Long Term Economic Benefits
The economic benefit of a preferential trade agreement is the economic efficiency gains from trade liberalization. A member country will allocate resources to sectors in which it has a comparative advantage vis-vis other members, and trade is created. The greater size of the combined market can also contribute to economies of scale and attract foreign direct investment, though since the benefits depend on the size of markets as well as on the producers in the Regional Trading Agreement (RTA)), they vary widely across countries.
Other than the traditional economic benefit of greater efficiency, countries enter into RTAs for many development-related reasons. Such arrangements offer the chance to create larger regional markets that are more attractive to foreign investors; to sequence liberalization by opening up in stages and to pursue structural change jointly with other members. Liberalization, trade facilitation, and structural reform are often thwarted by vested interests, and regional cooperation for the joint promotion of these processes can make them easier to achieve.
For smaller states like those in East Asia, RTAs also offer the opportunity to build capacity in trade negotiations. 8. 4 Economic Effects of East Asian Regionalism Studies have shown eight potential Free Trade Agreements in East Asia and estimated their economic effects. First, the economic effects of the three bilateral FTAs in Northeast Asia (China-Japan FTA, China-Korea FTA, Korea-Japan FTA) and a trilateral FTA in Northeast Asia (Northeast Asian FTA: NEAFTA) are estimated.
Subsequently, the case in which a bilateral FTA is concluded between Southeast Asia’s AFTA and a Northeast Asian country (e. g. , China-ASEAN FTA) and the case in which the whole of East Asia establishes one FTA (EAFTA) are examined. For each supposed FTA, effects of trade liberalization (“TL”) and effects of capital accumulation in addition to the effects of TL are estimated (“TL&CA”). Table 7 presents the effects of the impact of eight FTAs on each regional GDP. According to the findings, while the eight FTAs will bring economic benefits to all member countries, non-members will suffer a loss.
For example, if Korea and Japan conclude an FTA, the GDP of the two countries would increase while that of non-member countries, like ASEAN or Rest of World (ROW) could decrease. While the economic effects of TL alone are moderate, introducing capital accumulation (CA) effects expands the economic benefits. If the economic effects are estimated under the scenario of a China-Korea FTA, the GDP of China and Korea would increase by 0. 12% and 0. 76% respectively, considering the effects of TL only. When the effects of both TL;CA are considered, the GDP of China and Korea would increase by 0. 45% and 1.76% respectively.
In this case, capital accumulation is achieved through increased savings and active investments in the homeland as well as expanded investment in the businesses of the other. Under Northeast Asian regionalism, Korea is expected to gain relatively more economic benefits compared to China or Japan. Korea is forecasted to gain relatively more benefits from an NEAFTA as well as from a bilateral FTA with China or Japan. Like other FTAs, it is estimated that greater benefits would be generated by capital accumulation effects than trade liberalization effects under an FTA with Japan.
This could be because Japanese capital would be invested in Korea, increasing Korea’s growth potential. The impact of East Asian regionalism on regional exports and imports are arranged in Table 8 and Table 9. The estimated value is each region’s total exports to the world. In general, the exports of FTA member countries will increase, while non-members’ exports will decrease. Non-members will be at a disadvantage as a result of the trade diversion. In the case of a China-Japan FTA, while the exports of China and Japan are estimated to increase by 4. 64% and 1.
64% respectively, Korea’s exports are estimated to decrease by 0. 17%. Meanwhile, non-member countries’ exports may increase in certain cases, unlike the GDP and welfare levels. For example, the exports by ROW, the non-member regions, will increase by 0. 03% under an NEAFTA. When the three Northeast Asian countries conclude a trilateral FTA, the exports of ROW, including developed countries like the U. S. and EU, will improve while it will not happen under an East Asian FTA. Also Japan’s exports may increase with a China-Korea FTA and Korea-ASEAN FTA.
The phenomenon of Japan’s increasing exports with Korea’s FTA with other regions could be explained by Korea’s high dependency on Japan for machinery and intermediate inputs. Under a Northeast Asian FTA, Korea will record the highest growth rate in GDP and welfare level, while China’s exports will increase the most. Meanwhile, the export performances of non-members like ASEAN and ROW are anticipated to decline. Under an EAFTA, China is forecasted to record the highest growth rate of exports, increasing by 8. 79%.
Following China, ASEAN is estimated to increase its exports by 7. 88%. As trade barriers are eliminated and income level is increased, imports of FTA member countries will be activated. Contrary to the case of exports, while FTA member countries’ imports increase, non-member countries’ scale of imports will decrease. This is because the non-member countries will curtail their imports due to the reduction of income. The establishment of East Asian regionalism is anticipated to have a great impact on the production of countries within the region.
Among the eight FTAs studied, the effects of an NEAFTA and an EAFTA on production sectors in ASEAN and the three Northeast Asian countries are presented in Table 11. Under a Northeast Asian FTA, Korea’s industries will be affected the most. Among China’s industries, the clothing, electronic products and agricultural sectors will expand while the automobile and metal industries will be reduced. While Japan’s production in the textile, machinery and metal industries will expand, in the industries of clothing, other transport equipment, and agriculture production will decline.
Most of the industries in ASEAN and countries, which are not members of the Northeast Asian FTA, will also undergo a decrease in production. The establishment of an EAFTA is forecasted to have similar impact on the industries of the three countries, as with the NEAFTA. However, the impact on each industry will differ depending on the ASEAN country’s industrial competitiveness. Also, as the price of imported raw materials decreases, export prices will declines leading to an increase in exports to non-member countries. The demand increase, if sufficiently high, can push all member countries to increase their production of the item.
Overall, the findings show that member countries would benefit from both bilateral FTAs and regional FTAs, like an NEAFTA and an EAFTA. Also, evidently, there is no doubt that a China-Japan-Korea FTA will boost the economic systems of the three countries, keeping them close to each other through economic integration while aggressively participating in the trend of regionalism. This will result in substantial economic gains to member economies. Thus, despite the short-term negative effects and risks entailed, there are many other long term benefits and economic effects of regionalism on East Asia on the whole.
Chapter Nine: Conclusion No country in East Asia was spared totally of the contagion effect of the 1997-98 economic crisis. This shows that no one country can overcome this problem single-handedly and thus it inevitably warrants intensified cooperation more than before among all the East Asian communities. As discussed above, East Asian countries have gradually moved towards regionalism and bilateralism after the financial crisis and this trend is likely to persist. Regionalism can come through the approach of bilateral agreements and in the first section, the reasons for the shift towards bilateralism were examined.
The driving forces behind this have been the 1997-98 financial crisis which demonstrated the need to reduce the risk of financial contagion and exchange rate instability due to interdependency of the region; the failure of WTO; little accomplishment of APEC and unimportant RTA. In the later section, the roles and effects of regionalism were investigated. Regionalism acts as a strong surveillance system at the regional level, attempts to find its own solution within the region in different circumstances and create a sense of community in the region.
Although regionalism does create short-term negative effects and risks, the long term benefits and economic effects will cause East Asian countries to gain on the whole. The question of whether bilateral and regional trade aids or hinders global trade liberalisation was also examined above. It can be a positive force and complements global trade liberalisation or become a disruptive force and threaten global trade liberalisation. It depends on the policies of East Asian countries and the world’s reaction to the policies.
In our opinion, if countries want to benefit from global trade liberalisation, government should set policies that complement global trade, hence bilateralism and regionalism should aid in global trade liberalisation. However, regionalism in East Asia is still considered at its early stage and its precise shape still remains vague. In the foreseeable future, if the ASEAN+3 is converted to a sort of East Asian Community, a full-fledged East Asia free trade will be formed and it could be ranked alongside with EU and NAFTA in size, transforming the world into a tripolar economy (Bergsten, 2000).