RIETI Report February 2011

Toward a New Japan-ASEAN Relationship in 2011

This month's RIETI Report looks at endeavoring to mark 2011 as the dawn of a new era in the Japan-ASEAN relationship. FUKUYAMA Mitsuhiro, RIETI Consulting Fellow and Deputy Director for the Asia and Pacific Division (East Asian Economic Integration), Trade Policy Bureau, Ministry of Economy, Trade and Industry, presents a strong case for Japan to further strengthen its relationships in the region due to its growing importance, both in terms of economics and politics.

Japan's trade with ASEAN, which now comprises 10 member countries, in the first half of fiscal year 2010 surpassed that of the United States, and the region continues to serve as a major production and sales hub for Japanese firms. In light of these factors, it is crucial for Japan to further cultivate its relationships in the region, and Mr. Fukuyama has outlined three key factors that we should consider to achieve this end. Mr. Fukuyama also discusses the mid-income countries and why Japan should take a problem-solving approach with them during this period of fine tuning its policies in the region.

This month's featured article

Toward a New Japan-ASEAN Relationship in 2011

FUKUYAMA MitsuhiroConsulting Fellow, RIETI
Deputy Director for the Asia and Pacific Division (East Asian Economic Integration)
Trade Policy Bureau, Ministry of Economy, Trade and Industry (METI)

Asia: A region set to continue to undergo dynamic changes

Looking back at the worldwide political and economic events that unfolded over the past year, we observed the strength and resilience of a dynamically changing Asia.

The latest edition of the World Economic Outlook, released by the International Monetary Fund in October 2010, shows how Asia has served and will continue to serve as the engine of the world economy. Developing Asia is estimated to have registered some 9.4% growth in real gross domestic product (GDP) in 2010, compared with an average of 2.7% for advanced economies. Meanwhile, real GDP growth projections for China, India, and ASEAN-5(*1) in 2011 are 9.6%, 8.4%, and 5.4%, respectively—all exceeding the average estimate of 2.2% for advanced economies by a sizable margin. It is well expected that Asia will further solidify its position as the world's growth engine.(*2)

Robust growth of the Asian economies has not only had a profound impact on the economic front, but also on the global and regional political dynamics. At the G-20 summit meeting held in Seoul in November 2010, Asia was represented by not only the advanced economies of Japan and South Korea, the host of the summit, but also by the developing economies, namely, China, India, Indonesia, plus Vietnam as the rotating chair of the Association of Southeast Asian Nations (ASEAN) in 2010. With those emerging countries getting a greater say in the world, the so-called "rich countries' club" alone can no longer determine the key global political issues. Given these changes in the global economic and political environment, it is imperative for Japan to build new relationships with other Asian countries, redefining them as partners while it sets out to achieve its global strategic goals.

Meanwhile, when we look at East Asia in terms of political structures, China and India, both of which have achieved remarkable economic growth, are now becoming more confident in their political muscle. Thus, the critical questions that must be asked today are what types of relationships Japan should build with these two emerging powers in Asia and what policies should be pursued in this respect. Meanwhile, the East Asia Summit, held annually since 2005, will be joined by the United States and Russia, starting from this year. How to incorporate them into the regional framework is another challenge. This year will be a critical year for Japan because it will need to tackle the challenges outlined above in East Asia.

Southeast Asia: A region of growing importance

Against this backdrop, we must not underestimate the importance of maintaining and further strengthening existing relationships with Southeast Asian countries. ASEAN, which now comprises 10 member countries, is an indispensable partner for Japan in terms of both trade and investment. According to customs-based trade statistics released by the Ministry of Finance, Japan's trade with ASEAN in the first half of fiscal year 2010 (the six-month period from April to September 2010) amounted to 9.5 trillion yen, exceeding the 8.2 trillion yen in trade with the United States, albeit less than the 13.4 trillion yen in trade with China. Meanwhile, according to the Ministry of Economy, Trade and Industry's Survey of Overseas Business Activities, the number of Japanese companies' subsidiaries and affiliates in the ASEAN-6 countries(*3) stood at 4,046 in 2008, far greater than the 2,662 subsidiaries and affiliates in the U.S. and comparable to the 4,213 in mainland China. These figures show that the ASEAN-6 countries serve as a key production and sales base for Japanese companies. The Southeast Asian Economic Outlook, compiled by the Organization for Economic Cooperation and Development (OECD), forecasts that these six Southeast economies will steadily grow at an average annual rate of 6.0% between 2011 and 2015.(*4)

The importance of Southeast Asia is not limited to an economic sphere. As discussed above, Japan will have to engage in the international political game in East Asia while concurrently keeping an eye on the movements of major powers such as the U.S., Russia, China, and India. And it goes without saying that building friendly relationships with ASEAN countries is of crucial importance to Japan. Furthermore, given the fact that Southeast Asia is home to some of Japan's vital trade routes and numerous production networks of Japanese companies, the realization of political, economic, and military stability in the region is a matter of great concern to Japan.

Building a new Japan-ASEAN relationship

Considering the importance of Southeast Asia for Japan, from what point of view should we seek to build on our relationship with Southeast Asia? Simply put, the relationship between Japan and Southeast Asia used to be described as one in which Japan, as the only one advanced economy in Asia, provided assistance to developing economies in Southeast Asia. However, today's Japan-ASEAN relationship cannot be captured by such a simplified picture. Instead, we need to look at the relationship from more diverse viewpoints. Here, I would like to point out three important factors that are necessary in order to build new, strategic relationships with Southeast Asian countries going forward.

The first factor concerns the fact that the East Asian economies, including Japan and ASEAN countries, constitute a single, extensive economic area in light of increased interdependence. Deepening intra-regional economic interdependence in East Asia was discussed in the White Paper on International Trade 2001, in the compilation of which I was involved as an author and editor. As examined in the 2010 edition of the white paper, production networks in East Asia have since undergone not only quantitative expansion but also qualitative development, and they are now evolving into those that also include sales as well as research and development (R&D) bases.(*5) As they operate business in East Asia and bring about such dynamic changes in the process, Japanese and other companies are increasingly coming to define the region as a single economic area, rather than one that is segmented by national borders. Therefore, it is necessary for Japan to develop—in cooperation with other East Asian countries—new institutional mechanisms that can better cope with the region's economic reality, i.e., expanding economic ties in the region alongside ever-increasing intra-regional, cross-border corporate activities.

The second factor relates to the completion of a network of free trade agreements (FTAs) with ASEAN as its hub and the significant progress that has been made over the years in the areas of trade liberalization and rule making. With an eye on the establishment of an ASEAN Community by 2015, efforts are being made to deepen integration within ASEAN. Externally, ASEAN has concluded bilateral FTAs with six neighboring countries (Japan, China, South Korea, India, Australia, and New Zealand), and intergovernmental working groups have been launched as a first step toward economic integration under the framework of ASEAN+6. Meanwhile, some Southeast Asian countries are participating in negotiations on the Trans-Pacific Partnership (TPP), expressing their commitment to active involvement in the international rule-making process. Japan must not be left behind. It is strongly hoped that Japan will play a pivotal role in creating a regional framework, defining ASEAN countries as its fellow members constituting a single economic area. Indeed, Initial Steps towards Regional Economic Integration in East Asia (hereinafter simply "Initial Steps"), a proposal put forward by Japan at the meeting of ASEAN+6 Economic Ministers in August 2010, reflect all those developments revolving around ASEAN countries. It is hoped that the proposal will lay the groundwork to accelerate efforts toward realizing the Comprehensive Economic Partnership for East Asia (CEPEA), an economic partnership agreement covering ASEAN+6.(*6)

The third and last factor, though it may sound paradoxical, is the diversity of Southeast Asia. For instance, when we look at the levels of living standards measured by per capita GDP, relatively rich and developed ASEAN members, notably Singapore, are comparable to Japan, but poorer, less-developed members, namely, the CLM countries (Cambodia, Laos, and Myanmar), have a large number of people living below the poverty line. While the former group of countries would make good partners for Japan in designing advanced institutional systems for the region, those in the latter group would continue to need economic assistance for infrastructure development or support in other forms. As outlined in the Initial Steps, such a greater regional economic integration would require a two-axis approach—seeking to promote liberalization on the one hand and facilitate development on the other.

Meanwhile, between those two groups of countries, there exists another group of countries entering into the stage of mid-income countries as referred to by Hiroaki Suehiro, an economist.(*7) Though these countries have not yet reached an advanced level, we expect them to face the same problems that Japan faced or is still facing at present, ranging from the aging population and deficiencies in the social security system to environmental and urban problems. In dealing with those countries, Japan should take a problem-solving approach that effectively utilizes its technology and experience as noted in the New Growth Strategy (endorsed by the Cabinet in June 2010). Thus, while defining East Asia as a single viable world, Japan needs to develop and implement fine-tuned policies that accommodate the great diversity of countries in this region.

Indonesia is the rotating chair of ASEAN this year and will host the sixth East Asia Summit, of which Japan is a member, in October. In the run-up to the upcoming summit, Japan should deepen discussions on its East Asian policy while aiming to mark 2011 as the beginning of a new Japan-ASEAN relationship.

>> The original column was published in Japanese on January 11, 2011.

Notes:

  1. ASEAN-5 refers to the following five countries: Indonesia, Malaysia, the Philippines, Thailand, and Vietnam.
  2. IMF, World Economic Outlook, October 2010.
  3. For the purpose of this article, ASEAN-6 refers to the following six countries: Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam.
  4. OECD, Southeast Asian Economic Outlook, November 2010.
  5. See the Ministry of Economy, Trade and Industry's White Paper on International Trade 2010. Also see Suehiro (2010), "Higashi-Ajia Keizai o Do Toraeruka—Kaihatsutojokoku-ron kara Shinko-chuushinkokugun-ron e (How to Define the East Asian Economy—From the Theory of Developing Economies to the Theory of Semi-Developed Economies)," RIM Kan-Taiheiyo Bizinesu Joho, July 2010, Japan Research Institute, which points to the acceleration in recent years of "Asia's shift to Asia", a shift in trade and investment flows that began in the later half of the 1990s. More specifically, the author argues that the so-called Pacific Triangle, in which the U.S. has been serving as the final destination of consumption, is now being replaced by a new East Asian Triangle, formed by China (+ South Korea and Taiwan), Japan, and ASEAN (+ India).
  6. For details, see Fukuyama, "Higashi-Ajia Keizai-Togo eno Saisho no Ayumi (Initial Steps Toward Regional Economic Integration in East Asia)", RIETI Special Report dated October 19, 2010 (Available only in Japanese).
  7. For details about mid-income countries, see Suehiro (2010) and Suehiro (2009), Thai: Chuushinkoku no Mosaku (Thailand: Alternatives for a Mid-Income Country), Iwanami Shoten.

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