A trade zone for East Asia's future

A trade zone for East Asia's future
Building a new community under FTA will deepen integration

By TAKASHI KITAZUME
Staff writer

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Concluding an East Asian free trade agreement will be a crucial step toward the world's fastest-growing region's goal of greater integration as a community that would rival the European Union and North America, scholars from Japan and other Asian countries told a recent symposium in Tokyo.


Michael Yeoh (right) ponders a question as his co-panelists -- (from left) Simon Tay, Mario Lamberte, Suthiphand Chirathivat and Hadi Soesastro -- look on during the March 1 symposium at Keidanren Kaikan.

Japan in particular needs to take a leadership role in the endeavor by overcoming domestic economic difficulties as well as historic problems with its Northeast Asian neighbors, the participants said.

Meanwhile, the first-ever East Asian Summit -- scheduled to be held in December in Kuala Lumpur -- is expected to add further momentum to these efforts, although questions remain on how far and how fast the region should go in terms of community building.

During the March 1 symposium at Keidanren Kaikan, organized by Keizai Koho Center, think tank experts and academic scholars from Japan, China, South Korea and some members of the Association of Southeast Asian Nations discussed the prospects of East Asian economic integration.


Shujiro Urata speaks as his co-panelists -- K. Kesavapany, Zhao Jinping and Lee Chang Jae -- listen as they discuss the prospect of East Asian economic integration.

Participants agreed that East Asia has already achieved a substantial degree of "de facto" economic interdependence -- although unlike the European Union or the North American Free Trade Area, the process has so far been driven primarily by market forces.

"An East Asian free trade agreement will be significant as a means of solidifying integration with an institutional framework," said Shujiro Urata, an economics professor at Waseda University.

Urata, who gave a keynote speech at the symposium, noted that the movement toward FTAs in the region is relatively new -- having started only in this century but quickly gaining speed in the last few years.


Nobuo Tateisi

In the background is the slow progress in multilateral trade liberalization talks under the World Trade Organization, he said. Meanwhile, East Asian countries feared that creation of regional free trade blocs in other parts of the world would cut into their export markets, he added.


Remembering 1997 crisis
Also on the minds of East Asian leaders is the 1997 financial crisis, which ended Southeast Asia's economic miracle of the early 1990s, Urata noted.
The leaders realized the need to build a system of closer intraregional cooperation that would prevent a recurrence of the crisis, from which their countries have recovered, though not to the point of regaining their earlier strength, he said.

The FTA process in East Asia meanwhile has been accelerated by competition between Japan and China, Urata observed.

While China took the lead in proposing an FTA with ASEAN -- and has already concluded initial phases of trade liberalization, Japan followed suit and is also negotiating bilateral FTAs with some ASEAN member states, after concluding the nation's first FTA with Singapore in 2002.

With South Korea also holding separate talks with ASEAN, the FTA process in the region now centers on ASEAN's parallel negotiations with the three major economies of Northeast Asia -- which in the future is hoped to develop into a regional FTA.

What would be needed to move the process forward?

Trade liberalization will inevitably meet with domestic political resistance linked to uncompetitive sectors of the economy, Urata noted. To convince opponents at home, governments need to phase in liberalization measures over time, during which the uncompetitive sectors could receive various support to adapt to the changing environment, he said.

In this sense, Urata pointed out, Japan must learn from the lessons of what it did after opening the domestic rice market in the Uruguay Round of the General Agreement on Tariffs and Trade, the WTO's predecessor, during the 1990s. Japan spent 6 trillion yen to help the rice farmers who would be affected by the rice imports, but much of the money was not used on projects that would truly improve their productivity, but on wasteful public works projects in rural regions, he recalled.

As East Asia's largest economy, Japan has an important role of opening up its market for exports from developing countries in the region, Urata said.


Ready to pay price?
"One key to the future of an East Asian FTA is whether countries in the region will recognize Japan as a real partner -- and whether Japan is ready to pay the price of market opening," said Nobuo Tateisi, executive adviser to Omron Corp. and acting chairman of Keizai Koho Center.
Lee Chang Jae, a senior fellow at the Korea Institute for International Economic Policy, noted that South Korea -- like Japan -- has farm sectors that are sensitive to trade liberalization.

But the country may take advantage of the ongoing "FTA race" in the region to implement structural reforms of its domestic economy, Lee told the audience.

Some of the panelists noted that, given that countries in the region are in diverse levels of development, an East Asian FTA will not be just about trade liberalization but about broader economic cooperation.

An FTA must be a "more comprehensive arrangement, which will include cooperation on energy, food supply and labor arrangements -- movement of people," said K. Kesavapany, director of the Institute of Southeast Asian Studies in Singapore.

In this context, the rapidly-aging population in Japan -- which will create a manpower supply problem that many say will need to be addressed by inviting more migrant workers -- is an issue that can be addressed through an FTA in the region, Kesavapany noted.

Masahiro Kawai, a University of Tokyo professor and expert on international finance, emphasized the need for the region to step up its cooperation for the region's financial stability.

Following the 1997 crisis, which was triggered by a sharp devaluation of the Thai baht, East Asia introduced a series of mechanisms for regional financial arrangements, due chiefly to the region's resentment of the way the United States and the International Monetary Fund dealt with crisis-hit countries, Kawai noted.


New regional order
The main pillars of the regional arrangements for financial stability are:
* creation of a regional liquidity support facility through the 2000 Chiang Mai Initiative for currency swap arrangements;

* establishment of economic surveillance, particularly through the ASEAN-plus-Three Economic Review and Policy Dialogue process; and

* development of Asian bond markets, designed to channel a vast pool of savings to long-term investment for growth and development of the region.

Kawai said that efforts are under way, for example, to review the Chiang Mai Initiative to increase the amount covered by the scheme, to change the currently bilateral nature of the arrangements into a more centralized and multilateral network, and to either reduce or eliminate the initiative's linkage to IMF programs.

Such reforms, he added, would make the mechanism closer to the concept of an Asian Monetary Fund, which was proposed by Japan following the 1997 crisis but was eventually dropped due to opposition from the United States.

Also needed in the region, he said, are concrete steps to initiate exchange-rate policy coordination.

"Given the rising degree of economic interdependence among the East Asian economies through trade, investment and financial flows, it is increasingly important to maintain intraregional exchange rate stability, which requires closer policy coordination among financial and monetary authorities in the region," Kawai told the audience.

In more specific terms, he urged East Asian policymakers to consider creation of a regional common accounting unit -- something akin to the defunct European Currency Unit -- and adoption of a currency basket system covering members of the ASEAN-plus-Three group.

Some panelists told the symposium that the first East Asian Summit to be held Dec. 12-13 in Kuala Lumpur will provide an important occasion for giving greater momentum to regional integration. But there were divergent views over what specifically to expect of the summit -- or whether is it just a new name for the ASEAN-plus-Three summit.

Michael Yeoh, CEO of the Asian Strategy and Leadership Institute in Malaysia, posed the question distinctly: "Is this going to be old wine in a new bottle, or will we see the emergence of a new regional architecture? . . .

"I think the summit would provide a very strong fillip to regional cooperation and integration, and I believe that coming together in the first East Asia Summit is a significant and meaningful start for the region," Yeoh said.

To maintain the momentum, the East Asian summit should be institutionalized, and the participants should consider creation of a permanent secretariat to support the process, he added.

However, Simon Tay, chairman of the Singapore Institute of International Affairs, was of the opinion that the December summit should be a "modest and functional" event.

The participants should not loudly declare "the rise of East Asia as a separate entity, or Asian values or other things that could set off some danger signs in Washington and elsewhere," Tay said.

He was alluding to past initiatives for East Asian integration, such as a proposal by former Malaysian Prime Minister Mahathir Mohamad to create the East Asian Economic Group -- which was met with strong opposition from the United States who saw it an attempt to exclude America from the region.

It may also not be practical, Tay noted, to trumpet the rise of the region "given our present political and other differences."

The panelists expressed mixed views on the question of who should participate in the summit. While some said the summit should start out with the same members as the ASEAN-plus-Three process (Japan, China and South Korea), others said that Australia and New Zealand, which also have close ties with ASEAN, should be invited to the first summit.

But they were all in agreement that the summit should be open to all parties interested in the process.

What should be the longer-term objectives of the region beyond creation of an FTA?

Hadi Soesastro, executive director of the Institute of Strategic and International Studies in Indonesia, said the question of FTA is important, but only the first step toward community-building in East Asia.

"We have not been able to define what we mean by an East Asian community. . . . At the moment, we say that it's not going to be something like the European Community. We are not going that far . . . (to achieve) total integration as the ultimate objective, including political integration," he said.

But given their common desire desire to make the region peaceful, prosperous and progressive, East Asian countries must always have a "sense of solidarity" as they discuss the FTA and further efforts for regional integration, he added.

In this regard, Soesastro stressed the importance of Japan holding its FTA talks with ASEAN as a whole in parallel with its negotiations with some key individual members of the group. For continued solidarity among ASEAN members, it is important to make sure that poorer ASEAN members like Cambodia and Laos do not feel that they are left behind, he told the audience.

Zhao Jinping, deputy director of the Foreign Economic Relations Department of the Development Research Center of the State Council in China, suggested that the region should start by increasing economic cooperation -- a process that will have positive impact on political and security relations.

"In that sense, we can learn from the experience of the European Union," he added.

The Japan Times: March 10, 2005

from http://www.japantimes.co.jp/cgi-bin/getarticle.pl5?nn20050310d1.htm