singapore`s and asean`s competitive regionalism

8/3/2019 Singapore`s and ASEAN`s Competitive Regionalism

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Singapore and ASEAN's Competitive Regionalism in Southeast Asia and beyond

Takashi Terada(Organization for Asian Studies, Waseda University)


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1. IntroductionWhen the negotiations for trade liberalization in global and regional levels boggeddown, Singapore swiftly engaged in planning for and forging a vast array of Free TradeAgreements (FTAs), culminating in the creation of an FTA grounds well in East Asiaand beyond. On the role played by Singapore, Prime Minister Lee Hsien Loong,confidently stated that 'to say it is because of us may be too strong, but we set anexample and we set people thinking. And I think that's also the reason why ASEAN[Association of Southeast Asian Nations] itself is discussing FTAs. There is ademonstration effect' (cited in Straits Times, 1 December 2004). Singapore's interest insigning bilateral FTAs consecutively' was partly born out of a fear of its survival as anation that heavily relies on trade for its growth, and FTAs are expected to helpSingapore overcome its innate inability to call effectively for diplomatic and economicchanges in Southeast Asia to promote trade liberalization in the region and beyond.

There are two layers of FTA movements in Southeast Asia: 1) bilateral FTAs betweenASEAN members and extra regional countries, and 2) FTAs between ASEAN as asingle unit and extra regional countries. This chapter initially focuses on the first layerof bilateral FTA diffusion by exploring the impetus behind Singapore's activeengagement in FTA negotiations by examining three pressures (economic, security andlegal), set out by Solis and Katada, to establish whether Singapore has contributed to thegrowth of FTAs involving both Southeast and Northeast Asian countries, and if so, how.The chapter also examines the nature of trade policy-making system in Singapore toanalyze the alleged little involvement of the business sector in trade policymaking as acommon feature in Southeast Asia, demonstrating the predominant role of the state inthe FTA making process. The chapter finally analyses another level of FTA proliferationas ASEAN has served as a hub in the ASEAN+ 1 FTA networks with five major powers.The origins of this approach can be traced back to China's FTA proposal to ASEAN in2000, as a result of its concern to be isolated after the bilateral FTA initiative started byJapan and South Korea in 1998. Given the subsequent reaction taken by Japan, Koreaand India, China's aggressive diplomacy in Southeast Asia including the FTA proposalcan be seen as an independent variable against FTA diffusion in this layer, and,1Singapore has concluded FTAs with New Zealand (2000), Japan (2002), the European Free TradeAssociation (comprising Switzerland, Iceland, Liechtenstein and Norway) (2002), Australia (2003), theUnited States (2003), Jordan (2004), India (2005), South Korea (2005) and Panama (2006). Singapore ispresently engaged in FTA negotiations with several countries including Bahrain, Mexico, Canada,Panama, Peru, Sri Lanka and Ukraine.


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symbolically, the ASEAN+ 1 FTA movement has been a site for the competitions wheretwo types of FTAs - China-led traditional FTA with gradual implementation and Japan-led new-age FTA with single undertaking approach - have prevailed, creating furthercomplicated situations for multilateral companies' possible use of the FTAs.

This chapter argues that the impact of bilateral FTAs on Southeast Asia is limited, asonly Singapore and Thailand have virtually signed multiple bilateral FTAs and,moreover, those FTA and ASEAN's integration schemes such as ASEAN Free TradeArea (AFTA) are not well utilized by ASEAN's and multinational companies either,representing the perception gap between keener FTA creator in the governments andindifferent users in the business sectors. FTA diffusion certainly occurred in SoutheastAsia, but it is Japan-centered as most of ASEAN members chose it as their first and, insome cases, only bilateral FTA partner, and thus the concern about trade diversion effectas a valid explanatory variable is mainly attributed to Japan's larger economic presenceas the largest trading partner and investment source to those countries. Singapore'sefforts to sign an FTA with Japan through diplomatic persuasion and politicalconcession effectively functioned and the resultant involvement of Japan into the FTApolitics in Southeast Asia is evaluated as an independent variable in the bilateral FTAproliferation in the region.

2. Singapore s economic, political and legal impetuses behind the pursuit of FTAsSingapore has enjoyed the world's highest trade to gross domestic product (GDP) ratio,about 300 per cent, a fact that well accounts for its active diplomatic endeavors tofacilitate the trade liberalization movements in the GATT/WTO-based multilateraltrading system, as well as its efforts at regional levels such as ASEAN and the Asia-Pacific Economic Cooperation (APEC) forum. However, both regional and multilateralnegotiations became inert in the late 1990s: the Asian financial crisis in 1997 held upthe pace of ASEAN members' liberalization movement and sapped ASEAN's collectivestrength, while APEC became unwieldy and ill-equipped to handle trade issueseffectively, due mainly to the failure of the Early Voluntary Sectoral Liberalization(EVSL) program in 1998. In the multilateral arena, the 1999 Ministerial Meeting inSeattle, during which the increasing influence of developing countries became strongenough to hamper the liberalization movement at the WTO, as the institution employeda consensus-based decision-making approach among over 150 members.


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companies with access to a wider North American market, thanks to the NorthAmerican Free Trade Agreement (Straits Times 25 August 2002). Therefore, the FTAswith these two economic superpowers were expected to play a catalyst role inincreasing Singapore's economic and business presence in the Japanese and US marketswhile the trade liberalization momentums at regional and multilateral levels almost lost.

Singapore's growing interest in FTAs was spurred not only by trade and investmentinterest, but also by strategic considerations. Singapore tended to believe that FTAs withmajor economies would secure its presence in Southeast Asia by strengthening ties withthe FTA partners outside the region. Leifer (2000: 26) argued that Singapore was bornwith an innate vulnerability arising from its geopolitical circumstances: 'wedged-in' bybig Islamic countries like Malaysia and Indonesia. A useful way to counter thisvulnerability was related to the concept of the balance of power that is 'directed tofinding and employing ways of compensating for and reshaping to advantage a regionaldistribution of power,' which includes 'liberal internationalism in economic policy.' Forinstance, in November 2000, Indonesian President Wahid, unhappy with Singapore'srejection of his proposal to include East Timor and Papua New Guinea in ASEAN,urged Malaysia to form an alliance with the idea of cutting off Singapore's water supply.This was one of the many unfavorable remarks against Singapore, and allowedSingaporeans to see that their security could easily be jeopardized by their neighbouringnations. Antagonism towards Singapore in Malaysia and Indonesia has been a source ofprimary political fear for Singaporeans. Political unpredictability in both countries hasan adversarial effect on Singapore's foreign policy approaches. Therefore, 'the multipleinvolvements of important extra-regional states have been encouraged as a practicalway of coping with vulnerability' (Leifer 2000: 26). Raymond Lim, Minister of Statefor Trade and Industry and Foreign Affairs, supports this view by stating that 'our FTAsallow important nations like Japan and the United States to anchor their presence in theregion and ensure that they remain stakeholders here' (cited in Straits Times, 3 March2003). For instance, while Singapore expanded the Changi port facility in 2001accommodate American aircraft carriers, Singapore was negotiating an FTA with theUnites States, as a part of such strategy, with an expectation that it would serve as acatalyst for the United States to continue commitment and goodwill to Singapore, whichis conducive to regional stability and prosperity.

Singapore's population is small Gust over 4 million), and 99.9% of its imports arealready tariff- free, meaning that there is little incentive for a partner country to eliminate


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tariffs and grant Singapore preferential market access in return for the same by signing aFTA. Thus it is not a puzzle that only six companies have exported their products toSingapore by utilizing the Japan-Singapore FTA, despite of approximately 3000Japanese companies operating in Singapore (Nihon Keizai Shimbun, 25 June 2007).Singapore has thus been forced to convince potential partner countries of the merits ofan FTA by incorporating elements that go beyond trade in goods, such as liberalizationof services and systems for mutual recognition, and adopting preferential systems forinvestments from the partner country. This is a legal impetus behind Singapore's keenerinterest in FTAs. An important aspect of the appeal of Singapore as Japan's first FTApartner was the fact that it was possible to conclude an economic partnership agreement(EPA), a new type of FTA that Japan hoped to promote. EPA includes numerous 'newage' elements not incorporated in the WTO rules, such as cooperation in the area ofsmall and medium enterprises, the protection of intellectual property, harmonization ofstandards in e-commerce transactions, and the facilitation of human movement forbusiness purposes - which are termed 'WTO-plus' elements (see Solis in this volume).Given both nations enjoyed similar levels of economic development: Japan andSingapore ranked fifth and sixth in terms of GNP per capita in the world in 2000 whenthe FTA movement commenced, Singapore could be one of the few regional nationswhich could potentially conclude a 'new age' economic partnership agreement withJapan that incorporated areas beyond the elimination of tariffs, as Prime Minister Goh(2002a) said in his opening speech at the signing ceremony.

Singapore tended to emphasize the need to constantly stay ahead of neighbors andcompetitors for the survival in both economic and strategic contexts and Lee HsienLoong once pointed out that, should Singapore be overtaken and made irrelevant, its'influence and international standing will go down' (cited in Leifer 2000: 21). Singaporethus tried to act as a trendsetter in FTA diffusion in Southeast Asia by swiftly signingEast Asia's first and second bilateral FTAs with New Zealand and Japan in 2002.Accordingly, its interest in FTAs mainly emerged as a response to the external shockssuch as the stagnation of WTO or Asian financial crisis, rather than an influence of theproliferation of FTAs in other countries or regions. So the non-diffusion hypothesis ofindependent decision making fits the launch of Singapore's FTA policy best.

Yet, the emulation hypothesis seems to fit to explain FTA diffusion in Southeast Asiawhen it comes to the revision of the older FTAs partly by referring to the contents in thenewly-signed FTAs by other ASEAN members. The Japan-Singapore FTA, signed in


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2002 as the first bilateral FTA by only Asian countries, was not a perfect FTA as Japanexempted Singapore's key products such as petrochemicals from the liberalizationrequirement. Perhaps because Japan had never had an FTA, it was worried that the FTAwith Singapore might provide other ASEAN members a possible 'backdoor' entry to theJapanese petrochemical market, so Japan persuaded Singapore to agree to set up 60 percent of local content threshold which was stricter than 40 per cent set up in AFTA. Yet,Japan later removed tariffs on petrochemicals in an FTA with Malaysia signed in 2005,which then motivated Singapore to request Japan to provide the equal treatment in thefollow-up negotiations to review the initial contents of the FTA with Japan five yearsafter the effectuation. Singapore claimed that even if the Japan-Singapore FTAcontinued to keep tariffs on the products, its investors such as Exxon Mobil would movetheir production bases to Malaysia from which they would export their petrochemicalsto Japan to enjoy a non-tariff treatment to be granted under the Japan-Malaysia FTA.Singapore and Japan also agreed to lower the 60 per cent local content requirement to40 per cent, the review which was based on Singapore's concern that the higher localcontent requirement would cause Singapore to lose its attractiveness as an investmentdestination.' Any bilateral FTA signed between Japan and ASEAN members include thisreview commitment and 'emulations' are likely to continue to take place as far as thedifferent contents exist among those bilateral FTAs.

3. Bilateral FTA diffusion in Southeast AsiaThe proliferation of bilateral FTAs in Southeast Asia began when Singapore signed theFTA with Japan in 2002, and Singapore hoped, as then Singapore's Prime Minister GohChok Tong expressed, that the it would 'have a positive demonstration effect on othercountries and would hopefully give impetus towards the creation of more FTAs' (citedin Straits Times 23 October 2000). Singapore's prosperity has been closely associatedwith the economic growth of Southeast Asia, as well as investment and trade with themajor economies outside the region. For instance, when it started pursued FTAs late1990s, Singapore invested most in Southeast Asia among ASEAN countries and at thesame time, absorbed more than half of the total American and Japanese FDls toSoutheast Asia (Rajan, Sen and Siregar, 2001: 10). It is thus Singapore's interest to havean economically stable Southeast Asia, and especially it felt so after the 1997 Asianfinancial crisis, which seriously hampered ASEAN's economic growth, decreased theliberalization momentum, and collapsed its collective strength and prominence. Asdiscussed earlier, Singapore started its FTA initiatives with a hope that major economies2 Personal interview with a senior official from Singapore Foreign Ministry, 3 April 2008, Tokyo.


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such as Japan and the United States could catalyze wider economic links andcooperation with economies in Southeast Asia, creating greater trade and investmentflows for ASEAN members, helping regional economic growth, and creating moreemployment, given the fact that Japan and the United States were an important sourceof investments, capital, and technology, and a major export market for ASEANeconomies.

However, when Singapore activated its FTA negotiations in 2000 which included onewith Japan and New Zealand, it was viewed as insensitive since other ASEANeconomies were struggling to recover from the adverse effect of the financial crisis, andSingapore's image as a self-centered member who cared little about its neighboursstrengthened. In fact, Singapore did not consult with ASEAN members about its policyorientation towards bilateral FTAs, and some regional leaders were unhappy. Forinstance, Malaysian Prime Minister Mahathir stated that 'moves by Singapore tonegotiate separate free-trade agreements, were worrisome' (cited in Straits Times, 27February 2001), while his Trade Minister, Rafidah Aziz noted that Malaysia was 'notinterested in having bilateral FTAs with anybody' (cited in Straits Times, 15 March2001).

Yet Thailand soon joined Singapore as the only like-minded country in the region whichbegan to vigorously pursue FTAs after Thaksin Shinawatra came into power in January2001. Their shared interest in trade liberalization pushed the bilateral ties betweenSingapore and Thailand into a 'special strategic partnership' (cited in Straits Times, 19January 2005), founded on their enthusiasm in the pursuit of FTAs. The participation ofa major regional economy like Thailand in the FTA movement catalyzed other nationsto follow the trend. For instance, Indonesia's 'sense of unease ... leading to moreserious consideration on the need for [it] to do the same' grew when Thailand began toshow an interest in negotiating a FTA with Japan (Soesastro, 2004: 4). Their partnershipwas also instrumental in creating a regional atmosphere that pursued more activeengagement in trade and investment liberalization. In September 2003, Thaksin andGoh proposed that the projected date for realization of an ASEAN EconomicCommunity that would result in the formation of a single regional market should bebrought forward from 2020. Following this proposal, Goh worked to convince thePhilippines, while Thaksin did the same in Vietnam, resulting in these two countriesexpressing agreement with the proposal (Business Times, 9 October 2003). The group ofcountries supporting the proposal gradually expanded, resulting ultimately in the earlier


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formation of a consensus. In this way, Singapore has been able to function as afacilitator not merely with respect to bilateral FTAs, but also with regard to ASEANregional integration by overcoming its smaller size and limited influence in the region.Then, Malaysia and Indonesia - believed to be the least enthusiastic nations in theregion about bilateral FTAs - developed their interest in FTAs by studying all the prosand cons of the JSEPA, according to Katsuhiko Umehara, then Director ofMETI, (citedin Terada 2003). A bilateral FTA involves the connotation of creating a partner, wherebyeither country selects the other country in consideration of economic and politicalbenefits. Japan was already the most important partner for trade and investment as wellas the top aid donor for these two countries, and also because these countries recognizedthat Japan would have a vast market and purchasing power through an FTA, and theimportance of being able to enter tariff-free into the Japanese market, and within thatrecognition exists an expectation of bringing in investment and technology transfer fromJapan. As a result, Malaysia and Indonesia, as well as Thailand, the Philippines, andBrunei, have signed bilateral FTAs with Japan, a movement which Vietnam is nowjoining. It is also Singapore that set a precedent for Thailand and Malaysia to follow interms of the choice of FTA partners by signing with other major economies such as theUnited States and Australia, despite Malaysia being yet to sign them.

One of the powerful explanations behind the diffusion of bilateral FTAs in SoutheastAsia concerns the exclusive nature of FTA whereby the benefits accrued, such as tariffeliminations, come at the expense of the third party countries. The main negative effectsof FTAs are considered to be a decrease in non-members' exports to members, thedeterioration of the terms of trade for non-members, and a reduction in members'consumer welfare as the more efficient non-member producers are displaced by lessefficient member producers due to tariff preferences (Viner 1950, Eithier 1988, andUrata in this volume). It is the companies of non-FTA partners that are seen to begreatly disadvantaged in competing with other firms from FTA partners, whose productscan enjoy tariff-free privileges, leading to the creation of a trade diversion effect.Therefore, as Solis and Katada argue in this volume, business sectors or interests groupsfor certain industries in these cases may mobilize to influence trade policy, causing thediffusion of FTAs.

However, it is doubtful that this hypothesis comfortably explains the case of SoutheastAsia. First, the business sectors in Singapore, like many other ASEAN members, do not


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usually participate III the trade policymaking process, and their VOIces are notnecessarily influential in their governments' pursuit of FTAs. Sally (2004: 27) regardsthe absence of a systematic incorporation of business inputs as the 'Achilles heel' ofSingapore's trade policy-making, generating 'the passivity of the business sector' inSingapore's FTA movement. This makes it difficult for Singapore to 'digest the realbusiness preferences and information,' and to enjoy 'business feedbacks at home.' Oneof the reasons behind the slight business interest in influencing the government'seconomic policy lies in the excessive economic reach of the government in the market.In Singapore, numerous government-linked companies (GLCs) in which former andcurrent ministers and members of the ruling People's Action Party are involved, enjoytheir great market power to the detriment of smaller private companies.Centralized trade policy making is, to a differing degree though, a general characteristicacross Southeast Asia including Thailand, another key regional FTA player next toSingapore (Sally 2007: 1602). Although the governments of Indonesia, Malaysia andthe Philippines sporadically consulted with non-governmental sectors includingcommerce and industry organizations when negotiating their first FTAs with Japan, theinfluence of those groups in FTA policymaking was limited or unidentified (Azuma2007). This stems partly from most ASEAN companies' failure to 'see how theirbusinesses benefit from ... integration' and, as a result, the ASEAN governments find'no pressure from ASEAN businesses to move faster on regional economic integration',as Severino (2006: 249) comments. These observations support a view that interestgroup politics is neither necessarily an important factor for the proliferation of FTAs inSoutheast Asia, nor directly relevant to the FTA diffusion in the region, and that it is thestrong state that plays a central role in the bilateral trade negotiations (Aggarwal andKoo, 2005).

Regionalization is often referred to as a key factor behind the promotion of regionalintegration in 'East Asia' which has lacked a formal institutional mechanism to promoteregional integration, differing from the European approach. East Asia's regionalintegration has thus been characterized as market-driven, through increasing directinvestments, trades, technological transfers, and capital flows which combine theconstituent entities of a certain region. In this approach, multinational corporations haveplayed a key role, while policy coordination by the governments remained minimal(Pempel 2005). Yet, when it comes to 'Southeast Asia' where the business communitywas not so much involved trade policymaking process and the less tangible patterns of


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economic linkages and networks were built among ASEAN members, as seen in thelower intra-regional trade ratio, an European-type of regional integration via 'top-down'political dialogues before the emergence of substantial regional economic transactions isa more accurate observation. Singapore's trade policymaking approach represents thisintegration style as its trade policy is 'effectively depoliticized,' and implemented in'technocratic fashion,' indicating that the 'trade bureaucracy, largely insulated frominterest group pressure, can speedily implement policy objectives' (Sally 2004: 23-4).

Another fact that does not help the trade diversion explanation about FTA diffusion inSoutheast Asia is that Singapore and Thailand are virtually the only nations in SoutheastAsia which have successfully signed multiple bilateral FTAs, and the impacts of theirFTAs in the trade and investment flows in Southeast Asia are not expected to be sosubstantial and the actual trade diversion would not be so much relevant. In fact,Thailand now abandons FTA-oriented trade policy after the Thaksin government wasoverthrown by a coup in 19 September 2006, and FTA negotiations with the UnitedStates, the most significant FTA for Thailand, have been suspended since then. Thesmaller portion of tariff elimination element in the JSEPA and other of Singapore'sbilateral FTAs does not produce such a considerable trade diversion on trading partners.Also, Thailand's bilateral FTAs with Australia, New Zealand and India, are seen as'trade-light' FTAs, meaning these FTAs would make little difference to their tradeactivities due to the low trade volumes; for instance, Australia accounted for 2.3 percent of Thailand's total exports, while Thailand accounted for 1.8 per cent of Australia'stotal exports in 2004 (Sally 2007: 1609) and Thailand's average tariff cut ratios underthe FTAs with Australia and India were merely 0.74 per cent for 3,393 items and 6.6 percent for only 64 items in 2005, respectively (The Nation, 9 September 2006). Even theThai-Japan FTA, which is much more significant because of the total trade volume, isseen as 'quite weak' mainly because of some exemptions on goods, especiallyagriculture, and restrictive rules of origin (Sally, 2007: 1611).

The number of Japanese companies that have used FTAs with some Southeast Asiancountries like Malaysia is also small due to complicated procedures and the expensivecost of certificates of origin required to qualify for duty exemption. This is especiallytrue in the case of automobiles in which the companies need to obtain tens of thousandsof certificates for their parts (Nihon Keizai Shimbun 25 June 2007). Average FTAutilization rates by Singaporean companies for its six FTAs (the United States,Australia, Japan, ASEAN, India and China) are 37 per cent in 2006 and 32 per cent in


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2007, respectively (IE Singapore 2007). From the standard of European FTAs,utilization rates below 50 per cent are seen as 'very low' (Baldwin 2007: 12). Insummary, ASEAN members, except for Singapore, currently do not actively pursuebilateral FTAs, and they are yet to be necessarily well utilized and even acknowledgedas a useful business facilitator by ASEAN companies, indicating the actual tradediversion is not so substantial.

4. Conditions and outcomes of bilateral FTA diffusion in Southeast AsiaThe composition of FTA diffusion, that includes states' calculation over the choice oftheir FTA partners, dependents on how closely economic and business ties had beenestablished, as states tend to see bilateral FTAs as effective for strengthening theexisting economic relations through increased trade or investment interaction byfacilitating mutual economic benefits and business transactions between two countriesmuch more considerably than through a regional and global approach. In this context,Japan's interest in pursuing bilateral FTAs played a key role behind the proliferation ofthis kind of trading arrangement in Southeast Asia given the following conditions whichaffected the FTA diffusion: 1) Japan was the largest trading partner, source ofinvestment and technology, and aid provider to most of ASEAN members, forging closebilateral economic and business linkages; 2) Japan pursued bilateral FTAs mostenthusiastically in Southeast Asia among extra-regional countries such as China andKorea; and 3) not all ASEAN members were interested in bilateral FTAs with China andKorea. As a consequence, Japan became the first bilateral FTA partner to most ofASEAN members, and the only bilateral FTA partner for Indonesia, the Philippines,Brunei and Vietnam, despite ASEAN's criticism over Japan's bilateralism.

Japan's considerable economic and business presence on Southeast Asia actually madethe trade diversion effect relevant in the FTA diffusion. The Pilipino interest in signingan FTA with Japan originated from a fear about the possible trade diversion among itsneighbors that 'have started to gain wider access to the Japanese market' as stated byformer Economic Planning Secretary Solita Monsod in one of the Senate hearings onthe FTA with Japan: 'the presence of these EPAs with [other ASEAN members] and theabsence of an EPA with us will inevitably result in at least some amount of trade andinvestment diversion from us, which we can ill afford' (cited in Japan Times, 22 January2008). Indonesia's interest in an FTA with Japan was also spurred by the concern thatIndonesian products would be disadvantaged in Japan which already started negotiatingbilateral FTAs with other Southeast Asian nations (Sato 2007).


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While Japan was generally seen as a favorite 'bilateral FTA partner' by individualSoutheast Asian countries, China and Korea were not necessarily considered so; thePhilippines, for instance, continued to reject signing the bilateral early-harvest programdue to a fear of the influx of cheaper agricultural products from China, and it was finallysigned only through Hu Jintao's historic visit to Manila in April 2005. Vietnam was nothappy with a trading deal with China as its official expressed: 'Chinese appliances arevery popular in Vietnam... given the oversupply of electrical appliances in China,Chinese manufactures will be able to sell more to Indochina and the rest of ASEANunder the agreement' (Straits Times, 18 May 2002). Thailand is also not expected tosign the Korea-ASEAN FTA while Seoul continues to exclude rice from the tariff-reduction list (The Nation, 10 December 2005). Prime Minister Thaksin's offer toexclude rice from a bilateral FTA with Japan illustrates the high priority Thailandattached to securing a trade accord with Japan.

Japan's preference for bilateral rather than regional approaches in its FTA with ASEANcan be evidenced by the fact that the actual negotiation of the Japan-ASEAN FTA wasnot commenced until April 2005, and lagged much behind China and Korea China thathave not been instead interested in concluding a bilateral FTA with any nation inSoutheast Asia other than Singapore. In the meantime, there emerged a view in Japanthat as AFTA was not a customs union with a common external tariff policy, theASEAN-Japan FTA might eventually be established through the consolidation of theexisting bilateral FTAs between Japan and ASEAN, and that there would be no need ofthe Japan-ASEAN FTA (JETRO 2007: 83).

With regards to ASEAN's initial reactions to the ASEAN-Japan FTA, since ASEANmembers were at different stages of economic development, they were concerned thatJapan's bilateral FTAs with individual ASEAN members could leave the less developednations behind. With ASEAN leaders determined to stay economically united, they haveexpressed suspicions over Japan's intention with some claiming Japan's FTA policycould cause economic disintegration within ASEAN. Even during the process ofdrawing up the Joint Declaration in Phnom Penh in 2002, to be signed by PrimeMinister Koizumi and ASEAN leaders, the ASEAN side became reluctant to accept theinitial Japanese draft that stressed bilateral ties. The declaration that was eventuallyapproved by the leaders was rephrased to call for the promotion of FTAs between Japanand ASEAN (Yomiuri Shimbun, 6 November, 2002). It is curious that seven ASEAN


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members signed or now negotiating bilateral FTAs with Japan despite ASEAN'sconcern about Japan's bilateral FTA approach which would bring a negative impact toASEAN solidarity. According to Oike (2007: 15), a Japanese FTA negotiator, this wasmade possible by a closer bilateral relationship that Japan had already forged withindividual ASEAN members over decades through ODA and investment, unlike anyother country, and bilateral FTAs were considered by ASEAN members to be a way ofsecuring or increasing economic and technical cooperation from Japan. So thoseASEAN members accepted Japan's comprehensive EPA approach, originated in JSEPAwhich Japan saw an 'important intellectual springboard and model for the kind of FTAsand EPAs that Japan should aim for' (Watanabe 2004), despite their substantiallydifferent economic and industrial structure, compared with Japan.While Japan's bilateral FTA policy and its closer bilateral economic relations are amajor causal factor, Singapore's aggressive pursuit of bilateral FTAs is not so partlybecause the trade diversion effect to be caused by Singapore FTAs would be small, notbothering other Southeast Asian economies. Singapore's diplomatic efforts to bringJapan as region's most significant economic partner to the FTA politics in SoutheastAsia, however, acts as a secondary but significant role in this explanation. Singapore'sFTA approach to Japan initially invited only 'negative and, at best, skeptical' (Munakata2001: 19) responses, as there was still lingering opposition to changing trade policydirection by forging FTAs. Singapore's explanations about why it sought an FTA duringintensive talks in the first half of November 1999 were influential in changing Japan'sopposition to a FTA. According to Munakata (2001: 23), a senior MIT! official involvedin the talks with Singapore, what especially struck the Japanese officials was that Japanshould also secure policy options to 'complement the WTO;' this approach helped Japanconclude that 'negative reactions from other countries, if any, would be manageable'.

Singapore's tactics to visit the Ministry of Agriculture, Forestry and Fishery mmid-1999 to convey that Singapore was not interested in agricultural liberalization inJapan was also a significant gesture in Singapore's FTA courtship to Japan. Singapore isnot an agriculture-free nation; horticulture is fairly well-developed and Singapore is thethird largest exporter of cut orchids (after Thailand and Malaysia) in which the mainmarket is Japan. These orchids account for some $18 million (60%) of the agriculturalexports in 2002 (Straits Times, 20 September 2003). The tactics Singapore employedwere conducive to creating the view in Japan that Singapore was actually one of the fewnations that did not cause resistance from the farming sector in Japan. It is not an


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exaggeration to say that this persuaded Japan to commence official negotiations withSingapore as its very first FTA partner. As a result, there was only a 14 per cent increasein the number of Japan's zero-tariff commitments with regards to agricultural products,and, these benefits had been already reached within the WTO framework, meaning thatthere was no agricultural product in JSEPA from which Japan agreed to newly removetariffs. At that time there was an atmosphere among Japanese policy intellectuals whosupported the promotion of Japan's FTA policy that Japan would not have forged anyFTA without successfully concluding negotiations with Singapore.' Singapore greatlyassisted Japan in successfully launching its bilateral FTA policy and this move was aninitial factor behind the FTA diffusion in Southeast Asia.

5. ASEAN s efforts towards a unified trading playerSingapore's prosperity has been closely tied to the economic growth of Southeast Asia,as well as investment and trade with the major economies outside the region. Thus, it isin the interest of Singapore to encourage ASEAN's integration and link it with largereconomies, leading to the eventual establishment of a larger single market in East Asia.Before the 1990s, given that trade structures were competitive rather thancomplementary with similar resource endowments and levels of technologicaldevelopment, which culminated in the production and export of similar primary andlabor-intensive products, Southeast Asian countries were not interested in regionalintegration for two decades after the birth of ASEAN in 1967. ASEAN membersshunned the term and concept of 'integration' and stuck instead to 'cooperation,' as seenin official meetings and declarations until the late 1980s. A watershed decision inbringing the concept of regional integration to the agenda was the establishment ofAFTA, initiated at the Fourth ASEAN Summit in Singapore in January 1992. AFTAhassought to increase ASEAN's competitive edge as a production base in the world marketthrough eliminating tariff and non-tariff barriers within ASEAN and attracting moreforeign direct investment to the region.

AFTA is now almost completed with 99.77% of the products in the CEPT (CommonEffective Preferential Tariff) Inclusion List of ASEAN-6 which has been brought downto the 0-5% tariff range". The coverage has expanded and the scope has widened: theAFTA plus measures include harmonization of standards, reciprocal recognition of tests,and certification of products. The ASEAN Investment Area (AlA) as a framework for3 Personal interview with Naoko Munakata, 15December 2004, Tokyo4 Joint Media Statement of the Twentieth Meeting of the ASEAN Free Trade Area Council, KualaLumpur, 21August 2006


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promoting inflow of foreign direct investment in Southeast Asia was signed in 1998,which binds ASEAN countries to gradually remove investment barriers, liberalizeinvestment rules and policies, grant national treatment, and open industries to ASEANinvestors by 2010 and to all investors by 2020.

Despite these progress in implementing AFTA, examples abound underscoring the lackof willingness by member countries towards actual integration: for instance, exportingcountry's certificates of origin, which acknowledges that a product is CEPT certified,are frequently not admitted in the importing country; the necessary documents andformats are sometimes different for each country; and safety standards for electricalappliances are different as well (MET! 2004). Also, there are quite a few commoditiesput on a Temporary Exclusion List, a General Exception List or a Sensitive List(excluded from any liberalization program perpetually). AFTA has not been utilizedeither. For instance, only 4.1 per cent of Malaysia's exports within AFTA enjoyed theCEPT, while only 11.2 per cent of Thailand's imports were under the scheme (JETRO,2003). Also, the AFTA plus measures such as AlA, ASEAN Framework Agreement onServices (AFAS) or mutual recognition agreement have not made tangible progress(Sally 2007: 1601). Accordingly, ASEAN leaders' appeals for members' commitment tostronger regional cooperation and concerted efforts to facilitate regional integrationbecame cliches. Former ASEAN Secretary-General Rodolfo Severino criticized theorganization for having no clear idea about its future direction, saying that ASEAN hasbeen 'stuck in framework agreements, work programs and master plans' (cited inBusiness Times, 5 November 2002). Former Thai Prime Minister Thaksin also describedASEAN as a 'loose' grouping that 'has to work together more closely or risk being seenas unwilling to take action' (cited in Straits Times, 10 November 2002).

A most fundamental structural problem that has caused the lack of interest in ASEAN'sintegration schemes are insufficient intra-regional links, questioning the viability ofAFTA and other economic integration measures within ASEAN. Singapore's ForeignMinister Rajaratnam already recognized this structural problem in 1973: ' ... economicrealities require that regional cooperation must be wedded to external economicparticipation if ASEAN is to achieve its objectives. It is not intra-regional trade andinvestment but extra regional trade and investment which will accelerate ASEAN'seconomic growth' (quoted in Severino 2006: 257). In other words, cooperative schemesthat strengthen economic ties with larger extra-regional countries have been seen moreuseful for economic growth. Nearly 80 per cent of ASEAN's trade has been with non-


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ASEAN countries, and the exports of Indonesia and the Philippines to the ASEANregion are less than 10 per cent and 6 per cent respectively, while the combinedpopulations of the two nations account for nearly 60 per cent (Pang 2007: 13-14).Furthermore, 90 per cent of foreign direct investment has been from non-ASEANeconomies, and thus, a high degree of mutual interdependence among regionalcountries, in terms of trade volumes for instance, is not necessarily a powerfulexplanatory variable behind the formation of regional integration at least in the case ofASEAN. What has sustained ASEAN's need for the further promotion of integrationschemes to attain economic growth is to secure external markets and elicit widereconomic cooperation from larger extra-regional states, rather than to share the benefitsto be accrued from intra-regional cooperation. Thus, the fact that Japanese FDIs inChina increased in the 1990s and this trend became stronger as a result of China'saccession to the WTO in 2001 was a considerable concern to ASEAN. For instance,Japan's FDI in China during the first half of fiscal 2003 was 35.5% on a year-on-yearbasis, but its FDI ASEAN fell 14.6% during the same period (Kwan 2004). Noticeably,it was partly this move that spurred initially Singapore, as Lee Kuan Yew noted, toconsidered the FTA with Japan as a useful way to counter the economic threat posed byChina, (cited in Jiji Press News, 5 September 2001) and to hope to act as an importantcatalyst in promoting Japanese investment in Singapore and the region, blazing the trailfor other ASEAN members to attract more Japanese investment through FTAs ties.ASEAN, which was concerned that its appeal as an investment destination had beenalready damaged by the Asian financial crisis, decided to follow Singapore's initialmove to push ahead with regional integration in Southeast Asia, while expecting thatthis would also encourage Japan negotiate an FTA with ASEAN as a whole, and thatsuch FTA would stop the trend towards reduced investment by Japan (Lim 2003: 80).

ASEAN's approach underscores the concern that in negotiating FTAs with largecountries such as Japan and China, it must improve its international competitiveness byreinforcing the regional integration scheme and becoming an attractive investmentdestination, in order to avoid bowing to pressure from these large countries and losingits influence. The fear that ASEAN would be marginalized vis-a-vis larger economies inthe regional integration movement was expressed by Prime Minister Goh (2001):

. .. unless ASEAN, ourselves, get our act together, you may have a very wideincome gap between Northeast Asia and Southeast Asia ... Then ASEAN willbecome a marginal group within Asia. That is unstable for Asia. We will therefore in


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ASEAN try and work to integrate all our economies ... Long-term, we will havesome kind of East Asian Free Trade Area.'

These concerns then urged Goh to propose an ASEAN Economic Community (AEC)plan which was approved at the ASEAN Summit meeting in Bali, October 2003. Thisinitiative aims to fully deregulate the flow of people, commodities and currency as wellas investment and service markets within the region by 2020 (later it was broughtforward to 2015). Furthermore, the countries agreed to create a road map to promoteintegration in eleven industries, including automobiles and electronics, which make upover half of all trade at the informal Economy Ministers' meeting in April 2004. Theseproposals intend to change ASEAN's perception as a group of fragmented, relativelysmall economies unable to enjoy benefits from economies of scale in production despiteits integration efforts through the AFTA scheme.

6. Proliferation of ASEAN +1 FTAsIronically, while ASEAN's integration programs such as AFTA got stuck in the mireafter the financial crisis, it was China, formerly seen as its ideological threat, whichbrought an idea for dealing with ASEAN as a single trading partner and push ASEAN'sintraregional cooperation forward. In November 2000, Chinese Prime Minister ZhuRongji, partly influenced by the earlier move of Japan with Korea and Singapore,surprised ASEAN and East Asia with the proposal of a China-ASEAN Free TradeAgreement, the first trading arrangement in the region to be negotiated with ASEAN asone entity. China was attaching greater importance to cultivating good regional relationswith ASEAN partly to neutralize the containment policy of the Bush administration.China is also said to view ASEAN as an ally in the face of intensifying U.S. pressureover the revaluation of the yuan (Straits Times, 10 October 2003). China's proactivediplomatic approach towards ASEAN is also evident in its 2002 meeting with ASEANwhere China agreed to avoid using force to settle any dispute in the South China Sea, amajor source of confrontation between China and some member states, such asMalaysia, Vietnam and the Philippines.

China's immense interest in this FTA also derive from the opportunities that ASEAN'smarket of 580 million people and rich natural resources could offer. Moreover, China'sbasic approach to the region has focused on economic cooperation and mutual gains todispel the perception of a 'China threat'. To some extent, it has even become an engineof growth for the region, judging by the trade surpluses most ASEAN countries enjoy


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vis-a-vis China. Thus, to show its sincerity and goodwill, China offered to unilaterallyopen its agricultural market to ASEAN's latecomers five years ahead of the opening oftheir markets to China. In fact, China's FTA with ASEAN is based on more than justreciprocity since China gives more than it receives, for instance, according MFN statusto Vietnam, Laos and Cambodia before they even join the WTO (Terada 2003: 271).

It was the FTA initiative by Japan which move to negotiate FTAs with Korea andSingapore in 1998-9 that led China to feel isolated in the trade structure in East Asia, asNoboru Hatakeyama (2003) mentioned: 'had it not been for the start of JSEPA, therewould not have been such strong movements in this area towards FTAs, including thosebetween ASEAN and China.' China shortly joined the movement, but not bilaterally:China proposed an FTA with ASEAN in October 2000, on which they officially agreedin November 2001, conducive to the FTA diffusion being extended to Northeast Asia.Japan had not considered the establishment of an FTA with ASEAN as a singleeconomic unit, and the agreement for the establishment of a Japan-ASEAN FTA in2002 was seen as a response to the China-ASEAN FTA proposal (Terada 2006). AVietnamese official commented that Japan's FTA proposal with ASEAN in January2002 seemed to be a hastily-put-together affair that was 'all show' and had 'littlesubstance' and that its main purpose, not stated, was to counter the FTA proposal floatedby China to ASEAN (cited in Business World, 27 February 2002). With the rapiddevelopment of China as an economic superpower, its readiness to open its huge marketto foreign investors, and its aggressive economic movements into ASEAN, Japan foundit necessary to start pursuing an FTA with ASEAN while negotiating bilateral ones withindividual members. China's and Japan's FTA approaches to ASEAN also contributed toSouth Korea developing an interest in pursuing the same path, as its Trade MinisterHwang Doo-yun showed in Brunei, September 2002, leading to the final agreement onthe establishment of an FTA with ASEAN in 2004. India also proposed an FTA toASEAN in November 2002, and as in the case of Japan, the initial impetus for its desireto strengthen its economic relations with ASEAN through an FTA was provided byChina's FTA proposal (Shiino 2005). This ASEAN-centered FTA movement has beenjoined by Australia-New Zealand later, culminating in the formation of five 'ASEAN+ l'FTAs, perhaps as a basis for the eventual establishment of East Asian integration.

One important competitive element in the 'ASEAN+ l' FTA diffusion is that twodifferent types ofFTAs are promoted by Japan and China, and that both are presented toASEAN, meaning that ASEAN needed to implement two different types of FTA. Japan


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prefers to use the term of EPA rather than FTA to pursue more comprehensive economicarrangement, covering WTO-plus issues including investment rules or mutualrecognition standards to facilitate service-related business, in addition to theconventional FTA element of tariff elimination. Japan's FTA model is based on the FTAwith Singapore (JETRO 2007: 52). Meanwhile, the China-ASEAN FTA intends not toremove but lower tariff rates (less than 5 per cent) on almost all commodities (ASEANSecretariat 2001), and China and ASEAN, both categorized as developing countries,were entitled to utilize the enabling clause which indicates the exclusion of the article24 application. The China-ASEAN FTA was thus allowed to incorporate the EarlyHarvest Program under which, in 1 October 2003, China started removing all tariffs on600 agricultural exports of ASEAN such as vegetables, tropical fruits, meat, dairyproducts, ornamental plants, timber, and palm oil (Wong and Chan 2003: 511). Theseconcessions on the part of China imply ASEAN's importance in China's foreign policy,as discussed earlier, instrumental in eliminating ASEAN's concern about China as anFTA partner, creating an impression that Japan was lagging behind China in the FTAcompetition in East Asia (Terada 2006). This impression was strengthened since, in FTAnegotiations with ASEAN, Japan persisted in its comprehensive EPA approach, makingdemands in the WTO-plus elements that caused negotiations to be occasionally boggeddown due to the strong resistance on ASEAN's part, as Oike (2007: 23), a MOFAnegotiator confessed.

The more competitive element lies in the ways of implementations, and Japan's single-undertaking approach, meaning that every issue in the agreement is negotiated at thesame time, tends to promote trade liberalization more quickly China's model that isbased on gradual approach in which trade liberalization on goods is negotiated first, andthen followed by the services and investments. Also, Japan's FTAs promise to removemost of the tariffs immediately after the agreements become effective, while China'sapproach put the products into different categories of tariff ratios and remove or reducethose tariffs gradually in accordance with these different categories of products. Thus,the elimination of higher tariffs would take longer in China's FTAs, and, importantly,this is modeled after the AFTA approach. This means China's approach was morefamiliar and comfortable for ASEAN, which made it substantially easy to conclude theirFTA negotiations. Japan, as a developed nation, should meet the requirements of Article24 of GATT, which stipulates the mutual abolishment of tariff of 90% or more for alltrade within ten years, based on the principle of reciprocity, and ASEAN needed toabide by this rule in the FTA negotiations with Japan, unlike the case of the FTA with


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China, as mentioned above. Now that South Korea's and India's FTAs with ASEANtake China's model in terms of implementation of liberalization with the productscategories and initial liberalisation on goods, Japan's comprehensive and WTO-consistent approach, which the AustralialNew Zealand team is following though, doesnot well prevail in Southeast Asia. The result that China wins against Japan in the legalcompetition in the ASEAN+ 1 FTA diffusion is mainly attributed to ASEAN that prefersChina's model to accommodate the wide gaps among ASEAN countries in their level ofeconomic development. The result of competition over the FTA styles, however, maycause the completion of regional trade and investment liberalization to be delayed inEast Asia, not helpful in overcoming the 'convoy problem', where the least willingmember holds back the pace of trade liberalization. In addition, the different productcoverage and distinctive time framework of liberalization in these two types of FTAs inSoutheast Asia, together with the bilateral FTA networks Japan mainly forged, wouldmake it difficult for multinational companies as potential FTA users to identify whichFTA at both bilateral and regional levels could be most effective in terms of cost-savingfor their business. Thus, a 'spaghetti bowl' effect (Bhagwati 2008), meaning a largenumber of rules of origin with specific standards and involving specific procedures willbe formulated, and different rules will be applied to a single commodity, would be mostconspicuously presented in Southeast Asia.

7. ConclusionThis chapter focused on the role of Singapore to test the validity of the FTA diffusionframework in accounting for the proliferation of bilateral FTAs in Southeast Asia.Singapore's aggressive pursuit of FTA policy partly contributed to the initiation of a'domino effect', with more neighbouring countries extending the circle of FTAs inSoutheast Asia and beyond. Yet, as this chapter revealed, most of ASEAN memberschose Japan as its first and only bilateral FTA partner, underscoring Japan's distinctivestatus as the most significant trading and investment partner as well as aid giver inSoutheast Asia. So, this 'biased' FTA diffusion was mainly attributed to Japan whoseinitial FTA strategy, based on those strong economic ties, promoted bilateral rather thanASEAN FTAs, distinguishing its FTA approach from those of China and Korea. Most ofASEAN members decided to start FTAs with Japan as a result of the concern abouttrade diversion to be caused by pre-existing FTAs signed by Japan with other regionalcountries. Accordingly, the FTA diffusion in Southeast Asia was not a result offollowers' interest in emulating the FTA model preceded by Singapore or their ambitionto compete against it. Singapore's role in this process was to help Japan to start pursuing


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bilateral FTAs in the region.

Significantly, the bilateral FTA diffusion in Southeast Asia has now extended beyondSoutheast Asia. The ASEAN+ 1 approach was initiated by China's proposal of an FTAwith ASEAN in October 2000, following which Japan proposed its own FTA withASEAN in January 2002. The approach has since been adopted by South Korea, India,and AustralialN ew Zealand, with the result that ASEAN today functions as a hub for thefive ASEAN+ 1 FTAs. Yet, a step towards the commencement for an East Asia FTAnegotiation depends on ASEAN's willingness to move beyond this framework. ASEANas a loose group of relatively small economies inevitably depends on externaleconomies for its growth through FDI and exports, but its institutional significancewould be diminished if a larger arrangement such as an East Asian FTA, in whichASEAN could be marginalized, developed rapidly. ASEAN's reluctance to move tradeliberalization by itself, or perhaps its inability to take a political initiative towards awider regional integration as an unified player, can be found in the fact it has neverproposed an FTA to any of those '+ l' partners. The lack of willingness and capability onthe part of ASEAN would be a major obstacle to the establishment of region-wideintegration in East Asia. Larger countries such as Japan and China are fully aware ofthis sensitivity and institutional problem, as seen in their careful supports for ASEAN'sintegration programs (Terada 2006: 12). The completion of ASEAN EconomicCommunity is thus an initial but pressing step towards the eventual formation of theEast Asian FTA.


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