China, India, and Regional Economic Integration in Asia

1. Dr. JiangYu Wang Associate Professor School of Law The Chinese University of Hong Kong 19 March 2007 China, India, and Regional Economic Integration in Asia

2. 1. Some Basics of Regionalism • Trade creation or trade diversion? • Building block or stumbling block? • WTO consistency? • Trade realism

3. Trade creation or trade diversion? • Important question, and a topic of heated debate • The debate has provided little practical guidance for policy-making in the real world • A recent IMF staff paper suggests that Asian FTAs have not led to trade diversion.

4. RTAs have obvious benefits for members • Second-best choice • Scale economy and competition • More attractive to FDI • Political and geopolitics benefits

5. WTO Consistence of RTAs • The need for WTO Compliance • In theory, yes • Is there anything to be complied with? • MFN • GATT Art. XXIV • GATS Art. V • The Enabling Clause

6. The Rules and the Problems: focusing on GATT Art. XXIV • CU and FTA • “Substantially-all-trade” (SAT) requirement (XXIV:8) • “Not-on-the-whole-higher” (NWH) requirement (XXIV:5) • Interim agreement: “shall include a plan and schedule for the formation of such [RTA] within a reasonable period of time”. • Subject: “duties and other restrictive regulations of commerce [ORRC].”

7. The problems • What is SAT? • Quantitative approach • Qualitative approach • What is the scope of list of ORRC? • No agreed definition • No method to implement • Question: overall or product-by-product, country-by-country? • The GATT/WTO Members have never reached consensus on anything

8. The notification process – ill-enforced • The rule: “promptly notify” to enable Members to “make such reports and recommendations to contracting parties.” • Time, definitions, interpretations, etc. • Anyway, no need for GATT/WTO approval according to common understanding; GATT/WTO can make recommendations and reports • The Committee on Regional Trade Agreement (CRTA)

9. The Facts of the Enforcement of the Rules and the Work of CRTA • The “Contracting Parties of GATT” have never made an agreed set of recommendations to any RTA • RTAs operated at large • CRTA has not completed the review of any RTA

10. The “Enabling Clause” Differential and more favourable treatment reciprocity and fuller participation of developing countries: • Following negotiations within the framework of the Multilateral Trade Negotiations, the CONTRACTING PARTIES decide as follows: • 1.          Notwithstanding the provisions of Article I of the General Agreement, contracting parties may accord differential and more favourable treatment to developing countries(1), without according such treatment to other contracting parties. • 2.          The provisions of paragraph 1 apply to the following(2): • …… • c)         Regional or global arrangements entered into amongst less-developed contracting parties for the mutual reduction or elimination of tariffs and, in accordance with criteria or conditions which may be prescribed by the CONTRACTING PARTIES, for the mutual reduction or elimination of non-tariff measures, on products imported from one another;

11. What’s the root of the problems? • Politics • Started with the GATT review of Treaty of Rome

12. The question again • Is there a need to comply with WTO rules? • Experience shows that no RTA is not compatible with GATT/WTO

13. A Realist View • National security and regional stability as a legitimate goal in international trade relations • In the absence of positive multilateral rules, nations are free to pursue many goals • Almost all RTAs are political in nature • Importance of politically-driven RTAs in East Asia: Trade and Peace – interdependence promote peace • The East Asia case: colonized history, diverse culture, fragmented ideology grouping, border disputes, mistrusts, etc.

14. 2. The case of Asian economic integration

15. Still, why integrates? • Trade within the Asian region is far from reaching its potential, and policies that facilitate integration and more efficient regional trade accelerate growth and expand its basis, especially for lower-income Asia. • Tariff barriers are only part of the challenge to further economic integration and trade expansion in the region…. A deeper and more inclusive Asian Free Trade Area can achieve for its members larger benefits than that would arise from global trade liberalization along [WTO] lines. • The economies of the [ASEAN] have the most to gain (in domestic terms) from Asian economic integration, provided that this happens I a relatively uniform way.

16. The Economic Role of China and India in Asian Economic Integration • China’s leading role • China becomes the major market for many Asian economies • China’s rise as the major factor in shaping the new division of labor (production-sharing network)

18. Deeper production-sharing practices within the [East Asia] region have contributed substantially to the rise of intraregional trade flows. In particular, China’s emergence as a major production site for labor-intensive stages of production and assembly has exerted a huge impact on such flows, both within Asia and between Asian and the rest of the world. Goods that were previously processed and exported by other Asian countries are now finalized in China for export. This phenomenon explains, in large part, the increasing bilateral trade imbalances between China and its major trading partners; China has recorded growing trade surpluses with North America and Europe, while widening its trade deficit with the rest of Asia (UNCTAD 2004, P. 46).

19. India as a trader is much less significant • But India’s demonstrated potential is unlimited

21. 3. Regional initiatives by China and India • Both become fanatics of regional and bilateral trade agreements

24. 4. Types of Asian regionalism • Hub-and-spoke bilateralism • Pan-Asian FTA • Sub-regional integration in East and South Asia respectively, linked up by FTAs

25. Hub-and-spoke bilateralism

26. Bilateralism

27. Asian Free Trade

28. Summary: • China gains the most from bilateralism based on a China-hub • China gains least from an Asian Free Trade Area

29. Further, an East Asia FTA does not offer much benefit to China

30. A Japan-Korea FTA produces relatively weak benefits for the two participating economies (0.3 percent of GDP for Korea and close to zero effect for Japan). The widespread negative effects on nonparticipants are negligible when expressed as a percentage of initial GDP, reaching 0.1 percent of GDP only in the case of Vietnam. • Including China in the proposed arrangement significantly improves the welfare outcome for Korea and Japan, to 0.7 percent and 0.1 percent of GDP, respectively. In China’s case, however, the welfare gain is negligible …. With the inclusion of China in the FTA, the negative effects on nonmembers start to appear significant, particularly for Taiwan, China, and for the ASEAN economies, which compete directly with China in many markets. • The negative welfare effects on the ASEAN economies are converted into positive effects … if the proposal is expanded into an ASEAN+3 FTA, comprising the 10 ASEAN economies plus China, Japan, and Korea. Proportionately to GDP, the ASEAN economies and Korea are the biggest gainers from this arrangement, although for Korea there is only a marginal improvement in the welfare outcome relative to the outcome from the China-Japan-Korea FTA. In comparison with the latter arrangement, Japan enjoys a slightly larger welfare gain, although as a percentage of GDP, the gain is still small….[T]he welfare effect on China is negligible, although very slightly inferior to that from the China-Japan-Korea FTA. Gilbert, Scollay and Bora (2004)

31. India • Better positioned in South Asia (although not to be the largest gainer the SAFTA)

32. Regionalism or not? Economic gains are not the determining factor • Multiple objectives of regionalism • Regional politics and stability • Strengthen domestic policy reform • Increasing multilateral bargaining power • Securing market access • Forming strategic linkages

33. Although countries are not required to practice altruism in international trade, big trading powers are expected to factor not only their national interest, but also regional and global interest, into their policy-making.

34. 1. Hub-and-spokes bilateralism is stumbling blocks to the multilateral trading system, in which both China and India have significant interest. 2. Bilateral FTAs cause systemic problem of “spaghetti bowl”. 3. An integrated Asian market strengthen the negotiating position of China, India, and other Asian countries in the multilateral and bilateral talks (with U.S. and EU in particular). 4. The political objectives are important and necessary. Otherwise?

35. 5. Policy Recommendations 1. The routes for Asian economic integration: East Asian FTA + South Asia FTA + others = Asian free trade

37. A China-India FTA to link up the two sub-regions footnote: China-India FTA is strongly supported by Arvind Panagaria, a long time opponent to regionalism.

38. 3. China and India should lead Asia to practice open regionalism (with Asian identity) - does not mean “open membership” - defined as “external liberalization by trade blocks” - “the degree of liberalization on imports from nonmembers need not be as high as that from member countries”

39. 4. Deeper integration? • Investment • Services • Other areas

40. 5. Develop Asian “common guidelines” or “best practice” for RTAs • WTO consistent • Deeper integration • Liberal, or at least nonrestrictive, rules of origin • Clear and simply codes on technical barriers • Harmonization of regulatory standards not necessary • Dispute settlement to promote legalism

41. 6. In short, rebuilding global free trade by turning spaghetti bowls into building blocks