Japan Economic Foundation

Chairman's Speech

6 . Regional Integration in Asia

Japan-US Form
"Bi-national Study on the Impact of the rise of China and India, and the U.S. - Japan Economic Relationship"
ANA Hotel, Tokyo
July 6-July 10, 2006
Noboru Hatakeyama, Chairman and CEO

The Final Outline"distributed refers mainly to two trade relationship issues-namely, trade imbalance especially between the US and China and regional integration in Asia. In my presentation, for the sake of time, I would like to focus on regional integration in Asia.

Although it was not recognized as such at that time, a movement toward regional economic integration in Asia began in 1998. This movement was initiated by Japan who, ironically, was first solicited by a non-Asian country, namely Mexico. Due to NAFTA and an EU-Mexico FTA, US and EU goods could enter the Mexican market free of tariffs in principle while Japan's goods had to pay rather high tariffs. This was the motivation behind Japan and Mexico entering FTA negotiations.

(China's FTA)
At that time, China was unprepared to negotiate any FTAs because China was too busy trying to enter WTO. However, since the autumn of 2000 China has become an enthusiastic supporter of FTAs and has called upon the ASEAN as a whole to study such agreements.
In the summer of last year, the China-ASEAN FTA on trade in goods came into force. The goal of this ASEAN-China FTA is to eliminate most tariffs between China and six advanced ASEAN countries by 2010 and for the four remaining countries by 2015. This means that goods exported from China to ASEAN countries will enjoy reduced or zero tariffs in due course and vice versa. Although there are many "highly sensitive items" that are exempted from an obligation to liberalize, some Japanese companies may be tempted further to shift their factories to China in order to benefit the merits of the ASEAN-China FTA.

(India's FTA)
India is also negotiating FTAs with ASEAN as a whole and with Thailand individually. India is a relative new comer in the recent FTA race in this region. So when India suddenly asked ASEAN to begin India-ASEAN FTA negotiations, an ASEAN official asked his Indian counterpart if India was truly ready for such negotiations. India answered, "Everything China can do, we can do." In 2003 India and ASEAN agreed on a framework agreement for an FTA which was due to conclude by the end of last year, but was delayed and is still under the negotiations.

(EAS and ASEAN+3)
The first East Asian Summit(EAS)Meeting was held last December in Kuala Lumpur. India was invited to this meeting along with Australia and New Zealand.
The 9th Leaders' Meeting of the ASEAN+3(Japan, China and South Korea)was also held at that time in Kuala Lumpur. This ASEAN+3 meeting was supposed to deal with usual business between these 13 countries. It was at this meeting, however, that the decision was made authorizing the ASEAN+3 to continue to be "the main vehicle in achieving the goal of realizing an EAc." It was agreed that the EAS, originally supposed to discuss EAc, would instead" play a significant role in community building in the region." This "community building" can be interpreted as community building in general, which does not necessarily refer to an EAc per se.

(Russian Participation)
In addition, at the start of the EAS, Mr. Putin, President of Russia, attended the meeting as a guest. It was reported that Russia may be approved as a member of the EAS from next meeting hosted by the Philippines. If this is the case, the EAS will become an indifferent meeting to discuss an EAc because, frankly speaking, it is hard to imagine for Russia as an East Asian country.

(Difference between Community and FTA)
However, in my opinion, it does not matter whether an EAc issue is going to be discussed in the ASEAN+3 or the EAS. In either case it would be extremely difficult for an EAc to be realized anyway even in the long run. Only an FTA can be concluded in this region. I would like to explain the reason for my thinking, explaining the differences between a community and an FTA.
Firstly a full fledged "community" normally has three pillars; an economic community, a security and political community and a social and cultural community. However the coverage of an FTA is limited to economic activities.
The EU, a typical community, consists of these three pillars. In the BALI CONCORD II in 2003, the ASEAN declared it would, in the future, establish an ASEAN Community consisting of these three pillars. On the other hand the NAFTA, a typical FTA, deals with only economic activity.
Many Asian countries, including Japan, have bilateral security arrangements with the US. If an EAc offers a regional security arrangement, I wonder what would be the relationship between bilateral agreements and regional one.
The second difference between a community and an FTA is that a community often requires concessions of part of its sovereignty. Member countries of the EU have conceded their sovereignty over trade and competition policies.
However the ASEAN is not ready for conceding part of their sovereignty because ASEAN cherishes the principle of non-interference.
The third difference is that it is necessary in the case of community for each member to have common values such as democracy, transparency, rule of law and respect for human rights whereas there is no such need in the case of an FTA.
In East Asia, we have communist countries as well as one country led by a military group, which are respecting different values and systems from democracy.
An FTA does not require common values among its member countries; it only requires a common interest, regardless of each country's value.
In conclusion, it is my opinion that establishing an EAc is extremely difficult. However, establishing the EAFTA is feasible.

(East Asian Comprehensive FTA)
METI Minister Nikai recently proposed to commence negotiations for establishing a comprehensive FTA in East Asia. According to his proposal, the negotiations will start in 2008 after ASEAN's FTA negotiations with China, India, Japan and Korea are concluded by 2007. Members of this comprehensive FTA are ASEAN+3, India, Australia and New Zealand. I personally think Taiwan should be included as a custom territory as is the case with WTO.

(Agricultural reform)
In order for Japan to take the initiative for a comprehensive FTA, Japan must implement agricultural reform and further relaxation of immigration policy. Japan's agricultural reform should be pursued in conjunction with global agricultural reform. Of course, agriculture is important for securing food supply. However the food self sufficiency ratio in Japan is only 40% based on calories. Therefore, in addition to trying to increase domestic agricultural supply through strengthening international competitiveness of Japan's agriculture, Japan should consider agricultural supply sources in foreign countries, including China and India as a last resort of food supply to Japan. But the GATT Article 11, paragraph 2(a) allows "Export prohibitions temporarily applied to prevent or relieve critical shortages of foodstuffs." If there is a possibility of this article being used by food exporting countries, Japan can not fully liberalize food imports. Therefore, it is imperative for this article to be amended through negotiations in WTO or bilateral or regional FTAs so that consumers in importing countries are equally treated as consumers in exporting countries.

(Immigration Policy)
The immigration issue is included in an FTA on trade in services. For example, in the negotiations on a Japan-Philippine FTA, the Philippines requested more flexible system of Japan for Philippine nurses to enter and work in Japan. China and India have high quality workers willing to work abroad. More broadly speaking, Japan's population started to decline from last year and Japan will begin to suffer from labor shortages. Therefore, part of the declining population should be offset by the incremental supply of foreign workers. In this aspect as well, the government of Japan should take a more flexible policy for immigration.

(Need for High Quality FTA)
A China and ASEAN FTA has many "highly sensitive items" that are exempted from obligations to liberalize. Furthermore it does not include trade in services. Due to oppositions from ASEAN countries, FTAs between Japan and individual ASEAN countries are not ambitious enough to liberalize passenger cars imports, for example, or trade in services which is very important to cover international rules for FDIs. The final goal of an EAFTA should be to integrate an entire East Asian market into one as if it is a domestic market. In order to expand the East Asian market, it is necessary to include Australia and India as members of an EAFTA.

(US reactions)
As to Minister Nikai's proposal, there were some rather informal reactions from the US Government, which included inquiries regarding US participation and the relationships between Nikai's comprehensive East Asian FTA and already existing organizations such as APEC.
I personally think it would be quite difficult for the US to join simply because the US is not located in East Asia. Of course the US is critical of East Asia in terms of security and economy. Therefore, if the US wishes some institutional bilateral or regional linkages with countries in this region and proposes to consider the possibility of an APEC FTA or a bilateral FTA with Japan or India for example, she will be welcomed. By the way India should be accepted as a member of APEC.