRTAs from intra-regional FTAs contributes to our conventional understanding of preferential trade agreements, given that the regionalism literature has paid insufficient attention to the importance of cross-regional links, as we have discussed in Chapter 1. In other words, by distinguishing between intra- and extra-regional FTAs, we have identified the

20 For the gains and control trade-off, see Saadia M. Pekkanen, Mireya Solís and Saori N. Katada (2007) “Trading Gains for Control: Forum Choices in International Trade and Japanese Economic Diplomacy.” International Studies Quarterly. 51, 4. For a discussion of the dynamics where losses and losers tend to activate policy actions in economic policy making, see Katada and Solís (2006) “Domestic Source of Extra-Regional Foreign Policy Activism: Case of Japan” presented at International Studies Association Annual Convention, March 21–15 and also Baldwin (2006, Multilateralising Regionalism: 1469.


mechanisms through which seemingly trivial CRTAs have an effect on the unfolding of East Asian regionalism: cross-regional trade agreements allow East Asian govern-ments to hone negotiation skills, to boost international FTA credibility, and to set domestic political compromises on market opening, all of which shape subsequent FTA negotiations. Under regional constraints, early cross-regional negotiations ben-efit the East Asian governments as they strengthen their capacity and leverage for subsequent intra-regional negotiations. Thus, cross-regional initiatives have become very important components of unfolding East Asian intra-regionalism.

A second set of implications address the impact of East Asian cross-regionalism on the prospects of a coherent and exclusive regional trade arrangement emerging in East Asia, as well as its significance for the evolution of the multilateral trade regime.

Baldwin argues optimistically that the very motivations behind East Asia’s FTA initiatives, such as the unbundling of industries all across the region through foreign direct investment and production links, dramatic increase in intra-firm trade and subsequent unilateral liberalization, will inevitably lead to region-wide FTA coordination to eliminate the cumbersome, overlapping and conflicting rules of origin.21 In addition, “Factory Asia” (the production network of manufacturing sectors and firms in the region) seems to favor intra-regional arrangements since they minimize the costs associated with the business travel and communications associated with the management of such production modality.22 However, a barrage of CRTAs that emerged either prior to or concurrently with the surge of intra-regional FTAs renders such convergence of bilateral trade links into a well-defined regional trade agreement much more complex and uncertain.

It is not only the competitive utilization of extra-regional FTAs by the East Asian governments to boost their intra-regional negotiation strategy (as discussed above); but also the importance of preferential access to extra-regional markets that dilutes the chances of a cohesive “trading bloc” in the region. As our volume makes clear, there is a wide variety of motivations propelling East Asian countries into cross-regionalism. This makes it unlikely that the phenomenon of “counterpart coherence”23 as described by Aggarwal and Fogarty will unfold in East Asia. Thus, the region will remain relatively permeated in terms of regional policy-making and coordination. This is good news for global trade and the multilateral system, for East Asia is less likely to pose the threat of evolving into an exclusionary “bloc.”

21 Baldwin (2006, Multilateralising Regionalism): 1501.22 Baldwin (2006, Multilateralising Regionalism): 1508.23 In other words, the desire to negotiate with an extra-regional bloc (such as the EU) may create an incentive for greater intra-regional coordination to facilitate inter-regional negotiations. The ASEM meeting is one of the best known examples, but it has not made significant progress on the trade negotiation front. See Vinod K. Aggarwal and Edward A. Fogarty (2004) “Between Regionalism and Globalism: European Union Interregional Trade Strategies” In: Aggarwal and Fogarty (eds) EU Trade Strategies: Between Regionalism and Globalism Palgrave McMillan and Julie Gilson (2001) “Europe–Asia: The Formal Politics of Mutual Definition.” In: Peter W. Preston and Julie Gilson (eds) The European Union and East Asia: Interregional Linkages in a Changing Global System, Cheltenham, UK and Northampton MA: Edward Elgar.


There is no question that East Asian countries continue to support the WTO as an important forum for trade negotiation and dispute adjudication. And lately they have become more vocal in strengthening their individual and collective bargaining power in the WTO and other trade forums by leveraging their newly acquired power through intra-regional and extra-regional FTAs. Obviously, this will affect negotiation dynamics in the multilateral forum, as evident from the Chinese strategy to use its FTAs towards making others recognize its market economy status. But the challenge is whether East Asian countries can effectively coordinate their strategies at the multilateral level given the stiff competition that surrounds intra-regional FTA politics, as can be seen by the eagerness of these countries to use CRTAs in leveraging their position in regional FTA talks.

Finally, what policy implications can we draw from the analysis of East Asian cross-regional trade agreements? In the domestic context, the pace of FTA negoti-ations tends to pick up as the policymakers and bureaucrats manage to establish domestic precedents for selective trade liberalization, gain experience in FTA negotiations, and construct their FTA templates. In this sense, CRTAs have been useful for East Asian governments to learn the ropes of FTA negotiations without serious political risks. Furthermore, the domestic coalitions formed and the compromises reached during the early (usually cross-regional) FTA negotiations make it difficult to fully reverse the FTA trend, since these important precedents have already been set. Even China, whose political structure does not make it par-ticularly responsive to domestic constituencies, is now fully committed to bilateral trade liberalization.

In a way, competitive liberalization through FTAs is unfolding in East Asia. But the regional dynamics are different from the original concept promoted by the USTR Robert Zoellick half a decade ago, since FTA competition is not driven by a uniform goal of economic liberalization. Instead, each government in East Asia is seeking the upper hand in defining the direction of the trade governance in the region from standard-setting, to market access, to reputation and prestige.

There is no telling how long the region’s FTA frenzy will continue. The general support for FTAs might not last forever particularly when the tendency among many East Asian countries is to negotiate many FTAs with small trading partners, which consequently lead to very small or practically invisible welfare gains. There are already some signs of “FTA fatigue” in some countries.24 But as long as bilateral trade agreements and CRTAs continue to proliferate, the chances of developing a cohesive regional bloc seem slim.

Of course, a coherent regional preferential trade arrangement is much more desirable in terms of administrative and transaction costs than the “noodle bowl” that we see today. However, even at this undefined stage, there seems to be no consensus in East Asia regarding how the pieces of multiple FTAs will fit together. Especially as the involved governments begin discussing the “regional trade

24 Interview with a trade expert involved in the government’s policy and research committees in Japan, July 2007, Tokyo, Japan.


architecture,” the issue of “who is in” and “who is out” is highly political. One regional heavyweight, China, is fully behind the ASEAN+3 (or APT) framework where only East Asians are included. The other, Japan, supported by Singapore, has recently pushed towards the establishment of ASEAN+6, following the successful inclusion of Australia, New Zealand and India in the first East Asian Summit meeting in Malaysia in December 2005. Finally, the US government is now seriously promoting the Free Trade Area of the Asia Pacific (FTAAP) to prevent its marginalization from East Asia. All these developments highlight that reaching a consensus on the goals and membership of the regional integration project is a central challenge for East Asia in the future years.

In sum, the CRTAs actively pursued by East Asian governments in recent years capture patterns of strategic interactions among national, regional and global forces. These governments are not merely “pushed away” from a region rife with conflicts and competitions as they pursue CRTAs; rather, they engage with extra-regional partners because of domestic political considerations of promoting competitive industries and enticing domestic protectionist forces to compromise. At the regional level, the strategic nature of the CRTAs is more evident, as many of these governments seek intra-regional bargaining leverage as they accumulate prece-dents and skills through cross-regional negotiations. Finally, at the global level, East Asian governments try to influence the WTO agenda through their numerous regional and cross-regional agreements, showing that they are now prepared to go beyond their status as aggressive exporters and emerge as more assertive players in the global trade regime.

Index

Aaccess to markets, 133additive regionalism, 34adjustment costs, 89administrative protectionism, 126Afghanistan, 65AFTA. See ASEAN Free Trade Areaagricultural commodities, 87agricultural commodity exports, 102agricultural concessions, 84, 87, 88agricultural interests, 84, 153agricultural liberalization, 89agricultural lobbies, 84, 89, 90, 91agricultural market access, 85agricultural restructuring, 83agricultural sector, 89agricultural technology, 133agriculture, 31, 35, 45, 104, 111, 114Aid diversion, 19American Federation of Labor-Congress of

Industrial Organization (AFL-CIO), 61Anand Panyarachun, 101anti-dumping, 38, 97, 126, 135ANZSCEP, 52APEC. See Asia-Pacific Economic

Cooperationapples, 37Argentina, 28, 40, 128Article 24, 29, 85ASEAN. See Association of Southeast

Asian NationsASEAN+3 (APT), 7, 41, 64, 75, 95, 113, 119,

123, 128ASEAN+6, 75, 159ASEAN–Australia, 52ASEAN–Japan Commemorative Summit, 44ASEAN-9, 13ASEAN-10, 66ASEAN Economic Community, 113

ASEAN Economic Ministers, 101ASEAN Free Trade Area (AFTA), 51, 53, 64,

96, 101, 104, 108, 112, 114, 118, 132, 149

ASEAN Regional Forum (ARF), 7, 131ASEM. See Asia Europe MeetingAsia-Pacific Bilateral Free Trade

Agreement, 11Asia-Pacific Economic Cooperation (APEC),

7, 15, 25, 35, 52, 54, 65, 66, 86, 95, 102, 104, 106, 114, 118, 125, 132, 149, 150

Asia Europe Meeting (ASEM), 125, 128Asian Economic Community, 113Asian financial crisis, 7, 24, 27, 28, 30, 32,

45, 74, 100, 101, 104, 112, 148, 150Asian Monetary Fund, 7, 16, 65Asian production networks, 13Association of Southeast Asian Nations

(ASEAN), 7, 12, 17, 20, 21, 24, 25, 28, 31, 44, 49, 51–54, 58, 61, 63, 64, 67, 69, 74, 93, 95, 99, 100, 102, 104, 106, 113, 117, 121, 123, 125, 139, 141, 143

Australia, 11, 25, 60, 65, 66, 75, 93, 97, 99, 105, 106, 113, 115, 118–121, 123, 124, 128, 132, 136, 139, 140, 141, 143, 144

auto companies, 91automobile industry, 76automobile(s), 40, 66, 71, 77, 79avoidance of exclusion, 120Aziz, Rafidah, 113, 115Azocar, 34

BBahrain, 99, 105, 106, 107bananas, 87bargaining power, 149beef, 42, 85, 87, 89

161

162 Index

benign leadership, 21BIMSTEC, 99biotechnology, 61Bo Xilai, 145Brazil, 28, 40, 128bridge countries, 152Brunei, 49, 74, 97building blocks, 65, 127Bumiputra, 115Burma, 104Bush, George W., 59business elites, 101business environment, 92

CCairns Group, 102, 112Canada, 28, 31, 34, 60, 97Canales, Fernando, 88capacity building, 22, 23, 39, 90, 98, 107Central European Free Trade Agreement

(CEFTA), 101Closer Economic Relations (CER), 113, 118chaebols, 36Chiang Mai Initiative, 7, 64, 148chicken, 85, 88, 89Chile, 11, 12, 24, 25, 27, 29, 30, 31, 34–38,

40, 49, 74, 75, 95, 97, 114, 115, 119, 124, 128, 132, 135, 138–140, 143, 144

Chilean House of Representatives, 39China, 13, 17, 21, 23, 25, 28, 29, 31, 43,

44, 45, 52, 56, 64, 66, 69, 72, 73, 96, 97, 99, 104, 106, 107, 111, 113, 117, 121

China–Japan–Korea FTA, 67China–ASEAN FTA, 123, 126, 130China–Chile FTA, 140China–South Korea–Japan FTA, 17Chinese entrepreneurs, 112Clinton, 61Closer Economic Partnership Agreement

(CEPA), 124, 141Cold War, 16, 142collective security, 15Colombia, 34commodities, 114competition policy, 114competitive manufacturing sectors, 41competitive trade liberalization, 147complementarities, 87comprehensive national power, 143comprehensive security, 143concentric policy, 104concessions, 48

cosmopolitanism, 111, 120counter-terrorism, 138Croatia, 101, 105, 106crony capitalism, 120crony capitalists, 112cross production networks, 58customs procedures, 38, 86Czech Republic, 101, 105, 106

Ddairy, 144dairy tariffs, 145defensive motive(s), 128, 147demonstration effect, 93, 97Deng Xiaoping, 123developmental state, 56Development Bank of Singapore, 57differentiated products model, 32diplomacy, 34diplomatic acceptance, 98diplomatic leverage, 155diplomatic motives, 96diplomatic profile, 111, 120diplomatic status, 106, 107dispute settlement mechanism(s), 38, 66, 97Doha Development Round, 37domestic economic reform, 83domestic liberalization reforms, 111domestic reform, 34, 106, 120domestic reform(s), 34, 52, 106, 108, 120domestic structural reforms, 111domino effect, 18, 20

Ee-commerce, 60EAFTA. See East Asia FTAearly harvest, 128Early Harvest Programmes, 115early voluntary sectoral liberalization, 7East Asia, 17East Asia Economic Group, 113East Asian Community, 7, 75, 128East Asian Economic Caucus, 75East Asia FTA (EAFTA), 65, 132East Asia Summit (EAS), 64, 113economic blocs, 106economic complementarities, 6, 18, 21economic considerations, 140economic diplomacy, 20, 129economic motives, 96, 106, 133Economic primacy, 69economies of scale, 129

Index 163

education, 114efficiency gains, 10, 31Egypt, 97, 135elasticity, 10electronic firms, 91electronics, 71, 76, 77, 108electronics exports, 41elite dominance, 120embedded mercantilism, 10, 11energy security, 128entrepôt, 48, 53, 56, 64, 67entrepreneurs, 104environment, 114environmental factors, 151epistemic regime, 121EU. See European UnionEurope, 17, 93, 97European Community, 15, 20European Free Trade Association

(EFTA), 8, 28, 31, 53, 99European Union (EU), 8, 28, 31, 40, 45, 54,

64, 102, 121, 125, 128, 135exclusion, 146export-led growth, 101export-oriented industrialization, 28export-oriented trade policy, 123exporting industries, 106export interests, 106export promotion, 104extra-regional markets, 17, 147extra-regional partners, 20

Ffactor endowments, 33fair value, 135“fast track” 110, 115Federation of Korean Industries, 40financial liberalization, 108first-mover advantage, 18fisheries, 114food processing, 106footwear, 133foreign direct investment, 13forestry, 114forward engagement diplomacy, 107Fox, Vicente, 87France, 17, 135Free Trade Area of the Americas (FTAA),

102, 140, 142Frei Ruiz-Tagle, Eduardo, 34FTA “Chubs” D, 140FTAA. See Free Trade Area of the AmericasFTA diplomacy, 21, 72, 73, 75, 92, 155

FTA Watch, 109furniture, 133

Ggains from trade, 33GATS. See General Agreement on Trade in

ServicesGATT. See General Agreement on Tariffs

and TradeGATT Uruguay Round, 149General Agreement on Tariffs and Trade

(GATT), 6, 27, 29, 47, 51,102General Agreement on Trade in Services

(GATS), 47, 51geographically concentrated, 8geographically dispersed, 8geographical proximity, 1, 93Germany, 17globalization, 52, 61Goh Chok Tong, 59Go South, 105Government of Singapore Investment

Corporation, 57government procurement, 71, 77, 120government procurement contractors, 91grapes, 37gravity model, 33, 129Greater East Asia Co-prosperity Sphere, 6Gulf Cooperation Council (GCC), 74, 75,

124, 128

Hhedge mechanism, 106hegemon, 14, 16, 67historical animosities, 17Honda, 79Hong Kong, 52, 123, 141household appliances, 133House of Representatives, 59hub-and-spoke, 129hub-and-spoke alliance system, 14human resource development, 114human rights, 54, 66, 68, 131hybrid regionalism, 149

IIceland, 53, 124IMF. See International Monetary Fundimport substitution, 104India, 28, 31, 56, 64, 66, 74, 75, 93, 97, 99, 107,

110, 113, 115, 119, 121, 124, 128, 135

164 Index

India–Singapore Comprehensive Economic Cooperation Agreement (CECA), 54

India–Singapore Fund, 54Indonesia, 74industrial interests, 91industrial restructuring, 48, 123industrial sectors, 108information communication technology, 54,

58, 60, 114information technology, 53, 106intellectual property rights, 25, 30, 54, 60, 62,

108, 114inter-sectoral complementarities, 39, 45interaction, 23intergovernmentalism, 23International Enterprise, 59internationalization, 123international leverage, 106International Monetary Fund (IMF), 16, 40,

100, 104investment diversion, 77, 82Iraq, 65Israel, 8, 35

JJapan, 13, 16, 17, 23–25, 28–31, 33, 38,

43–45, 53, 64–66, 69, 96, 99, 104, 110, 113–115, 119, 121, 125, 132, 144

Japan–ASEAN FTA, 44Japan–Singapore Economic Partnership

Agreement (JSEPA), 52Japan–Malaysia Economic Partnership

Agreement (JMEPA), 114Japan–Mexico FTA, 83, 85, 92Japan Foreign Trade Council, 82JETRO, 91Jordan, 8, 54, 97, 131

KKeidanren, 82Kim Dae-jung, 28, 30, 35, 41, 45knowledge-based economy, 48, 49, 53, 54, 57,

63, 68, 97Koh, Tommy, 98Koizumi, Jun’ichiro, 84, 93Korea, 23, 64, 69, 93, 121Korea–Singapore Free Trade Agreement

(KSFTA), 54Korea–US FTA, 24, 42, 43, 45

South Korea–US FTA, 29Korea Automobile Manufacturers

Association, 33

Korean Farmers League, 36Korean War, 15Korean Women Farmers Association, 36

LLaos, 99lattice regionalism, 11, 120layered, 104leadership, 120legal services, 54leverage, 5, 22, 23, 25, 34, 38, 45, 48, 69, 84,

89, 93, 108, 124, 144, 146, 153leverage motives, 96leveraging, 90Liberal Democratic Party (LDP), 84Liechtenstein, 53Look East, 105, 112, 119Look North, 105

MMahathir Mohamad, 15, 75, 112, 119, 131Malaysia, 15, 23, 25, 35, 52, 61, 64, 69, 74,

93, 95, 96, 135mandatory liberalization commitments, 65manufacturing, 104, 106maquiladora, 80, 91marine products, 54market-oriented economic liberalization, 29market access, 6, 20, 31, 32, 48, 53, 60, 61,

97, 119, 149Mercosur, 28, 34, 99, 128METI. See Ministry of Economy, Trade and

IndustryMETI bureaucrats, 91MEUFTA. See Mexico–European

Union FTAMexico, 11, 24, 28, 31, 34, 60, 74, 75, 97,

128, 140Mexico–European Union FTA (MEUFTA),

24, 73, 81, 90Middle East, 68, 93, 102, 130minilateral trade agreements, 6Ministry of Agriculture, Forestry, and

Fisheries, 85Ministry of Agriculture and Forestry,

36, 39Ministry of Commerce, Industry

and Energy, 36Ministry of Economy, Trade and Industry

(METI), 71Ministry of Finance, 85Ministry of Finance and Economy, 36

Index 165

Ministry of Foreign Affairs, 36, 85Ministry of Foreign Affairs and Trade

(MOFAT), 36Morocco, 131most-favored-nation, 47multinational corporations, 12, 62Mutual recognition agreements, 62Myanmar, 54

NNAFTA. See North American Free Trade

AgreementNakagawa, Shoichi, 89National Trades Union Congress (NTUC), 61NATO. See North Atlantic Treaty Organizationnatural partners, 10natural trading bloc, 33negotiation capacity, 73negotiation precedents, 34negotiation skills, 38, 120neofunctionalism, 18, 64networked, 104new bilateralism, 11newly industrialized economies, 13New Zealand, 11, 25, 30, 35, 49, 52, 65–67,

75, 93, 95, 97, 99, 105, 107, 113, 115, 118–121, 123, 124, 128, 132, 133, 135, 136, 138, 140, 141, 143–145

NGO Network for Political and Social Reform, 109

Nippon Telegraph and Telephone Corporation, 53

Nissan, 79Nitya Pibulsonggram, 109non-governmental organizations (NGO), 39non-military security threats, 143non-tariff trade barriers, 126noodle bowl, 151North American Free Trade Agreement

(NAFTA), 6, 13, 24, 42, 60, 66, 72, 79, 81, 90, 91, 92, 102, 111, 120, 128, 140, 142

North Atlantic Treaty Organization (NATO), 15, 17

North Korea, 65Norway, 53Nukaga, Fukushiro, 89

OObuchi, 52OECD. See Organization for Economic

Corporation and Development

Office of the Minister for Trade (OMT), 36omni directional, 104open regionalism, 10orange juice, 85, 88oranges, 88, 89Organization for Economic Corporation and

Development (OECD), 24, 48, 51, 60, 63, 68, 69

PPacific Economic Cooperation

Council (PECC), 101Pakistan, 97, 115, 119, 124, 128, 135Panama, 97Paraguay, 28, 128partner selection, 5patchwork quilt, 111patent protection, 109peaceful development, 144peaceful rise, 144pears, 37penetration of goods, 105People’s Action Party, 56, 57Persian Gulf, 131Peru, 54, 97, 99, 105, 106pharmaceuticals, 109Philippines, 74, 93, 104phytosanitary measures, 111Plaza Accord, 150Policy Affairs Research Council, 89politically sensitive sectors, 31pork, 85, 87precedents, 90precedent setting, 22, 23, 39, 90preferential access, 18preferential tariff, 140preferential tariff zones, 105preferential trading, 20privatization, 123processed agricultural products, 54procurement, 111PROSEC, 81

Qquotas, 87

Rratification, 39ratification process, 88realism, 23refrigerators, 37

166 Index

regional discrimination, 19regional economic security, 31regional security cleavages, 17regional trade production networks, 150rent-seeking, 18rice, 115Roh Moo-hyun, 42rules of origin (ROO), 18, 25, 38, 63, 66, 71,

79, 86, 91, 112, 129, 139Russia, 65, 102, 132

SSchuman Plan, 17science and technology, 114sectoral access, 106sectoral economic motives, 95sectoral exclusions, 74sectoral politics, 39security, 98, 106

alliance, 17externalities, 15motives, 141strategy, 129, 143

Senate, 59sensitive commodities, 85sensitive items, 89sensitive sectors, 35, 74, 115sequencing, 107service-producing industries, 54service hub, 48service liberalization, 92services, 111services sectors, 120setting precedents, 73Shanghai Cooperation Organization (SCO),

124, 132signal, 135Singapore, 23, 24, 28, 31, 74, 83, 92, 96, 118,

123, 124, 131, 135, 140Singapore–Australia FTA (SAFTA), 54Singapore Department of Trade and

Industry, 97Singapore Inc., 48, 49, 56, 57, 59, 67, 68Singapore International Enterprise, 63Singapore–New Zealand CRTA, 52Singapore’s Economic Development

Board, 59socio-economic restructuring, 28South Africa, 28, 102, 135South African Customs Union, 124South America, 35South Asia, 93South Korea, 27, 96, 97, 104, 113, 123, 132

South Korea–Chile FTA, 27, 32, 33–35, 37, 38, 41, 44, 45, 85

South Korean National Assembly, 34, 39

spaghetti bowl, 64, 111spillover effects, 43Spratly Islands, 67Sri Lanka, 97standard-setting, 155state-owned enterprises, 120state enterprises, 111strategic goal, 128strategic interests, 138strategic pragmatism, 57strategic reserve, 120strategic rivals, 129structural adjustment costs, 39structural barriers, 75structural reforms, 120substitution effect, 87Supachai Pantichpakdi, 101supply chain management, 52Switzerland, 53, 74, 75

TTaiwan, 13, 16, 105, 123, 131, 140tariff-rate quota system, 86tariff discrimination, 126tariff quotas, 89tariff(s), 18, 25, 74, 87, 114, 119, 126technical assistance, 133technical barriers, 53, 105technical barriers to trade, 126technical cooperation, 86telecommunication, 53, 54Telstra, 54Temasek Holding Limited, 57terms of trade, 19territorial disputes, 17textiles, 66, 108, 133Thailand, 16, 23, 25, 30, 35, 52, 69, 74, 93,

95, 96, 123, 128, 150Thaksin Shinawatra, 101, 107“three rural problems”, 145tourism, 61, 102, 114Toyota, 79toys, 133Trade-in-Goods Agreement, 31trade

access, 106, 111blocs, 102diplomacy, 106, 107, 119diversification, 64

Index 167

diversion, 6, 16, 23, 25, 64, 73, 81, 90, 106, 152

facilitation, 86governance measures, 8hub, 6, 34liberalization initiatives, 97promotion authority, 61rules, 30

Trans-Pacific Strategic Economic Partnership, 49, 54, 97

transaction costs, 18, 20, 105transparency, 77transport costs, 52Treaty of European Union, 102Turkey, 8, 35

UUkraine, 97uncompetitive sectors, 45United States, 13–17, 25, 31, 38, 60, 62, 72,

97, 99, 106, 108, 114, 115, 119, 120, 125, 133, 135, 143, 150

Uruguay, 28, 128Uruguay Round, 6, 102US–Canada free trade agreement, 79US–Jordan FTA, 61US–Singapore FTA (USSFTA), 49, 59, 60,

63, 64, 69, 98US Trade Promotion Authority, 31

VVenezuela, 28, 34Vietnam, 74volume of trade, 89

Wwashing machines, 37weapons of mass destruction, 138welfare gains, 28, 35World Bank, 21, 144World Trade Organization (WTO), 22, 24,

25, 27, 29, 32, 45, 47, 53, 54, 60, 69, 77, 86, 98, 104, 106, 108, 111, 113–115, 118, 125, 127, 135, 139, 141, 153

World War II, 15, 16WTO. See World Trade OrganisationWTO-plus, 32, 64, 84

Yyonshô taisei, 85

ZZhu Rongji, 125

Documents

Cross Regional Trade Agreements: Understanding Permeated Regionalism in East Asia (The Political Economy of the Asia Pacific)