Economic Integration in East Asia and Japan's Role: Abridged Version

Toshihiko KINOSHITA (Professor, Waseda University)

This is an abridged version of Prof. Kinoshita's full paper, which was presented at the SPFUSA Seminar "Asian Voices" in Washington, D.C. on June 24, 2004, and is available in PDF form:

http://www.spfusa.org/Program/av2004/jun2404.pdf

Recently, free trade agreements (FTAs) and economic partnership agreements (EPAs) have become very popular in East Asia. An EPA is an agreement which the Japanese government is trying to realize; EPAs include FTAs, development assistance, human exchanges, standardization, rulings and so on. Many FTAs and EPAs are under negotiation in East Asia, and surely they reflect increased momentum for regional economic integration. Additionally, East Asians aspire to set up an East Asian community, although it is not an immediate, but instead a long run target. I would like to contemplate why such movements have become very popular in East Asia, what role Japan can play there, and what problems East Asians are facing.

Laying the Groundwork for Asian Regional Integration.

The move for further economic integration is related to the emerging regionalism for FTAs and EPAs in East Asia. East Asia used to be satisfied with a GATT-WTO based framework for integration, and it is only recently that it has embraced relatively strong regionalism. There are four reasons why these sentiments emerged rather recently.

The first reason is that general trend toward regionalism of the world. We observed the birth of NAFTA and the EU, and the latter's expansion. The second reason why a strong nationalism has emerged is the weak workability of the WTO. And thirdly, the recent experience of the currency and financial crises in the region that made them feel a de facto dissolution of APEC. Fourth, we have seen a physical deepening of economic integration in the region through increased, intraregional trade, and capital transactions, as well as strong human networks. These four reasons have made East Asians take a new step in the region.

Increasing Tension Characterized East Asian Regionalism

Regionalism in East Asia has become increasingly rife, due to several reasons I have already mentioned, but at the same time, centrifugal vectors are there. FTAs help economic development but cannot solve "diversity problems" among members, income disparity in particular. Proactive actions to correct such discrepancies are necessary for further economic integration. FTAs will not only be important for proactive action, but so will economic cooperation, dedicated to regional public goods.

That is the recognition of the Japanese government; that is why the Japanese government has proposed economic partner agreements (EPAs) to its neighbors, rather than mere FTAs. Japan could and should take the initiative by providing further financial support, intellectual contributions, good rules, as well as social capital in the region.

Is Japan competing harshly with China and ASEAN countries in trade in the same destination, say, the U.S.? We can largely say no. Japan's trade and industrial structure are supplemental to those of China and ASEAN countries. A general lack of a challenging power by the Japanese in the world and in East Asia was not attributed to its industrial or trade structure, but to its long-term economic sluggishness or its "lost decade." A revival of its economic growth is being awaited. If Japan revives, then a virtuous circle would begin - more exports, more imports, more FDIs (foreign direct investments). That will give stimulus to East Asian countries.

In fact, China is harshly competing with ASEAN countries in its external trade. ASEAN countries have recognized this phenomenon as inevitable, and are trying to find new opportunities in their trade and tourism with China as regional partners. Like in trade, China and ASEAN countries are competing in attracting FDI from Japan and the rest of the world.

Issues on Path to an Asian Economic Community

Let me state key issues on the path to an Asian Economic Community. We cannot set up an EU-type community in the foreseeable future. Sub-regional grouping and good sequencing toward the final target will be a realistic approach. To realize FTAs and EPAs one after another on a bilateral, sub-regional or regional basis will be a shortcut to the final destination.

An obligation of the members of East Asia is to pay the cost of regional public goods. What are the regional public goods in the region? First, not to repeat the current crisis. Second, to nurture Asian bond markets. Third, to stabilize fluctuations of exchange rates of regional currencies. Fourth, to finance an East Asian or ASEAN-wide social infrastructure altogether. Fifth, to reduce income gaps among members. Sixth, to protect the environment in the region. Seventh, to fight against terrorists and pirates. Eighth, to cooperate on energy-saving and conservation. These comprise the regional public goods.

And who should pay the cost? None other than member countries. China will have to pay its cost, Japan will have to pay a sizable portion, and so on. Out of all the members, Japan, China, and Korea, which are relatively big economic powers, will and should be the main players, while respecting the initiatives by ASEAN.

Conclusion

In conclusion, I would like to say, firstly, Japan could take a low-profile but effective leadership role to realize good quality free trade agreements in the region, attaining a business-friendly climate for all. So, while paying the largest share of costs for regional public goods Japan could cooperate with China and other East Asian countries to deeper economic integration, and eventually realize an Asian Economic Community.

Second, Japan will continue to be an important economic power of the world and it should not forget its role in the world politics and economics. For instance, Japan should also contribute to reviving a new round of WTO and to fight terrorism globally.

Third, the U.S. should understand the aspiration of East Asians to realize an East Asian Community in the long run, though creating East Asian Free Trade Areas (EAFTA) will come earlier. When Dr. Mahathir, former Prime Minister of Malaysia, proposed the EAEG or EAEC more than 10 years ago, the U.S. rejected the idea, and Japan regrettably could not support the proposal. But the situation has dramatically changed since then. I wish the U.S. would not break the dream of East Asians again. Japan's responsibility will be to give the U.S., Japan's only true ally, assurance that the creation of the Community or the EAFTA would not harm the U.S. This role of Japan could not be replaced by China. Transparency of the decision-making and openness of the regional economy in view of trade and investment will be the key to keep the trust of the U.S. While keeping its trust, Japan could play a clever leadership role in its own way in the region.