Integration of East Asia: Embracing whole region with "extrovert" approach

TAMURA Akihiko
Consulting Fellow, RIETI

A number of countries are proposing a variety of frameworks for promoting East Asian integration. And Japan's proposal is not just a rehash of its earlier ones; at its core is what I call "extrovert regionalism," for seeking future global partnership. Outward-looking trade policy is also meaningful in that it may be instrumental in enabling citizens to select optimal economic policy measures.

Simultaneous progress sought in East Asia and with U.S.

Since last year, Japan's trade policy has undergone significant changes. Last year, Japan proposed an economic partnership agreement (EPA) that would include Australia, New Zealand, and India along with the ASEAN+3 countries (Association of South East Asian Nations members plus Japan, China, and South Korea). Then, during the East Asia Summit (EAS) meeting in January 2007, EAS members (ASEAN+6 countries or those included in the proposed EPA) agreed to launch a study on the EPA, which will be conducted by a group of private-sector experts.

Meanwhile, inspired by South Korea's recent conclusion of a free trade agreement (FTA) with the United States, momentum is building in Japan to negotiate an EPA with the U.S. and Europe. According to media reports, the government is moving to include an EPA-related proposal in the White Paper on International Economy and Trade 2007.

As such, while proposing an EPA under the ASEAN+6 framework on one hand, Japan is trying to seek an EPA with the U.S. on the other. This may leave some observers wondering exactly what strategy the government is following in promoting its EPA policies. Of course, policymakers have their own take on it. ASEAN+6 countries have a collective population of approximately 3 billion, with an aggregate gross domestic product (GDP) amounting to $9 trillion. These figures easily show the significance of forming a regional economic partnership. It is also clear that a single region-wide framework should be installed in East Asia in order to solve the existing tangled web of FTAs and EPAs in the region; a phenomenon referred to as the "Asian noodle bowl."

Calls for EPAs with the U.S. and Europe have been coming primarily from the Japanese business community, where many companies are concerned about being put at competitive disadvantage to South Korean companies in the U.S. and European markets. To a degree, this argument is economically rational. Also, FTAs and EPAs are generally said to have a built-in domino effect, or chain reaction mechanism, wherein one country's conclusion of an FTA or EPA triggers negotiations by other countries that could in turn be left in a disadvantageous position. Japan's move to follow South Korea is in accordance with this theory and not at all surprising.

Big impact on economic growth

However, both these envisioned EPAs - whether under the ASEAN+6 framework or with the U.S. and/or Europe - are extremely ambitious and it is still too early to evaluate their realizability. Therefore, a philosophy is now needed that can provide an integrated explanation of and underpin Japan's future trade policy. This firm, underlying philosophy should be extremely important for realizing the EPAs.

The key to deriving the philosophy is already existent in the ASEAN+6 framework as such. ASEAN+6 is important not only in its call for an EPA covering all of East Asia but also in its being based on a paradigm completely different from those of prior EPAs.

The conventional regionalism in East Asia has essentially been driven by two factors. One aspect is described as "defensive regionalism," referring to how moves toward regional integration in East Asia intensified to try and counteract the rise of regionalism witnessed in the emergence and development of the European Union and the conclusion of the North American Free Trade Agreement (NAFTA). The other aspect can be described as a formation of an intergovernmental system based on the de facto integration of East Asian economies. That is, behind increasing moves to strengthen government-to-government partnerships lies actual economic developments; multinationals, - particularly those in electronics, electric machinery, and automobiles - have developed extensive intraregional production networks that incorporate the production division of labor and, along with this, intraregional trade structure has deepened.

However, the philosophy underlying an ASEAN+6 EPA is based on a paradigm that transcends both types of motivation discussed above. This paradigm of "extrovert regionalism" seeks the most liberal possible trade policy for the Japanese government at its own discretion amid the uncertainty surrounding the multilateral trade regime of the World Trade Organization (WTO). This new regionalism is composed of two major factors: a "forward-looking approach" to pursue economic partnership even with countries not currently in a close relationship with Japan and a "global approach" to proactively seek partnership with countries outside East Asia while promoting economic integration within East Asia.

The former approach is evidenced in Japan's ASEAN+6 proposal, which would include India, a country that has not been a part of the de facto integration of East Asian economies to date, as a member of the EPA. The latter approach can be observed in the way Japan, along with other East Asian countries, accepted the U.S. proposal to create an FTA covering all Asia-Pacific Economic Cooperation (APEC) members as a proposal for a "long-term objective."

Given the potential scope of areas covered, extrovert regionalism underpinned by such forward-looking and global approaches will have a huge impact on future growth of Japan's economy if ingrained and steadily implemented as the underlying philosophy of its trade policy. According to the World Bank, 1.2 billion people will belong to the global middle class by 2030, up from 400 million today, and the geographical distribution of these people will not be limited to East Asia. Based on the global approach, it would also be natural to consider the possibility of partnerships with resource-rich countries as well as with consumer countries to fully capitalize on the effects of East Asian integration.

Such a direct impact on economic growth is indeed not the only expected result of extrovert regionalism. The true significance of this philosophy lies in its critical - though not direct - impact on structural reform of the Japanese economy.

Significant impact on structural reform

Trade policy is often said to, just like internal economic policy, contribute to the structural reform of the domestic economy. This is because trade negotiations generally lead to the liberalization of domestic markets. But the effect of trade policy would be limited in this respect. Normally, sector-by-sector liberalization of import restrictions is the objective of a negotiation counterpart, but what is most needed for Japan's structural reform is not sector-by-sector regulatory reform but changes to cross-sectoral regulations governing domestic economic policies, such as taxation law, competition law, labor law, and educational systems.

Even if a negotiation counterpart demands the reform of cross-sectoral regulations, the degree to which Japan responds to the demand depends on what liberalization commitments it can get from that counterpart in return. Therefore, the end result may be very limited reform of domestic regulations.

I propose we change the way of thinking about the contribution of trade policy. Instead of perceiving trade policy as a driver of structural reform, we should consider it a type of infrastructure providing information to inform choosing the ways and means of structural reform, which are realized through domestic economic policies such as taxation law and labor law.

When citizens decide what domestic economic policies they wish to see implemented, they must be given an accurate understanding of the actual state of the global economy. Should Japan seek international economic cooperation and Japan's trade in goods and services with countries be further enhanced, Japanese people's understanding of the state of the global economy would deepen. So it would be fair to say that trade policy aimed at trade liberalization can serve as an information infrastructure aiding the selection of government policies. In particular, extrovert regionalism, which calls for economic partnership with a broad spectrum of countries, serves that purpose.

The impact of the global economy can be understood through everyday encounters with foreign goods and services that have penetrated the Japanese market, for instance increasing amounts of products made in China or call center inquiries answered with a foreign accent. However, I would bet few are aware yet that Japanese cell phone companies are having hard time in the international market because of the unique situation in Japan, where they have been maintaining robust performance. For each individual to gain an accurate picture of the global economy and thus make sensible policy choices, the government must create an environment where people can see and feel first-hand, as much as possible, the reality of the global economy.

Some scholars in international economic law, though small in number, are attempting to see free trade from the general public's viewpoint and define the right to benefit from free trade as a part of human rights in the course of arguments concerning the "constitutionalization" of the WTO or the increasing constitutional attributes it exhibits. Following this idea, it may be possible over the medium to long term for Japan to define free trade as a "right to know" and subject it to upcoming arguments on possible Constitutional amendments. When this happens, extrovert trade policy will secure its position in Japan as an infrastructure for selecting the nation's economic policy.

>> >> Original text in Japanese

* Translated by RIETI.

June 5, 2007 Nihon Keizai Shimbun

October 4, 2007

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