The Prospects of ASEAN-Korea Free Trade Area (AKFTA): A Qualitative and Quantitative Analysis

Article excerpt

The current global economic crisis has alerted East Asian countries to the risks of excessive dependence on exports to the United States and EU. This shared sense of vulnerability is likely to promote regional economic integration. In particular, intra-regional trade is now viewed as a new potential engine of growth. The ASEAN-Korea Free Trade Area (AKFTA) is a concrete example of this general trend. This paper qualitatively and quantitatively examines the economic feasibility and desirability of AKFTA - qualitatively using the theory of economic integration and quantitatively by applying a CGE model. Our analysis provides some grounds for optimism about AKFTA's prospects.

Keywords: ASEAN, Korea, trade, free trade area, economic integration, CGE model.

I. Introduction

The Republic of Korea (Korea) and the countries of the Association of Southeast Asian Nations (ASEAN) have been integral to the miracle that has transformed East Asia from a group of typically poor Third World countries into the world's most dynamic economies. More precisely, Korea and ASEAN s Indonesia, Malaysia, Singapore, and Thailand have sustained rapid growth in the post-war era, alongside Hong Kong, Japan, and Taipei, China to put East Asia firmly on the world map as an economic powerhouse. The success of these countries has been based on export-oriented industrialization and is a powerful tribute to the potential benefits of globalization.

But that same globalization turned against these countries with a vengeance in the 1997/98 Asian financial crisis. The massive capital inflows that had helped fuel rapid economic growth and subsequent "sudden stop" in capital inflows wreaked financial havoc,1 which eventually spread to the real economy. There is a widespread perception throughout the region that external forces, such as investors from the United States and Europe, were largely responsible for the Asian crisis. Regardless of their accuracy, such perceptions gave rise to a region-wide sense of vulnerability to and suspicion of external forces, which, in turn, fostered a greater sense of regional identity and gave a strong impetus to regional economic integration.2

In the immediate aftermath of the Asian crisis, the focus of economic regionalism lay in promoting regional financial cooperation, best exemplified by the Chiang Mai Initiative (CMI) among the ten ASEAN countries, the People's Republic of China (PRC), Japan, and Korea.3 The focus of regionalism has more recently been shifting towards the expansion of intra-regional trade. The current global financial and economic crisis rooted in the U.S. subprime mortgage crisis is likely to further stimulate efforts and initiatives to promote intra-regional trade.

The ASEAN-Korea Free Trade Area (AKFTA) is a concrete example of efforts and initiatives to promote intra-regional trade. In May 2006 the two sides signed a free trade agreement that would lead to a free trade area by 2016. (Thailand joined only in February 2009 after resolving issues on the rice trade.) While economic integration refers to the removal of barriers to the cross-border flows of goods, services, capital, and labour, economic integration between ASEAN and Korea realistically means only more trade between the two sides before they can contemplate moving towards deeper levels of integration. The central objective of our paper is to examine the extent to which economic criteria favour AKFTA s prospects. To address this question, we use qualitative analysis based on the theory of economic integration pioneered by Viner (1950) and quantitative analysis using the CGE model.

In section II, we review the theory of economic integration. In section III, we explore the issue of whether AKFTA would be beneficial for ASEAN and Korea through the prism of this theory. In section IV, we present a CGE model and its quantitative estimates of AKFTA s trade and welfare impact, and in section V, we summarize our key findings. …