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Comprehensive Economic Partnership in East Asia (Part 1)

Risaburo Nezu
Senior Executive Fellow, Economic Research Center

September 9, 2009 (Wednesday)

Report of the CEPEA Expert’s Meeting

As reported in newspapers, on August 15th Economic Ministers from a total of 16 countries including the ASEAN 10 and Japan (because of the elections, a replacement sat in place of Mr. Nikai, the Minister of Economy, Trade and Industry), South Korea, India, Australia and New Zealand gathered in Bangkok. The Ministers discussed the report prepared by experts regarding the Comprehensive Economic Partnership in East Asia (CEPEA), and agreed that it should be realized in concrete terms and that talks will begin among governments. As Chair of the expert group of CEPEA, I have coordinated this report for the last two years, and would like to offer my opinions on the significance of CEPEA, the discussion that emerged in the process, and the problems that remain.

Two Reports

In August 2006, East Asian Economic Ministers met and agreed that experts would examine the concept of CEPEA. At this time, expert-led research concerning free trade agreements (FTA) among ASEAN and Japan, South Korea and China (ASEAN+3) had already been underway since April 2005, with China as the main proponent. The experts’ recommendation to begin government negotiations on an ASEAN+3 FTA was regarded as premature by the various countries, and it was decided that the experts would continue research for some time. In the end, experts concurrently researched the ASEAN+3 FTA advocated by China as well as the ASEAN+6 concept later proposed by Japan, giving the impression that Japan and China were jockeying for the lead in East Asian integration. It was decided that Japan, the proposer of ASEAN+6, would provide the Chair, and I was asked to fill the role by high-level officials at the Ministry of Economy, Trade and Industry (METI). I have since coordinated the report after a total of 10 meetings, and on August 15th submitted it to the Ministers who also received a report on ASEAN+3 at the same time. It was decided that governments would begin negotiation on specific recommendations from both reports in order of feasibility.

Japan-China Discord

Before looking at the content of the recommendations, it should be noted that I myself am not entirely clear why in 2006 Japan initiated an ASEAN+6 movement that would put it in conflict with China. However, I do believe ASEAN+6 is meaningful in the following ways.

First, China and India will carry more weight in the global economy, and world trade and environmental problems cannot be considered without including India. Meanwhile, Australia and New Zealand’s political and economic ties with Asia are becoming stronger. Including these three countries is a natural step, and there should be no objection.

Second, India, Australia and New Zealand all face current account deficits. The majority of other Asian countries enjoy surpluses, and have relied on exports to the US and EU for growth. The global economic crisis, however, has made it clear that growth dependent on foreign demand has become impossible, and East Asia must stimulate demand within the region. The inclusion of India, Australia, and New Zealand creates a structure more dependent on internal (regional) demand.

Third, the relationship between these three countries and the rest of Asia is complementary in terms of industrial structure. India boasts superior capabilities in IT services, but is weak in manufacturing. China and its neighboring Asian countries are strong in IT and automobile manufacturing. Australia and New Zealand are heavy agricultural exporters, and have high hopes for market liberalization in the heavily-populated China and East Asia.

Fourth, though not openly discussed much, there are concerns over relations with the US. When not included, the US views East Asian collaboration, regardless of shape or size, with caution. The Mahathir EAEC proposal and the concept of an East Asian IMF were scrapped after heavy opposition from the US. Convincing the US is also a significant problem this time, and the inclusion of India, Australia and New Zealand should prove helpful—all three countries maintain friendly relations with the US and are based on democracies and market economies. Their presence will reassure the US that Asia will not move in a unified, anti-American direction. ASEAN+3, on the other hand, would give too much power to China, and doubts remain over whether this kind of balance could be maintained.

Key Factor: ASEAN’s FTAs with India, Australia, and New Zealand

In terms of economic partnership in East Asia, financial and other collaboration under ASEAN+3 has achieved significantly higher results. The notion that it is more realistic to conclude FTAs first in ASEAN+3 and then sequentially spread to the other three countries is a cogent one. To counter arguments, it was critical that India, Australia, and New Zealand had firm foundations for cooperation in place, and on visits to each country I asked trade ministers and high-level government officials to speed up FTA negotiations with ASEAN. The effects of these efforts aside, India agreed to a FTA with ASEAN in August 2008 and Australia and New Zealand followed suit in February 2009, successfully showing regional economic integration under ASEAN+6 to be a realistic option. These efforts were important in gaining AEM consensus to promote economic partnership under ASEAN+6.

Many proposals were made in the CEPEA experts’ meeting report. The important points are commencing government-level research towards a regional free trade sphere that includes 16 countries; eliminating practical obstacles (such as rules of origin that differ among each country) in the promotion of intra-regional trade and investment; creating a system that will advance economic cooperation more efficiently; and forming an institutional framework (such as an East Asian version of the OECD) that will enhance policy coordination in East Asia.

Opening the Japanese Market is Critical

The various countries involved do not seem to expect immediate developments in terms of FTAs. ASEAN countries in particular are fresh off three years of negotiating FTAs within the region as well as with the other six countries, and there is a general sense of negotiation fatigue. ASEAN has, however, completed FTAs with the six neighboring countries, and in this sense has fulfilled its role as a hub. The problem lies with the “+6” countries such as Japan, China, Australia and India: they have not concluded bilateral FTAs among themselves. In the case of Japan, bilateral FTA talks with South Korea, Australia, and India have basically seen no progress, while negotiations with China and New Zealand haven’t even begun. South Korea seems unenthusiastic about FTA negotiations, as Japanese tariffs on industrial products—South Korea’s main export item—have already been reduced to nothing or close to it, giving South Korea little incentive. On the other hand, there are domestic concerns that eliminating South Korean tariffs would allow superior Japanese industrial products to flood in. Japanese opposition to the liberalization of agricultural products with Australia and New Zealand is strong, while their counterparts regard Japan’s requests to exclude agricultural products from negotiation as unacceptable. A US-Japan FTA is the subject of debate in Japan’s current elections, and hopefully a turning point will be reached in Asia and Oceania trade policy. The DPJ’s policy of income compensation is a method already employed in other developed countries, and if this could be implemented in exchange for lower tariffs (several times higher than the value of the agricultural products) Japan could restore its leadership in East Asia.

There is a related point here that must not be forgotten: China is seen as enjoying trade surpluses with countries around the world, but in fact the opposite is true with most Asian countries. China gathers raw materials and half-finished products from its neighbors, completes assembly, and achieves surpluses by exporting to the US and Europe. In other words, China has opened its market to its Asian neighbors and is importing many goods, and in doing so is also facilitating the industrialization of these countries. Meanwhile, Japan imports almost exclusively raw materials, generally maintains surpluses, and is sucking in the valuable foreign currency of its neighbors. China’s open market policy plays a large role in its expanding level of influence, and agricultural exporters such as Australia and New Zealand have recently begun to show more interest in China and South Korea than Japan. England and America’s rise in the last century as key players in the global economy was also due to market liberalization and spreading their currencies around the world. For Japan to become a true leader in Asia it is vital that it further liberalizes its market, and the CEPEA is an important test for this. (Continued in Part 2.)