A Move Toward East Asian Economic Integration

SHINODA Kunihiko
Consulting Fellow, RIETI

Production and sales networks in East Asia today

The floods that engulfed parts of Thailand in the autumn of 2011 were yet another reminder that Japan's production and sales are closely linked with the rest of the East Asian region, including the Association of Southeast Asian Nations (ASEAN). There are currently 11,497 Japanese affiliated companies operating in ASEAN, China, and the rest of Asia. This equates to more than 60% of the total of 18,599 currently operating abroad (Note 1). Consumption is surging in emerging countries in Asia, with a 10-fold increase expected in the middle-class population to 2.31 billion by 2020, compared with 240 million in 2000 (Note 2).

Two visions of economic integration; RCEP as a new concept

With this background, in its "Global Economic Strategy" unveiled in 2006, the Japanese government advocates regional economic integration by ASEAN, Japan, China, South Korea, India, Australia, and New Zealand (ASEAN+6 or CEPEA: Comprehensive Economic Partnership in East Asia) to secure closer ties with other East Asian countries, with other initiatives such as the establishment of the Economic Research Institute for ASEAN and East Asia (ERIA). Meanwhile, there has also been talk of economic integration between ASEAN and Japan, China, and South Korea (ASEAN+3 or EAFTA: East Asia Free Trade Area) since 2003. As a result, efforts for economic integration in East Asia have wavered between these two visions, namely ASEAN+6 and ASEAN+3, over the last five years (Note 3).

Regardless of which vision gets realized first, both should be advanced in the same direction, considering the overlap in the member countries in ASEAN+6 and ASEAN+3. Initiatives aimed at moving toward these two visions have gathered steam since 2011 with accelerated discussions around the Trans-Pacific Strategic Economic Partnership Agreement (TPP) and a Japan, China, and South Korea free trade agreement (FTA). At the Informal Consultations of the Economic Ministers of the East Asia Summit Participating Countries in August 2011, Japan and China jointly proposed establishing three new working groups (on trade in goods, trade in services, and investments) for trade and investment liberalization.

In light of this movement to integrate ASEAN+3 and ASEAN+6, the Regional Comprehensive Economic Partnership (RCEP)--a new and open concept which does not prejudge the number of member countries--was proposed by ASEAN leaders at the East Asia Summit in November 2011 (Note 4). Furthermore, it was decided at the ASEAN Summit in April 2012 that working groups be set up as soon as possible for the launch of negotiations for a comprehensive RCEP agreement by the end of this year. This series of decisions marks a major shift toward East Asian economic integration and signifies that this has now gone beyond mere discussion among the participating countries.

Significance of East Asian economic integration for Japan

What should Japan aim for within this new framework? Looking at it anew today, five years after the initial proposal of the ASEAN+6, we can find the following three areas to be focused upon which Japan can benefit from East Asian economic integration.

First, regional economic integration will create a broad basis to address the expansion, expanding and deepening production networks in East Asia. An economic partnership agreement (EPA) or an FTA with one country alone would make it difficult to apply preferential tariff rates because it is difficult to identify the appropriate "origin of production," which should be specified under an EPA or an FTA, in a highly streamlined and diversified production network in the East Asian region. Managing existing bilateral EPAs/FTAs or ASEAN+1 FTAs is said to be very complicated because detailed rules are different from one agreement to another. A regional EPA or FTA that covers all major production areas is necessary for optimum production allocation and location.

Second, access to emerging countries will be improved. In particular, it is highly expected that China and India will become the largest export destinations within the Asian market in the future, but some Japanese companies point out that import regulations, such as high tariffs and cumbersome customs clearance procedures, are still serving as barriers (Note 5). Therefore, the hope is for an EPA scheme to liberalize and facilitate trade in the region. In addition, if Japanese companies are to use third-party FTAs, say between ASEAN-China or ASEAN-India, the Japanese government is not in a position to make comments on their operation should problems arise. Instead, if Japan is part of a framework that includes China, India, and ASEAN, the government would be able to call on the participating nations to maintain and abide by their trade regulations.

Third, Japan will be able to strengthen its geographical competitiveness. With production of high value-added components increasing especially in China and Thailand, there are concerns that Japan would fall behind other Asian countries as a production base. Unless it participates in a broad-based economic partnership with ASEAN, China, and South Korea, the trend toward moving production bases overseas could accelerate. Thus, Japan needs to be proactive in forming a new economic framework so that its companies can keep their competitive edge by retaining their local production of high value-added parts and components and building efficient production networks.

Thus, Japan aims at commencing negotiations on the comprehensive economic partnership in East Asia as soon as possible based on the "Basic Policy on Comprehensive Economic Partnerships."

Future issues

To achieve regional integration, there will be working group discussions among ASEAN and other FTA partners, as per the decisions made at the East Asia Summit last year and the ASEAN Summit in April. However, there still exist some challenges.

First, high-level economic integration of all participating countries cannot be done overnight unlike an EPA among industrialized nations, because East Asian countries are at various stages of development. Creation of a new EPA must be done in a gradual approach, by setting an ambitious goal while promoting cooperation according to the domestic circumstances of each country. Second, as mentioned earlier, a number of FTAs already exist in a multilayered fashion in this region. This means that the existing FTA rules must be simplified and integrated into a new set of rules for a new regional framework. The ERIA's FTA mapping study that analyzes the similarities and differences of existing FTAs will serve as a useful reference (Note 6). Third, tariff cuts alone would not be sufficient to support the advancement of emerging countries. For example, liberalizing and facilitating logistics and distribution networks are both essential to building supply chains. This means that a comprehensive agreement needs to be more broad-based and include items such as the liberalization of services and investments, not just tariff cuts.

Despite these challenges, the move toward economic integration in the East Asian region could accelerate even more in the years ahead, reflecting actual economic conditions and given that production and sales networks have already been built in the region over the years. We cannot take our eyes off of the development taking place in the East Asian region; we need to see for certain whether negotiations on RCEP will indeed begin in earnest in November 2012 as was decided at the ASEAN Summit.

April 24, 2012
  1. ^ "Summary of the 2011 (41st) Survey of Overseas Business Activities" of the Ministry of Economy, Trade and Industry
  2. ^ "White Paper on International Economy and Trade 2011" of the Ministry of Economy, Trade and Industry
  3. ^ For discussions above, refer to the following website.http://www.meti.go.jp/policy/trade_policy/asean/activity/asean63.html
  4. ^ Although the RCEP will not limit the number of participating countries beforehand, the precondition is that membership is only open to countries that would agree to a "template." This template is expected to include the main pillars of the agreement, including a liberalization ratio. Details have yet to be finalized.
  5. ^ See "FY2011 Survey on the International Operations of Japanese Firms" of the Japan External Trade Organization (JETRO), etc.
  6. ^ For studies on ERIA, go to the following pages:

April 24, 2012

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