Is an Asian Trading Bloc Feasible? Europe and North America Know All about the Challenges of Trying to Create a Regional Free Trade Area. Now China and the Association of Southeast Asian Nations (ASEAN) Are Embarked on the Same Quest

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In May 2002, China and the ten-member Association of Southeast Asian Nations (ASEAN)--Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore. Thailand and Vietnam--began negotiations on the creation of what could be, within ten years, the world's largest free trade area: the China-ASEAN Free Trade Area. Although the announcement was not unexpected similar initiatives have been undertaken from time to time--it nevertheless sparked a renewed debate on the feasibility of establishing a European Union-style East Asian common market. Will the proposed China-ASEAN Free Trade Area become another large trading bloc to rival the EU and the North American Free Trade Agreement (NAFTA)?

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A formidable player

The idea of creating a regional free trade area between China and ASEAN countries was first proposed by Chinese premier Zhu Rongji at the ASEAN-China summit meeting held in Singapore in 2000, and was adopted by member countries at last year's summit in Brunei. It aims to cut tariffs and eliminate non-tariff barriers between China and ASEAN countries. According to the agreement, China and ASEAN countries will also strengthen economic ties by promoting co-operation in five major areas: IT, agriculture, investment, human resources and the development of the Mekong River. China will also provide financial support for infrastructure projects like the Kunming-Bangkok highway and the Pan-Asia railway.

The creation of a China-ASEAN Free Trade Area would significantly change the balance of world commerce. It will be the first East Asian economic group to operate without the United States as a member. A combined ASEAN-China market would be a formidable market player, with 1.7 billion consumers, a combined GDP of approximately $2 trillion, and total international trade of about $1.2 trillion.

Following the 10+3 formula for political dialogue among East Asian countries, the free trade group is planning to include two other major ASEAN neighbours--Japan and South Korea (and possibly India, at some point), becoming an East Asia Free Trade Area. This would create a trading consortium with a combined GDP of approximately $6 trillion--compared to a US GDP of $8 trillion--and exports valued at $1.3 trillion. The new organisation would thus become the world's second largest trading group, after the EU ($2.2 trillion), but ahead of the NAFTA ($1.2 trillion).

Rationale for Asian regionalism

Historically, the Asian countries have not had a strong sense of an 'Asian identity', unlike their European counterparts. But economic developments over the past decade, especially in the wake of the 1997-1998 Asian financial crisis, have altered peoples' attitudes significantly, and a new regionalism is now emerging. A number of forces have contributed to this process.

First, intra-regional trade, led by foreign direct investment, has developed rapidly in recent decades. Large companies and transnational corporations have established horizontal and vertical production linkages among the neighbouring Asian countries, in order to exploit scale economies and to enhance their value chain. This in turn has resulted in enhanced production networks across the region and increasingly close economic ties, providing a strong impetus for Asian governments to seek closer economic collaboration. The economic success of other regional trading blocs, such as the EU and NAFTA, has convinced the Asian governments that they could achieve similar results by emulating such organisations.

Second, Asian countries were greatly dismayed by the solutions prescribed by the International Monetary Fund and western governments for tackling the Asian crisis of 1997-98. To a certain extent, some are still suffering the side effects. Unable to change the existing international frameworks, many Asian countries realised that, in order to avoid future economic crises and reduce their reliance on external support, they should co-operate more closely. …