Research Background and Motivation

Chapter 1 Introduction

1.1 Research Background and Motivation

Since the end of World War II, nations around the world all vigorously push forward the free trade scheme to reconstruct the global trading order. Free trade means a country can freely produce and sell products to other countries without trade barriers such as tariff, quota, or non-tariff barrier to the imports of foreign goods, enabling the free products flow between countries and countries (Charles, 2009). Free trade can bring benefits and enhance the standard of live around the world since the outputs can be increased due to specialization. If the government sets legal restrictions on international trade or shuts down the international flow of products and services for the sake of protecting domestic industry, yet, it will also lead to inefficiently use the resources, reduce the productivity and social welfare, and diminish the competitiveness of a country.

As the rise of free trade, the economic integration¹ has been the new trend around the world. Every country starts to seek trading partners to form economic grouping,² aiming at congregating resources and abilities of the members to accelerate economic developments of the participating countries. In the early stage of economic integration, the members of economic bloc are composed of countries nearby, forming the regional economic grouping to reduce the cultural and language barrier (Krugman, 1991).

In the 1990s, the three major regional economic groupings are European Union

1 Economic integration has several forms, significantly in the degree of cooperation, dependence, and interrelationship among participating nations. Economic integration can be regional Cooperation Groups, free trade area, customs union, common market and political union (Cateora and Craham, 2005, p. 282).

2 If the economic grouping is classified according to the number of the member countries, it can be called multilateral (or multinational), meaning that there are more than two member countries in the group, or bilateral, referring that there are only two members in the group.

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(EU), North American Free Trade Agreement (NAFTA)³ and ASEAN Free Trade Area (AFTA).⁴ The custom union⁵ model is adapted as the European Union’s core model and soon afterwards the European Monetary System (EMS) was set up.

The single currency, Euro, thus has been developed and formed the Euro-Zone, ⁶ proving impetus for the economic and trading development of the union’s members.

North American Free Trade Agreement and ASEAN Free Trade Area are integrated by the model of Free Trade Area.⁷ Since 2001, the ASEAN negotiated and signed the China–ASEAN Free Trade Area with Chinese authority. Nowadays with the two new participants, Japan and Korea, joining the discussion of forming the ASEAN Plus Three Free Trade Area, the ASEAN is paving its way for the formation of Asian Economic Community. (Chirathivat, 2002)

After the year 2000, the economic integration is no longer confined to regions.

Regional economic groupings and their participants begin to seek trade cooperation outside of their region. For example, European Union has signed Free Trade Agreement with Korea, Mexico, USA and Singapore. Right now there are various and many FTAs are discussed and every country keeps looking for new trading partners.

Most of the FTAs are often named as Free Trade Agreement. However, some countries may use alternative names due to political and historical concerns. For example, the Closer Economic Partnership Arrangement (CEPA)⁸ signed between

3 On August 15^th, 1992, USA, Canada and Mexico officially formed a free trade zone based on the basic principles of GATT.

4 The idea of ASEAN free trade zone was first proposed in 1992. Currently the ten members include the six original ASEAN countries (Indonesia, Malaysia, Philippine, Singapore, Thailand and Brunei ) and four new members (Vietnam, Laos, Myanmar and Cambodia). The free trade zone has officially launched since 2002.

5 Custom union aims acting eliminates barriers among members and providing a common external trade policy (Charles, 2009).

6 The Euro Zone refers to the alliance of countries that adept Euro as the only official currency. It is the European Central Bank that formulates unified monetary policy for the Euro zone. Until 2010, there are 16 member states in the Euro Zone.

7 Within free trade area, all barriers to trade among members are removed and each country can determine its own trade policies toward nonmembers (Charles, 2009).

8 CEPA is the first bilateral Free Trade Agreement (FTA) for both the China and Hong Kong. It abides

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China and Hong Kong in 2003 and the Economic Cooperation Framework Agreement (ECFA)⁹ signed between China and Taiwan in 2010. Alt hough their names may be different fro m the commo n FTAs, in the essence they st ill are a kind of FTA.¹⁰

Even though the eco no mic integrat io n can boost the GDP, import and export volume and social welfare o f the participat ing countries (e.g. Baier and Bergstrand, 2007; Ornelas and Turner, 2008; Falvey et al., 2010), it is possible to bring negat ive impacts o n individual industries (e.g. Kortum, 1997; Kletzer, 2004). It is thus very common to see large-scale protests initiated by the suffered industries in countries that are to establish FTA related policies. For instance, in 2006 the large scale protest in Korea was initiated by Korean farmers worrying that after the formation of the FTA the cheap American agricultural products will dump to Korea, causing a serious blow at the local agriculture industry. In 2010, when the Taiwan government is to sign ECFA with China, many scholars and experts oppose to the agreement, questioning that this agreement will just benefit certain industries while depriving the vulnerable industries of their transformation opportunities.

fully by the WTO’s requirements on FTAs. While the Agreement eliminates trade and investment barriers between Hong Kong and the Chinese mainland, it does not raise any obstacles for other economies’ access to the two markets. CEPA covering three areas: (1) trade in goods; (2) trade in services; and (3) investment facilitation. CEPA opened up new business opportunities for Hong Kong’s manufacturing and services sectors, thus helping Hong Kong to revive some of its industrial activities and to strengthen its status as a commercial centre (Chiu, 2006, p. 276).

9 The Agreed Framework is aimed at the critical industries. Negotiation of the mutual exemption of tariffs or preferential market access conditions can be conducted firstly so that the part that has reached consensus can be implemented as priority. This is called the Early Harvest that can immediately respond to the desperate needs of eliminating tariff barriers for the industries facing difficulties in international market.

10 National Policy Foundation research report, July 07, 2010. http://www.npf.org.tw/post/2/7761

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