Comprehensive Economic Partnerships East Asia East Asia Plus

Comprehensive Economic Partnerships: East Asia? East Asia Plus? Asia Pacific? Wing Thye Woo Brookings Institution wwoo@brookings. edu Institute of Strategic and International Studies, 5 th East Asia Congress, Mapping the Second Decade of East Asian Community Building, Kuala Lumpur, Malaysia, 2 -4 December 2007.

Two Questions for a CEP • How big? • How deep?

How large the membership? • Adam Smith • Blocs within WTO, WTO-plus • Potsdam meeting in 2007: The blocking coalition within WTO, the abuse permitted by FTA clause

How Deep Should Integration Go?

The Monetary-Financial Side of Asian Economic Integration • 2000 Chiangmai Initiative to pool forex reserves via web of bilateral swap agreements (BSAs) • 2002 Japan proposes Asian Bond Market Initiative • 2006 Asian Development Bank proposes Asian Currency Unit • 2007 Pooling to replace BSAs

Should there be a common currency in Asian economic integration if there is no “political union” objective?

NAFTA GDP: US dominates now and in future 2005$ trillion USA Canada Mexico 200512. 5 1. 2 0. 7 202519. 6 1. 8 2. 4 2050 37. 7 3. 0 7. 8 • Survival of individual currencies • Or Benelux-style outcome (e. g. Brunei)

EU GDP: Fairly equal size 2005$ trillion France Germany UK 2005 2. 3 3. 1 2. 3 2025 3. 2 3. 9 3. 3 2050 4. 9 5. 4 5. 1 • Strong spillover effects. Cooperative equilibrium is win-win over Cournot eqlm. Common currency as coordinating mechanism. • Political union to prevent any more French. German wars.

Asia GDP: Japan now, China in future 2005$ China Korea Japan trillion 2005 1. 9 0. 8 5. 3 2025 11. 7 2. 6 6. 7 2050 48. 6 3. 7 8. 0 • Yen block now and Yuan block in future? • If NAFTA outcome, then present push for Asian Currency Unit will be wasted effort.

What type of exchange rate cooperation if no common currency? • Bilateral or multilateral swap arrangements are not sustainable and won’t increase to meaningful sums unless members are pre-qualified for assistance: Regional surveillance mechanism is required. • Asian Monetary Fund, no economic logic for AMF to morph into the regional central bank. • Part of the pooled Asian reserves can be safely used to finance sound infrastructure projects in the poorest Asian countries rather than putting all reserves into assets of G 7 economies.

What kind of financial cooperation? • Asian Bond Market Initiative – Improved regional financial market is good thing • But how plausible is the assumption that Asian money won’t also panic and run away from Asia when non-Asian money panic and start running away from Asia? • Establishment of a regional financial center that matches London and NY is the appropriate form of financial cooperation in Asia