[NSP Report 59] The Proliferation of Asian FTAs and Korea's Strategy: Focusing on the Potential for Multilateralization of Bilateralism

Kim, Chi-wook is an Assistant Professor in the Department of Political Science and International Relations at the University of Ulsan. He graduated from the Department of Diplomacy at Seoul National University and received his M.A. and Ph.D. in Political Science from the University of Texas at Austin. He previously served as a Senior Fellow at the Sejong Institute. His research areas include global economic governance, network world politics, and middle power theory. His recent major publications include "The Revival of Keynesianism? An Analysis of the Economic Discourse of US Political Elites After the Financial Crisis," "US-China Free Trade Agreement (FTA) Competition Viewed Through Network Theory," "The Global Financial Crisis and Changes in World Economic Governance," and "Toward a Multistakeholder Model of Foreign Policy Making in Korea? Big Business and Korea-US Relations."

I. Introduction

This paper projects that Asian trade relations in the 2010s will be governed by overlapping Free Trade Agreement (FTA) networks, and proposes a strategy for Korea: a form of "bilateral multilateralism" that transforms bilateral FTAs into de facto multilateral regimes. Having experienced successive economic miracles and myths in the 1990s, Asian countries are now facing another turning point in the 2010s, termed the 'Asian Century' (World Bank 1993; Krugman 1994; Bhagwati 1998; Kohli 2011; Bowring 2011). The return of Asia to the international political stage is characterized by the rise of China and the relative decline of the United States in terms of actors. These structural changes in the world order became more visible with the 2008 global economic crisis, and the competition and cooperation between the United States and China appear to be the driving forces that will determine the future direction of the Asian trade order.

Under the post-war multilateral trade order, Asian countries successfully transformed into global factories based on export-led industrialization strategies. However, unlike Europe or North America, they failed to establish a multilateral institution to comprehensively govern intra-regional trade relations. Instead, they have managed free trade through overlapping bilateral FTAs. In short, bilateralism has emerged as a defining characteristic of the Asian trade order and the trade policies of individual countries (Heydon and Woolcock 2009).

However, the possibility of power transition at the global level has further amplified complexity and uncertainty in Asian trade politics. It would not be an exaggeration to say that China has been the protagonist in the Asian FTA arena thus far. China has pursued an aggressive FTA strategy, primarily centered around the Association of Southeast Asian Nations (ASEAN), and has achieved a certain degree of success in building regional influence based on this. In contrast, the United States has maintained a relatively passive stance in Asian FTA politics, at least until the Obama administration actively pursued the Trans-Pacific Partnership (TPP) as part of its engagement policy in Asia. However, the US pivot to Asia was well articulated in the remarks of Secretary of State Hillary Clinton, who expressed expectations that the TPP agreement, as a high-standard free trade agreement, could serve as a benchmark for future trade agreements and develop into a platform for regional integration and the establishment of a free trade area in the Asia-Pacific region (Clinton 2011).

Korea is at the center of the Asian FTA game, which is driven by China and the United States. The Korea-US FTA, signed in 2007, officially entered into force in March 2012, five years after its signing. While the US had already concluded (and brought into force) FTAs with three countries—Australia (2005), Chile (2006), and Singapore (2004)—it finally concluded a bilateral FTA with Korea, the first among the three major East Asian economies. Furthermore, Korea and China completed a joint industry-academia-government study in May 2010 as a preliminary step to FTA negotiations and held director-general level preliminary consultations in September 2010. The Korean government initiated the first domestic procedure to pursue a Korea-China FTA in February 2012. Both countries agreed to strive to commence negotiations as soon as Korea's domestic procedures were completed. Negotiations for a trilateral FTA among Korea, China, and Japan also gradually materialized. The joint industry-academia-government FTA study, which began in May 2010, concluded on March 30, 2012, and specific schedules for FTA negotiations were expected to be determined at the Korea-China-Japan summit in China in May 2012. On March 21, 2012, Korea, China, and Japan abruptly concluded negotiations for a Bilateral Investment Treaty (BIT), focusing on investment liberalization and intellectual property rights protection, after five years of talks, thereby increasing the possibility of a trilateral FTA.

As such, the Asian trade game in the 2010s is expected to gain momentum centered around bilateral FTAs amid sluggish efforts to form regional multilateral institutions. What strategy, then, can Korea adopt in the competition between the US and China at the global level, and in the Asian FTA game centered around Korea, China, and Japan, and ASEAN? This study advocates for the establishment of domestic economic governance that distributes the benefits of free trade and for a "bilateral multilateralism" that ensures existing bilateral FTAs have the same effect as de facto multilateral trade regimes. Bilateral multilateralism refers to a situation where the trade governance architecture is formally bilateral in nature but practically yields multilateral effects.

To flesh out this strategy, Chapter II examines the Asian trade governance structured around FTAs. Chapter III reviews the current state of FTAs and uses Social Network Analysis to reveal the structure of the Asian FTA network. Chapter IV then elucidates the necessity and content of bilateral multilateralism as Korea's FTA strategy. Chapter V summarizes this study and concludes by discussing the limitations of bilateral multilateralism.

II. Asian Trade Governance in Transition

The characteristics found in the evolution of the post-war Asian trade order can be summarized as the failure of multilateralism and the rise of bilateralism. Trade relations among Asian countries in the 2010s are expected to be governed by bilateralism.

However, Asian countries began to actively engage in bilateral FTAs in the early 2000s. Until then, Asian countries, along with the global World Trade Organization (WTO) system, also aimed for multilateralism at the regional level (Asian Development Bank 2010). Efforts to create a multilateral trade agreement in Asia, led by Japan, were attempted as early as the late 1960s. Japanese economist Kiyoshi Kojima proposed the creation of a Pacific Free Trade Area (PAFTA) in 1966. This proposal was later evaluated as having laid the groundwork for the Pacific Economic Cooperation Conference (PECC) and the Asia-Pacific Economic Cooperation (APEC) process. PAFTA, with founding members Japan, the United States, Canada, Australia, and New Zealand, reflected the growing recognition of the importance of the Asia-Pacific economy and was proposed as a response to European integration. However, it failed to materialize due to the passive stance of the United States and the opposition of China.

Japan and Australia established the Pacific Basin Economic Committee (PBEC) in 1967, which had the character of a private economic cooperation body with a low degree of institutionalization between the two countries. As bilateral relations between Japan and China became more important in the 1970s and China adopted a negative stance towards regional cooperation in Asia, Japan's interest in multilateral agreements waned (Kojima 1971; Deng 1997). Then, in 1980, the Pacific Economic Cooperation Conference (PECC) was established through proposals by then-Japanese Prime Minister Masayoshi Ohira and Australian Prime Minister Malcolm Fraser, reviving regional cooperation momentum. PECC aimed to promote Pacific cooperation on trade and development issues through information exchange and communication as a tripartite forum involving government, business, and academia.

Prior to this, ASEAN was launched in 1967 with Indonesia, Malaysia, the Philippines, Singapore, and Thailand as its members. However, ASEAN was perceived as a consensus-based political and security community in its early stages and did not pay much attention to economic issues. Although it introduced a Preferential Trade Agreement (PTA) at the 1976 Bali Summit, the scope of products covered was narrow and member states' willingness to implement was weak, resulting in a negligible impact on intra-regional trade. Subsequently, the ASEAN Free Trade Area (AFTA) was concluded in 1992, agreeing to establish an ASEAN free trade area within 15 years. The goal was to reduce intra-ASEAN tariffs to 0.5 percent by 2008 while gradually eliminating non-tariff barriers among member states, ultimately creating a free trade area.

Efforts toward a more comprehensive multilateral trade regime in the Asian region materialized with the establishment of APEC in 1989. The first APEC Summit in the United States in 1993 officially declared the vision of building a single market, and the second summit in Bogor, Indonesia, in 1994 adopted the 'Bogor Goals,' which set targets for trade and investment liberalization within the region. The agreement stipulated that in the first phase, developed APEC member economies such as the United States, Japan, Australia, Canada, and New Zealand would pursue regional trade liberalization by 2010. In the second phase, the remaining members, including Korea, China, Malaysia, Thailand, Indonesia, Singapore, the Philippines, and Mexico, would participate in regional trade liberalization by 2020. Subsequently, various action plans to deepen APEC economic integration were presented at annual APEC summits. However, as of 2011, APEC has still not reached its regional trade liberalization targets (APEC 2011).

The gap in multilateral trade agreements in the Asian region has been filled by bilateral FTAs. As shown in [Figure 1], Asian countries had already concluded, were negotiating, or were conducting joint studies on 250 FTAs as of 2011. The vast majority of these FTAs are bilateral agreements, which surged from 3 in 1990 to over 170, accounting for 68 percent of all FTAs.

Asian bilateralism is largely defensive in nature, a response to the spread of regionalism in Europe and North America at a time when the regional multilateral framework of APEC was falling short of expectations. Outside Asia, FTAs began to proliferate from the 1990s, primarily among the European Union, the United States, and some South American countries. Initially, Asian countries reacted negatively to this spread of bilateral FTAs. With the exception of the ASEAN Free Trade Area (AFTA) in 1992, no Asian country had concluded a bilateral or plurilateral free trade agreement before 2000. Japan and Korea continued to support multilateralism until the late 1990s and were among the OECD member countries that had not signed bilateral trade agreements. However, as WTO negotiations stalled and APEC lost momentum, they gradually felt a sense of isolation. Consequently, Korea initiated FTA negotiations with Chile in 1999 and began FTA discussions with Japan at a quasi-governmental level. Japan considered the FTA offer from Singapore a potential important test case and signed it in 2002. Subsequently, it shifted its focus to FTA negotiations with Mexico to offset the adverse effects of the North American Free Trade Agreement (NAFTA)... (to be continued)