The East Asian Community and the EU: a Mismatch?

 

by Dr. Ali M El-Agraa

Professor of International Economics

International Economic Integration and EU Studies

Faculty of Commerce, Fukuoka University

Nanakuma, Jonan-ku, Fukuoka, Japan

 

 

    This paper supplements an earlier one where I compare the East Asian Community (EAC), which  the incumbent Japanese Prime Minister Yukio Hatoyama is actively promoting as a centrepiece of his coalition government, with that of  the late South Korean President Roh Moon-hyun’s Northeast Asian Community (NEAC) and find them to be similar. This paper concentrates on what the EAC can learn from the European Union experience since Hatoyama, and Roh before him, has stated that it is the EU that has been the source of his inspiration. I argue that the true successes of the EU have come through the creation of supra-national institutions, the equivalent of which is beyond the reach of this region in the foreseeable future. Given this hurdle, I then consider what arrangements may be feasible under the present circumstances and find that the best that can be hoped for is consistent with what I stated in the previous paper: a ‘preferential trade and investment arrangement’ provided it includes agricultural products. Also, that it should be between China (including Hong Kong and Taiwan), Japan, both the Koreas and the United States, otherwise one must wonder why the EAC or NEAC is needed, rather than the ASEAN+3 and ASEAN+6 that are presently in the making. The problem is that both Hatoyama and Roh have ruled out the US as a full member while at the same time they want it to continue to provide security for the region when full membership would enhance that. Moreover, agriculture continues to be kept out of the equation in regional arrangements in this part of the world when it a major source of the economic gains expected from a PTA .

 

Key words: East and Northeast Asia, economic integration, Six-Party Talks, China-Korea-Japan relations, the European Union

 

 

Dr Ali M El-Agraa is Professor of International Economics, International Economic Integration and EU Studies, Faculty of Commerce, Fukuoka University, Nanakuma, Jonan-ku, Fukuoka 814-0180, Japan. Tel: 81-92-871-6631, Fax: 81-92-864-2938, E-mail: elagraa@fukuoka-u.ac.jp http://www.comm.fukuoka-u.ac.jp/ali/index.html

 

Introduction

 

      In my paper in the May-June issue of this journal[1], I compare the East Asian Community (EAC), which Yukio Hatoyama, Prime Minister of Japan declared in 2009 to be the centrepiece of his coalition government[2], with the Northeast Asian Community (NEAC), likewise put forward by the late President of South Korea (Korea) Roh Moo-hyun in 2007[3]. I show that both want their communities to involve some of the countries participating in the Six-Party Talks, but with the US seen mainly as a security provider/overseer. They both ask for the formation of regional integration schemes, with the EAC deeming a ‘free trade area’ (FTA, see below), or ‘preferential trading agreement/arrangement’ (PTA, see below), to be an effective way to promote economic ties in the region under a common set of rules[4], but with the NEAC discarding it for falling short of what is minimally needed. They both seek wider cooperation in a number of areas ranging from the economic to the social, military and environmental, with the EAC being categorical on a common currency, but the NEAC not ruling it out. They both want to see an end to their historical grievances but are not fully agreed on every item. And, vitally, they both want to emulate the experience of the European Union (EU). I concluded that the ‘sensitive’ unresolved issues concerning China, Korea and Japan stand in the way of such communities, especially when China’s ambitions extend beyond Asia.

 

          The purpose of this paper is to consider the question of what the EAC, hence the NEAC, can learn from the overall EU experience. Overall, since in the previous paper I discuss what can be learned from the European Coal and Steel Community (ECSC) of 1951, but that relates to the distant past. I should however reiterate that the ECSC was run by the ‘High Authority’ which acted independently of the governments of the member nations, i.e. the High Authority was a truly supra-national institution, a point that I shall return to in the conclusion.

 

      The paper is structured such that it begins by highlighting the main features of the EU. It goes on to consider the lessons to be drawn from the EU experience for the EAC, before discussing what arrangements are feasible for the region given serious hurdles facing the proposed communities. It finishes with pertinent conclusions.

 

Learning from the EU experience

 

1. EU experience

      To answer the question regarding what the EAC can learn from the EU experience, it is of course necessary to describe what the EU stands for today. This is however a well trodden area, so I need only to highlight the salient and pertinent features and very briefly[5]. I should however reiterate what I stated in the previous paper that by singling out the path followed by the EU as the bench mark against which to judge the EAC, I am not suggesting that the EU route is the only one available for it: I am doing so simply because it is the benchmark against which Hatoyama, and Roh Moo-hyun before him, has set himself. Indeed, in the light of what is to ensue, it would become increasingly apparent that the EAC should pursue different routes, choosing between among alternative possibilities, but I leave this for later.

 

       Also, in order to facilitate easy comparisons, it is important to appreciate where both the EAC and EU stand within the general context of international economic integration (regional integration). Given that this is also a well trodden area[6], I can be very brief here too.

 

        Regional integration is concerned with the discriminatory removal of all trade impediments between at least two participating nations and with the establishment of certain elements of cooperation and coordination between them. The elements of cooperation and coordination depend entirely on the actual form that integration takes. Different forms of economic integration can be envisaged (Chart 1) and practically every country in the world belongs to at least one[7]:

(a)    FTAs or PTAs where the member nations remove all trade impediments amongst themselves but retain their freedom to determine their own policies vis-à-vis the outside world (the non-participants);

(b)   ‘customs unions’ (CUs) which are very similar to PTAs except that member nations must conduct and pursue common commercial policies (CCPs) such as adopting common external tariffs (CETs) on imports from the non-participants;

(c)    ‘common markets’ (CMs) which are CUs that allow also for free factor mobility across members’ frontiers, i.e. capital, labour, technology and enterprises should move unhindered between the participating countries;

(d)   ‘complete economic unions’ (EcUs) which are CMs that ask for complete unification of monetary and fiscal policies, hence the participants must introduce a common authority to control monetary and fiscal policies; and, arguably,

(e)    ‘complete political unions’ (PUs) where the participants become literally one nation as happened in the case of the two Germanys in 1990 since this goes beyond regional integration but it is added since it was uppermost in the minds of the fathers of European integration and is suggested by Hatoyama.

 

   Chart 1: Schematic presentation of regional integration arrangements

Scheme	Free Intra- Scheme Trade	Common Commercial Policy	Free Factor Mobility	Common Monetary & Fiscal Policy	One Government
PTA	Yes	No	No	No	No
CU	Yes	Yes	No	No	No
CM	Yes	Yes	Yes	No	No
EcU	Yes	Yes	Yes	Yes	No
PU	Yes	Yes	Yes	Yes	Yes

 

 

      One should emphasise that such a schema is meant for only sharpening concentration; it is not intended to represent what is happening in the real world. Indeed, many PTAs now allow for free capital movement to encourage foreign direct investment (FDI) flows; hence in practice there is some overlap in the schemes and incoherent structures in other cases.

 

      There are so many facets to today’s EU which the following list does not fully exhaust[8]:

1. It has a CM, allowing free mobility across its member nations’ borders for commodities, services,[9] people, capital and enterprises, hence its so-called ‘four freedoms’, enshrined in its ‘single market’ (SEM).
2. It has a CCP, entrusted to a single Commissioner, i.e. no single EU member nation can deal with commercial matters by itself.
3. It has a single currency (in the sense that eventually all but the UK, which has an ‘opt-out’[10], will be using it), run by a single central bank, the European Central Bank (ECB),  which determines the interest rate for the entire ‘eurozone’, i.e. member nations using the euro have no control over their own monetary policy.
4. It has a ‘regional policy’ and ‘structural funds’, which help both the poorer regions and the poorer member nations, which have elevated Ireland from the bottom of the EU league of per capita GNI (using PPP data) to the second and galvanising the Spanish economy beyond recognition[11].
5. It has, since the coming into force of the Lisbon Treaty on 1 December 2009, a single President of the European Council[12], ex-Belgian Prime Minister Herman Van Rompuy, appointed by the EU national leaders for two and a half years, renewable once.
6. It has, since the coming into force of the Lisbon Treaty on 1 December 2009, a Foreign Policy Chief[13], called ‘foreign policy supremo’ by the press, Catherine Margaret Ashton (Baroness Ashton of Upholland) of the UK, ex-EU Trade Commissioner, who is appointed for five years, controls a vast diplomatic corps, a third of the senior personnel of which will be provided by the member states, has own budget, and is a vice-president of the EU Commission.
7. It has some sort of ‘common defence’ in that all members belong to NATO.
8. It sets very strict conditions for the joining of the club through the ‘Copenhagen criteria’.

In short, the EU is largely a complete economic union (EcU above), exceeding it in some respects, but falling slightly short of it in a few others.   Hence, in order to consider what the EAC can or cannot learn from these EU characteristics, it is vital to elaborate on them. I shall however not give them equal weight since three of them are too straightforward to warrant more than a mere statement:

 

a) The SEM

Unlike many EU policy areas, the SEM is almost universally positively acknowledged, perhaps because it has been central to EU development[14]. It is an important stepping stone on the route from the CU to a fully-fledged EcU. It is defined in the Single European Act (SEA[15]) as ‘an area without internal frontiers in which the free movement of goods persons, services and capital is ensured’[16]. This means that borders should disappear within the EU: goods, services, capital and people should be able to move between member countries as they move between regions within a country. This requires the removal of customs and passport controls at borders; the elimination of any national barriers to the sale of other EU countries’ goods and services; and the ending of any national controls on the movement of capital. This is a very extensive agenda that has such wide implications for virtually every EU policy area.

 

      Although problems remain especially in the financial services area, it is widely acknowledged that the EU has made excellent progress with the SEM[17]. Can the EAC really duplicate such an achievement? As mentioned, to do so would require the freedom to move across-borders for goods, services, labour, capital and enterprises. Despite some restrictions, goods are not a major problem. However, services remain largely a national domain. With regard to labour, even Chinese citizens are not allowed to move freely in their own country from one city to another, and in the case of China, Japan, Korea and several countries in this part of the world, foreigners are more or less shut out. As to capital, although several countries, especially Japan, have been investing in China, the bulk of their investment heads to the US and Europe (below), and China invests mainly in the US and Europe. Enterprises largely go hand in hand with capital through joint ventures, hence their movement is similar to that of capital, but especially in the case of China they are asked to sell all their products abroad[18].  It would therefore seem like a wild dream to think that the EAC can emulate the EU in this respect any time soon.

 

b) The CCP

       The main provisions of the CCP[19] contain the well-known aspiration: ‘By establishing a [CU] between themselves member states aim to contribute, in the common interest, to the harmonious development of world trade, the progressive abolition of restrictions on international trade and the lowering of customs barriers’ (Article 131). The cornerstone of the CCP is Article 133 which sets out the important rule that: ‘the CCP shall be based on uniform principles, particularly in regard to changes in tariff rates, the conclusion of tariff and trade agreements, the achievement of uniformity in measures towards the liberalisation of export policy and in measures to protect trade such as those to be taken in the case of dumping or subsidies’.

 

      Article 133 defines CCP coverage only with an illustrative list; mostly tariffs, antidumping or anti-subsidy measures, and trade agreements. Trade in goods, including agriculture, falls unambiguously within the EU’s competence. Decision-making concerning trade in goods under the Article is by ‘qualified majority voting’ (QMV[20]) in the Council. Subject to Council’s approval, the Commission is empowered to conduct negotiations in consultation with a special committee appointed by the Council for this purpose (the Article 133 Committee), and within the framework of such negotiating directives as the Council may issue to it. For example, the EU Commission negotiates on behalf of the member states in the WTO. During negotiations, the Commission may sometimes interpret its mandate in a way with which some member states may disagree, which has been a source of tension in the past.

 

      What this amounts to is that the CCP dictates that in international trade negotiations such as in the on-going WTO’s Doha Round, the EU Commission (through its external trade commissioner) is the sole speaker on behalf of all member states. Hence, in this sense, the EU Commission is a supra-national institution. Thus the pertinent question to ask is: would the EAC be able to agree to such an arrangement? Again, the answer is in the negative and will remain so for the foreseeable future[21].

 

c) The common currency

With regard to the single currency, the answers to two pertinent questions are of particular importance. First, why is it used by only 16 of the 27 EU nations? Second, who issues it?

 

The answer to the first question is that in order to ensure the stability, hence to provide it with the confidence that it needs for its future survival, the EU has set very strict ‘convergence criteria’ for joining the euro. These criteria are:

(i)                 Price stability – membership requires an inflation rate not exceeding 1.5% of the average for the three EU nations with the lowest rates.

(ii)               Interest rates – membership requires a long-term rate within two percentage points of the average for the three countries with the lowest inflation rates.

(iii)             Budget deficits – membership requires a deficit of less than 3% of a member's GDP.

(iv)             Public debt – membership requires a ratio not exceeding 60% of a member's GDP.

(v)               Currency stability – membership requires a member nation's currency not to have been devalued in the previous two years and to have been maintained within the 2.25% margin of fluctuation allowed when the ‘exchange rate mechanism’  (ERM) of the European Monetary System (EMS)[22] was initiated.

 

       When these criteria[23] were tested at the end of the third and final stage for EMU[24] on 2 May 1998 on the then 15 EU member nations, only Greece failed; Denmark, Sweden and the UK had decided not to join at that time, with the UK granted an opt-out. Since then Greece and four of the new members have done so. Thus the answer is that no member nation can join the euro unless it has passed these criteria.

 

As to the second question, the euro is controlled by the ECB[25], which was established on 1 June 1998. The ECB is given total independence to carry out its mandate: to ensure price stability in the euro zone; price stability has been defined to be an annual increase in the consumer price index of less than 2%. To achieve this, a so-called two-pillar strategy is followed: the first is the setting of a target for the growth of money supply, defined in the broadest sense; and the second is assessing future price trends and risks to price stability by examining trends in wages, exchange rates, long-term interest rates, various measures of economic activity and the like. The ECB is also responsible for collecting all necessary statistical information, from both the national authorities and economic agents, e.g. financial institutions, and for following developments in the banking and financial sectors and promoting the exchange of information between the European System of Central Banks (ESCB) and banking authorities. In executing its task, the ECB defines and implements the monetary policy of the eurozone; holds and manages the foreign exchange reserves of the eurozone and conducts foreign exchange operations; issues euro notes and coins; and promotes the smooth operation of the payment systems. These activities are consistent with the necessary conditions set in the early 1970s by specialists in the field for ensuring the sustainability of EMU: explicit harmonisation of member nations’ monetary policies; a common pool of foreign exchange reserves; and a single central bank or monetary authority[26].

 

So the same question has to be reiterated: what is the feasibility of a single currency for the EAC? Again, the previous negative answer has to be repeated since the ECB is a supra-national institution. However, some may object, claiming that Hatoyama’s call for a single currency has not come out of the blue, citing in evidence the cooperation developed in the aftermath of the Asian crisis of 1997: the Chiang Mai Initiative (CMI) and the Asian Bond Market Initiative (ABMI). So something on CMI and ABMI is warranted.

 

      The original aim of CMI[27] was the creation of a network of Bilateral Swap Arrangements (BSAs) among the ASEAN+3 countries to help them manage regional short-term liquidity problems and to facilitate the work of other international financial arrangements and organizations such as the IMF. However, the bilateral CMI framework lacked efficiency and coherence since a country with excess reserves could not offer assistance to one with liquidity shortage if the two did not have a BSA. Moreover, because no regional surveillance mechanisms were installed, countries that would be in a position to provide liquidity in times of need had no means to regularly assess in normal times the solvency of countries with potential liquidity crises. Accordingly, in order to mitigate the moral hazard risk involved in any ‘lender of last resort’ activity, liquidity provision was made conditional on the existence of an IMF programme with the particular country recording a liquidity deficit. However, in 2005 it was rightly agreed to make CMI more effective by multilateralising it. Also, in early 2006 it was decided that the agreed total amount of $74 billion was too small to provide a cushion in the case of a severe crisis so in 2008 it was proposed to raise it to $80 billion and in February 2009 to $120 billion, and in May 2009 it was agreed that China and Japan will contribute 32% each and Korea 16% and the ASEAN nations the remaining 10%.

 

    Although CMI has been active, experience with it does not provide any basis for the introduction of a single currency. The fund is fixed and is issued by countries, not by a single authority. It is for emergencies while a currency is for all daily financial activities. And so on and so forth. Hence, it would be far fetched to claim that experience with CMI has laid the lawn for a single currency.

 

    The ABMI is a red herring as far as a single currency is concerned. It is a fact that it was endorsed by ASEAN+3 finance minsters on 7 August 2003, but its aim is to create efficient and liquid bond markets and to contribute to the mitigation of currency and maturity mismatches in financing. Moreover, despite its name, it covers countries in the Middle East like Turkey, some of those belonging to the Commonwealth of Independent States and most of those in APEC. It therefore extends beyond reach for the proposed EAC or NEAC and, vitally, has nothing to do with a single currency.

 

d) The regional policy and structural funds

EU ‘regional policy’ was introduced in 1975 with the creation of the European Regional Development Fund (ERDF), which the UK had insisted on during its membership negotiations before joining in 1972. The EU refers to it as an instrument of financial solidarity and a powerful force for cohesion and economic integration.

 

The policy had a major reform in 1989[28], specifically designed to accompany the introduction of the ‘single market’ (above), integrating various EU funds, renaming them the ‘structural funds’. These funds comprise the ERDF, the European Social Fund (ESF), the ‘guidance’ section of the European Agricultural Guidance and Guarantee Fund (EAGGF) and, since 1994, a Financial Instrument for Fisheries Guidance (FIFG). The reforms also included ‘match funding’ by asking the member states to inject amounts equal to the EU transfers. The Cohesion Fund (CF), also created in 1994 to assist the poorer EU nations prepare for monetary union (EMU), acts in many ways like one of the structural funds. Further reforms were introduced in 1994, designed to accompany steps towards EMU, hence the CF; in 1999, to prepare the way for enlargement to include the former socialist countries in central and Eastern Europe (the CEECs); and in 2007 to complete the integration of the new member states into regional policy such that the funding for 2007-2013 represented a major shift to the ‘east’.

 

The regional policy which has emerged in the aftermath of the 1989 reforms places great emphasis on four principles. They are: the use of a system of multi-annual programmes of assistance; the need for a close partnership between all of those involved in regional policy; a commitment to subsidiarity (the retention at EU level of the minimum necessary powers); and a desire that EU money should be a genuine supplement to regional policy spending by the member states (additionality).

 

In order to ensure that funding is as precisely targeted as possible (called the principle of concentration), the structural funds have since 1989 been given the task of attaining specific priority objectives. At one time there were no fewer than seven such objectives, but they have been reduced to just three. Objective 1, known since 2007 as the ‘convergence’ objective, focuses on the most disadvantaged regions in the EU: those whose GDP per capita (at purchasing power parities) is under 75% of the EU average. Hence all the 12 CEECs benefit from this, receiving about half of total EU regional spending. The objective is designed to help them catch up with the rest of the EU. It is by far the most generously funded of the three, commanding over 80% of total funding, and has less stringent requirements in terms of percentages of investment costs met and matching national funding targets, which are conditional.

 

    Objective 2, known since 2007 as the ‘regional competitiveness and employment’ objective, focuses on policies to stimulate innovation, the knowledge society, entrepreneurship, the protection of the environment and the enhancement of workers’ skills. Areas eligible for funding may[29] comprise all regions other than those under objective 1; hence it is effectively ‘non-regional’. Regions eligible for funding are mainly those suffering from industrial (i.e. manufacturing) decline, certain disadvantaged rural areas, certain urban areas suffering severe economic, social and environmental problems and fishing communities in decline.

 

     Objective 3, named ‘territorial cohesion’, provides a small percentage of total funding: 2.5% of the 2007-2013 budgetary allocation for regional policy. Its aim is to stimulate cross-border and transnational economic development initiatives.

The EU has always deliberately extended most of its financial assistance to the very poorest areas; in practice those eligible under objective 1. This concentration process has been strengthened for the 2007-2013 period as can easily be seen in Table 1, which sets out the ‘indicative’ allocations for funding; indicative since the actual expenditures would depend on how the member states and regions actually spend the money during the period: about 82% of the total is objective 1 funding. For a sense of overall perspective, it should be pointed out that EU regional expenditure over the period 2007-2013 is expected to be 36% of the EU general budget, amounting to about €350 billion over the seven year period.

 

      So what is the moral of the story? As just mentioned, the EU provides substantial assistance to both its poorer regions and member nations.  It dictates that the per capita GNI for the poorer countries should be elevated to the average level for the total membership by allocating EU monies for the purpose, i.e. the decision regarding allocation is EU-wide, not member country specific. This would be vital if the EAC were to survive and become stable and prosperous. Would this be feasible, given the disparities between the EAC nations, revealed by a glance at the GNI and per capita data, given in Table 2, which includes other nations that I shall refer to in the next section? That would be a near-impossibility, especially for China, which despite the size of its GNI not only remains a poor nation in per capita GNI terms, but, pertinently, most of its people live in dire poverty? According to the National Bureau of Statistics of China[30], the disposable income of urban dwellers was 7,052 yuan while that of rural inhabitants was only 2,111 yuan in the first six months of 2007. Not only that, but the annual increase for the former was 14.2 per cent after adjustment for inflation, while that for the latter was only 13.3 per cent; thus income disparity is on the increase. And, vitally, can a fund be created for the purpose?

 

   

f) EU president, foreign policy supremo and security

     Here, I can be very brief. The EU president and foreign policy supremo are supra-national appointments so are subject to the same considerations given to the ECB and EU external commissioner. Hence, the likelihood of the EAC agreeing on similar arrangements is close to zero. This leaves just the common security leg of this dimension.

 

 

          In the EU, the security leg of the Common Foreign and Security Policy (CFSP)[31] is concerned with stemming the tide of terrorism. Add to it the common defence provided through membership of NATO, the EU has more or less a comprehensive common security system. Of course, the US is the major contributor to the budget, personnel and logistics of NATO, but it is essentially a partner and in only one leg of the common security. However, it should not be forgotten that the US made the Marshall Plan conditional on European integration, of course to strengthen its stance against the menacing Soviet Union, asking in return for free access to the European markets for its multinational corporations. It may therefore seem that the EAC and Roh’s NEAC are similar to the EU in this respect since they want to be partners with the US by it providing them with security while they continue to contribute towards the costs. But that relates to only Japan and Korea, not to China since both want security to ensure against all outsiders, including China. However, some may raise objections to this on the grounds that the rationale for the NEAC, hence for the EAC, is the creation of an equivalent to the security facilitated by the Six-Party Talks set up[32]. But the latter is mainly concerned with the containment of the DPRK, i.e. it caters mainly for the claimed threat emanating from only that nation, which was included by the previous US administration of George Bush in its ‘axis of evil’. There are also other demands on the Six-Party Talks since especially Japan and to some extent Korea want it to deal with the ‘abductions’ issue[33] before anything else, but these too are a one-way traffic from the two heading for DPRK. Since China lies at the very heart of the EAC and the Six-Party Talks and, given what has been stated about EAC membership, so does the DPRK. Thus the creation of the EAC for common security purposes necessarily means that not only should the US be involved bust also in a different way than in the present security arrangements. Would that be possible? I very much doubt it given the developments mentioned above and China’s own hegemonic ambitions, but I shall return to this later.

 

g) The Copenhagen criteria

     EU membership is conditional on the meeting of the ‘Copenhagen criteria’, generally known as the ‘accession criteria’. These state that any country seeking EU membership must conform to the conditions set out by Article 49 and the principles laid down in Article 6(1) of the Treaty on European Union.[34] To join the EU, a new member state must meet three conditions:

(i)                 Political: stability of institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities;[35]

(ii)                Economic: existence of a functioning market economy and the capacity to cope with competitive pressure and market forces within the Union;

(iii)             Acceptance of the Community ‘acquis’: ability to take on the obligations of membership, including adherence to the aims of political, economic and monetary union.

 

        The EU has always dictated that only countries with democratically elected governments would be allowed to join; witness the cases of Greece,[36] Portugal and Spain[37]  whose membership was delayed for many years. Can these conditions be seriously contemplated by the EAC? China is certainly adamant that human rights are the concern of individual nations and has repeatedly rebuffed the EU for attempting to act otherwise: witness its confrontations with the EU when the two have a formal relationship[38].

 

2. Lessons from the EU experience

 

     The EU experience thus indicates that it would be a very tall order for the EAC to emulate the EU experience since in most of the pertinent areas the EU has recorded its achievements through a supra-national institution. It is doubtful if the ECSC accomplishments would have been possible without the High Authority being granted the freedom to decide by itself. And as mentioned in my previous paper, the ECSC was not about trade, rather about common access to resources and freedom for labour to work anywhere in the member states. In the case of the single currency, it is equally doubtful if it could have become a reality without an independent ECB in charge of inflation control, the issue of the euro, the eurozone foreign exchange reserves and more.

 

    The upshot of all comparisons of the EAC with the EU is therefore that all indications point to the feasibility of only a PTA between Japan and Korea, and the US if we define the EAC to be the equivalent to the Six-Party Talks. This conclusion is reinforced when the ‘unsettled issues’ stressed by both Roh and Hatoyama[39] become part of the equation. I shall return to this point in the conclusion, but what needs examination before then is the present situation of the countries concerned regarding the feasibility of  a PTA; hence the following section

 

How feasible is a PTA by the EAC nations?

 

      Regional integration specialists have for a very long time agreed that for a PTA to be potentially economically beneficial, at least for the partners in question, the member countries should be conducting most of their trade amongst themselves and should have high initial tariffs, but low external tariffs after integration. This is because under such circumstances there is more likelihood that ‘trade creation’ (TC) would outweigh ‘trade diversion’ (TD). TC refers to the replacement of expensive domestic production by cheaper imports from a partner country; hence the larger the percentage of trade between the partners relative to their total trade, the more would be the gains from regional integration.  TD is about the replacement of cheaper initial imports from the outside world by more expensive imports from a partner nation[40]; hence the lower is the percentage of the partners’ trade with the non-partners, the less would be the harm from regional integration and this would be more so, the lower the partners’ external tariffs. So how does East/Northeast Asia fare in this respect?

 

       Intra-regional trade is almost non-existent[41]. China’s exports go mainly to Hong Kong (about 15%; without ‘about’ hereafter) and Japan (8%), with the EU (20%) and US (19%) accounting for the bulk of it. The DPRK exports 33% to China and practically nothing to the rest except for 5% to the EU. Hong Kong sends 49% of its exports to China and 14% to each of the US and EU. Japan fares likewise with 15%, 20% and 15% respectively and so does Korea, with 22%, 12% and 151%. And Macao almost matches these with 15%, 41% and 20% respectively, but with 13% going to Hong Kong. Furthermore, Mongolia sends 72% to China, 6% to each of Hong Kong and the EU and 5% to the US. Russia’s exports go mainly to the EU (54%), with only 5% to China and 2% to each of Japan and the US.

 

       In short, for the countries under consideration, a large percentage of their exports goes to the US and EU rather than to each other, except in the case of Hong Kong and Mongolia where they mainly head to China. In other words, intra-regional exports are insignificant except in the case of countries which are part of China or almost inseparable from it (Mongolia). Some analysts would insist that these percentages have been improving, but that does not matter much given that the latest percentages are so insignificant; hence it would be pointless to supply earlier data.

 

       In terms of imports, the percentages reveal a slightly different picture. China’s imports come mainly from Japan (14%), the EU (12%), Korea (11%), Taiwan (11%) and the US (7%). Most of the DPRK’s come from China (44%), followed by Thailand (6%), Russia (4%) and the EU (3%). Those of Hong Kong also come mainly from China (46%), Japan (10%), Taiwan (7%), the EU (7%), Singapore (7%), the US (5%) and Korea (4%), with 2% from each of Malaysia, the Philippines and Thailand. As to Japan, they originate mainly in China (21%), the US (12%) and EU (10%). For Korea, they come mainly from China (18%), Japan (16%), the EU (11%) and US (11%), followed by Taiwan (3%) and Russia (2%). For Macao, the picture is very different from that of exports: the imports are mainly from China (43%), the EU (16%), Hong Kong (10%), Japan (9%), the US (6%), Taiwan (4%), Singapore (3%) and Korea (2%). Mongolia receives 32% from China, 30% from Russia, 11% from the EU, 8% from Korea, 7% from Japan, 2% from the DPRK and from Singapore, 1% from each of Taiwan and the US. And Russia gets most of its imports from the US (43%), China (12%), Japan (6%), the US (5%) and Korea (4%).

 

     As to tariffs, their total weighted average is zero for Hong Kong and Macao; about 2% for Japan, Taiwan and the US; and about 5% for China and Mongolia. They are therefore not far different from those of the EU at 3%. What is interesting is that except for Singapore, with zero per cent, they are in the range of 3.6-12.7% in ASEAN, the only established regional integration scheme in the area. Note that Russia is on 11.8% while New Zealand is on 3.5%, Australia on 5.5% and India on 8%. Also, except in the case of India and Australia, they are lower for the non-agricultural products and higher for all the agricultural products, with China on 16%, Taiwan on 11.4%, Japan on 10.1%, Korea on 91.6%, Russia on 24.2% and India on 41.9%. It would therefore seem that regional integration may provide economic benefits in mainly agricultural products, but they are practically excluded in all the RTAs in this area, on ‘sensitivity’ grounds, and their liberalisation is a taboo subject in the countries concerned for reasons that require a paper on its own right, but it suffices to say that agricultural lobbies are supreme especially in Japan, Korea and the US.

 

      Considering only total trade, there is therefore only some sort of case for regional integration between only China, together with Hong Kong and Taiwan, Japan, Korea and the US. Some sort, because the percentages are not that significant across the spectrum since the traffic is heading one-way to either China or the US. Yet neither the EAC nor NEAC includes the US as a full member, thus less economic gains should be expected. And as just indicated, any arrangement will have to include agriculture if it is to bring economic benefits to the region, yet agriculture remains a taboo subject.

 

      Before leaving this section, one may ask about FDI flows, given that it is now widely accepted that PTAs also allow for their freedom (above). So how do these countries fare in terms of FDI? Updating earlier data[42], which naturally is provided for only the countries that do have them, the flow is largely a one-way traffic to China from Japan (about 13% of Japan’s outward FDI goes to China) and Korea (about 26% of Korea’s outward FDI goes to China) and, vitally, from the US (10%  of US inward FDI comes from China) and the EU (10% of outward FDI goes to China); not to mention its own Hong Kong (35% and 40% of inward and outward FDI, respectively, comes from and goes to China). This reinforces the conclusion just reached on PTAs, i.e. the most feasible would be one involving China, Japan, Korea and the US.

    

         I should hasten to add that I am not suggesting that they should not try to form a PTA. Indeed, a PTA which includes the US would have great potential not only in economic benefit terms, but also for common security. The former because of the combined trade and FDI flows between them relative to all the nations mentioned in this context, the data for which are in the tables. The latter since, with China, together with Hong Kong and Taiwan, and the US being so involved, security efforts can be limited to dealing with problems emanating from DPRK.  Such a PTA should not be seen as undermining ASEAN+3, ASEAN+9 or the APEC forum since it simply means that these countries form a club of their own; after all, ASEAN is involved in all three. This may galvanize ASEAN into enhancing its own club and promote progress in all the countries concerned unless one is of the opinion an ‘oligopolistic’ structure may lead to indeterminate outcomes. I am therefore not trying to undermine the EAC or NEAC initiative; I am simply trying to stress the problems that have to be seriously faced in order to make it a reality.

 

Conclusions

     Several conclusions arise from the examination of what the EAC can learn from the EU. First, Hatoyama is not categorical on how precisely the EAC relates to the EU experience. He mentions the historical background, the desire for eternal peace and the single currency, but does not depict these within the overall nature of club EU and how got to its present state.

 

        Second, the true EU achievements relevant to the EAC have all been accomplished through supra-national institutions. The ECSC had a High Authority which was an independent institution, taking its decisions without reference to the governments of the member nations. The EU commissioner in charge of external trade speaks and conducts international negotiations and agreements on behalf of the entire EU. The ECB is alone in charge of the monetary policy for the entire eurozone and for the issuing and conducting all matters concerning the euro. And since the Lisbon Treaty came into effect on 1 December 2009, the EU now has a fulltime president serving for at least 30 months which could be extended for another term, and has a foreign policy supremo for five years supported by own staff of about six thousand. Thus even the ECSC experience is beyond the wildest of EAC dreams. This is reinforced when the other EU supra-national institutions are taken into consideration. Of course, miracles can happen, but they are not within my realm.

 

    Third, under present circumstances, the basic requirements for a ‘customs union’, let alone a ‘common market’ or ‘economic community’, will not be realised by the various nations mentioned in the EAC context in the foreseeable future. This is because all the existing arrangements in which they are involved, as well as those presently under discussion, do not even meet the criteria for a mere PTA.  For example, ASEAN is still not a FTA and the APEC forum is nowhere near there despite its members’ vehement statements after each summit to commit to a FTA. The combination of these factors suggests that the best that can be hoped for is a ‘preferential trade and investment arrangement’, precisely what Roh Moo-hyun ruled out, and in any case one must wonder why EAC is needed, rather than the ASEAN+3 that is presently in the making or for that matter ASEAN+6. This compounds the conclusion regarding what the EAC can learn from the EU.

 

     Fourth, China will not enter the EAC simply because it sees itself as the ‘leader’ in this region with global ambitions in the not-so-distant future. Indeed, it has been very cool on the idea and has stated that cooperation should be extended to all nations in the region. Since China is at the very heart of the EAC, cooperation is therefore all that can be hoped for.

     

     Nevertheless, and finally, a case can be made for a PTA comprising China, with Hong Kong and Taiwan, the DPRK, Japan,  Korea and the US, but with the US not only as a full partner, but also as the mainstay of security in the region. This is because: the trade and investment interactions between them are the deepest relative to the rest; the US will not sanction an arrangement which does not include it; both Hatoyama and Roh before him agree that the US is indispensable for security purposes; and the DPRK will be utterly delighted to belong to a club including the US, hence the threats by it will be eliminated.  But this is a hope which reality suggests is beyond reach. A hope which I am certain would be shared by all of us not only for the sake of just this region but the entire world.

 

References

 

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