Building the Northeast Asian Community

Byung-Woon Lyou
Lecturer at Korea University School of Law, SJD (2003)
Indiana University School of Law--Bloomington

Asia is one of the most socio-politically divided regions in the world. Without regional cooperation, it faces difficulty in the world market, sometimes receiving unfair treatment. Asia contains more than half of the world’s population, but Asian countries have a relatively small share of international organizations. Given these facts, it is meaningful to explore the need and legal basis for a Northeast Asian Community (NEAC), which would be an economically integrated regional trade association composed of Korea, China, and Japan.

Within the last decade, the possibility of an East Asian regional trade agreement (RTA) or a much broader Asia-Pacific integration has been debated extensively. Though not currently regionalized, Asia could be divided into three groups. In the Southeast Asian region, there is the Association of Southeast Asian Nations (ASEAN). ASEAN established the Asian Free Trade Area (AFTA) in 1993 and included Cambodia as its tenth member in 1999. In 1983, Australia and New Zealand organized the Australian/New Zealand Closer Economic Trade Relations Agreement (ANZCERTA) which has strengthened their cooperation with Asian countries, following the United Kingdom’s entry into the European Union (EU). South Asia, the second regional group, is made up of India, Pakistan, Sri Lanka, and Bangladesh, whose economic contribution in Asia is relatively small. The group remains divided by religious conflicts and a contentious history. A third regional group, Northeast Asia, has the potential to develop into a similar economic community because of the increasing necessity of integration among neighboring countries.

A recently proposed formation of an East Asian Economic Caucus (EAEC)9 aimed to create an extended form of ASEAN, with China, Japan, and South Korea as its core states. A regional community requires a certain degree of cultural homogeneity, what is sometimes called “an inherent regional civil society.” Given the strong societal differences between Northeast and Southeast Asia, it would be more workable to establish the NEAC, while Southeast Asia strengthens AFTA, than to extend ASEAN to encompass Northeast Asia.

With the end of the Cold War, Asia-Pacific (including the Americas and Oceania) intergovernmental cooperation systems emerged from the Asia Pacific Economic Cooperation (APEC) process, in 1989. APEC is a loose organization which has regional, multilateral, and interregional characteristics. “The subsequent Asia-Europe meeting (ASEM) established an inter-regional dialogue system between East Asia with the European Union.”

A regional community like the EU15 established in Northeast Asia would provide several key benefits. Economically, the Northeast Asian countries would receive increased efficiency through economies of scale; increased productivity stimuli; strengthened bargaining power in the international market; and the “trade creation effect.” Even though economic theory does not support such integration in every instance, a regional community, on the whole, improves its productive abilities with the creation of gains from trade.

The Heckscher-Ohlin (H-O) theory (also called the factor-price equalization theorem), which is based on the theory of comparative advantage, postulates that welfare improvement within a community can be achieved through the exchange of goods created by each state’s plentiful factors of production and through price equalization. Free trade in a regional community brings optimum allocative efficiency by use of specialized factors of production. Given an extended opportunity, the use of these specialized factors would result in economies of scale and productivity stimulation. This theory, however, is premised on the idea that each country participant has different, plentiful factors of production and that these factors are homogenous.

A RTA brings with it two kinds of trade effects. One is the trade creation effect: this refers to the expansion of trade with efficient suppliers inside the community. The other is the “trade diversion effect,” which refers to a shift in trade from the efficient suppliers outside the community to inefficient suppliers located inside it. If the trade creation effect is larger than the trade diversion effect, then economic integration will bring a Pareto improvement. In the EU, regional integration has led to gains of about one percent of GDP. Moreover, the unmeasured dynamic gains that come from economies of scale and productivity stimuli make the net effect much larger. Even though some social losses can take place through integrated policies, such as the EU’s Common Agricultural Policy (CAP), these are the harmonization costs for the integration. Through the establishment of a regional community, the Northeast Asian countries could reduce these negative integration effects.

Socio-politically, the Northeast Asian countries would strengthen their positions in international organizations and societies as a result of integrating into a regional economic community. The EU deals effectively with the United States by using a single discussion channel in matters like trade and disputes settlement, while Korea, Japan and China tackle the problems individually and often ineffectively. Increased exposure to the effects of international markets requires not only domestic policy adjustments but also a collective policy arrangement. Isolation also creates problems in electing or appointing officials to international organization; Asian countries are thus often unfairly treated. Thus, the countries need a push forward to create a regional community.

Transition from relative heterogeneity to increased social homogeneity in areas such as culture, economic policies, and security, in fact, is the process of regional integration. Northeast Asia, in which social homogeneity is ahistorical, lacks experiences of social interchange, and in this sense is fundamentally different from Europe. Even though the Chinese Character culture, Confucianism, and Mahayana Buddhism influenced all of Northeast Asia considerably, historically there have been only minimal diplomatic interchanges between governments and only small-scale, unofficial trade in the frontier areas. Moreover, the Northeast Asian countries’ levels of economic development differ greatly. Certain requirements must be attained before progressing to new levels of economic integration, and basic socio-cultural factors may limit this process, as is evident from European integration. Until now, the Northeast Asian peoples have not realistically considered regional integration, because of gaps in social homogeneity, poor experiences in social exchanges, and differences in economic development. However, there is increasing recognition of the need for a Northeast Asian organization that reflects competitive regionalism and globalization.

Regionalism can be approached in several ways. One approach, which is rooted in the neo-functionalists’ theory, describes regionalism as the incremental creation of regional institutions in response to various functional demands, such as enhancing the economic welfare of participating states. Another approach, rooted in federalist theory, is the model of fair distribution of power and competence at a level below a global organization. This approach, known as “constructivism,” focuses on the communal identity in regional integration. In constructivism, regional integration is “ideational products.” This approach emphasizes collective security, rather than a functional or economic need for the regional integration. This Note focuses on the neo-functionalist theory, since the main purpose of the NEAC would be the Pareto improvement of its members.

Presently, the causes of regional integration are primarily economic. When NATO lost its original “raison d’être,” regionalism faced a new situation: while security considerations became less salient, economic development became a central issue. Neo-functionalism has to meet new threats, such as environmental risks, drug-trafficking, and global terrorism. In addition to regionalism, globalization complicates these issues. Globalization is described as “flows of trade and finance between the major regions in the world economy, while equivalent flows within them can be differentiated in terms of local, national and regional clusters.” Both globalization and regionalism stimulate the interchange of goods and finance as well as the integration of subunits. Globalization and regionalism are thus both types of integration.

Regionalism continuously influences all aspects of life, from culture to politics to the economy. “Within the economic, or trade realm, the impact of regionalism has been especially pronounced.” Mass regionalism, rooted in neo-functionalism, was initiated after the collapse of the Cold War regime and with the beginning of WTO system. Europe has since been rearranged as a successful regional community. The United States has free trade agreements (FTAs) with Canada and Mexico (NAFTA) as well as with Israel. At the Summit of the Americas, heads of state representing thirty-four American countries have reaffirmed their political commitment to strengthen hemispheric relations by approving the finalization of a Free Trade Area of the Americas (FTAA) by January 2005. In Latin America, not only may a broad Latin American free trade area result through a combination of the MERCOSUR and Andean Pacts, but that free trade area itself may be merged with NAFTA into the FTAA. In addition to ASEAN (AFTA) in Asia, some regional groups in central, eastern, and southern Africa have formed a continent- wide African Economic Community (AEC).

The growth of country membership in the WTO has not adversely affected the growth of regionalism. “Over 170 RTAs are currently in force.” In fact, global flourishing of RTAs makes Northeast Asian countries feel isolated. Globalization can also be defined as the growing integration of world markets, which brings denationalization of politics, markets, and laws. While China and North Korea have insisted on nearly absolute state sovereignty, there are increasing limitations on that sovereignty because of these globalizing trends. Globalization asks for a combination of self-rule and shared rule.

From the late 1960s to early 1970s, because of the disappointment from the post-colonial policies, Third World states applied regionalist practices toward trade and economic cooperation among the developing countries. During the Cold War, this regional hegemony created a sort of league of non-allied states. This regionalism, which was used by the Third World as a justification for the adoption of domestic policies such as socialism and the protection of infant national industries, did not advance globalization.

By contrast, the popular paradigm today is free trade, globalization, and substantial growth through competition. GATT’s article XXIV42 restricts the formation of regional fortresses, or exclusive economic blocs. It requires that any modern regionalism not be a malignant form but rather a bona fide form, one favorable to globalization. The regionalism of today cannot afford to be inward-looking because globalization has made markets more and more interconnected and interdependent. With GATT article XXIV, which makes regionalism compatible with multilateralism, globalization has broken down the traditional dichotomy between regionalism and multilateralism.

The regionalism of today responds to three aspects of globalization: the replacement of domestic markets by international markets; the decline of geographical determinants of money and labor; the continued intensification of multinational and private policy-making structures. Thus, a benign form of regional integration has a positive effect on global trade liberalization. Globalization and regional integration can be seen as complementary processes, modifying each other, in the formation of a new world order, even though they may be based on different situations or concrete issues. Another important force, accelerating change in production and consumption patterns, is the rapid progress of information and communications technology. The Internet, an important method of doing business today, has contributed to a borderless global economy by removing physical distance.

In this recognition of these trends, Northeast Asia has shifted its attention more and more toward the development of an institutional expression of its own identity. In the past, Japan regarded the EU and the United States as its main trade partners and was not very interested in its neighbor countries. In recent years, there are remarkable signs that the Japanese are rediscovering their regional identity, economically exemplified by Japan’s vigorous promotion of the Japan-Korea Free Trade Agreement (JKFTA). The JKFTA could induce China to participate in a regional community. China’s WTO participation with Taiwan in 2001 will promote free trade in this area once more. With China’s participation in the WTO, the WTO framework could serve as a common adivisor of Northeast Asia, accelerating trade regionalization. Moreover, both the APEC and the ASEM have moved in recent years to keep up the momentum of their early years.

Northeast Asia has a successful model of a regional community in the EU. In the case of the two Koreas, it should be noted that the unification of Germany was achieved with the integration of West Europe, and the formation of the EU. The unification of the two Koreas can be aided through a regional integration process as well. A considerable part of the unification cost, like EU’s various integration funds, would be the cost of North Korea’s accession to the NEAC. The China-Taiwan problem is somewhat different; Taiwan does not seek unification with China. The NEAC integration could be the answer to the problem. If the process involved substantial integration, asking a partial restriction on sovereignty, under supranational control, not only could it ease Taiwan’s apprehension of being absorbed by China, but also it could give China the same effect of two regimes under one state.

It is important that the NEAC not act as a “regional fortress.” Essentially, the NEAC should not take regional protectionist measures. Such action would be taken as a threat by non-members. As the trial of EAEC was considered by the United States to encourage economic rivalry with Japan, similar regional exclusiveness also could be considered a hegemonic stance. The NEAC not only should have good relations with the rest of the world, but also should pursue the common good of the world. A benign form of regional integration does not imply division of international society, because it strengthens the organizing international or global society through the integration of regional unit. Good empirical evidence suggests that the general political opposition of third countries to the EU, and its exercise of international legal rights, has now largely disappeared.

This Note is composed of three main parts. Part II will define the proposed NEAC. Focused on an economic integration and WTO rules, in order to define the NEAC, the present Northeast Asia situation and a reasonable degree of integration for countries in the region and the empirical implications of the EU should be considered. Part III discusses the economic necessity of the NEAC. This part explains the “custom factory effect,” derived from the NEAC integration. This part also shows the current degree of regionalization of Northeast Asia, by surveying the international transactions among the Northeast Asian states and analyzing the economic effects, such as the intensity index of trade, through formulae and statistics. Part IV explores the socio-political requirements for Northeast Asian countries to be able to integrate. This part seeks a way to meet these requirements, namely a potential method for the establishment of the NEAC. Then, this Note draws conclusions.

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