Asian Economic Integration- Current Status and Future Prospects -

Speech by Mr. Kaoru Yosano
Former Minister of International Trade and Industry

Thank you, Dr. Aoki.

Mr. Okamatsu, Dr. Chen, Professor Stiglitz, distinguished speakers at the conference, and ladies and gentlemen, I am very honoured to speak before you on this timely and important subject: Asia's economic integration.

This evening, I am going to talk about Japan's position toward regional economic integration. Its position has changed rather dramatically in recent years. And I was privileged to be the Minister of International Trade and Industry when this change took place.

Now, let me put the whole picture in a historical perspective. Before the creation of the modern-day international legal order in the 19th century, which is based on the European tradition since Grotius and the Treaty of Westphalia, there were, at least, two alternative and concurrent systems of international legal order: the Chinese system and the Islamic system.

Japan did not play any significant role in these systems. The situation remained largely unchanged even after Japan's opening to the world. There was an unfortunate period in the 1930s and 1940s, when Japan actively sought to be a leader of the region, with a new international legal order of its own creation. This misguided adventure ended in catastrophe, inflicting terrible damage to the region.

After 1945, while embracing defeat, Japan returned to a reclusive position vis-a-vis the international legal order. It became a meek follower of the rules established by hegemonic powers.

In the late 1980s and early 1990s, with the end of the Cold War and the collapse of the Eastern bloc, the situation changed dramatically. As the Cold War was about to end, Japan became assertive in the GATT. It filed its first complaint in the GATT dispute settlement system in 1988. It played a more active role in the Uruguay Round than in previous rounds, for instance, in the area of anti-dumping negotiations. It played a leading role in the creation of the APEC in 1989. In 1992, it started publishing an annual trade policy report-Japan's answer to the USTR's foreign trade barriers report. There was a clearly visible change in Japan's trade policy in the late 1980s and the early 1990s.

A decade later, where do we stand? Despite the economic downturn, Japan's aggressive trade policy position remains unchanged. In fact, it has become even more assertive.

Ten years ago, Japan was still acting within the confines of the multilateral system. It took a very sceptical view of regional initiatives, such as the NAFTA and the single European market. Along with countries like Korea and Hong Kong, it boasted its "splendid isolation" from the rest of the world, which seemed to be moving toward regionalism. True, Japan was promoting APEC, but APEC was supposed to be a model for open regional cooperation, something to be distinguished from free trade areas or customs unions under Article XXIV of the GATT. All of that changed in the past few years.

As I mentioned at the outset, I myself am one of the policymakers who charted and pursued this new course. Nowadays, METI is promoting a multi-layered trade policy, encompassing multilateral, regional and bilateral initiatives. It does not shy away from the formation of a full-fledged free trade area, as evidenced by the conclusion of the Japan-Singapore Economic Partnership Agreement last year.

A number of academics and practitioners, many of whom are gathered here today, have tried to explain what brought these changes. Many factors were at play: (a) the Asian financial crisis of 1997; (b) the debacle at the 1999 WTO Ministerial in Seattle; and (c) proliferation of economic partnership agreements in the region, to name a few. As I understand, there will be a discussion tomorrow afternoon on this specific topic at the symposium, so I will not dwell upon this subject now.

Instead, let me briefly outline the state-of-play of Japan's regional initiatives.

Regarding the Japan-Singapore Economic Partnership Agreement, we are expecting the Diet to approve the agreement during the current session, and I hope it will enter into force within the year.

With Mexico, as a result of the meeting between Prime Minister Koizumi and President Fox in June last year, there has been a series of intensive discussions toward formation of a possible free trade area at the Joint Experts Group, consisting of the representatives of the government, industry and academia of the two countries.

With ASEAN, at a meeting between METI Minister and ASEAN economic ministers last September, it was agreed to establish an expert group toward closer economic partnership between Japan and ASEAN countries. The group has met twice this year, and its report on the possibility of an FTA between Japan and ASEAN will be submitted to the Japan-ASEAN Summit in the autumn of this year.

Furthermore, regarding ASEAN, the East Asia Study Group is considering the possibility of an "ASEAN plus three" free trade area.

Regarding Korea, the Japan-Korea FTA Business Forum, which has been active since March last year, has recommended the early conclusion of a free trade agreement between the two countries. Following this development, Prime Minister Koizumi and President Kim Dae Jung this March agreed to establish a joint expert group regarding the bilateral FTA.

Speaking of Korea, we should not forget about the trilateral initiative between Japan, China and Korea. The academic study has been ongoing for a while, but the first government-level meeting was held in January, this year.

With Chinese Taipei, a possibility of private-sector forum for the study of an FTA is being explored.

Finally, as the latest move in Japan's regional initiatives, Prime Minister Koizumi and Prime Minister Takshin agreed earlier this month to establish a working group on closer economic partnership between Japan and Thailand.

This is a rough sketch of where we stand today. In addition, Japan has been approached by Chile, Australia, Canada and the MERCOSUR for consideration of exploratory work on closer economic partnership. You can easily bet that we will see more policy initiatives in the coming weeks and months.

As many speakers today pointed out, economic integration in the region has intensified on a de facto basis. It is not possible to reverse the trend, nor is it desirable. Rather, we must accept the de facto integration as a given. What kind of policy is needed to further the economic integration? I would like to emphasize two points: (a) a need for vision and (b) adherence to the WTO rules.

First, let me touch on the need for vision. We have to be clear about what we are going to achieve through regional integration.

If you look at successful cases of regional integration, such as the NAFTA and the EU, you will note that these groupings were the result of intentional efforts toward regional integration, not a natural extension of an existing economic partnership.

In the Western hemisphere, on one hand, the United States was not able to afford a poor, corrupt dictatorship at the south of its border. The economic disparity between the U.S. and Mexico were causing all kinds of problems, such as illegal immigration. Mexico, on the other hand, consciously chose to be integrated with the U.S. economy so that it would be locked into a process of economic liberalization and democratization. These were not mere economic calculations. They were largely political.

Turning to Europe, the conditions were worse. Germany and France had fought three wars in a century, with devastating effects on their economies as well as their nations' psyches. There answer was regional economic integration. Again, the motive was political.

Do we have a similar motive here in Japan? Perhaps the situation in East Asia today is not exactly comparable with the examples I just cited. But in my view, formation of free trade areas and closer economic partnership can be, and should be, turned into an important political agenda in Japan today.

The present economic situation in Japan dictates us to take a bold move toward structural reform, furthering regional economic integration through free trade areas and closer economic partnerships. By integrating the Japanese economy into the global economy through international agreements, we can lock in and secure the movement toward structural reform of our economy, just as China intends to achieve the same effect through accession to the WTO.

Some may ask, "Why bother? We are already a member of the WTO." My answer is that the WTO moves too slowly. Despite the launch of the new round at Doha, I am not very optimistic about a quick outcome of the negotiations. To see what I mean, you only have to think of the painstaking process in the lead-up to Doha, including the "battle of Seattle" in 1999.

This brings me to my second point about adherence to the WTO rules. Despite the pessimism about the speed of the WTO process, I am a firm believer in the multilateral trading system. We must abide by the WTO rules in promoting regional economic integration.

Therefore, the starting point for our discussion will be the WTO obligations (under Article XXIV of the GATT and Article V of the GATS). This requires substantial sectoral coverage. We cannot exclude sensitive sectors, such as agriculture, from the sectoral coverage of regional integration agreements. This creates a huge political problem. Some people might argue that we could follow the EU's example, which started with the European Steel and Coal Community (ECSC). If the Europeans could begin their integration process with sectoral coverage that narrow 50 years ago, why can't we do likewise in Asia today, they would ask.

The simple answer is that the ECSC was illegal under GATT Article XXIV, so the Europeans secured a waiver in 1952. The waiver was supported by the United States, which was promoting its Marshall plan for the reconstruction of Europe. If Japan were to request a waiver for its regional trade agreement leaving out the agricultural sector today, I do not think that we have any chance of securing the necessary three-quarters majority from the WTO membership.

So, we have to deal with our farmers and other groups that are doing business in sensitive sectors. There is no easy way out, but the WTO rules are not so inflexible as to require inclusion of all sensitive sectors. Limited exclusion is still possible. Furthermore, an interim agreement does not need to have full sectoral coverage, which can last for ten years. We have to build consensus within Japan based on these rules.

To sum up, we need a clear vision for why we are promoting regional economic integration, and my answer is: structural reform of the Japanese economy. In so doing, we must abide by the rules of the WTO.

These are not easy goals but they are achievable. By tackling these issues head-on, we can have a serious discussion about regional economic integration and formation of closer economic partnerships. I believe it is also in this context that we can start talking about a real recovery of the Japanese economy.

I hope the discussions at this symposium today and tomorrow will promote deeper analysis of the issues and lead to positive solutions to the problems identified.

Thank you very much.