NIRA East Asian Regional Cooperation Research Group Report

Strengthening Regional Cooperation in East Asia

【Executive Summary】

Motoshige ItohPresident, National Institute for Research Advancement (NIRA)
Professor, Graduate School of Economics and Faculty of Economics, The Universityof Tokyo

The Japanese government has proposed the concept of an East AsianCommunity. Unfortunately, however, up to this point no concrete policy has beenformulated indicating how to proceed with efforts towards the establishment ofsuch a community. What policy initiatives will be necessary to enable thedevelopment of closer relationships between Japan and East Asia? This reportconsiders the problems and the potential inherent in cooperation between Japanand East Asia, chiefly in the economic field, and offers concrete policy proposals
concerning the direction in which Japan and the region should proceed.

Thinking about an East Asian Community
At present, the economic ties between East Asian nations are becoming stronger.
The concept of an East Asian Community can be seen as an endpoint of thedeepening cooperation between the region’s nations. It will be necessary to develop
a shared awareness regarding certain points: What areas should cooperation be
deepened in, what will Japan be required to do to this end, and will it be possible
for an entity that can be termed an East Asian Community to emerge from theseefforts? In developing such a shared awareness, serious consideration should begiven to the following points.
9Keeping pace with the speed of change in East Asia
East Asia is changing at a rapid pace. The Chinese economy is growing－3－

particularly rapidly, and if this trend continues without change, it is predicted that
China’s economy will be more than three times larger than Japan’s in 2020 (Figure1). However, Japan is not keeping pace with the speed of this change on either thepolitical or the economic fronts. Right now, it is essential for Japan to craft an EastAsia strategy predicated on the major changes that are taking place. Japan must
avoid at all costs being excluded from East Asia’s growth.
Learning the lessons of the EU
The experience of European unification offers numerous valuable lessons inconsidering regional cooperation in East Asia. While the present European
financial crisis demonstrates the difficulty of currency unification, the EU didachieve significant successes by pursuing regional unification, including thestimulation of regional trade and investment and the enhancement of politicalstability. In the East Asian region also, it is necessary to increase the level ofeconomic cooperation in order to prevent political confrontations and discord.
Learning from Europe, East Asia must also cooperate as a region, and take theinitiative in creating frameworks and systems not merely for the region but for theworld.
9Figure 1 Trends in nominal GDP for China and Japan
In 2020, China’s GDP will far exceed Japan’s
25.0

20.0Trillion dollars
Projections basedon 1990‐2008
growth rate

Japan
China

China
21.0 trillion
dollars

15.0

Japan
6.8 trillion
dollars

10.0
Japan 3.0 trillion dollars
5.0

China 390 billion dollars
0.0＊ Report, p. 4 (Figure II). Figures up to 2008 are actual figures. Figures from 2009 onwards areprojected by NIRA based on the average annual growth rate of nominal GDP, expressed in U.S.
dollars, for the period 1990-2008.

Taking the opportunity to increase trade dependency
Japan’s level of trade dependency is too low (Figure 2), and it will be necessary toincrease it in future. The potential for economic growth in Japan’s East Asianneighbors to contribute significantly to expanding the nation’s own trade volume is9－4－

increasing, and promoting this expansion and smoothly realizing the subsequent
large-scale changes in the nation’s industrial structure will be a major agenda forJapan’s economic policy. East Asia possesses excellent characteristics forpromoting a regional division of labor, and there is tremendous significance inproceeding with the formation of EPA and FTA. In addition to increasing the paceof its EPA negotiations, it will be essential for Japan to enter into negotiations
towards the conclusion of a Japan-China-Korea EPA, looking towards theestablishment of a free trade area that encompasses all of East Asia.
Figure 2 Trade dependency of major nations
Japan’s level of trade dependency is less than half of Germany’s level
100
9080
7060
50
40
30
20
100%
72.6

31.6

S.Korea＊GermanyChinaCanadaFrance

U.K.

Japan

U.S.A.

Report, p.7 (Figure III).

Becoming an “outward-looking” nation
In the 20 years since the collapse of the bubble, Japanese society has,
unfortunately, become extremely inward-looking. Opening Japan up to East Asia
via regional cooperation will also be very effective in providing the motive force forpositive reform in the Japanese economy and in Japanese society. It will benecessary to reexamine, with our gaze turned to the outside, issues that havepreviously only been considered from a domestic perspective. With the rapid
growth of East Asian nations, the trend towards openness is intensifying
throughout the region. This is also a tremendous opportunity for Japan, and now istherefore not the time for Japan alone to remain inward-looking.
9Recognizing the present importance of multi-tracking
At present, attempting to define an East Asian Community in a concrete form isneither practical nor desirable. The desirable option is to progress step-by-step via
the channels that are available to us. What is important above all in the region is
maintaining a good relationship between China and the U.S. At present,
multi-tracking represents the foundation for regional cooperation. It can be
expected that proceeding with cooperation from multiple directions will produce aclearer vision of a future East Asian Community.
9－5－Supporting the peaceful and stable growth of China
Regional cooperation in East Asia cannot be considered without China. China’s
neighbors must support its peaceful and stable growth, not merely via their own
economic relationships with the nation, but by constructing mechanisms forregional cooperation in many fields. The maintenance of a stable relationshipbetween China and the U.S. will also be necessary to controlling China’s military
expansion, and Japan must also not neglect diplomatic efforts to ensure that therelationship between the two nations remains a good one.
9Learning from the Asian financial crisis
Responding to a financial crisis is difficult for a single nation in isolation. There
are also limits to the functions of international organizations such as the IMF.
Mechanisms enabling all the nations in the region to cooperate in responding to afinancial crisis are needed. A variety of forms of currency and financial cooperation
are proceeding in the region, and the establishment of the Asian Monetary Fund(AMF) now appears as a future possibility. It will be necessary to establish
frameworks for currency and financial stabilization, in addition to forums for
dialogue concerning fiscal and monetary policy and policy coordination in theseareas.
9Setting a timeline for regional cooperation
As in the case of trade negotiations, the fact that the nations of the region
continue discussions and negotiations at a variety of levels within a variety ofregional frameworks is itself of great significance (the “bicycle theory”). It will benecessary to set a timeline for these discussions, and to adopt an approach thatincorporates at least the following three points.
(1) Formulation of policy issues that can be taken up with a view towards concrete
realization in one or two years(2) Setting of policy targets for five to ten years in the future(3) Development of the concept of an East Asian Community from a longer-term
perspective
9－6－

【Individual fields】
１．The Evolution of an EPA/FTA Network in East Asia –Towards the Realizationof Wide-area Economic Partnership Agreements
EPAs and FTAs represent an important policy tool in promoting the economic
unification of East Asia and enabling Japan to view the growing Asian market as a“domestic market.” At present, based on the existing regional EPA/FTA network,
discussions are proceeding looking towards the realization of multiple visions ofwide-area EPAs, for example involving ASEAN+3, ASEAN+6, or the APEC nations.
In order to proceed smoothly with this process, it will be necessary to formulate
roadmaps towards the realization of these visions, to share targets between thenations of the region, and to manage progress in a variety of regional cooperativeforums.
It has been estimated that the liberalization and facilitation of trade by means ofsuch wide-area EPAs would boost Japan’s GDP by 16.2 – 20.4 billion U.S. dollars(0.22 – 0.27% of national GDP) and the region’s GDP by 186.2 – 578.4 billion U.S.
dollars (0.62 – 0.86% of regional GDP) . If the effects of the liberalization of services
and investment and various types of cooperation are included, these figures
become higher. Japan must engage in its own internal reforms, such as
strengthening its agricultural base, and proceed actively and strategically withEPA/FTA negotiations.
(Tetsuo Ota)
Figure 3 Economic effect of wide-area economic partnership agreements in East Asia
Wide-area EPAs will revitalize the regional economy（１） Changes in actual GDP (billion U.S. dollars (Rate of change: %))(a) Trade liberalization (nonagricultural sectors)(b) Trade liberalization (all sectors)(c) (b) + trade facilitation①EAFTA (ASEAN+3 region)
Japan
Region②CEPEA (ASEAN+6 region)
Japan
Region③FTAAP (APEC region)
Japan
Region1.9 (0.03)

2.1 (0.03)

2.4 (0.03)

29.7 (0.10)

51.5 (0.14)

90.4 (0.13)

2.3 (0.03)

32.1 (0.11)

3.4 (0.05)

58.7 (0.17)

4.6 (0.06)

97.1 (0.14)

16.2 (0.22)

186.2 (0.62)

16.6 (0.22)

276.0 (0.78)

20.4 (0.27)

578.4 (0.86)（２）Changes in economic welfare (billion U.S. dollars)①EAFTA (ASEAN+3 region)
JapanRegion(a) Trade liberalization (nonagricultural sectors)

20.8②CEPEA (ASEAN+6 region)
Japan
Region

62.7

26.4

101.4

③FTAAP (APEC region)
Japan
Region26.7

108.0(b) Trade liberalization (all sectors)

19.2

66.4

25.9

107.4

26.5

115.0(c) (b) + trade facilitation

40.3

229.7

45.7

315.7

41.2

579.7

＊ Report, Figure 1-5. Results generated by a simulation based on dynamic analysis of GTAP model.
See Strengthening Regional Cooperation in East Asia for details of methodology.

－7－２．A New Stage of Currency and Financial Cooperation in East Asia – The
Creation of an Asian Monetary Fund
A variety of initiatives towards currency and financial cooperation haveproceeded based on the lessons of the Asian financial crisis, such as the Chiang
Mai Initiative (CMI) and efforts to foster Asian bond markets. In order to increase
the effectiveness of the CMI, it will be necessary to1) Establish mechanisms for decision-making and implementation
2) Increase the scale of funding and increase the scope of delinking from theIMF
3) Incorporate economic surveillance and establish an independent secretariat
At present, these issues are being responded to through the multilateralizationof the CMI and other initiatives. What should now be investigated as one viableoption is to move one stage further and bring together functions and structures
related to currency and financial cooperation that presently exist within
decentralized systems, in the medium-term creating an Asian Monetary Fund(AMF) (see Figure 4). The establishment of a fully-fledged secretariat will beessential in order for an AMF to fulfill its various functions (responses to financial
crises, economic surveillance, various forms of cooperation, etc.). Cooperation
between individuals from a wide range of fields in the operation of an AMF could
also be expected to assist in fostering financial personnel in East Asia.
(Tetsuo Ota/Masatoshi Jinno)
Figure 4 Image of AMF
Further development of CMIM for establishment of AMF
Country B

Country A

Decision‐making by representatives ofparticipating countries
Country C

Country D
Deposits/Contributions＋z Supplies foreign currency liquidity to participating countries experiencing acurrency crisisz Economic surveillance and policy coordination are integrated in operationz Functions as a center for the development of currency and financial
cooperation in the region, including consultation regarding an exchange andcapital transfer management system and policy, cooperation to enhance thefunctions of the financial system, establishment of a settlement system, andthe collection and archiving of economic and financial statistics.

・ Economic surveillance/Policy coordination
・ Currency and financial cooperation

Independentsecretariat＊Report, Figure 2-5.

３．East Asian Regional Cooperation and a Strategy for the Development ofHuman Resources – Exchanges of Foreign Students as a National Strategy
The further development of economic cooperation in East Asia will demand a－8－new strategy for the fostering of human resources to conduct activities thattranscend national borders. Against the background of economic growth in EastAsia, the number of students proceeding to higher education is growing, and there
is increasing exchange of foreign students in the region. The contact with diverse
cultures and societies offered to large numbers of young people through theseexchanges represents an unparalleled opportunity to develop valuablecharacteristics – the ability to communicate, the ability to solve problems, and theability to consider issues from multifaceted perspectives. As a strategy to foster
human resources suited to a new era, Japan should enter into cooperation with theother nations of the region in promoting exchange between foreign students.
Japanese universities should develop unique strategies to provide a diverse rangeof programs for foreign students. In addition to providing a foundation withworld-leading centers for research and education, it will be necessary to offer
internationalized universities at which units can be taken in English; at otheruniversities, special programs only available in Japan could be offered. At thesame time, it will be essential to create an environment that increases the ease ofstudying overseas for Japan’s younger generation.
(Terumi Hirai)

４． The Expansion of Population Mobility in East Asia and Japan –International Migration for the Vitalization of Economies and Labor Markets
International migration within East Asia is increasing. It is expected that therate of international migration within the region will continue to grow withfurther progress in regional cooperation. However, the low birth rates of East
Asian nations results in a decline in the potential mobility of their populations in
the region, and it is possible that in the long term competition to secure humanresources may increase in East Asia.
In order to attract highly-qualified foreign workers to Japan, it will be essential
to improve the working environment by fundamentally revising systems andcustoms that have until today been exclusively focused on Japanese employees,
and to create a sound labor market for foreign workers.
The government will be required to proceed steadily with a variety of initiatives
to enable Japan to accept foreign human resources, including 1) Reviewing thescope of acceptance of foreign human resources; 2) Establishing a domestic system
for the acceptance of foreign human resources; 3) Proceeding with the conclusionof social security agreements; and 4) Providing education for social integration.
These measures should be implemented in an integrated and consistent manner
via the formulation of a comprehensive policy framework concerning theacceptance of foreign human resources.
(Akiko Tsuji)－9－５．Open Skies over East Asia – Towards “One Sky”
Asia’s airline market is expanding significantly, and the trend towards
liberalization is also gaining strength. Liberalization agreements centering on theU.S. have realized “open skies,” enabling airlines to decide freely on routes andnumbers of flights. The EU, by contrast, has realized total liberalization by
allowing cabotage, enabling airlines from any member country to offer transport
services between any two points within the EU region. With the abolition ofregulation within the region, the EU has gone beyond the concept of “open skies” torealize “one sky.”
The U.S.-Japan Aviation Pact was concluded in December 2009, but in order toincrease the significance of this agreement, it will be important to realize “one sky”
together with China, South Korea, and, further, with the ASEAN countries. It will
be desirable to form a more organic and efficient network, for example throughsystematization via circulatory transport between multiple cities and thefunctional use of alliances from a strategic perspective.
(Naoki Shimoi）

６．Environmental Cooperation in East Asia – Towards the Establishment of a
New Type of Infrastructure
East Asia’s environmental problems transcend national borders. These areurgent issues, and the necessity for enhancing environmental cooperation in theregion is increasing. In dealing with these issues, what is required is a paradigm
shift, away from the establishment of infrastructure as a foundation for economic
development, and towards the establishment of environmental infrastructure inorder to create sustainable economies and societies. When proceeding with theestablishment of such environmental infrastructure in the nations of the region, it
will be necessary to formulate an “environmental grand design” which willfunction as a comprehensive blueprint, and to ensure that the interests of different
fields do not clash. It will also be essential for private sector environmental
businesses to be actively involved.
Based on the lessons it learned in overcoming its own pollution andenvironmental problems, Japan should maximize its use of its advanced
environmental technologies in order to expand regional environmental cooperation.
To this end, the creation of an ongoing and comprehensive framework forcooperation between the public and private sectors will be indispensable.
(Naoko Mori）－ 10 －７．The Process of European Unification and its Lessons for East Asia
As the most advanced example of regional unification, European unification
provides an important model. By deepening its unification, the EU created a single
market and a single currency, revitalized its regional economy, and improved
Europe’s position in the world economy. However, in order to maintain theseachievements, further deepening of the unification will be necessary, for example
by correcting regional imbalances and further enhancing cooperation in fiscalpolicy.
Despite the fact that numerous differences exist between Europe and East Asia
in terms of historical background, basic conditions, etc., in both regions common
regional goods provide the motive force for the systematization and further
deepening of unification. Using wide-area EPAs as a platform to advance economicunification, we must create a free and vigorous economic zone in East Asia.
However, given the significant differences in levels of economic development
between the nations of the region, and the fact that the existing environment does
not promote the transfer of authority in relation to fiscal and monetary policy, it
would be wise to be prudent with regard to currency unification in East Asia.
(Tetsuo Ota/ Tetsushi Saito)－ 11 －