Policy Update 042

# Initial Steps Toward Regional Economic Integration in East Asia (Japan's Proposal)

FUKUYAMA Mitsuhiro Consulting Fellow, RIETI
Deputy Director for the Asia and Pacific Division (East Asian Economic Integration)

## Asia greets the "season of economics"

In April 1955, under the leadership of Indonesian's then-President Sukarno, Asian independence leaders--including India's Prime Minister Nehru and Chinese Premier Zhou Enlai--gathered in Bandung for the inaugural Asian-African Conference. At the time, Asia was caught up in the enthusiasm over the "season of politics," and now, half a century later, Asia enthusiastically greets the "season of economics."

The global financial crisis--triggered by the collapse of a leading American investment bank--in September 2008, dramatically changed the global economic structure. One of the resulting outcomes from the crisis is the fact that, at least for the immediate future, East Asia will continue to serve as a growth engine for the global economy. According to the IMF, the Asian economy, which in 1980 was worth around $2 trillion, reached around$15 trillion in 2009, and is expected to grow to a scale that exceeds that of NAFTA and the EU by 2015 (Figure 1). While the U.S. and European economies have not yet fully recovered, our focus has turned to the economic potential of Asia.

Another resulting consequence from the crisis is the new challenge of rebalancing the global economy. East Asia has grown on the back of exports to external markets, particularly to the American market. However, in the future, it will be necessary to ensure that growth is sustainable by promoting demand within the region.

Against the backdrop of such structural changes in the global economy at present, in order to realize an economic recovery, Japan should pursue economic growth with Asia by creating a single, seamless Asian market, while concurrently working to remove growth constraints. This approach is stated in the New Growth Strategy endorsed by the Cabinet in June 2010.

## ASEAN Economic Ministers Meeting and Japan's proposal of "Initial Steps"

Based on the aforementioned viewpoints, we would like to examine how to promote regional economic integration in East Asia. There are various ideas on FTAs (China-Japan-Korea FTA, and ASEAN+3: EAFTA, ASEAN+6: CEPEA, FTAAP, and TPP) in the region, where growth coincides with deepening economic interdependence. Moreover, there is a concept on the "East Asia Community," and at Prime Minister Kan's inauguration speech on October 1, when touching upon the importance of FTAs and EPAs, he noted that "with a view toward making the East Asian Community a reality, I want to open our country to the outside world and move forward with concrete steps of negotiations as much as possible." The Japanese Government has plans to finalize the Basic Policy on Comprehensive Economic Partnerships based on these various ideas by autumn this year.

Below is an outline of some of the discussions on East Asian economic integration in the ASEAN Economic Ministers Meeting, as well as Japan's proposal of "Initial Steps."

Regarding the study among ASEAN and its dialog partners, after the Track Two Study Group finished, the intergovernmental examinations commenced. In October 2009, at the East Asia Summit in Thailand's Huahin, it was agreed that ASEAN+3 and ASEAN+6 could be examined and considered in parallel by Senior Economic Officials. After the study of EAFTA commenced in April 2005, Japan's then-Minister of Economy, Trade and Industry, Mr. Nikai, proposed in August 2006 his idea of ASEAN+6 FTA Comprehensive Economic Partnership for East Asia (CEPEA) and the establishment of the Economic Research Institute for ASEAN and East Asia (ERIA), which aimed to be an OECD type of research institution. After four years, both EAFTA and CEPEA entered into intergovernmental examination. ASEAN set up four working groups: (1) rules of origin; (2) tariff nomenclature; (3) customs procedures; and (4) economic cooperation; and it started discussion with its dialog partners.

Japan's proposal of "Initial Steps" reflected these developments. It suggested that the establishment of five "ASEAN+1" FTAs and expansion and reorganization of production networks are to be the base of the proposal. From this point of view, with recognition that the integration framework should be ASEAN+6, it aims to promote the four working groups with the assistance of ERIA by studying the comparative research of the existing FTAs.

There are three main points in the proposal. First, it emphasizes to promote the four working groups. It stresses to consider input from business societies. We held a 16-country government-business workshop on 'rules of origin', where differences among agreements and procedural complexities were suggested by the businesses, twice. It is important for governments to create user-friendly rules, listening to business needs in the intergovernmental process.

The second point of the proposal is the recognition that liberalization and development are double pillars of the integration. The East Asia region is characterized by a large discrepancy at the level of economic development. The Track Two report suggests that one of the goals of CEPEA is narrowing development gaps in the region. Economic development that focuses on regions with inadequate infrastructure, in addition to eliminating economic discrepancies, will facilitate in expanding the benefits received from liberalization by promoting the movement of people, goods and money. At the Economic Ministers Meeting in August, ways of development were discussed, and ERIA's The Comprehensive Asia Development Plan, which is intended to serve as a blueprint for development in the region, was welcomed.

Finally, at the same time as focusing on four working groups, the proposal points to the need to promote further discussion on a broader range of economic fields based upon seven pillars: (1) trade in goods (including ROO and tariff nomenclature); (2) customs procedures, trade facilitation / logistics; (3) economic cooperation; (4) industrial policy; (5) hard infrastructures and enhancement of connectivity; (6) investment and trade in services; and (7) movement of skilled labor. As regional economic interdependence continues to deepen alongside the bilateral FTAs that have been established, we should aim to establish more comprehensive and high-quality institutions.

Promotion of liberalization and development alongside deeper integration will enable long-term sustainable growth in East Asia. As such, Japan will be able to achieve economic growth with Asia. Japan's AEM proposal is named "Initial Steps," as it is intended to take the initial steps of working with other counties at the governmental level.

## Toward Next Steps

In September 2010, negotiations on the Comprehensive Economic Partnership Agreement between Japan and Republic of India reached an agreement in principle. It marks the 12th EPA agreement for Japan, which comes after some time following the Economic Partner Agreement between Japan and Vietnam that came into effect in October 2009. As the ASEAN-India FTA is already effective--incorporating an enormous market of over 1 billion people, allowing for expanding and restructuring the production network of East Asia, including Japanese firms--it will be necessary to consider what kind of East Asia wide institutions to pursue.

At the end of October, the fifth East Asia Summit is planned to take place in Hanoi. It was agreed in August at the Economic Ministers' Meeting that progress of working groups will be reported to the leaders. After the leaders receive such reports, it is expected that further examination will continue at the four working groups. Next year's East Asia Summit is planned to be held in Indonesia, the host country of the Bandung Conference. Inside Japan, we should continue the debate over the way to integrate the country with East Asia.

The original text in Japanese was posted on October 19, 2010.

February 23, 2011

The summary outcomes of the ASEAN Economic Ministers Meeting 2010 and Japan's proposal are referenced from the following Ministry of Economy, Industry and Trade website:

February 23, 2011

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