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Take your partners for economic integration

Japan Times, Tokyo

Take your partners for economic integration

As East Asia develops identity of its own, it cannot afford to exclude Japan, U.S.

By Takashi Kitazume, Staff writer

4 June 2007

Japan should continue its push for economic integration in East Asia while at the same time solidifying its relations with the United States, with an eye toward a bilateral free-trade agreement with the U.S., said participants in a recent symposium in Tokyo.

Increased regional identity in East Asia should not be construed as a threat to American interests because even though emerging institutional frameworks in Asia may exclude the country, the U.S. will remain a dominant economic and security player in the region, they said.

Some experts, meanwhile, raised questions about the jumble of bilateral FTAs in the region, which they warned could even complicate matters for cross-border transactions. They also gave mixed views on what impact the recent FTA deal between the U.S. and South Korea would have on East Asian integration.

The May 21 symposium, "Economic integration in East Asia and its implications for Japan and the United States," was jointly organized by Keizai Koho Center and the Center for Northeast Asian Policy Studies at The Brookings Institution, gathering policy experts from Japan, the U.S., China and South Korea at Keidanren Kaikan.

Hiromasa Yonekura, vice chairman of the Japan Business Federation (Nippon Keidanren) and president of Sumitomo Chemical Co., said in his keynote speech that pursuing economic integration in East Asia is vital for Japan to achieve sustainable growth as the nation faces a decline in its population and globalization’s growing competitive challenges.

"Economic partnership agreements are an important tool for that, and Japan should pursue East Asian integration built on a network of EPAs," Yonekura told the audience.

So far, Japan has either concluded or agreed on EPAs with most of the key economies in the Association of Southeast Asian Nations, with negotiations with Vietnam launched in January.

The next step, he said, should be for Japan to develop these bilateral agreements into a comprehensive regional framework.

Conclusion of an EPA with ASEAN as a whole, on which a basic accord on goods trade was reached in early May, will set the stage for Japan to seek more expanded deals in the future that include China and South Korea, as well as India, Australia and New Zealand, Yonekura said.

Japan cannot pursue such increased ties with the rest of Asia, however, without considering its relations with its key ally, the U.S., he emphasized. Tokyo should quickly look into the possibility of an EPA with the U.S. as well, he added.

And as Japan begins to pursue EPAs or FTAs with industrialized countries, it is essential for the nation to accelerate economic structural reforms - particularly the agricultural sector, he said.

Deputy Foreign Minister Mitoji Yabunaka said recent improvements in Japan’s relations with China - as illustrated by Premier Wen Jiabao’s visit to Tokyo in April - will be a major impetus as Japan tries to advance regional cooperation in East Asia.

While Yabunaka described the often-mentioned concept of an East Asian Community as a "long shot" to be realized, he noted that significant work has been done under the so-called ASEAN-plus-three framework involving the 10 ASEAN members and Japan, China and South Korea.

Today, there are more than 50 committees and working groups under the framework, covering wide areas, including trade and investment, finance, environment, information technology, culture, tourism, as well as efforts against terrorism and piracy, he said.

New world order

Takashi Shiraishi, vice president and a professor at the National Graduate Institute for Policy Studies, said it is important for Japan to solidify its alliance with the U.S. just as it pursues economic integration in East Asia - especially given the predicted shift in the balance of power among the world’s leading economies.

Citing a recent set of predictions by the Japan Center for Economic Research, Shiraishi noted that the size of China’s economy is forecast to be seven times as large as that of Japan in 2050. It will be even slightly larger than the U.S. economy between 2020 and 2040, before the U.S. regains its status as the world’s biggest economy in 2050, the forecasts show.

Such a radical shift in the balance of power, he said, will inevitably result in changes in the international order. The question, he added, is whether they will be revolutionary changes that destroy the current order, or evolutionary ones, where the changes come in predictable ways.

For Japan, the latter scenario is of course preferable, and the challenge for the nation will be how to increase the long-term predictability in the changing world order, Shiraishi said. The only answer for Japan, he said, is to maintain its alliance with the U.S. because Japanese and U.S. economies combined will continue to be larger than China’s in the coming decades.

What Japan should consider, he said, is how to encourage the U.S. to increase its stake in the East Asian economy. One option would be to seek a free-trade agreement with the U.S., and another would be to "reinvent" the Asia-Pacific Economic Cooperation forum - which was strongly promoted by the U.S. in the early 1990s but lost its momentum after the 1997 Asian financial crisis, Shiraishi noted.

Shujiro Urata, a professor of economics at Waseda University’s Graduate School of Asia-Pacific Studies, also called for an FTA with the U.S. as a way for Japan to remain competitive in the decades to come.

With its population on a downward path, the sheer size of the Japanese economy will inevitably be surpassed by countries with much larger populations like China and India, said Urata.

But a nation’s competitiveness is determined more by per capita gross domestic product, and the key to higher per capita GDP is how efficiently the nation’s limited land and other resources are used, Urata argued. To ensure efficient use of such resources, Japan needs external as well as institutional pressures - which could come in the form of FTAs or EPAs with industrialized countries like the U.S., he said.

East Asian regionalism

For the U.S., meanwhile, moves in East Asia toward building regional institutions that do not include the U.S. have often been a sensitive issue.

Richard Bush, senior fellow and director of Brookings’ Center for Northeast Asian Policy Studies, said U.S. concerns often voiced over East Asian regionalism "lack a certain realism."

"I don’t see why the U.S. should get nervous about regionalism that springs from a desire to express an Asian identity," Bush said.

But Bush said he has doubts whether East Asian regionalism will serve its supposed function of facilitating economic integration based on transnational production networks that have already emerged - because that function is not necessarily geographically defined.

"The supply chains of which Asian production networks are a part often start in the U.S. and end up in the U.S. . . . Their production aspect may be in Asia, but the supply chain is not. So East Asia-only FTAs may not be economically justifiable," Bush told the audience.

A bigger question, he said, is "the nature of economic regionalism that is occurring and what it means for the East Asian economy." Bush noted that the current "muddle of competitive bilateral FTA deals" - in which, for example, the ASEAN-China FTA is in reality 10 separate trade agreements - may be making business more complicated - rather than simpler - for multinational corporations operating in East Asia.

Chu Shulong, a professor of Tsinghua University in Beijing and visiting fellow at the Brookings, said the U.S. has no reason to worry about East Asian regionalism because "its role and influence in Asia is always there."

Chu noted that while the U.S. is no longer the biggest trading partner for more and more Asian countries as interregional trade in Asia rapidly increases, the "quality" of the U.S. role in the region has not declined.

"The U.S. still provides the major source of market, technology, capital and management skills to Asians," he said.

"No matter how far Asian integration goes in the future, the U.S. will remain one of the most influential powers in economy, security, politics and culture in East Asia" in the foreseeable future - and neither China, Japan or India will surpass the level of U.S. influence, he noted.
U.S-South Korea FTA

One recent major development in East Asia was the agreement reached in April between the U.S. and South Korea on a bilateral FTA. While the deal awaits congressional approval, it is the first U.S. free-trade accord with a major Asian economy.

Urata of Waseda University said the Seoul-Washington agreement will have a major impact on developments in FTA deals in East Asia.

Wonhyuk Lim, a fellow at the Korea Development Institute, said the South Korean-U.S. FTA deal was the result of a rather abrupt change in direction of Seoul’s FTA strategy - after FTA talks with Japan that began in 2003 went nowhere, and negotiations with China and ASEAN made little headway.

Earlier studies showed that China would be the most desirable FTA partner for South Korea, given their increasingly close economic ties, Lim said. However, an FTA with China was viewed as politically suicidal, given South Korea’s alliance with the U.S. and its strained ties with Washington over North Korea and the U.S. base issue, he added.

Lim said he was skeptical of the prediction of some observers that the U.S.-South Korea deal would create an FTA domino effect and that it would increase the call for a Japan-U.S. FTA.

Japan will still face the prospect of adjustments in its vulnerable domestic agricultural sector if it is to pursue an FTA with the U.S., he said. Lim also doubted if the trade diversion effect from the Seoul-Washington deal would be so great as to pressure Japan to act because U.S. tariff rates are already low and many Japanese export industries like automobiles produce in the U.S., he added.