Asia Study Report - Economic Integration Involving Broader Geographical Areas to Bring Greater Benefits
Faculty Fellow, RIETI
Economic integration of East Asia under ASEAN+61 would bring greater benefits to participating countries than realized under ASEAN+32. Japan must promote liberalization and structural reform, particularly in the agriculture sector, playing a leading role in working toward establishment of an ASEAN+6 free trade agreement (FTA).
Following the experience of the Asian currency crisis of 1997, East Asian countries have strengthened regional cooperation under ASEAN+3, organizing meetings at levels such as summit, ministerial, and sector-specific meetings. In the course of this process, Japan and some ASEAN countries such as Singapore and Indonesia called for an expanded forum and the first East Asian Summit was held in December 2005 under the ASEAN+6 framework, encompassing 16 countries including India, Australia, and New Zealand.
Increasing presence of ASEAN+6
Japan has been taking the initiative in developing economic and environmental cooperation under ASEAN+6. It has proposed and is working toward establishing an East Asia ASEAN Research Center (ERIA), an East Asian version of the Organisation for Economic Co-operation and Development (OECD) for the purpose of proposing policy for promoting economic growth in the region, as well as a vision for a Comprehensive Economic Partnership in East Asia (CEPEA) including an FTA.
Cooperation under ASEAN+6 has just begun. I led a project at the Japan Center for Economic Research (JCER) that examined the significance and challenges of including India, Australia, and New Zealand in the East Asian regional cooperation framework, and put together a proposal for overcoming these challenges.
Amid high economic growth in China and India, ASEAN+6 has been increasing its presence in the world economy. As of 2005, ASEAN+6 accounted for a quarter of the world's total gross domestic product (GDP) and one-half its population. Economic expansion has been accompanied by increased intraregional trade in goods and services trade as well as intraregional cross-border direct investment. ASEAN+6 countries' intraregional trade dependency - the percentage of intraregional trade to total trade - has risen to above 40% on average. However, a closer look finds as high as 55% for Australia and New Zealand but below 30% for India.
India's high market potential
Intraregional production networks have developed among ASEAN+3 countries as a result of direct investment by multinational corporations, particularly in the machinery industry. India, Australia, and New Zealand have generally been left outside these networks. India is, however, beginning to be incorporated into a production network for computers and automobiles via the supply of parts and components and/or the provision of information services.
The addition of India, Australia, and New Zealand to ASEAN+3 brings major advantages in ensuring procurement of mineral resources and primary commodities as well as in developing India's consumer market. For Japanese companies, which are typically focused on high value-added goods and services, India is not a high value-added market and thus difficult. But ongoing hesitation about entering into business with India will prevent Japanese companies from capturing the enormous opportunities arising from the market.
Though India's economy is widely seen as having a bright future, a range of problems still must be addressed in order to achieve high growth that will increase employment and reduce poverty. Thorough deregulation and improvement of government governance, particularly at the local level, are serious challenges. Meanwhile, reform of the labor market is making little progress and infrastructure remains underdeveloped.
By strengthening trade and investment relationships with ASEAN+3 countries, India, Australia, and New Zealand will be able to promote economic growth. Trade and investment must be liberalized to enable their expansion. As part of its economic reform since 1991, India has been promoting liberalization but a highly complex tariff system and various non-tariff barriers still remain. Though areas open to foreign investment are increasing, foreign companies are still subjected to an array of restrictions and thus considerable room remains for further liberalization.
A simulation analysis of the impact of an ASEAN+6 FTA on trade liberalization, using a general equilibrium model, found that an FTA would push up the region's GDP by 2.1%, and Japan's GDP by 0.5%.
Presently in Asia FTAs under ASEAN+1 (ASEAN plus China FTA and ASEAN plus South Korea FTA), are being formed, while a possible ASEAN+3 FTA (East Asia FTA) is being studied. We also conducted a simulation analysis of the impact of these FTAs. Our findings show that an FTA under ASEAN+6, among different variations of ASEAN+ FTAs, would bring the greatest economic benefit to ASEAN+6 countries (see Table below).
ASEAN + 6
Along with this is an expected increase in opportunities for cross-border division of labor brought by opening the hitherto-closed but enormous Indian market. The above figures are quite likely underestimate the actual impact because they do not reflect the impact of direct investment that positively contributes to economic growth.
Agriculture is a sector said to be an obstacle to realizing an FTA. With the presence of Australia as a major exporter of agricultural products, New Zealand with its competitive advantage in dairy products, and India with extensive land and diverse agriculture, agricultural trade under ASEAN+6 looks quite different from that under ASEAN+3.
Australia, New Zealand, and India are all net exporters in agricultural trade. India's export surplus is partly attributable to the failure of its agricultural policies. Thus, with continuous population growth and rising income, domestic consumption in India is expected to increase and agricultural exports decrease in the coming years. On the other hand, the flow of agricultural exports from Australia and New Zealand will likely continue, as will the trend of Japan and South Korea being net importers in agricultural trade. As for China, import and export are very much balanced at the moment. However, given the prospect for further progress in industrialization and increased domestic food demand concomitant with economic growth, China is quite likely to eventually become a net importer in agricultural trade.
Net exporters and net importers in agricultural trade coexist in ASEAN+6. Nevertheless, their intraregional trade dependency in this sector remains low. This indicates a high possibility that the net importing countries can raise their food self-sufficiency ratios on a regional level by expanding intraregional trade in agriculture.
Likewise, the addition of India and Australia is expected to have a favorable impact in the energy sector. Like China, India has been increasing its presence in the international energy market and its energy demand is expected to continue to rise sharply. Cooperation among ASEAN+6 countries would help them increase their bargaining power vis-à-vis energy producing countries - Middle Eastern countries, Russia, etc. - wishing to secure stable energy demands. The presence of Australia, a major energy producer and exporter, in regional cooperation would increase overall intraregional dependency on coal and natural gas.
Political leadership and public support are needed
One of the beneficial functions of regionalism, as exemplified by ASEAN+6, is formulating networks of government practitioners engaged in areas like trade and finance, creating a multilayered mechanism for close exchanges of information. This results in a "sense of unity" with participating countries seeking shared common policy interests. In East Asia where countries differ substantially both in their views and interests regarding the way of proceeding with regional cooperation, it is all the more important to strengthen this sort of function.
Japan, as a leading player in promoting cooperation under ASEAN+6, should go beyond just promoting regional dialogue and propel this cooperation forward. More specifically, both human and financial resources should be invested for the establishment and efficient operation of a secretariat so that Japan and other ASEAN+6 countries can work together toward the full-fledged launch of ERIA and CEPEA. Also, Japan, in cooperation with like-minded countries, should strongly promote the participation of India, Australia, and New Zealand in meetings and projects currently organized under ASEAN+3.
An FTA would be the centerpiece of economic partnership under ASEAN+6 and Japan should be playing a leading role in working toward its conclusion. At the moment, however, Japan is not living up to its expected role due to strong opposition from its agricultural sector, those seen as highly likely to suffer from trade liberalization. Discussions on the liberalization of agriculture tend to focus solely on potential damage. Yet it is not only possible to alleviate such damage, Japan could pave the way for a brighter future for agriculture by simultaneously promoting liberalization and structural reform.
When Japan proceeds with liberalization and structural reform of its agricultural sector and demonstrates leadership in initiatives toward concluding an ASEAN+6 FTA while at the same time promoting regional cooperation in various areas including energy and the environment, it makes a considerable contribution to a brighter future for Japan and the rest of East Asia. Strong leadership of foresighted politicians and secure public support for that leadership are vital for Japan to play such a role.
* Translated by RIETI.
January 25, 2008 Nihon Keizai Shimbun
1. ASEAN+6 consists of India, Australia, and New Zealand along with the ASEAN+3 countries
2. ASEAN+3 groups the Association of Southeast Asian Nations with Japan, China, and South Korea
March 17, 2008
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