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Economic Partnership Agreements and the "East Asian Community" - The Meaning of the Japan-Philippines EPA

Research Institute of Economy, Trade and Industry (Tokyo)

February 8, 2005

Economic Partnership Agreements and the "East Asian Community" - The Meaning of the Japan-Philippines EPA

Faculty Fellow, RIETI

Implications of the Japan-Philippines EPA

Late last year, Japan and the Philippines reached agreements in principle on the major elements of an Economic Partnership Agreement (EPA). The move paved the way for the conclusion of Japan’s third such bilateral agreement, following those with Singapore and Mexico. "Economic Partnership Agreement" or "EPA" is the term Japan uses to describe a free trade agreement (FTA).

The Japan-Philippines EPA differs from the two preceding agreements in that it may serve as a trigger that sets off moves toward the eventual formation of an "East Asian Community." The Japan-Singapore EPA was significant in that it marked Japan’s first successful conclusion of an FTA. Meanwhile, the signing of the EPA with Mexico, a country that had already concluded FTAs with more than 30 countries and regions, eliminated various disadvantages suffered by Japanese companies doing business in and with Mexico, as compared to their counterparts from countries with which Mexico had FTAs. In this regard, the Japan-Mexico FTA is "defensive" in nature and designed to ensure that Japanese companies receive equal treatment, for instance, with those from the United States and the European Union. The Japan-Philippines EPA is completely different. It is hoped this agreement will spark EPAs with Thailand, Malaysia, Indonesia and the Association of Southeast Asian Nations (ASEAN) as a whole, bringing into view the eventual realization of an East Asian Community. Such a community would embrace not only South Korea, with which Japan is currently negotiating an EPA, but also China. The question that needs to be asked here is what implications the Japan-Philippines EPA, or EPAs between Japan and other East Asian countries, have for the formation of an East Asian Community.

What is an East Asian Community?

When we speak about an East Asian Community, what we have in mind is the integration - particularly on the economic front - of East Asian countries into a unit comparable to the EU, which integrates European countries, or the Free Trade Area of the Americas (FTAA), a framework currently under negotiation that aims to integrate North and South American countries. Behind the East Asian Community concept is the prospect that these three regional groups will lead the global economy and become pillars of the World Trade Organization (WTO) regime.

Developments in the three regions - though we call them all "integration" or "economic integration" - are completely different from one another. The driving forces for the integration in Americas are the economic, diplomatic and military power of the U.S. On the other hand, many pundits agree that the institutionalization of the European Union and the European Community has driven the integration of Europe. How, then, will East Asian integration evolve?

It is said that economic integration in East Asia has proceeded smoothly as seen in the expansion of cross-border trade and investment within the region. This is not a case of institution-led integration but the result of active cross-border investments by multinationals - primarily Japanese companies - and the subsequent expansion of interregional trade. That is to say, economic integration in East Asia has been driven by economic reality, not by institutions. Will the network of EPAs that Japan is trying to build in East Asia bring a major change to the ongoing integration process in East Asia?

Japan-Philippines EPA

According to what I have heard so far, it is in the area of tariff elimination for trade in goods that Japan and the Philippines are to establish a preferential relationship. That is, Japan, in principle, will impose no tariffs on goods imported from the Philippines, including items subject to custom duties when imported from other countries (preferential tariff arrangements). The Philippines will apply this same rule to imports from Japan. In addition, Japan has agreed to accept the Philippine government’s request concerning nurses. Thus, Filipino nurses will receive preferential treatment as compared to those from other countries working in Japan. There will also be some liberalization in the construction and transportation sectors.

These are about the only areas where the Japan-Philippines EPA will change the present state of affairs. Some people may wonder about investment rules, trade in services or the protection of intellectual property rights. Indeed, the agreement covers a broad range of issues and includes provisions relating to all such areas. But these provisions will not change the current state of affairs. They are designed to maintain or set rules to support the status quo (investment rules and trade in services) with the few exceptions stated above. Otherwise, they are intended to be a mechanism for facilitating further cooperation between the two countries (intellectual property rights, small and medium enterprises cooperation, and so forth). That is, except for the areas of trade in goods and work permits for Filipino nurses, what will be achieved through the Japan-Philippines EPA is nothing more than maintaining the status quo.

Of course, investment rules have an "insurance effect" because their presence will prevent the Philippines from backpedaling on its investment liberalization efforts. But is there any likelihood for the Philippines to retreat on investment liberalization? Although some may raise the possibility of another currency crisis, in such an event, the Philippine government would be allowed to implement measures to restrict investment under the terms of the EPA.

Furthermore, the Philippine government may move to eliminate tariffs on goods imported from other countries, although Japan remains the only beneficiary of such preferential treatment for the time being, and the same can be said about Japan’s special treatment for the Philippines. Thailand, with which Japan is also currently negotiating an EPA, has already concluded an FTA with Australia. Also, after negotiations with Japan, Thailand is set to intensify talks with the U.S. Thus, although Japan and the Philippines are to put in place a system of special preferences for trade in goods, there is no telling just how long such special treatment will remain "special."

With respect to the issue of Filipino nurses, Japan has, up to now, restricted the employment of foreign nurses and caretakers. A number of Filipino nurses are already working in countries across the rest of the world, that is, apart from Japan. Thus, as far as this particular issue is concerned, the conclusion of the Japan-Philippines EPA will merely bring Japan closer to the situation in other countries.

It is safe to assume that the form of the Japan-Philippines EPA will basically be retained in EPAs with Thailand, Malaysia and South Korea. Japan’s EPAs will not result in an exclusive regional group - such as the EU/EC - which is based on preferential relationships among its members. (The EC is not an FTA but a customs union.) Japan’s EPAs are fundamentally different from groupings such as the EU/EC.

In addition, in view of the bilateral trade-related agreements Japan has concluded in the past, achieving tariff elimination for trade in goods through bilateral arrangements is a landmark. None of the bilateral trade-related agreements hitherto concluded by Japan, including investment agreements, contained elements that would change the status quo of the other party. Regarding this point, the importance of the WTO and the General Agreement of Tariffs and Trade (GATT) must once again be acknowledged. At the same time, we must remember that Japan and the U.S., which always demands that the other party change its status quo, have a completely different underlying philosophy of trade policy and negotiation stance. (Even if both the U.S. and Japan seek to conclude an FTA, their goals - what they want to accomplish through the FTA - are totally different.)

Assessment of an East Asian EPA: The need for process thinking and strategic thinking

Needless to say, it is politically and diplomatically important for Japan to vigorously pursue and to actually conclude EPAs with other East Asian countries, so as to demonstrate Japan’s proactive efforts to forge stronger relations with them. However, the institutional impact of such EPAs vis-a-vis regional integration will not be so significant. In reality, a great deal of economic interdependence already exists between Japan and the rest of East Asia, in particular with the ASEAN countries, which has led to a high degree of economic integration in the East Asian region. In this regard, East Asia contrasts sharply with Europe, where institutions - the EU/EC - have led the integration. Judging from the Japan-Philippines EPA, this difference between East Asia and Europe will basically remain intact for a prospective East Asian EPA centering on Japan. Other than its political and diplomatic implications, the conclusion of EPAs will have a limited impact on regional integration.

Rather, the important aspect of EPAs is the formation of cooperative relationships through all sorts of bilateral negotiations. Will the East Asian EPA network evolve into an effective mechanism for managing regional economic integration or end up becoming a mere ornament to a series of EPAs? This is a crucial question. We must also recognize that the conclusion of an EPA is just one step in Japan’s promotion of economic integration in East Asia. We must avoid falling into a sort of fetishism, in which we see the formation of a region-wide EPA network as a magic wand that can automatically promote the economic integration of East Asia and lead to the formation of an East Asian Community. EPAs should thus be perceived in the light of thinking about process. Specifically, EPAs should be assessed based on their real value; the government needs to leverage EPAs and implement a succession of policy initiatives in this process. Very little will come about "automatically" through the conclusion of EPAs. The question is how we will utilize EPAs for the development of cooperative relationships in East Asia and the promotion of regional integration. A comprehensive strategy that embraces currency cooperation, official development assistance (ODA) and the promotion of Japanese corporate investment in East Asia needs to be formulated.

 source: RIETI