Asian Economic Integration- Current Status and Future Prospects -

With de facto integration rapidly taking place, Asian economies now need to have an institutional framework to address issues stemming from market forces － the very driving force for the ongoing integration － and catch up with Europe and North America, participants agreed at a recent RIETI symposium on Asian economic integration.
During a round-table session on April 23, held under the theme of "Prospect for Economic Integration in Asia: Approaches from Political Economy (The Way Ahead)," they generally shared the view that Asia economies should further proceed and deepen their integration, which they say will benefit the region and complement global liberalization.
Many questions remain unanswered, however, as differing opinions were expressed as to how such an institutional integration should take place. Some even voiced skepticism, pointing to the lack of clear vision for the final goals of such integration and political difficulties seen in Japan and elsewhere in the region.

Toshiya Tsugami, visiting fellow at RIETI and director of Northeast Asia Office at the Ministry of Economy, Trade and Industry, said that while de facto integration proceeds an institutional framework must be created to avoid unnecessary distortions that may arise from focusing on specific areas in integration process.
Pointing to China's entry to the World Trade Organization and emerging moves toward free trade arrangements in the region, many participants in the session said East Asia now has a momentum for deeper integration.
"China's WTO membership will provide a very new opportunity for East Asia... to move forward East Asia's economic regionalization," said Liu Guangxi, executive vice-chairman of Shanghai WTO Research Centre and vice president of Shanghai Institute of Foreign Trade.
Yoshihide Soeya, a RIETI faculty fellow and Keio University professor, noted that Beijing's willingness to participate in the regional integration, together with Washington's no-objection stance toward such regional integration, is giving an impetus.
"China's somewhat strategic way of premising its regional policies on its economic weight" has been fundamentally affecting three important undercurrents － economy, security and democratization － that have been driving regional developments, he said.
Naoko Munakata, senior fellow at RIETI and visiting fellow at the Brookings Institution's Center for Northeast Asian Policy Studies, pointed to a positive change in Washington's attitude toward Asian integration.
"Until recently, the knee-jerk reaction among Americans to the East Asian initiative was that regional integration is bad when it is exclusive," she said.
Citing USTR Bob Zoelick's positive comment on ASEAN's FTA with Japan, Korea and China, however, she said that the current U.S. administration has a different approach in addressing regional integration in East Asia. But she advocated that Washington should more actively support East Asian integration beyond rhetoric.
" More fundamentally, however, I think that the U.S. has a clear interest in helping East Asia become more mature and integrated, and this is so regardless of the U.S. membership," she said.
Soeya viewed the U.S. attitude more positively, saying that the United States, which tends to react negatively to any move to affect its hegemony in Asia, now seems to be "ready to see the development of Asian economic integration without necessarily expressing any concerns or trying to find (its) own place."

A series of emerging initiatives to formulate FTAs were generally perceived as reflecting Asian economies' desire for regional integration. However, while some participants see FTAs as a meaningful step for trade liberalization and eventual regional integration, some others are far more skeptical.
Hu Angang, director of Chinese Academy of Sciences' Center for China Study and Tsinghua University professor, called for FTAs among four key players in East Asia － Mainland China, Japan, South Korea and Hong Kong － that together account for 24 percent of the world population and 26 percent of total gross domestic products in the world.
Then, in the mid- to long-term, he said, China will expand cooperation with other Asian countries including Australia and New Zealand, a move that may evolve into a Pan-Asia free trade zone.
Pointing to a range of emerging or proposed FTA initiatives such as those under the framework of ASEAN plus three, ASEAN plus China, ASEAN plus Japan, Japan-China-Korea and Japan-China-Korea-Hong Kong, C. H. Kwan, senior fellow at RIETI, questioned rationale behind each of those initiatives.
"Is there any theory to tell about the optimum sequencing of how we get from here to there? The only convincing principle... is that we start with FTAs that face the least political barriers," he said. "But as a rule, FTAs that are easy to form usually do not convey many economic benefits. How should we solve that problem?"
Harsher criticism came from Peter Drysdale, head of Australian National University's Australia-Japan Research Centre.
"You cannot make progress by excluding the difficult... important issues from negotiation. If you did a series of bilateral FTAs... you could get agreements but that exclude everything that was important, everything that was difficult," he said. "The critical thing is how to make progress in a framework that delivers what serious and progressive policymakers in Japan and elsewhere in the region want in terms of deeper integration in the region."
Chia Siow Yue, director of Institute of Southeast Asian Studies in Singapore, acknowledged the limitation of an FTA but said she still find some benefits, saying, "The easiest bilateral (free trade arrangement) may result in minimal gains. Fair enough. But that small gain is still better than zero gain."
Munakata said that "political pragmatism" is necessary to make a real progress as each country has its sensitive sector.
Japan-Singapore FTA actually did open a "pinhole" in Japan's agriculture-as-a-sanctuary mentality, bringing "tremendous psychological effects" on the Japanese bureaucracy, she said.
She said Japan sees FTAs not simply as a means for tariff reduction but more as a problem-solving mechanism.
In proceeding on regional integration, she said, East Asia should take a multi-layered approach, which is not to downgrade the WTO but to facilitate a process of selecting the best forum to solve various problems.

Meanwhile, some noted that East Asia lacks identity and needs to draw a clear picture of the benefits of regional integration. "In order to upgrade the ongoing de facto regional integration to institutional integration, or in order to shift to a new stage, political will is necessary. In order to do that, something is required," said Mitsuru Kitano, visiting fellow at RIETI and director of the Foreign Ministry's Loan Aid Division. "I have some hesitation as to whether we should call it identity or not but... some vision of collective interests will be required."
Izumi Aizu, principal of Asia Network Research and executive research fellow at GLOCOM, said, "It sounds like we are trying to achieve a long-term vision of a community. But in the mean time, I don't really see... the clear economic activities or benefits. And that may perhaps encounter objections of those who would like to preserve their own fundamental culture."
"In the age of the Internet, satellite broadcasting or jumbo jets, all economic activities are crossing borders, so what are we really trying to achieve?" he asked.
Ichiro Araki, director of research and senior fellow at RIETI, suggested one reason behind the missing identity is the lack of involvement by regional organizations and representatives from civic society in the integration process.
Zhang Yunling, director of Institute of Asia-Pacific Studies and of APEC Policy Research Center at Chinese Academy of Social Science, said East Asia has its identity at least in four dimensions, that is, geographically, economically, politically and in terms of Pacific relations.
"If East Asia formulates an identity or (achieves) integration, the structure of the relations between East Asia and the United States will be fundamentally changed to set up a rational relations between the two sides of the Pacific. This is also reflected in the Atlantic relationship already through the integration of Europe," he said.
Zhang said East Asia, unlike Europe, should start from cooperation rather than from integration because the region － though economically integrated － still lacks institutional supports and must prepare itself for potential political conflicts. And for that, he said, it is not necessary to set a clear goal from the very beginning.
"The train is moving. Nobody wants to lag behind and everybody wants to get on the train," he said. "East Asia lacks a clear defined political goal... but the process has started."
Yu Yongding, director of Institute of World Economics and Politics, said that East Asia need to have a long-term objective, asking itself why it needs regional cooperation.
"When I raised this question, I had the United States, the EU in my mind because the U.S. is a very powerful country and the EU ... is competing and also cooperating with the United States. Then, we need another pillar that is the East Asian community," he said. "We should really think about why we need regional economic cooperation, why we do not just joint the WTO to carry out the kind of liberalization within the framework of the WTO."
Chia said distinction must be made between the political objective and the economic objective of regional integration.
"The political objective could be the eventual evolution of an East Asian community," she said. "But the economic objective, to me, is very clear that the integration process should help to reduce economic conflicts, improve economic stability, and improve the economic competitiveness of individual countries in the region. It is not that it would become an inward-looking regional grouping. It is to help us improve competitiveness in a globalized economy."
Shujiro Urata, faculty fellow at RIETI and Waseda University professor, also stressed the need of cooperation because an FTA, albeit beneficial to its members, imposes certain adjustment cost, for instance, unemployment.
"You have to deal with these adjustment cost issues. For that, it is very important to have not just an FTA which has a trading arrangement but economic assistance element in it," he said. "With economic assistance that you give or receive, you can... deal with these adjustment problems."
Wu Rong-I, president of the Taiwan Institute of Economic Research, said that Taiwan － both the government and business community － is eager to join the trend of regional integration.
While stressing the importance of democracy as fundamental to deepen regional integration, he said, "When everybody considers Asian economic integration, Taiwan should be part of it... If Taiwan is excluded, regional integration is not complete."

As to Japan's role in regional integration, Munakata said success or failure of Japan's policy efforts determine whether the East Asian region can overcome challenges and create opportunities through integration, while Tsugami pointed to the need for Japan to get more serious and conscious about getting benefits from the regional integration.
Takashi Shiraishi, faculty fellow at RIETI and Kyoto University professor, pointed to the need to overcome Japan's political immobility. Japan's domestic development has led to regionalization in some areas but there are areas where hardly anything has taken place, he said.
"Security, nothing has taken place. Agriculture, nothing has taken place. And, of course, (no development has been made in) political leadership at the highest level in the attempt of region building," he said. "Why? I think the reason is very simple: because Japan has been undergoing, on one hand, economically, socially and culturally very dynamic changes while we are having political immobility."

Concluding the session and the two-day ANEPR meeting on Asian economic integration, Masahiko Aoki, RIETI president and Stanford University professor, said, "We have obviously not reached a consensus about this but I might put the consensus view as a force, namely, the Asian integration itself is not just the objective. Our concern is to generate a stable and efficient economic order in Asia."
And for that purpose, Asian cooperation is necessary and that cooperation ought to be complementary to a stable and efficient global order, he said.
Aoki said that Asian integration is not just reduction tariffs or FTAs, calling for attention to a series of other aspects: an emergent organizational architecture as seen in innovative strategic alliances, contractual agreements and modular-types of supply chains, increasing human mobility, competition and cooperation in shared infrastructure, and environmental spillover effects.
Meanwhile, referring to the problem of Asian identity or norm of trust building, he said, a mechanism for trust building is very important to enhance economic exchanges especially in the region which is diverse in culture.
"People tend to think that the contract enforcement can be done and ought to be done by a mechanism of rule of law and third party governance... But it is so complicated, so law cannot be perfect," he said. "Of course, it is important to formulate clear rules which are not exclusionary, and more universal rulemaking is obviously a very important one. But toward that step, I think, the mechanism of trust ought to be complementary in enforcing contracts and protecting property rights across borders."

-The RIETI editorial department is responsible for this article