ASEAN-Japan Research Institute Meeting

ASEAN-Japan

Comprehensive Economic Partnership: Vision and Tasks Ahead

July 2003

ASEAN-Japan Research Institute Meeting

ASEAN-Japan Research Institute Meeting

List of Research Institutes

Brunei Darussalam	The Philippines
University of Brunei Darussalam	Philippine Institute for Development Studies
Tan Siew Ee	Mario B. Lamberte
Associate Professor, Faculty of Business, Economics, and Policy Studies	President
Cambodia	Singapore
Cambodian Institute for Cooperation and Peace	Singapore Institute of International Affairs
Kao Kim Hourn	Hank Lim
Executive Director	Director for Research
Indonesia	Thailand
Centre for Strategic and International Studies, Indonesia	Thailand Development Research Institute
Tubagus Feridhanusetyawan	Chalongphob Sussangkarn
Head of Department of Economics	President
Lao PDR	Vietnam
National Economic Research Institute Committee for Planning and Cooperation	Central Institute for Economic Management
Sirivanh Khonthapane	Dinh Van An
Acting Director	President
Malaysia	Japan
Malaysian Institute of Economic Research	Institute of Developing Economies Japan External Trade Organization
Mohamed Ariff	Ippei Yamazawa
Executive Director	President
Myanmar
Yangon Institute of Economics
Kan Zaw
Rector

JOINT STUDY REPORT

ASEAN-JAPAN COMPREHENSIVE ECONOMIC PARTNERSHIP:

VISION AND TASKS AHEAD

by

ASEAN-Japan Research Institute Meeting

July 2003

1. Renewed Initiative for ASEAN-Japan Cooperation

In January 2002, Prime Minister Junichiro Koizumi visited Singapore and signed the Japan-Singapore Economic Partnership Agreement. He went on to stress the need for strengthening a sincere and open partnership between Japan and ASEAN and proposed an Initiative for ASEAN-Japan Comprehensive Economic Partnership (AJCEP).

In September 2002, ASEAN Economic Ministers and Ministers of Economy, Trade, and Industry met in Brunei (AEM-METI) and jointly recommended the Leaders to ‘commence consideration of a framework that would provide a basis for concrete plans and elements towards realizing the AJCEP in accordance with guiding principles, such as the comprehensiveness of countries and sectors. The framework should be developed and its outcome presented to the Leaders in the year 2003 for their consideration. The implementation of measures for the realization of the partnership, including elements of a possible FTA, should be completed as soon as possible within ten years while according due consideration to the economic levels and sensitive sectors of each country’. The Leaders met in Cambodia last November and signed a joint declaration. A committee of senior economic officials of ASEAN and Japan has been established to build a framework of AJCEP since March 2003.

In support of this AJCEP initiative at the governmental level, the Institute of Developing Economies/JETRO (IDE-JETRO) of Japan and research institutes of five ASEAN member countries last year began a new joint study program on the AJCEP and its underlying strategy for enhancing international competitiveness. The five ASEAN research institutes are the Centre for Strategic and International Studies of Indonesia, the Malaysian Institute of Economic Research, the Philippine Institute for Development Studies, the Singapore Institute of International Affairs, and the Thailand Development Research Institute. This program also attempts to address the Japan-ASEAN Leaders’ suggestion for ‘strengthening the network that links research institutions on Japan and ASEAN countries’. The ASEAN-Japan Research Institute Meeting (AJRIM) met for the first time in Bangkok in October 2002. In July 2003, during the ASEAN-Japan Exchange Year, representatives from ten research institutes including those from University of Brunei Darussalam, Cambodian Institute for Cooperation and Peace, National Economic Research Institute, CPC (Lao PDR), Yangon Institute of Economics, and Central Institute for Economic Management (Vietnam) met in Tokyo. AJRIM came to an agreement to submit the results of the joint study to AEM-METI in September 2003 and publish the same later for wider dissemination.

2. ASEAN-Japan Relationship: Overview

New initiatives have been frequently made to strengthen the ASEAN-Japan relationship. Japan and ASEAN member economies have been close economic partners for more than three decades. ASEAN members accelerated their development in the 1970s and from 1987 to 1996 achieved a decade-long period of ‘miraculous growth’. Japanese firms participated in this achievement through active direct investments and through imports. They have established business networks throughout the region, and the accumulated stock of their direct investment in manufacturing in ASEAN (Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam) is now 3.4 times larger than that in China. The ASEAN member economies, however, suffered a severe setback from the Asian financial crisis of 1997-98, an event that also severely affected the Japanese economy. Though they have recovered from the crisis more quickly than anticipated, their structural deficiencies still need to be addressed decisively.

The recent advance of the Chinese economy and of Chinese firms has caused a feeling of uneasiness and is often seen as a threat to the rest of East Asia. However, the majority view that China’s dynamism could serve as a strong engine supporting East Asian development. In the short run, there are regional economies, sectors and firms that will be directly affected by competition with China. A major economic policy issue shared by many ASEAN member economies is how to promote upgrading of their industrial structure and enhance the international competitiveness of their industries.

This year, the six original ASEAN members will complete the AFTA liberalization on schedule, reducing tariffs below 5% except for a limited number of sensitive items. New ASEAN members will follow this in turn. The completion of AFTA will achieve a single integrated ASEAN market and will enable existing firms, both indigenous and foreign, to achieve more efficient intra-ASEAN specialization, thus strengthening the competitiveness of ASEAN as a whole. It will also encourage more foreign firms to invest within ASEAN.

Meanwhile, the Japanese economy has matured and its decade-long stagnation has continued. The domestic base for manufacturing has weakened and many Japanese firms have been shifting production capacity abroad. In ASEAN, Japanese firms are developing strategies and business networks aimed at the whole ASEAN market. Together with cross-border advancement of indigenous ASEAN firms, this will help strengthen the competitive edge of both Japan and ASEAN. AJCEP provides a framework for these moves.

3. Vision of ASEAN-Japan Comprehensive Economic Partnership

What is the vision of AJCEP? In parallel with the AJCEP initiative at governmental level, AJCEP has been discussed by businessmen and academics at various international conferences in the region. However, while various regional cooperation schemes have been proposed in the region, few people so far share a clear vision for the future, or an understanding of the concrete tasks that lie ahead.

The six elements below should be incorporated in the vision of AJCEP:

First, AJCEP aims at an FTA between Japan and ASEAN as a whole contrary to the traditional pattern of bilateral cooperation between Japan and individual ASEAN member states. Completion of AFTA would achieve a single ASEAN market, and an FTA between Japan and the integrated ASEAN would generate new business opportunities for both Japanese and ASEAN firms. For example, a bilateral FTA between Japan and an ASEAN member will not induce Japanese firms to invest in the country for the sake of its segmented market. However, an ASEAN-Japan FTA will provide a favorable incentive for investment in production using each country’s comparative advantage and aiming at the whole ASEAN market. The completion of AFTA will provide a core base for new investments.

Second, ASEAN member governments must change their trade, investment, and industrial policies from the traditional pattern based on import restriction and export subsidy to a pattern of greater market competition within a single ASEAN market. They have to convert cheap labor assembly production of low value-added goods, based on imported parts and materials, to upgraded production based on their own comparative advantage and on domestic supporting industries. The Competitive Strategy Report, compiled by IDE-JETRO and the research institutes of five ASEAN countries and Vietnam, aims to encourage each ASEAN member to identify its own comparative advantage. The promotion of trade and investment liberalization and domestic structural reform is inevitable in order to enhance trade and cross-border investment among member economies. Liberalization and structural reform basically depend on self-help efforts but they tend to make little headway due to resistance from entrenched domestic interests. Joint implementation of liberalization and reform in a comprehensive FTA framework will help individual governments to persuade their nationals of the usefulness of external commitments.

Third, Japan, for its part, has to convey to its ASEAN counterparts how its on-going reform of industry and corporate structure affect trade and FDI relationships with neighboring economies. What will be the effect of the ASEAN-Japan FTA, once it is completed, on Japanese investment in ASEAN? Japan should also respond positively to the expectation of ASEAN members concerning the expansion of agricultural exports and labor movement in ways that will bring long-term benefits to both ASEAN and Japan.

Fourth, in the single integrated ASEAN there still remain big differences in living standards and in stages of industrial development between the six original member states and Cambodia, Laos, Myanmar, and Vietnam (CLMV). The specific and differential treatment of just allowing a longer period of implementation is not sufficient to make up the difference, and ASEAN needs a regional program and an institutional process so as to enable the late-starters to overcome their handicaps. On the other hand, Japan is currently increasing bilateral technical cooperation to CLMV, while decreasing the total amount of ODA. When combined with the human and physical resources and experience of the original ASEAN members, this approach will be enlarged to become an ASEAN-wide assistance program. It will encourage CLMV to participate in AJCEP and strengthen the solidarity within ASEAN toward an integrated and single ASEAN market.

Fifth, AJCEP will be a comprehensive program incorporating not only trade and investment liberalization but also facilitation and economic and technical cooperation so that the afore-mentioned objectives can be achieved. For the smooth and effective implementation of those efforts, development of capital markets and various kinds of economic cooperation are inevitable. Effective utilization of existing initiatives by larger regional groups such as APEC will be useful. Without the provision of these regional public goods, regional integration will be very difficult to achieve.

Sixth, the AJCEP can co-exist with other bilateral or subregional FTAs promoted either by ASEAN or Japan or other countries in the region. Indeed, the AJCEP may well be viewed as a building block of a broader East Asian Economic Community. It is important for all East Asian economies to promote bilateral and subregional FTAs in parallel, while sharing the ultimate goal of an East Asian FTA.

4. Tasks Ahead for the ASEAN-Japan Comprehensive Economic Partnership

Accordingly, the following actions will be on the agenda for AJCEP.

Task 1: Reduction of Barriers to Trade, Services, and Investment

What impact can be expected from a complete reduction of barriers to trade, services, and investment between ASEAN and Japan? A “forward looking” Applied General Equilibrium model of global trade developed by IDE-JETRO provides analysis over time of the announcement effects of FTA prior to implementation and the effects after the implementation. The simulation results show significant welfare gain when barriers to trade and investment are completely removed by liberalization and facilitation.

One of the major characteristics of an ASEAN-Japan FTA is its huge and long lasting impact of its investment effect on the ASEAN economies. This is because ASEAN has a closer and complementary trade relationship with Japan, whose economic size is very large. The reduction of barriers between ASEAN and Japan will increase the expected rates of return on investment in ASEAN and thus will lead to an expansion of investments in ASEAN until they become equal to that of investments in other regions.

On the other hand, the Japanese economy would also benefit from the ASEAN-Japan FTA. When Japan agrees to reduce barriers mutually with ASEAN as one of its major trading partners, the expected rates of return on investment in Japan also will increase, and investments will expand through large capital inflows into Japan. Therefore, the ASEAN-Japan FTA would be mutually beneficial to ASEAN and Japan by expanding trade and investments, and would therefore contribute to the economic growth of both ASEAN and Japan.

What impact can be expected if ASEAN and Japan were to agree on an ASEAN-Japan FTA after an ASEAN-China FTA? In this case, ASEAN economies would enjoy combined benefits from the two FTAs. This is because ASEAN would be a hub connecting Japan and China, attracting capital from the world. This suggests that concluding an FTA with Japan, a huge trading country, has great impact in East Asia. At the same time, Japan would also gain from the ASEAN-Japan FTA. The magnitude of the effects would be considerable for a Japanese economy that has stagnated for a long period of time.

However, the huge effects of removal of barriers to trade, services and investment between ASEAN and Japan can be realized only in an environment where each firm can maximize its profits. In fact, because of financial constraints, some firms cannot invest in ASEAN even if it were otherwise reasonable to do so. Also, in reality, complicated administrative procedures for investment have to be taken into account. For instance, certificates of product origin and customs clearance procedures may be more time-consuming and costly than before implementation. If that is the case, the investment-increasing effect of the AJCEP will be lessened. Therefore, AJCEP’s expected huge effect greatly depends upon further improvement of the investment environment. Among other improvements, saving time and cost in customs clearance would be a breakthrough for ASEAN in its attempt to attract more investments.

Task 2: Completion of a Single ASEAN Market

In order to maximize the effects of AJCEP, ASEAN must commit itself not only to trade liberalization within the region, but also to formation of a single ASEAN market by promoting the facilitation of business activities within the region.

ASEAN has been operating the Common Effective Preferential Tariff (CEPT) scheme, which reduces regional tariffs below 5%. The six original ASEAN members will complete the CEPT scheme within 2003, except for sensitive items such as agricultural products and items included in the temporary exclusion list (TEL) for purposes of protecting domestic industries. New ASEAN members will follow suit: Vietnam by 2006, Laos and Myanmar by 2008, and Cambodia by 2010. In addition, the original ASEAN members are to start reducing tariffs of items in the TEL by 2005. In order to enhance the effect of the AJCEP, ASEAN will have to complete this CEPT scheme on schedule.

In addition, regional liberalization of services and of investment and facilitation in the region are vital for ASEAN to arrive at a single ASEAN market. One example illustrates this. Transportation services on land between Thailand and Malaysia have not been mutually agreed and containers on the trucks cannot cross the border without changing vehicles. This not only causes a rise in transaction costs but also slows down the speed of business. In the middle of July, ASEAN Economic Ministers discussed how to enhance intra-ASEAN trade and investment. They noticed significant market segmentation and high transaction cost within ASEAN due to a variety of non-tariff measures such as complicated customs procedures, divergent product standards, and technical regulations. They discussed how to harmonize these measures between ASEAN members and agreed to strengthen economic integration beyond AFTA. We fully support this initiative as it is consistent with the task of AJCEP.

In the course of industrial upgrading, Japanese firms will introduce advanced production systems that cannot be replaced by automation and other labor saving techniques. However, due to the diminishing number of children and the ageing of its population, it may be difficult to cover all those processes. Japanese companies will require overseas production bases for manufacturing goods in ASEAN, and they will choose the region because they have invested there for a long time, accumulated production know-how, and employed numerous local technicians. This will bring about an international division of labor between ASEAN and Japan, contrasting with the traditional bilateral relationship between Japan and each ASEAN country, and will create ASEAN-wide relationships, in which parts and materials are transferred across borders within the region. In order to respond to this new international division of labor, each ASEAN country must abolish barriers to trade, services, and investment and make efforts to form a single market where firms are able to enjoy the speedy and less costly conduct of business.

In this respect, the time has come for ASEAN to deepen and to accelerate its economic integration. The idea of an ASEAN Economic Community (AEC) is seen as a logical extension of the various initiatives taken and implemented by ASEAN thus far towards greater economic integration. This next step, however, requires a strong and firm commitment by ASEAN members to move forward in a credible and timely manner. For accelerating economic integration of ASEAN, major institutional changes at the ASEAN Secretariat must be undertaken to provide a more consistent and effective way of implementing policy towards individual ASEAN members. Specifically, the ASEAN Secretariat must be transformed from being a structure for inter-governmental co-operation into a regional institution. This process will be gradual but a strategic introduction of “regional units” into its existing structure can bring about significant results.

Task 3: Industrial Structural Reform in ASEAN Economies

In the interest of creating a single market, the ASEAN economies must emphasize a competitiveness-enhancing policy. Its main pillar would have capacity building such as human resource development and the enhancement of facility to raise the level of technology and skills, in order to create new locational advantages. This shift in focus enables the adjustment to a rapidly changing economic environment and the establishment of complementary trade relations within ASEAN countries and with China. Completion of AFTA and ASEAN-Japan FTA (and ASEAN-China FTA) will inject more principles of market mechanism into the industrial policies of ASEAN economies. Summarizing the competitive strategy reports from the research institutes of the six ASEAN members, IDE-JETRO is attempting to quantify fundamentals for industrial upgrading in order to prioritize areas for policy intervention.

Because of ASEAN’s industrialization and the emergence of China, the original ASEAN members have lost the advantage that they once enjoyed in factor endowment with respect to abundant unskilled labor. Even so, the technological capability of indigenous firms remains low. For further development and competitiveness, ASEAN must create a new factor endowment by developing human resources and by forming technology and skills, so as to climb up the technological ladder. The low level of technology and skills of indigenous firms stems from (1) the lack of a policy framework that is conducive to the development of technology and skills, (2) the manufacturing of products only for small domestic markets, and (3) the high cost of intermediate goods resulting from protection of specific industries. However, if ASEAN countries change their industrial policies from protecting specific industries to adopting more competitive policies, and if indigenous firms in ASEAN succeed in manufacturing on an ASEAN-wide or an East Asia-wide basis, they might be able to climb up the technological ladder in the same way as Japanese SMEs climbed it by specialization. Eventually, this will attract foreign direct investment in more advanced fields and enable both foreign and indigenous firms to develop together, strengthening the linkages amongst them.

Efforts to strengthen competitiveness should be basically dependent on self-help and should be carried out at national level. Singapore, Malaysia, and Thailand have a clear vision of moving from a production-based economy to a knowledge-based economy. Singapore is now trying to be a hub of education in East Asia by inviting talents from the region and is advancing toward a knowledge-based economy. Malaysia’s strategy is to nurture indigenous technology by providing fiscal incentives for R&D to be commercialized, by establishing science parks with quality control laboratories and modern prototype production centers, by increasing the number of science and technology students to meet market demand, and by strengthening a linkage between industry and education. As for Thailand, a taskforce for technology formation and skill formation has just been set up under the Ninth Five Year Plan starting in 2002. Accordingly, some government agencies are now assigned the responsibilities to implement the competitiveness policies. For example, since October 2002, the BOI has reoriented its main function from the promotion of overall investment towards the promotion of skilled and technological intensive industries and provision of comprehensive services of trade and investment to investors.

Indonesia has not developed comprehensive plans for strengthening its technology base due to financial constraints in the aftermath of the Asian financial crisis. The focus of the policy agenda in Indonesia is currently on macro-economic stability and economic recovery from the crisis. The real challenge for Indonesia is to develop a comprehensive and competition-based trade, investment and industrial policy to meet growing competition in a global economy. As regards the Philippines, in the process of strengthening the country’s hitherto backward technology base, its educated and highly trainable human resources have remained largely untapped and unexploited. This is due to the absence of well-coordinated plans for industrial policy and technology, very limited budgets for research and development (R&D), and poor private sector participation in R&D owing to lack of appropriate incentives. Vietnam has yet to take measures to improve institutions, administrative capabilities, and the investment environment.

Task 4: Industrial Structural Reform in Japan

Japan has continued to suffer from a decade-long recession caused by the maturing of its economy and society, the fall in the birth rate and the ageing of the population, the aftermath of the rapid appreciation of the yen in the late 1980s, and the bursting of the bubble economy in the early 1990s. Japan has implemented a variety of reforms in public institutions and regulations and drastic changes are under way in her industrial and corporate structure. In June 2002, the Fiscal and Economic Advisory Council adopted drastic reform programs including tax policy and government expenditures on public infrastructure, social welfare, and local governments. In April this year it enacted laws for Industry Revitalization and Special Districts for Structural Reform. Japan must complete these reform efforts as soon as possible on a sustained basis, otherwise the AJCEP will lose its momentum.

Dynamism also emanates from groups of competitive firms establishing business networks conducive to the creation of a new division of labor in East Asia. By and large, the Japanese structure of production and trade does not compete with, but is complementary to those of ASEAN and China, of which Japanese firms try hard to take the best advantage. In these circumstances, both ASEAN and China are Japan's major partners and, while Japanese firms are now establishing production networks in China, they are restructuring and strengthening their networks in ASEAN conducive to the completion of AFTA. The AJCEP aims to provide a favorable policy environment for this development.

ASEAN and Japan would also enjoy significant potential economic gain from agricultural trade liberalization. Several ASEAN economies are the world major exporters of many agricultural products, e.g., Thailand is the largest exporter of rice, rubber and shrimp; Vietnam the major exporter of rice and coffee. But more important, the new ASEAN economies, the CLMV, which have strong comparative advantage in agriculture, will be able to have access to the large Japanese market. The Japanese consumers will also gain substantially from lower food prices and tax savings that are used in protecting the Japanese agriculture. However, this requires a sizable adjustment to Japanese agriculture.

Some ASEAN members are interested in an increase of cross-border labor mobility. Labor mobility is a sensitive issue in almost every country, but, while being on the agenda of WTO's services trade negotiations, it will increasingly be given attention in future. Mutual recognition of engineering qualifications is one example of the facilitation of labor mobility. Currently, the IT qualifications of Japan are mutually recognized by Myanmar, the Philippines, Singapore, Thailand, and Vietnam. Mutual recognition of more qualifications should be included in AJCEP.

An FTA has the function of serving as a laboratory for experimenting with liberalization on a limited scale. The AJCEP can perform the role better by combining liberalization with facilitation and economic and technical cooperation and should tackle these tasks rather than excluding them.

Task 5: Joint Arrangement of Policy Environment

The AJCEP needs to formulate a wide variety of policy environments that facilitate business activities. In this regard, the principal aim should be to attract as many firms as possible, both indigenous and foreign, and to achieve economic prosperity in the region. Not only trade and investment liberalization are needed but various supplementary measures are required to facilitate cross-border business activities. Customs procedures in ASEAN are still costly and time-consuming, and discourage firms from pursuing cross-border business activities. As described in Task 1, realization of cost-free customs procedures would be a breakthrough for inviting more investments in ASEAN. It is essential for the governments of ASEAN and the Japanese government to jointly improve customs procedures, standards and conformance, intellectual property rights, competition policy, and transportation and communications regulations so as to create competitive and ‘seamless’ investment environments in the region.

Also, Japan has to be ready to provide technical assistance to ASEAN as a whole and collaborate with ASEAN to develop technology and skills. Again, through automation and labor saving, Japanese firms will continue to develop advanced production processes and these will require more highly skilled labor. Japan is likely to encounter a shortage of skilled labor in the future due to the drop in its birth rate and the ageing of its population. ASEAN members also need to cooperate closely in capacity building and institutionalization such as skill formation, business-matching of small and medium firms, reforming legal systems, and improvement of administrative capability in individual ASEAN member governments. Furthermore, technical cooperation such as testing centers and pilot manufacturing plants should be set up so as to nurture the technical competence of indigenous firms. AEM-METI Economic and Industrial Cooperation Committee (AMEICC) started centers of excellence comprehensive program in 2000 which aimed to strengthen the function of human resource development-related institutes. Improvement of infrastructure such as building an ASEAN-wide transportation system will realize smooth business activities.

These facilitation and technical assistance measures need be promoted with the close and greater cooperation of all participating countries. This partly overlaps the approach by APEC, a wider cooperation group than AJCEP. APEC has been successful in promoting facilitation and Ecotech among members by introducing and disseminating effective systems and rules and best practices. ASEAN and Japan, both active members of APEC, can take advantage of successful APEC practices in these areas. Facilitation, capacity building, and improvement of infrastructure will enhance the competitiveness of ASEAN as a whole.

Task 6: Capital Markets and Financial Cooperation

The 1997 financial crisis provided a stimulus for much greater financial cooperation within the region. Prior to the crisis, the financial position of the East Asian region as a whole was fairly strong, with a combined current account surplus (saving surplus) of about $150 billion per year and combined foreign reserves of about $600 billion. However, while the financial position of the region as a whole was strong, many individual countries in the region were in highly vulnerable financial positions. Countries such as Thailand, Indonesia and South Korea had to rely on short-term foreign borrowing to finance their current account deficits. The ratio of short-term foreign debt to official reserves in these countries increased rapidly and reached between 110-190% prior to the crisis. Thailand used up almost the entire amount of its foreign reserves in a futile attempt to defend its currency, ending up insolvent and with almost no foreign reserves left to meet its foreign currency obligations, and it was this that precipitated the crisis. As the liquidity positions of foreign currencies in various countries in the region came under scrutiny, the vulnerabilities of Indonesia and South Korea became very clear, and they followed Thailand into crisis, requiring IMF assistance to prop up their foreign currency liquidity positions.

As a result of the crisis, diverse parties within the region realized the need for East Asia to achieve better leverage on its financial strengths and to develop new approaches and mechanisms to better protect itself from risks and volatile developments of the kind that led to the financial crisis. It was recognized that there was a need to ensure a more stable economic development environment for the region in the future. In fact, significant progress has been made in financial cooperation within the region. Modes of cooperation range from surveillance and early warning mechanisms such as the ASEAN surveillance process under the Manila Framework, and the formation of the ASEAN+3 group leading to the development of a regional financing facility (the Chiang Mai Initiative) involving an expansion of the ASEAN swap arrangements and a series of bilateral swap arrangements between ASEAN member countries and each member of the Plus Three group. The fact that the ASEAN+3 group was formed, and the fact that the first substantive cooperation initiative of the group, the Chiang Mai initiative, was in the area of financial cooperation, both indicate the importance attached to the deepening of financial cooperation within the region. Therefore, it is not surprising that many of the ASEAN countries’ reports on the AJCEP suggest that financial cooperation between Japan and ASEAN countries should be an important part of the AJCEP.

Much more can be done on financial cooperation within the region, and concrete measures can be included as part of the AJCEP framework. Current initiatives on the development of an Asian Bond Market need to be supported by many additional measures so as to harmonize capital market rules and regulations, and trading and clearing mechanisms, as well as the development of regional credit rating institutions and standards. Technical cooperation on these issues can be carried out within the framework of the AJCEP and would be a catalyst for expansion and application to the whole of the East Asia region. An active and efficient Asian Bond Market could be an important mechanism for recycling surplus savings within the region and would become a source of long-term development financing for countries that may have saving deficits. This would ensure that deficit countries would not need to rely as much on short-term external borrowing as in the period prior to the 1997 crisis, and this would contribute to much greater financial stability in the region in the future.

Other aspects of financial and monetary cooperation can also be included, such as stronger mutual economic surveillance mechanisms, greater macroeconomic policy coordination, and the promotion of the yen to become a more important international currency within ASEAN. Some form of exchange rate coordination may also be possible particularly if there were to be more stability in the exchange rates of the major currencies (i.e. dollar, yen, euro). Clearly, there are many aspects of financial and monetary cooperation that could be included within the AJCEP framework. This would also make the AJCEP stand out from the China-ASEAN FTA where financial cooperation is not a significant issue, and contribute to laying the ground for a broader framework of East Asian financial cooperation.

Task 7: Support to New ASEAN Members

New ASEAN members have much lower per capita income than the original members, and are handicapped in infrastructure, human resources, technology, and capital endowments. Though CLMV have comparative advantage in agriculture and agro-based industries, they have not developed to a satisfactory level. Nor does industrialization go well on its own. In order to overcome these handicaps, CLMV need a specific and differential treatment by allowing them a longer period of implementation of liberalization reforms. They also need to incorporate a variety of technical assistance programs and economic cooperation.

Since November 2000, ASEAN leaders have established an Initiative for ASEAN Integration (IAI) in which original ASEAN members extended technical assistance to new members in human resource development. Also, Japan has extended assistance to human resource development to CLMV; in Cambodia, for example, a center to teach how to use industrial sewing machines for workers in apparel industry was set up with the purpose of training technicians.

As regards infrastructure, the Greater Mekong Subregion (GMS) projects aim to develop the Mekong basin, involving Cambodia, Myanmar, Laos, Thailand, Vietnam, and China. Effective utilization of water resources could supply cheap electricity to neighboring countries. Furthermore, road projects in the Mekong Delta such as the East-West Corridor could improve logistics in the region. These projects could not only enhance the competitiveness of ASEAN as a whole, but could also develop agriculture and agro-based industries and create job opportunities.

During the 1980s, Japan provided the original ASEAN members with bilateral ODA. These ASEAN members have outgrown this stage, while Japan is constrained severely by reduced ODA spending brought about by its prolonged recession. However, throughout the 1990s, Japan has been increasing its ODA to CLMV and has been reinforcing its support of the GMS projects. It is possible to develop Japanese ODA to CLMV, both in infrastructure and in technical assistance, into broader aid involving greater ASEAN participation, and incorporating human resources, training facilities, skills, and the experiences of the original ASEAN members. This would strengthen the solidarity of ASEAN. AMEICC is implementing this type of assistance combining Japanese funds with human and physical resources of other ASEAN members on a small scale. The AJCEP could include a framework for facilitating and systematizing assistance of richer ASEAN members to CLMV.

Task 8: Way towards AJCEP

For its part, the Japanese government, having agreed on the Japan-Singapore Economic Partnership Agreement, has started consultation on bilateral FTA with Thailand, Philippines, and Malaysia. Bilateral FTA is a pragmatic approach, taking advantage of increased momentum for achieving higher integration among interested countries. However, bilateral FTA is subject to a limited gain from scale economies. It is necessary to promote AJCEP in parallel with the bilateral FTA negotiations. Non-participating countries will feel the pressure to participate in AJCEP so as to avoid being left behind.

Though FTA may be accepted as a realistic approach, what will happen to the future of East Asia? Will East Asia be able to achieve sufficient prosperity to qualify as one pole among three, alongside Europe and America? The FTA plans at bilateral, multilateral, and East Asian scales are complex. Among them, the competitive liberalization that China and Japan are negotiating with ASEAN, through the formation of an FTA, is remarkable. However, whilst both Japan and China pursue FTA negotiations with ASEAN, neither of these countries has proposed a Japan-China FTA. Furthermore, although the prime ministers agreed that trilateral cooperation between Japan-China-Korea is desirable, it is still at the stage of study amongst experts.

In the future, an East Asian community that includes ASEAN+3 and also Hong Kong and Taiwan, is desirable. As such, the region would be able to form an economic pole that is equivalent to the European and American continents. This development would be consistent with economic rationale. However in reality, the rapid achievement of this goal is hindered by economic gaps, remaining differences between the economic systems, a lack of experience in integration and a historical hangover from the first half of the twentieth century between Japan, China and Korea. There is no way forward other than to begin with feasible objectives, regardless of whether these are bilateral or multilateral arrangements. If a particular FTA arrangement goes far ahead of the others, it will tend to distort trade and investment within East Asia and may become a stumbling block for the development of East Asia as a whole. It is important for all East Asian economies to promote individual and sub-regional FTAs in parallel, while sharing the ultimate goal of an East Asian FTA embracing all the sub-regional FTAs. Positioned in between bilateral FTAs and ASEAN+3, AJCEP can play the role of a catalyst in achieving the East Asian community of the future.