Japan Economic Foundation

Chairman's Speech

8 . Regional Economic Integration in Asia

Japan's Foreign and Security Policies:
Alternatives, Drivers and Implications
4-6 October, 2005
Noboru Hatakeyama Chaiman and CEO Japan Economic Foundation

Regional Economic Integration in Asia

It is said that a de facto regional economic integration is taking place in Asia. For example, the inter-trade ratio of East Asia on an export basis is 63% which is well over that of NAFTA(38%) and close to that of the EU(68%). The NAFTA and the EU have a preferential trading system for their member countries under the name of an FTA or a Community. In other words they are strengthening regional integration institutionally whereas East Asia is doing so without such an institutional mechanism thus far. In terms of an international trade mechanism, East Asia has been relying only on the WTO with the exception of ASEAN, which has the AFTA (ASEAN Free Trade Area).

1. FTAs in Asia
(Japan's Change)
In the late 1990s East Asia started feeling the necessity to support an on going de facto regional integration with institutional mechanisms such as bilateral FTAs. Japan took the initiative for a change. Back in late 1998 and early 1999 Japan started joint studies on FTAs with South Korea and Mexico. Although these two joint studies were conducted by JETRO for Japan, which was established by the Government of Japan but does not represent the Government per se, a joint study between the Governments of Japan and Singapore for an FTA started in December 1999. In other words, Japan changed its trade policy from entirely subscribing to the WTO to simultaneously pursuing a dual track of the WTO route and the FTA route. Namely, Japan added bilateral or regional economic integration policy to its trade policy list. There were several reasons for this change. The original reason why Japan had been committed only to the WTO and was reluctant to become involved in bilateral or -regional integrations such as FTAs was that the multilateralism represented by the WTO was thought to be the most efficient and fair tool for liberalizing and facilitating international trade. However, the EU was launched successfully in 1992, strengthening European integration further and NAFTA was established in 1994. Because of these developments Japan became increasingly isolated.
In addition, ministerial meetings failed in Brussels in 1991 for GATT Uruguay Round and in Seattle in 1999 for a new round of the WTO. These failures cast or confirmed doubt about the appropriateness of a trade policy relying only on multilateralism.
The number of WTO members increased to 148 as compared to 123 in 1986 when the Uruguay Round negotiation had started. This made WTO negotiations difficult and time consuming.
In Japan liberalization pressure due to the international commitment to the WTO or FTAs is thought to be conducive to attaining the domestic reforms which have become the most important agenda of P.M Koizumi's cabinet. Therefore, if the WTO negotiations took time, it was only natural for Japan to have started using FTA routes as well.
Japan currently has FTAs with Singapore, effective since November 2002, and with Mexico, effective since April 2004. Japan has also agreed in principle on FTAs with the Philippines, Malaysia and Thailand and is negotiating FTAs with South Korea, Indonesia and ASEAN as a whole. Japan has already started a study on a FTA with Chile and will do so soon with Australia and Switzerland.

In negotiating FTAs there are always heated debates over at least two issues, namely agriculture and immigration. The weight of agriculture in the Japanese economy declined from 9% of GDP in 1960 to 1.1% in 2002. The agricultural population's share of the total is only 4.1%. Of course agriculture is important for securing food supply. The self supporting ratio of food in Japan is only 40% on a calorie basis, which is the lowest among developed countries. In order to improve this ratio Japan's agriculture should be exposed to foreign competition, rather than being dependent on import restrictions.
However, the Government of Japan was often criticized especially by other Governments for not taking a positive initiative in the agricultural WTO negotiations.
In the negotiations for a Japan-South Korea FTA, it is said that the Korean side stopped to negotiating because the level of Japan's agricultural liberalization was too low.
It is often said that Japan's FTA negotiations with Malaysia and Thailand respectively were agreed in principle rather quickly because these countries, having taken into consideration Japanese low level of agricultural concessions, reciprocated with low level of concessions to Japan in industrial goods and Japan had to accept. I personally think that Japan should take a leadership role in trying to conclude high-level FTAs with these individual countries, however long the negotiations might take. On the other hand, when it comes to an FTA between Japan and ASEAN as a whole, the negotiations should be finished as quickly as possible due to a reason I will mention later in the ASEAN-China FTA section.

(Immigration Policy)
Now let's move to the second issue, which is immigration. 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 .It was reported that Japan attached a condition to this, requiring Philippine nurses to speak Japanese and to pass the Japanese examination for nurses. A numerical ceiling is said to be established for nurses' entry into Japan. Philippine side reportedly asked why Japan is trying to limit the number of Philippine nurses coming into Japan if those nurses are required to pass a Japanese examination. I personally think this criticism from the Philippines makes sense. More broadly speaking, Japan's population will start to decline from next 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 more a flexible policy for immigration.
While Japan was dragging its feet for starting FTA negotiations with other ASEAN countries than Singapore especially because of concerns over two points mentioned above, China started negotiating FTAs with other countries. In particular, it has concluded an FTA on trade in goods with ASEAN as a whole and this FTA has come into force already. The goal of this ASEAN-China FTA is to eliminate most tariffs between China and six advanced ASEAN countries by 2010 and for the other four countries by 2015. This will mean that goods exported from China to ASEAN countries will enjoy reduced or zero tariff in due course and vice versa. Therefore, some Japanese companies may be even more tempted to shift their factories to China so that they can enjoy the merits of ASEAN-China FTA. The hollowing out of Japanese industries would then become even more serious. To cope with this situation, Japan should conclude an FTA with ASEAN as a whole as quickly as possible so that Japanese companies can have a level playing field with companies located in China in terms of the ASEAN tariffs imposed upon their exported goods. In this regard, Japan-ASEAN FTA could be an FTA only on trade in goods as is the case with the ASEAN-China FTA because an FTA on trade in services may take time.

As I mentioned earlier, China and ASEAN concluded negotiations on an FTA last November. Japan and ASEAN are negotiating an FTA between them and Korea-ASEAN FTA negotiations started last February. Are those three FTAs going to coexist in the future? I donft think so. Not only these three but also the AFTA and such bilateral FTAs in Asia as the Japan-Singapore FTA will be absorbed by the EAFTA (East Asian Free Trade Agreement) which will be established in the future. The EAFTA's members are supposed to be the ASEAN 10+3, namely Japan, South Korea and China, and Hong Kong and Taiwan, although China might be opposed to Taiwan's membership. The EAFTA is different from an EAC (East Asia Community) although the former can be part of the latter.
The EAFTA will be just like NAFTA which is not North America Community.

2. East Asian Community (EAC)

The first East Asian Summit was held next December in Kuala Lumpur. The leaders of the ASEAN10 +3 and Australia, India and New Zealand took part. They discussed an EAC. The establishment of an EAC was originally proposed on October 31, 2001 in a report of the East Asian Vision Group (EAVG). The EAVG was established in October 1999 by the Summit of the ASEAN +3. The report was titled "Towards An East Asian Community" with a subtitle of "Region of Peace, Prosperity and Progress".

( The Definition of "community")
What is most important and nevertheless has not been referred to in the report is the definition of "community". Of course, we don't need a detailed rigid definition of the word at this early stage. However, the fundamental features of the "community" should be described because we cannot know what we are talking about otherwise. For example, whether or not the "community" includes a "security community" would be a very important aspect to know. A full-fledged "community" has ordinarily three pillars : an economic community, a security and political community and a social and cultural community. In 2003 ASEAN declared it would establish an ASEAN Community consisting of these three pillars by 2020 in the case of an economic community. As we all know, many Asian countries including Japan, have bilateral security arrangements with the US. It would be hard to coordinate both bilateral and regional security arrangements. There is a high possibility that these two arrangements will contradict each other if a full-fledged "community" is being considered. I don't think any Asian countries, including Japan and China, are ready to consider, such a full-fledged "community" at this stage.
Therefore, from now on I would like to only touch upon an economic community in principle.
Whether or not such an economic "community" is different from an FTA should be made clear, although it would be quite surprising if some one pointed out that these two would be identical despite using different words.
It should also be made clear whether or not part of the sovereignty of each member country should be conceded to the EAC with a permanent secretariat established somewhere in a member country, as has been the case with the EU.
If the answer is "no", then an EAC may turn out to be just rhetoric with no substance or just a consultation body such as the OECD or APEC at best. The OECD or APEC cannot be called an institution whose members are "integrated".
How about the case when the answer is "yes"? Then the reasons have to be defined for establishing an EAC attractive enough to convince member countries to concede part of their sovereignty. The reason for the establishment of the EEC, the origin of the EU, was that France and Germany would never fight again. This was the very reason that European countries decided to concede part of their sovereignty to establish the EEC in the first place.
Do East Asian countries have such a convincing reason for member countries to concede part of their sovereignty?

(ASEAN's Position)
As a matter of fact, ASEAN declared in Bali on October 7th 2003 that ASEAN will establish the ASEAN Economic Community(AEC).
I visited an ASEAN member country in March this year and met a few leaders of the country. I asked them if the AEC was a community like the EU or the EEC. The reason why I raised this question was because the BALI CONCORD II, which declared the establishment of the ASEAN Community, including the AEC, emphasized the importance of the principle of non-interference and this seemed to contradict the concept of a "community" which accompanies interference, namely concessions of part of a country's sovereignty to the community. The responses from each leader to my question were unanimous in denying the concessions of sovereignty to the AEC.
Some of them even said that the AEC would be something like an Economic Partnership Agreement(EPA) among ASEAN countries. Certainly, the AFTA has only dealt with trade in goods thus far. It has to address trade in services and foreign direct investments from now. The AFTA should be expanded to cover trade in services and so on. But that expanded AFTA would be quite different from a community. If the AEC is just an ASEAN-EPA, it would be misleading to name it a "community". The ASEAN definition of the word "community" is important not only for the countries in ASEAN but also for other East Asian countries or economies . Unless ASEAN countries and non-ASEAN economies can agree on a definition of community, there is a possibility that, if I am allowed to use a Japanese or Chinese cliche here, ASEAN countries and non-ASEAN economies might have different dreams even though they are in the same bed.
If they agree that "community" accompanies concessions of sovereignty, that would be fantastic but the ASEAN Secretariat should clearly convey that definition to ASEAN member countries for sure. If they agree that "community" does not accompany concessions of sovereignty, an EA C will turn out to be just something like an ASEAN-EPA at best.

(Common Value)
In order to for us to be able to concede part of our sovereignty we have to share the same value such as transparency, rule of law, democracy and respect for human rights .
China is a communist country, respecting different values and systems than democracy. I asked my European friend if the EU welcomes communist countries as a member. He responded immediately as follows: "Oh no! That was why it took more than 10 years for ex-communist countries like Hungary and Poland to join us." Therefore it would be very difficult for the East Asian Community to be formulated including countries with different values.
(Added Value because of EAC?)
There is an opinion that, instead of defining the reason for establishing an EAC, we should start from easier or feasible agreements on functions such as the liberalization of trade and investment or financial cooperation.
In this case, however, the question would be what kind of added value an EAC could create on the top of the achievements each functional agreement will have brought about. Trade and investment liberalization in the East Asia will be able to be completed by establishing an EAFTA. The financial cooperation in this area may be achieved through further work to expand and deepen the Chiang Mai Initiative. Will an EAC bring about something new upon the outcomes of each possible functional agreement?

(Item by Item Approach)
Let's assume we have found such a convincing reason. The reasons may include securing peace and energy , promoting the liberalization of trade and investment, implementing financial cooperation, protecting the environment, and enhancing education in this region. Then the next question would be why we should try to pursue these objectives by formulating an EAC as a single platform instead of solving these issues item by item separately. If the item to be solved is different, the members might be also different. For example, if we address the security issue in this area, even North Korea should be invited to become a member. On the other hand, if we address energy issue, inviting Russia should not be ruled out.

The membership of an EAC is an important issue. The original idea of an EAC was proposed by the EAVG made up of scholars from ASEAN +3. Taiwan was not included. However, Taiwan is too important to be missed in this area, both economically and politically. The size of the Taiwanese economy measured by its GDP is bigger than those of any ASEAN countries. Of course the issue of Taiwan Strait is one of the most serious security problems in this area.
Therefore, it is indispensable for Taiwan to be a member of the EAC. China will be opposed to including Taiwan unless Taiwan accepts the "One China Principle"( OCP). The policy of the government of Taiwan on the OCP seems to have changed recently. Back in 1993 when the first APEC leaders meeting was held in Seattle, Mr. Pin Kung Chian, the then Trade Minister of Taiwan, told the press that in the future there would be one China, but until then there were and would be two Chinas. The current President, Chen Shui—bien, seems to take the view that there are and will be two Chinas forever. However, Japan has committed itself to the OCP. The U.S. is also committed to the OCP. Therefore, the current Taiwan's policy cannot be supported by China and other countries.. The government of Taiwan should go back to the policy expressed by Minister Chian more than 10 years ago. But at the same time the government of China should be flexible in terms of the definition of "One China" The question of which one China will prevail in the end should be kept ambiguous so that the government of Taiwan can at least have logical leeway to persuade the Taiwanese people to accept the OCP.

3. Conclusion
As a conclusion, establishing an EAFTA would be feasible. By the time of the EAFTA being established, perhaps an FTAA (Free Trade Area of the Americas), which covers every country except Cuba in the entire American continent, might have come into force. By then Bulgaria and Romania will have joined the EU, although Turkey's participation is not certain. The EU may try to include North African countries as members. In this regard the world trading system would have three large FTAs : the EU, an EAFTA and an FTAA
On the "community" front however, the EU will remain as a big community and there will be no "community" in the American continent because the US, a hegemonic country, would not concede even part of its sovereignty anyway. There will be no "community" in Asia either if China remains a communist country. It might therefore be worth exploring the possibility of establishing an Asia Pacific Democracy Alliance consisting of the US, Japan, Korea, Taiwan, some ASEAN countries, Australia, New Zealand and India. This would not be a "community" but an alliance to disseminate the value of democracy and to cooperate in solving non-traditional security issues such as reducing the damage caused by the natural disasters.