Asia Study Report - Asia Should Take Sector-by-Sector Approach to Promoting Cooperation

URATA Shujiro
Faculty Fellow, RIETI

In building a regional community, Asia, where countries differ greatly in their stages of economic development and political systems, should seek to promote cooperation by a gradual sector-by-sector approach, rather than trying to establish a region-wide institutional framework. In doing so, bringing more countries into the scope of the community will result in greater economic growth.

Further liberalization is needed to expand trade and investment

In mid January, the 10th ASEAN+3 Summit and the 2nd East Asia Summit were held consecutively in Cebu, Philippines. Ongoing regional cooperation in East Asia, prompted by the outbreak of the East Asian financial crisis, was launched primarily within ASEAN+3, which groups the members of the Association of Southeast Asian Nations (ASEAN) and three East Asian countries (Japan, China, and South Korea). Since the first summit meeting held in 1997, cooperation under ASEAN+3 has significantly expanded. In addition to annual meetings of leaders and ministers, a total of 48 inter-governmental consultative forums have to date been established, covering 17 different sectors including economy and energy.

Meanwhile, the East Asia Summit was launched in 2005 under the expanded framework of ASEAN+6, bringing India, Australia, and New Zealand together with the ASEAN+3 countries. These two frameworks are both calling for establishing an East Asia Community as an important step toward ensuring economic prosperity as well as social and political stability in the East Asian region. With this in mind, the Japan Center for Economic Research (JCER) has examined the current state and challenges of regional cooperation, which is indispensable to creating an East Asia Community, and considered what policies Japan and other East Asian countries should take to overcome the challenges.

Since the 1980s, East Asia has witnessed rapid development of intra-regional production networks involving inter-process division of labor by multinationals, particularly in the electronics and electromechanical industries, which were spurred by a robust increase in trade and investment within the region. The driving force behind the building of these production networks has been the steps taken by East Asian countries toward trade and investment liberalization under such frameworks as the General Agreement of Tariffs and Trade (GATT), the World Trade Organization (WTO), and the Asia-Pacific Economic Cooperation (APEC) forum.

Yet countries with high tariff and non-tariff barriers are still conspicuous in East Asia and many of these countries continue to maintain equally high barriers in the area of investment. Thus, further liberalization efforts are needed to expand trade and investment.

In a bid to expand trade and investment, East Asian countries have been putting in a great deal of efforts to strengthen hard infrastructure such as logistics. However, in addition to poor coordination between regional and domestic infrastructure, customs clearance procedures are inefficient, and an electronic switching system has yet to be introduced. Underdeveloped soft infrastructure such as the issue of trade and investment facilitation has been hampering the progress of regional integration in East Asia.

Japan can help other East Asian countries cope with these problems by extending cooperation and actively and strategically offering its accumulated know-how and technologies, thereby further expanding trade in East Asia and bringing significant benefits to Japanese companies operating in other countries in the region.

As trade liberalization efforts under the WTO hit a snag, East Asian countries - like many countries in other parts of the world - are increasingly looking to free trade agreements (FTAs) as an instrument to eliminate trade barriers with specific countries. However, FTAs concluded or negotiated thus far by East Asian countries are either bilateral or plurilateral arrangements. With respect to the possibility of establishing an FTA encompassing the whole East Asia region, no governmental-level discussions have yet taken place.

In forming an East Asia FTA, liberalization of agricultural trade poses a major obstacle. Not only importing countries, but many exporting countries are also protecting agriculture. Beneath this are political factors and concerns about food security. Liberalization of agricultural trade is a difficult but unavoidable step toward economic growth. Yet it is equally important for Japan to implement an efficient quarantine system for ensuring food safety and seek to establish common rules for the protection of intellectual property rights so as to promote the development of new products.

A simulation analysis of macroeconomic impacts of an East Asia FTA, based on a general equilibrium model, produced results that have important policy implications. Specifically, it was found that resulting economic growth is greater when trade liberalization and facilitation are comprehensively promoted (by including agriculture) and if an FTA covers greater geographical areas, such as ASEAN+6 rather than ASEAN+3.

In East Asia, the development of regional cooperation began in the financial and monetary sector, prompted by the currency crisis in the late 1990s. As a means to safeguard against potential shortages of foreign currency, such as the one that caused the crisis, ASEAN+3 countries launched the Chiang Mai Initiative (CMI); a network of bilateral swap arrangements (BSAs) whereby one party to a BSA would be able to borrow foreign currency from the other in the case of crisis. In addition, as a way to reform the financial system overly reliant on the banking sector, ASEAN+3 countries are working toward the development of an Asian bond market while continuing to pursue Asian Bond Fund (ABF) initiatives. The creation of an Asian Monetary Unit (AMU) as a common currency in Asia has been placed on the policy agenda. However, based on lessons learned from the European experience, East Asia should gradually deepen currency cooperation.

Cultural exchange plays important role

Given the continuing high economic growth and surging energy consumption, East Asian countries are increasingly concerned about energy security, meaning that room exists for strengthening regional cooperation in the field of energy. The adoption of energy efficiency-enhancing technologies and the stockpiling of oil are perceived to be effective in increasing energy security. Japan, which boasts an extensive accumulation of technologies and know-how in this area, can play an important role in regional cooperation.

Information technology (IT) is indispensable in today's economy and society. However, almost all IT-related technologies introduced in East Asia, except for those in Japan, are developed by U.S. or European companies and East Asian companies are paying hefty licensing fees to U.S. and European licensors.

The competitive advantage of U.S. and European companies lies in their ability to set international standards in the IT area based on their own research and development. A key enabling factor for such competitiveness is the strenuous joint efforts of the government and private sectors in the U.S. and Europe. To rectify the ongoing situation which puts East Asia at disadvantage, an environment must be created that facilitates cooperation among Japanese, South Korean, and Chinese companies with technology development capabilities.

Cultural exchanges foster mutual interest and understanding among people from different countries and should play a significant role in the process of forming an East Asia Community. Steps to promote cultural exchanges include relaxing restrictions on cultural imports, strengthening intellectual property protection, and easing the entry of foreign nationals.

Trusting relationships in the security area are crucial to creating an East Asia Community but have yet to be developed. For the moment, there are three types of security arrangements in East Asia: 1) "bilateral security," exemplified by the U.S.-Japan and U.S.-South Korea security alliances, 2) a web-like style of security as a more open framework that combines bilateral alliances and multilateral cooperation; and 3) "cooperative security," as seen in the ASEAN Regional Forum, focusing on non-military issues such as politics and diplomacy. It is important to integrate these three types to create a multilayered security mechanism made of complementary components.

Unemployment is expected to rise but will be manageable

East Asian countries are profoundly different in their stages of economic development, as well as in their political systems. Thus, in creating an East Asia Community, countries should take a "functional approach" in which they promote cooperation in a sector-by-sector manner as described below, rather than an "institutional approach" in which they try to build a community by implementing region-wide institutions.

Presumably, an East Asia Community would be composed of three sub-communities: an economic community, a socio-cultural community, and a security community. In such a case, a practical way to proceed toward the ultimate creation of an East Asia Community would be to form each sub-community in step-by-step manner. The first stage would be to create an East Asia economic community as an expanded, comprehensive, region-wide FTA that enables the free movement of people, goods, capital, and information within the region. In doing so, the aforementioned regional cooperation in the economic field would be crucial.

In the process of creating an economic community and through cultural exchange, mutual understanding among countries in East Asian would deepen. At the same time, should this also lead to the narrowing of income gaps in a way that developing countries catch up with developed countries, East Asian countries would come to share more common values. The resulting environment would enable the formation of a socio-cultural community, and then a security community, in East Asia; eventually leading to the establishment of an East Asia Community.

Japan, as the most advanced economy in East Asia, should play a leading role in creating an East Asia Community. The country, faced with extremely low fertility and a rapidly aging population, is about to lose its economic dynamism and it must be recognized that building and maintaining close relationships with other East Asian countries, where high economic growth is expected in the coming years, would bring economic and social prosperity to Japan.

In the process leading up to the establishment of an East Asia Community, Japan might encounter a range of structural problems including an increase in unemployment resulting from further trade liberalization and the inflow of foreign workers. However, these problems can be manageable if displaced workers are provided with temporary income compensation to make up for lost income, as well as with technical assistance to help them build their capacities in seeking new employment opportunities. Japan needs the ability to draw up and political will to implement an appropriate strategy toward the creation of an East Asia Community.

>> Original text in Japanese

* Translated by RIETI.

January 30, 2007 Nihon Keizai Shimbun

April 25, 2007