The Korea-ASEAN Special Summit, which opens in Jeju today is highly significant for upgrading Korea`s economic and diplomatic ties with ASEAN and promote regional economic cooperation in the midst of the ongoing global economic crisis. The event is assured to usher in a new era of mutual collaboration between Korea and ASEAN since the establishment of the bilateral dialogue in 1989.



ASEAN is an effective geopolitical and economic organization of 10 countries located in Southeast Asia with a population of around 570 million in 2007 and a combined GDP of about $1.3 trillion. The ASEAN has successfully demonstrated its collective position and views to promote inherent regional cooperation through numerous internal meetings including the summit meetings, foreign and economic ministers meetings, and defense meetings and through dialogue with its partners including Korea, China, Japan, Russia, the United States, Canada, Australia, New Zealand and the EU.

Indeed, the Korea-ASEAN summit can serve Korea as a fresh starting point to realize Korea`s new Asia economic diplomacy in a greater Asia. It could also provide an important turning point for Korea to focus on Southeast Asia beyond traditional four powers` diplomacy including the United States, China, Japan and Russia and expand the practical spectrum of Korea`s practical diplomacy to the pan-Asian region.

Korea`s economic diplomacy towards ASEAN thus far has lacked a long-term vision. Quite frequently Korea sought some immediate economic benefits with tangible results. Until very recently, Korea has not been able to establish a strategic position on economic diplomacy vis-a-vis ASEAN because it has been preoccupied with the Chinese, United States and Japanese markets.

However, it is promising that ASEAN and Korea have maintained a very close economic relationship, with the bilateral trade reaching $90.2 billion in 2008. This makes ASEAN the third-largest trading partner for Korea after China and the EU. Furthermore, ASEAN is at present Korea`s second-largest outbound investment destination and second overseas construction market. Most significantly, the ASEAN-Korea FTA on merchandise went into effect in November 2007 and then the FTA on service area was also established to pave the way towards full-fledged economic exchanges.

But Korea`s ASEAN economic diplomacy needs to be upgraded by recognizing the fact that a big shift is taking place in the structure of cooperation among Asian countries beyond the existing ASEAN+3 (China, Japan and Korea) framework as China, Japan and India have each joined the Treaty of Friendship and Cooperation with Southeast Asian Countries. Furthermore, ASEAN+3 has recently developed an expanded framework by inviting India, Australia and New Zealand to form the East Asian Summit and broaden the regional cooperation matters.



Rising East Asian identity and intra-regional FTAs



Indeed, the 1997/98 Asian financial crisis brought about consensus among East Asian countries that they should promote a sense of "East Asian identity" for regional economic cooperation to avoid a recurrence of regional economic crisis.

Accordingly in November 1999, the ASEAN+3 (China, Japan, and Korea) Summit released the Joint Statement on East Asian Cooperation that outlines a wide range of possible areas for regional cooperation.

Since then, ASEAN has been a main driver towards an expanded East Asian regionalism within the ASEAN+3 framework. As a result, the growing interdependence during the past decade in East Asia through trade and financial cooperation has emerged as a result of sheer market forces such as a geographical proximity and regional export-led economic growth especially due to rising China.

In particular, the framework for financial cooperation was consolidated in May 2000 by the ASEAN+3 Chiang Mai Initiative (CMI), which involves a regional currency swap to provide self-help and support mechanisms. East Asian economies have also proposed a regional bond market to utilize excessive foreign exchange reserves and high savings. Undoubtedly, these moves toward financial cooperation have helped East Asian economies reduce any fear of a foreign liquidity crisis while the present global financial crisis has been unfolding.

Table 1 shows that the share of ASEAN+3`s real GDP reached nearly 20 percent of global total GDP. In 2000, the share of ASEAN+3 recorded 17.2 percent but increased to 19.4 percent as a result of the rapid growth of the Chinese and ASEAN economies. The Chinese economy has been growing so fast as to catch up the Japanese economy in terms of size, while the ASEAN countries posted a far higher growth rate than the world average. In the years to come, ASEAN+3 are expected to grow to the level of the EU and NAFTA economies, the two largest economic blocs with an almost equal share of the global economy.

As East Asian countries represented by the ASEAN+3 have experienced disadvantages from the effects of regionalism in ever-deepening EU and expansion of NAFTA, countries in East Asia have lately realized that without their own FTAs a sustainable regional growth is not likely to come. In addition to the existing ASEAN Free Trade Agreement, the three major Northeast Asian countries -- China, Japan and Korea -- have recently joined the FTA bandwagon as evidenced by the FTAs underway in East Asia (See Table 2).

Among the proliferating intra-regional FTAs, an effective implementation of the FTAs that the big three in East Asia, namely China, Japan and Korea have concluded with ASEAN is likely to set the tone for regional integration in East Asia. It should be noted that East Asia accounts for about one-third of the world`s population and slightly greater than one-fifth of the world`s GDP as well as trade volume and about 14.3 percent of global FDI. Of East Asian GDP, China, Japan and Korea together constitute slightly less than 90 percent. As a result, a trilateral economic cooperation among China, Japan and Korea is instrumental in getting a serious East Asian integration started.

A number of regional FTAs in East Asia that have been either completed or are in progress are likely to add renewed momentum to the ongoing integration process. The two forces will accelerate the "long march" toward an East Asian community. Both the post-financial crisis restructuring and ongoing regional FTA initiatives will reinforce each other to enhance East Asian economic efficiency.

East Asia has great potential to develop a more formal and self-contained entity like the EU or NAFTA. To realize this potential and to ensure region-wide growth dynamism in a sustainable framework, East Asian economies must reconcile whatever differences that may arise due to diverse economic backgrounds and political motivations.

Indeed, FTAs are international agreements of like-minded countries. Any possible "spaghetti bowl" or "noodle bowl" effects due to the possible complexity of commodity rules of origin issues and "hub and spoke" problems due to competition for hegemonic economic leadership vis-a-vis marginalized economies need to be avoided.

In particular, the pursuit of a China-led FTA or a Japan-led FTA in an uncooperative fashion is likely to generate a hub-spoke bilateralism in the region. If this is the case, East Asia should work out an ASEAN+3 FTA in a long-term perspective. In the long run, it might be more feasible to invite the United States, India, Australia and New Zealand to form a larger regional FTA in Asia with an ideal of open East Asian regionalism.

East Asia needs to become more of a community and less a mere combination of booming economies. Peoples in Northeast Asia should convince themselves that the dynamism of economic cooperation and growing role of production fragmentation in a borderless economy have great potential to bring together former adversaries and reduce the chances of military conflicts. Indeed, the prosperity and stability for the people in East Asia should prevail over a cynical and emotional preoccupation with territorial sovereignty and historical animosity.

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East Asian countries have been remarkably successful in nurturing manufacturing sectors so that they have been able to compete in international markets under export-led development regimes. However, East Asian economies were less successful in developing their financial sectors; hence financial weakness persisted even during the high performance years. To ensure a speedy recovery from the present global economic crisis and create a formidable buffer against external shocks in the future, East Asian countries have to strengthen their financial systems.



Building an East Asian FTA: a roadmap and challenges



Despite political and social barriers, there is much to be gained from an East Asian FTA. Factors such as geographic proximity, complementary endowments of production factors and functionally growing economic ties in East Asia have proved the beneficial impacts.

As East Asia becomes a free market with the elimination of tariffs and non-tariff barriers, businesses will be able to expand exports and enjoy economies of scale. Moreover, the creation of a huge free market will bring dynamic benefits to member countries, for example, increased inflows of foreign direct investment, which will subsequently create more jobs and facilitate the transfer of advanced technology.

Other forms of dynamic benefits also exist. First of all, common standards for production technology, product regulations, distribution and after-sales services can be expanded across countries in the region.

Since the U.S. bulging trade deficit has been a main cause of the serious global ongoing imbalance, it is time for East Asia to create its own internal demand for sustainable growth. The establishment of an East Asian FTA presents an effective way to go about creating this internal demand on the part of East Asia to ensure a speedy recovery from the global economic downturn.

There are several possible ways to promote an East Asian FTA. Under current conditions, it may be difficult to promote an FTA covering the whole region in the short term, although it is the most economically desirable approach.

Therefore, as the second best alternative, a simultaneous and/or piecemeal East Asian FTA should be phased in, starting with those agreements currently under discussion. For example, China, Japan and Korea have already formed a bilateral FTA respectively with ASEAN and gradually can develop those bilateral FTAs into a wider East Asian FTA while ASEAN can play an FTA hub role.

Another scenario is to establish a trilateral FTA involving China, Japan and Korea and then to amalgamate the already existing ASEAN FTA. However, a consolidation of different FTAs could be very difficult because the different trade regulations under various bilateral FTAs would have to be standardized into one agreement. It is highly unlikely that an East Asian FTA will evolve by itself as a result of the amalgamation of bilateral FTAs.

In addition, there is a possibility that the competition between China and Japan, with both currently vying for regional leadership, may be intensified through bilateral FTAs with ASEAN, making an East Asian FTA more difficult.

As many economists suggest, there is a danger that a hub-and-spoke bilateralism led by China and Japan might develop, as demonstrated in the 1994 study of the European trade arrangement. If this happens, "this arrangement tends to marginalize the spoke economies both economically and politically" in East Asia. It also leads to a profusion of FTAs that can make the whole region less attractive to foreign direct investors that might be called, in an Asian context, the "noodle bowl" problem.



Korea`s agenda beyond ASEAN-Korea FTA



Given the newly emerging economic landscape in East Asia, Korea has to be aware of the importance of ASEAN as a strategic partner for the realization of its new Asian diplomacy, shifting away from a simple economic partnership in trade and investment.

Rather than promoting short-term and piecemeal cooperation projects, Korea need to build "deep trust" first with each Southeast Asian country and establish comprehensive cooperative programs to maintain reciprocal relations in the region with a mid- to long-term perspective.

In particular, Korea should renew its already proactive partnership with ASEAN countries by incorporating official development assistance with the trade and investment relations. The most immediate things Korea can do in ASEAN countries are to help ease the gaps in development in the region and provide assistance for economic integration to late-developing countries.

The special characteristics of ASEAN are found in its great diversity in terms of factor endowment and economic development stage. Provision of Korea`s development experiences with increased official development assistance to less-developed ASEAN countries will serve as a critical trust building process.

It will not only ease the region`s development gap by helping eradicate poverty in the poorest sectors of the region, but would also promote a knowledge based economy by sharing Korean experiences in such areas as e-government, e-custom services and IT-based distance learning. This should be an effective way for Korea to deepen mutual trust with ASEAN.

Some new initiatives could also be worked out. For example, the Mekong River basin could be selected as an overseas green development belt as envisioned in Korea`s green growth strategy of the Lee Myung-bak government. The concept can become part of the East Asia Climate Partnership project.

Korea`s new Asia diplomacy plan is a diplomatic strategy that places importance on Asia and presents a vision that expands the horizon of Korea`s Asian diplomacy from Northeast Asia to pan-Asia and the South Pacific region. In this process, the ASEAN, which has a multilayered cooperation structure with Northeast Asia, Southwest Asia and the South Pacific, should be a strategic partner for Korea to move forward its new Asian diplomacy. This is why Korea has to consolidate deep trust first with ASEAN countries to expand the economy-focused cooperation network to security and cultural cooperation.

Following ASEAN and India, Korea is trying to reach free trade agreements with Australia and New Zealand after both Korea and India signed provisionally a comprehensive economic cooperation agreement. As Korea is now going to chair the G20 next year, Korea in harmony with ASEAN can address more effectively standstill and even rollback measures in trade liberalization in facing ongoing global economic downturn and in designing a post-crisis global financial system.

Although East Asia is regarded as one of the three major regional economic pillars in the world, East Asia has still the lowest level of economic cooperation and integration when compared to the EU and NAFTA. Economies in East Asia should therefore recognize the need for strengthening regional economic cooperation to utilize a "partnership from differences." The Korea-ASEAN special summit can contribute not only to enhancing regional manufacturing efficiency and but also to addressing a serious regional common agenda such as energy and environmental issues.

Many Koreans trust that the first-ever Korea-ASEAN Special Summit in Juju, dubbed as the "Island of Peace and Prosperity," should be able to set another milestone towards a peaceful and prosperous East Asian community.



By Ahn Choong-yong