Introduction
In the 1990s there was an increasing global emergence of free trade agreements (FTAs). However, East Asia did not embrace the regional trade arrangements and the whole concept of regional integration that followed. Until a few years ago, economies of East Asia, especially the North-east Asia ones, were yet to develop any operational economic cooperation strategies.
However, intraregional trade interdependence and investment are concepts have taken root in East Asia as a result of geographical closeness and forces of the market.
Recently, the increase in interdependence in East Asia as a result of trade and cooperation in financial sectors has highlighted the need for East Asian countries to participate in economic cooperation and integration. For East Asian countries to usher in the new international trade environment, closer regional economic cooperation such as FTAs must be put in place.
The financial crisis that affected East Asian countries in 1997 necessitated the need for East Asian identity. In November 1999, the ASEAN meeting gave out the joint statement on East Asian cooperation that pointed out the possible areas the countries could cooperate.
This led to the creation of the ASEAN Free Trade Agreement and after sometime, China, Japan and Korea, the main North-east Asian countries joined the FTA bandwagon. The financial crisis that occurred in 1997 led to a consensus among East Asian countries that they needed closer regional economic cooperation in order to prevent reoccurrence of the financial crisis.
A consolidation for the framework of financial cooperation was carried out in 2000 by ASEAN and the Chiang Mai Initiative (CMI). The framework comprised of a swap of regional currency to create support and self-help mechanisms.
This paper aims at addressing the issue of economic cooperation in East Asia with special focus on the causes of the financial crisis and attempts made by governments towards economic cooperation.
Intra-regional Economic Dependence and Cooperation in East Asia
Due to the disadvantages that East Asian countries experienced as a result of regionalism in other regions, the countries started making considerations to establish a regional bloc. They discovered that if they did not have FTAs of their own, they were not able to compare with other established economies such as Europe and North America.
The countries learnt from the 1997 crisis and saw the importance to strengthen economic cooperation in their regions. Through the experiences of the financial crisis, policy makers in East Asia admitted that they did not have proper mechanisms to deal with such crisis when they occurred.
Their reliance on international financial institutions that were located in the US affected them adversely and prompted them to look for ways of solving their problems on their own. The failure of the international economic institutions that existed during the period of the crisis also motivated the East Asian countries to take initiatives to solve their problems.
Rising Reliance on Intra-regional Trade and Investment
East Asia constitutes approximately one third of the total population of the world and accounts for slightly more than one fifth of the trade volume and world’s GDP.
The countries are expected therefore to register economic potential that matches that of EU and NAFTA in future, on condition that they embrace economic cooperation.
It is quite clear that Japan, China and Korea play a key role in any attempts to achieve economic integration among the East Asian countries. In 2002, the North-east Asia occupied 17.8 % of the total world GDP. At the same time, their share of the world trade total amounted to 12.8%.
Economic Cooperation in East Asia
In addition to the increased functional integration endeavors in investment and trade by market forces, significant progress has been witnessed in the field of economic cooperation in East Asia. The Asian financial crisis provided the East Asian countries with a different perspective on matters related to regional cooperation.
The CMI acted as an important turning point in offering support for regional economic cooperation. Since then, the countries have embarked on efforts to establish regional cooperation that has the capacity to prevent future crises. The efforts of the countries to achieve economic cooperation have led to the emergence of policy –led integration (Henning 110).
The non-discriminatory nature of financial cooperation and the financial crisis that took place in Asia were factors that were able to inspire economic cooperation or movements on integration to lead the financial sector.
The East Asian countries were required to establish institutions that permitted consultation on interest rates, exchange rates and foreign exchange reserves in order to ensure that the activities of ASEAN continued effectively.
As it was witnessed during the financial crisis, failure to block channels that led to the crisis by introducing multilateral cooperation early enough made it impossible for countries whose foreign reserves were not enough to go through the crisis. The establishment of strong financial institutions and enough regulatory mechanisms have been the focus of Asian financial markets to counter the threat of external shocks.
As a result, policy dialogue on a regional level has been an important step to enhance the process of restructuring institutions and East Asian financial markets. This has made it important for the East Asian countries to continually restructure the financial sector and development (Stiglitz and Yusuf 46).
In this context, there are three pillars which assist the liquidity of the countries and are important in shaping the economies. They include surveillance, monitoring and coordination of exchange rates. However, the growth of regional economic cooperation is an evolutionary process as it happened in the case of monetary integration in European countries.
An elementary type of economic cooperation may include a mere pooling of foreign exchange or arrangements of mutual credit like bilateral swaps.
With regard to facilitation of regional trade, some types of elementary economic cooperation are carried out with no coordination to exchange rate commitment under which exchange rates of countries that take part rely on each other, or disappear as a result of the use of a common currency.
East Asian countries work towards achieving this type of economic cooperation. Although it may not be possible to achieve a complete monetary integration at this stage, the countries may start an examination of the desirability and feasibility of coordination and cooperation of policies on exchange rates.
Following the financial crisis that rocked the East Asian countries, it was suggested that increased flexibility in exchange rates was crucial for future developments. However, a modification in East Asian dollar standard was proposed to regulate inflow of money while monitoring the revival of the East Asian dollar standard and improved dollar exchange rate stability after the period of crisis.
In order to foster continuous economic cooperation in East Asia, a strong and regulated exchange rate strategy was essential. However, financial restructuring for the whole region to be achieved, coordination is an area that must be focused on. Some East Asian countries such as Japan have taken a leading role to hasten the operations of CMI process.
Majority of East Asian countries that show commitment in economic cooperation agree that CMI is a process that requires support through surveillance systems and independent monitoring. The system should have the capacity to keep track of the region’s economic performance, function as a framework for the institutions to formulate policies and coordinate members and impose policy and structural reforms.
As East Asian economies continue to gain openness and interdependence, they become exposed to international disturbances due to high levels of capital mobility in different countries around the world. Capital mobility growth restricts small countries from retaining their pegged exchange rate.
The formation of a region with a single currency may be a solution to the problems facing the East Asian countries. Unwillingness among individuals in the political realm and lack of individuals with experience in regional cooperation are some of the factors that make it difficult to establish a common currency in East Asian countries (lincohn 175).
Therefore, a temporary process of establishing a bloc that is quasi-monetary is a viable alternative for East Asian countries in a bid to achieve economic cooperation. Some scholars suggest that it is important to form a new organization tasked with assessing the desirability and necessity, then carry out implementation of the quasi-monetary union.
The institution tasked with the coordination work should avail a strategy for implementing systems that are unified and exchange rate inflation targets that are flexible.
However, exchange rate systems that are flexible combined with inflation targets that are also flexible are appropriate in attaining the objective of having low external costs and reducing the rate of inflation. The institution performing the coordinating work should keep track of financial reforms and development.
It is important to improve the financial system and attain a satisfactory fiscal performance. When financial and institutional coordination are implemented systematically to develop a quasi-monetary bloc, this has the possibility of causing economic and political convergence in East Asian countries.
This is an important step that plays an important role in the establishment of common monetary standards. Enhancing interregional trade and the establishment of a regional FTA and capital investment supports the establishment of a common currency region.
Japan and China contribute positively towards political and economic development in East Asia. Both countries have problems that require solutions before they can serve as economic leaders in East Asia.
Both have a crucial role to play in the process of economic cooperation since none has the capacity of being the dominant player in the process. Clear leadership is important in the formation of a single currency bloc which is a critical aspect of economic cooperation in East Asia.
Recent Developments towards FTAs in East Asia
In the recent years, interest in FTAs as well as a rapid functional economic cooperation has been common in East Asia.
The sudden interest in FTAs in East Asia has been associated with the growth of regionalism across the world, intensification of the integration process between EU and NAFTA, the financial crisis that affected East Asia, awareness of the East Asian countries of the need to boost their economic cooperation and the competitive FTA initiatives taken by Japan and China among other factors.
By the end of 2005, nearly 162 cases of different trade agreements involving various regions had been recorded. The East Asian countries especially the North-east Asian ones have been working on the establishment of multilateral free trade regimes under WTO. In February 2002, the FTA between Singapore and Japan became operational.
On the other hand, China started offering reduced tariffs to ASEAN member countries that were not well developed in agricultural produce from 2004, courtesy of the package dubbed Early Harvest Package.
The ASEAN countries together made an announcement to conclude the market access to manufacturing products in the bilateral FTA, hence they left negotiations to be done on market opening and investment for the services sector. In April 2004, Korea commenced an implementation process of an FTA with Chile after which FTA negotiations with Singapore began (Mingqi 10).
AFTA has been the major regional trade agreement towards economic cooperation in East Asia. Initially, it was comprised of six member countries among them Thailand, Malaysia, the Philippines, Singapore and Brunei after its formation following the ASEAN meeting in 1992.
Other countries started joining in the subsequent years after its formation. It grew into a regional trade agreement that was responsible for the entire region of South-east Asia.
The possibility of establishing Eat Asia FTA has been a subject of discussion during ASEAN meetings. The initial proposal to form the bloc was proposed by East Asian Vision Group (EAVG) in 2001.
After the proposal, another group known as East Asia Study Group (EASG) was assigned the task of making a follow up on EAVG proposal. On its side, EASG proposed that there was need to take long term measures to ensure economic cooperation.
Some of the economic cooperation measures that were proposed by the two groups included transforming the ASEAN summit into East-Asia summit and introduction of an East Asian FTA and East Asia Investment.
As a result of the official studies that were conducted by EASG and EAVG, ASEAN members saw the importance of FTA as a long- term means of enhancing economic cooperation in East Asia.
They wanted to emulate the example of increased economic integration that was taking place in Europe and North America and also introduce trade institutional measures and liberalization of investments in the region (Yong and Cheong 175).
The most unexpected change in FTA policies of East Asian countries occurred at the ASEAN China summit which took place in Singapore in 2000 after the Chinese premier during that time announced the possibility of having an FTA with ASEAN.
China was among the countries that proposed bilateral FTA and had already announced reduction of tariffs to less-developed countries. Japan also announced its support for an FTA with ASEAN since it was also eyeing the benefits that accompanied Free Trade Area.
In other words, Japan exercised and has been exercising a passive reaction towards China’s FTA policy instead of taking a leading role to promote economic cooperation in East Asia. In the recent past, ASEAN members have continued to discuss bilateral FTAs with India, Korea, Japan and Australia (Yong and Cheong 175).
Among the most crucial steps that have been taken towards economic cooperation among East Asian countries is the progressive approach that has been taken by China to ensure economic cooperation is achieved.
China possesses an advantage with regard to the country’s FTA policy in that once its leaders support FTA development in certain regions, the government finds it easy to make remarkable progress because its decision making process is a centralized socialist system.
This has not been the case in Korea and Japan, where FTA deliberations have been interfered with by susceptible industries and interest groups characterized by diversity. China’s realization of the economic importance of an FTA has been critical in promoting FTAs with its neighbors alongside ASEAN.
The introduction of networks for leaders has been a critical factor in enhancing talks on East Asian economic cooperation. The ASEAN summit was held in 1997 after the former Prime Minister of Malaysia invited political leaders from some of the East Asian countries.
The event inspired acceleration of the talks on intraregional economic cooperation among East Asian countries. After the financial crisis came to an end, East Asian countries discovered the limit of a developmental policy that was export-oriented, and mainly targeted the American market.
This made East Asian countries susceptible to negative effects as a result of the disruption of US economy and stagnation in the world economy.
This underscored the need to for integration of East Asian regional markets to increase the regional demand. While East Asian countries have been concerned about declining industries as a result of industrialization in China, they have been focused to take advantage of the economic growth in China.
In addition, stagnation of the world economy has been associated with a reduction in the products China exports to other countries thus enabling the East Asian countries expand their Exports to China (Yong and Cheong 175).
Building an East Asian FTA: A Roadmap and Challenges
Despite the social and political barriers that have bee associated with East Asian economic cooperation, there have been many benefits gained from the economic cooperation. Factors such as geographical proximity and growing economic relations after the crisis have helped the countries achieve the goals.
The conversion of East Asia into a free market due to elimination of tariffs has also enabled businesses to increase their exports and enjoy the benefits of economies of scale.
Moreover, creation of large free markets has enabled the member countries to enjoy dynamic benefits such as increased inflows of uninterrupted foreign investment. This has led to an increase in job opportunities and facilitation of technology transfer.
There are also other benefits that have been associated with East Asia economic cooperation. To begin with, it has been possible to diversify common standards for technology production, regulation of products and distribution of services in different countries in the region.
Whether the standards conflict with EU and North America standards has been of little concern, since East Asia countries have the capacity to present a unified front for leveraging. China has already initiated major changes in the regional economic landscape with a high possibility of influencing whichever strategies East Asian cooperation has been focusing on.
There has been a need for the rest of the East Asian countries to strengthen their economic ties with china. The economic position of china has been greatly improved not just in East Asia but also globally. The presence of an East Asian FTA has been important since it has been offering an effective way of accessing the Chinese market and strengthening economic cooperation among East Asian countries.
After the financial crisis, different economists have suggested the restructuring of the development model of East Asia. Countries in the East Asian region have achieved remarkable economic growth through exports to the US markets.
However, the need to achieve economic cooperation among East Asian countries has emanated from the fact that the US demand for imports may decline due to stiff competition and its increasing trade deficit.
East Asian economic cooperation through formation of FTA has become an effective way of creating demand for the region’s products. An East Asian FTA has the advantage of regional and economic stability and has played an important role in making the presence of the region in the international community stronger.
There have been various ways of promoting economic cooperation among East Asian countries. Under the prevailing conditions, promotion of an FTA that covers the whole region in the short term has been the most advisable approach to use although it might have been a difficult process to undertake.
The other option has been the formation of bilateral FTA with ASEAN followed by an expansion of the bilateral FTAs to become a larger East Asian FTA. However, consolidating Different FTAs has been hard because this requires the standardization of trade regulations under different bilateral FTAs.
Conclusion
Although East Asia has been described as one of the main world economic pillars, the level of economic cooperation in the region has still been very low as compared to NAFTA and EU.
It has therefore been important for East Asian economies to realize the importance of having a strong economic cooperation to seize the advantages that come with economic cooperation.
Despite the fact that there have been difficulties in attempts to establish interregional free trade in East Asian historical legacies, the countries should realize the importance of economic cooperation while looking at the increasing number of FTAs formed across the world.
Countries from the East Asian region have continued to build their manufacturing sectors which have the capacity to compete internationally under regimes led by exports. The recent efforts by the East Asian countries to establish FTAs will continue to enhance the efficiency of the manufacturing industry.
East Asian countries have not been very successful in developing their financial sectors hence weaknesses in the sectors have continued to exist even when the countries have been performing highly.
The financial markets have to be strengthened in order for the economies to recover fully and shield themselves from external shocks. The economic crisis that was witnesses in the 1990s acted as a wake up call for the countries to cooperate economically.
The CMI has been instrumental in enhancing financial cooperation in the region. The regional FTAs that have already been put in place have been key players in the economic integration process. The two forces have been responsible for ensuring that the East Asian community is established.
Despite the fact that East Asia started economic integration efforts when EU and NAFTA had already started, the financial crisis and the regional FTA efforts have been instrumental in boosting economic cooperation in the region.
The East Asia region has been a region that can potentially match NAFTA and EU as long as the East Asian countries which have been characterized by diverse economic and political backgrounds put aside their differences and work towards economic cooperation.
FTAs are international agreements among countries that share the same interests which have the potential of increasing the economic cooperation of the region.
Although the region experienced a severe financial crisis in the 1990s, efforts to rebuild themselves have been thriving. Economic cooperation among the East Asian countries has been an important step towards enhancing the economic stability of the countries.
Works Cited
Henning, Randal. East Asian Cooperation. Washington,DC: Institute for International Economics, 2002.
lincohn, Edward. East Asian Economic Regionalism. New York: Brookings Institution Press, 2004.
Mingqi, Xu. East Asian economic integration:China’s Perspective and Policy. Beijing: Australia-Japan Research Centre, 2003.
Stiglitz, Joseph and Shahid Yusuf. Rethinking the East Asian Miracle. New York: Oxford University Press, 2001.
Yong, Choong and Inkyo Cheong. A Search for Closer Economic Relations in East Asia 2007. Web. <http://www.ftainfo.net/eng/data/JER_AhnCheong_1217252857.pdf>.