February 2008
Asian Research Report 2007

Larger Benefits from Expanding the Economic Sphere
Structural Reform Initiatives Centering on Agriculture
Shujiro Urata
Senior Economist, Japan Center for Economic Research
Professor, Waseda University
Benefits for nations participating in East Asian economic integration would begreater, if integration was promoted within the framework of the wide-area
integration of the Association of Southeast Asian Nations (ASEAN) + 6,
encompassing India, Australia and New Zealand, in addition to Japan, China andSouth Korea. Japan should press ahead with its liberalization and structuralreform, centering on agriculture, and should play a leading role in the establishmentof a free-trade agreement among the ASEAN + 6.

Since the Asian currency crisis of 1997, regional cooperation has beenpromoted in East Asia within the framework of the ASEAN + 3 (Japan, China andSouth Korea) through summit and ministerial meetings and issue-specific conferences.
Within this context, based on Japan’s proposal and with the help and support ofSingapore and Indonesia, the first East Asian Summit was held in December 2005 withthe participation of 16 nations (the ASEAN + 6).
Increasing Presence of the ASEAN + 6
Japan has been taking the initiative in promoting cooperation among theASEAN + 6 in economic partnership, the environment and other areas. It proposed
and has been working for the creation of an East Asia/ASEAN economic research center(ERIA), which will make policy recommendations for the promotion of economic
growth in East Asia and which will be seen as an East Asian version of the Organization
for Economic Cooperation and Development (OECD). Japan also proposed and has
been working for Comprehensive Economic Partnership in East Asia (CEPEA), whichwill include free-trade agreements.
Cooperation within the framework of the ASEAN + 6 has just begun. The
Japan Center for Economic Research (JCER) has examined the significance of andproblems in including India, Australia and New Zealand in the regional cooperation
framework of East Asia and presented its recommendations for surmounting theproblems the initiative faces (the study was headed by this writer).
Against the backdrop of high growth in China and India, the ASEAN + 6 are

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Asia Research Report 2007

growing in importance in the world economy. In 2005, these nations combined
accounted for a quarter of the world’s gross domestic product (GDP) and a half of theworld’s population.
The expansion of their economies has also increased
intra-regional trade in goods and services, and foreign direct investment. The degreeof dependence on intra-regional trade among the ASEAN + 6 has been rising and has
exceeded 40 percent. While that of Australia and New Zealand is extremely high at
around 55 percent, that of India is low at below 30 percent.
High Potential of the Indian Market
Among the ASEAN + 3, intra-regional production networks have been built
through foreign direct investment by multinational enterprises, centering on themachinery industry. India, Australia and New Zealand have not been incorporated into
these networks. In computers, automobiles and some other product groups, however,India is being incorporated in these production networks through the provision of parts
and information services.
The addition of India, Australia and New Zealand will greatly benefit theASEAN + 3 in securing sources of mineral resources and other primary products and incultivating the consumer market in India. However, the Indian market, in which value
added is not very high, will be a difficult market to do business in for many Japaneseenterprises, which tend to focus on providing high value-added goods and services.
On the other hand, if Japanese firms remain passive about doing business in India, they
will miss out on the enormous demand, set to arise in that market.
Although many observers have a bright outlook for the Indian economy, there
are still many problems that need to be addressed in realizing high economic growth,which is designed to expand jobs and reduce poverty: 1) More radical easing ofregulations and the improvement of governance at government level, especially at local
government level, are urgent tasks; 2) labor market reform has not made progress and 3)
infrastructure is not adequate.
India, Australia and New Zealand will be able to promote their economic
growth by enhancing their trade and investment relations with the ASEAN + 3. For
the expansion of trade and investment, their liberalization is essential. India hascontinued to liberalize since its reform of 1991, but its cumbersome tariff system andnon-tariff barriers are still intact. Although the sectors in which foreigners may invest
have been increasing, activities of foreign enterprises are being restricted. There isstill much room for further liberalization.
A simulation analysis using a general equilibrium model shows that tradeliberalization through the formation of an FTA among the ASEAN + 6 will push up theGDP of the ASEAN + 6 by 2.1 percent. It will increase Japan’s GDP by 0.5 percent.
At present, FTAs in the form of the ASEAN + 1 (such as the ASEAN + Chinaand the ASEAN + South Korea) are being formed with the ASEAN serving as theiraxis.

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Asia Research Report 2007

Effect of East Asian FTA on GDPs (%)
ASEAN+3
ASEAN+6(ASEAN+1)×6
Japan
0.4
0.1
0.5
China
4.7
0.2
4.8
Korea
3.6
0.2
3.7
ASEAN
5.7
2.1
5.9
India-0.1
0.5
3.5
Australia-0.1
0.2
1.4
New Zealand-0.1
0.1
1.9
ASEAN+6
1.7
0.3
2.1
At the same time, discussion of an ASEAN + 3 initiative (East Asian FTAinitiative) is under way. Simulation analyses of the ASEAN + 6 FTA and ASEAN + 1FTAs show that the former will bring the greatest economic benefit to the ASEAN + 6(Table). Behind this result is the increased opportunity for division of labor comingfrom the enormous Indian market despite the fact that it tends to be closed. However,since the above-mentioned result does not take into account foreign direct investment
and other factors which contribute to economic growth, it may well be underestimating
actual effects.
An obstacle to FTAs is said to be agriculture. An examination of theagriculture of the ASEAN + 6, which include Australia (a major farm product exporter),
New Zealand (with its large comparative advantage in dairy products) and India (wheremany forms of agriculture are practiced in its huge territory) reveals a picture which isdifferent from that of the ASEAN + 3.
Australia, New Zealand and India are all net exporters in agriculture. The net
export position of India is partly a result of a misguided agricultural policy. Hence, inthe future, exports are expected to decline as domestic consumption increases with theincrease in population and rising incomes. On the other hand, exports from Australia
and New Zealand will continue. The net import trends of Japan and South Korea arelikely to continue in the future. In China, exports and imports of agricultural products
are in equilibrium at present. However, given expected increases in demand for foodand progress in industrialization, it may well become a net importer.
Although there are farm product exporting countries and importing countries
in the ASEAN + 6, the degree of dependence on intra-regional trade is small. Thissuggests that there is a very large possibility that greater intra-regional trade will raise
the food self-sufficiency rate within the region.
In the area of energy, the addition of India and Australia is expected to bringwelcome effects. India’s presence is growing in the international energy market, and,like China, its energy demand is expected to increase sharply. Its cooperation in theASEAN + 6 will lead to a strengthening of the negotiating power of the ASEAN + 6
vis-à-vis the Middle East and Russia, which wish to secure demand. The addition of
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energy resource-rich and energy resource-exporting Australia in regional cooperation
will raise the rate of intra-regional dependence in coal and natural gas.
Political Leadership and Public Support Essential
Another useful function of regionalism, such as the ASEAN + 6, is that itbuilds regional networks of working-level officials of various ministries and agencies
pertaining to trade and finance through various conferences, and thereby creates ameans of close information exchange at many levels. This would likely nurture a“sense of solidarity” among working-level officials in East Asian countries, and help theparticipating countries share common policy interest. The enhancement of thisfunction is all the more desirable in East Asia, where conspicuous differences ofopinions and interests hamper the discussion of how to proceed with regional
cooperation.
While Japan is taking the initiative in the framework of cooperation among theASEAN + 6, it should not only urge discussion but also actually take steps toward
cooperation. Specifically, in order to make ERIA and CEPEA fully operational and incooperation with the ASEAN + 6 countries, Japan needs to invest human resources andfunds for the creation and efficient operation of their secretariat. At the same time,along with the countries which share its views, it should work hard to involve India,Australia and New Zealand in the meetings and projects taking place within theframework of the ASEAN + 3.
The pillar of the ASEAN + 6 economic partnership will be an FTA. Japan
should take the initiative in establishing an ASEAN + 6 FTA. However, since it faces
strong opposition from its agricultural sector, which fears damage from tradeliberalization, it has failed to play its expected role. Although discussion of theliberalization of agricultural trade in Japan focuses on the damage to Japanese farmers,
measures to ease the damage are feasible. Moreover, by implementing its structuralreform simultaneously with liberalization, Japan could envisage a bright future for its
agriculture.
If Japan works for the liberalization and structural reform of its agriculture andplays a leading role in the creation of the ASEAN + 6 FTA while extending cooperationin various fields, including energy and the environment, it will contribute to creating abright future for Japan and East Asia. For Japan to assume these roles, strong politicalleadership with foresight, along with the support of the Japanese people, are essential.
(The original Japanese article appeared in the January 25, 2008 issue of The Nihon Keizai Shimbun)
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