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Summary

Asia Research
ReportRegional Cooperation Toward theEstablishment of an East Asian
Community―With a View to Asia in 2020―

December 2006

Japan Center for Economic Research

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Introductory Chapter: Regional Cooperation Toward the Establishment ofan East Asian Community – With a View to Asia in 2020
Shujiro Urata
Senior Economist, Japan Center for Economic Research /Professor, Graduate School of Asia-Pacific Studies, Waseda University

The momentum is building toward the establishment of an East Asian Community, with thefirst East Asia Summit held in late 2005. However, a specific road map for the East Asian Community
has yet to come into sight. In achieving economic prosperity and social/political stability in the region
through the creation of the East Asian Community, a host of problems must be resolved, including thefinancial system vulnerability revealed in the Asian currency crisis, serious natural resources andenergy problems exacerbated by high economic growth, food problems, impediments to trade anddirect investment that have been fueling the region’s high growth and security problems.
The plan for the creation of an ASEAN Community being promoted by the Association ofSoutheast Asian Nations (ASEAN) comprises three pillars: an Economic Community, aSocio-Cultural Community and a Security Community. A similar framework may be applicable to theestablishment of the East Asian Community. The first stage can be devised as the creation of an East
Asian Economic Community evolving from comprehensive free trade agreements (FTAs) that allow
the free movement of people, goods, money and information within the region. Included as animportant item of the East Asian Economic Community is regional cooperation in a broad range of
economic fields covered by this report. Mutual understanding among East Asian countries would
deepen through the process of establishing the Economic Community. If the income gaps among thosecountries narrow through the process of the region’s developing countries catching up withindustrialized partners, East Asian countries could move ahead toward the greater sharing of values.
Consequently, it would become possible for them to create a Socio-Cultural Community and a
Political and Security Community, which would lead to the ultimate goal of establishing the East
Asian Community.
There are two types of regional cooperation. The first type is cooperation in issues common
to all countries in East Asia, or cooperation in areas strongly oriented toward the provision of regional
public goods, such as financial institutions and energy. The second type is cooperation in areas that are
conducive to the narrowing of gaps among the region’s countries, such as physical distribution
infrastructure and information technology.
Japan, the most economically developed nation in East Asia, should blaze a trail inestablishing the East Asian Economic Community that helps realize East Asia’s economic prosperity
and in creating the East Asian Community that contributes to the region’s social and political stability.
For Japan, which is beginning to lose dynamism amid the aging population combined with the

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declining birthrate, building and maintaining close relations with other East Asian countries with highgrowth potential into the future can be considered conducive to the prosperity of its own economy andsociety. As it is possible to cope with structural adjustment problems that are highly likely to emerge
with the establishment of the East Asian Community, what is required of Japan is the planningcapability for mapping an appropriate strategy and the political determination to implement thatstrategy.

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Chapter 1: Economic Integration in East Asia and Changes in Production
Networks
Ikuo Kuroiwa
Senior Researcher, Institute of Developing Economies

In East Asia, intermediate goods trade occupies a large proportion of trade and its growthrate is robust, while the Grubel-Lloyd index is also high to indicate the progress in intra-industry trade,mainly in intermediate goods, in the region. It may be argued that as varying production processes in
East Asia become increasingly interconnected through trade in intermediate goods, the weight of bothintermediate goods trade and intra-industry trade has increased.
An examination of changes in local content in industries in East Asia during 1990 to 2000
shows a decline of local content (a rise in import content) in the electronics industry and many otherindustries. This decline reflects the stronger spatial linkages – interdependence of industries acrossborders which are linked through transactions of intermediate goods – among East Asian countries that
helped form the extensive production networks in the region. In the meantime, as local content in theautomotive industry rose most significantly during the same period, the expansion of the production
network was limited to mostly within the Association of Southeast Asian Nations (ASEAN) and someneighboring countries.
Changes in local content for the electronics and automotive industries can be explainedby the characteristic features of parts and components (transportation cost, architecture) anddifferences in industrial policy (import-substituting or export-oriented). Of these factors, transportation
cost is expected to decline further, thanks to infrastructure development and the progress in logistics
and supply chain management (SCM) in East Asia. Within East Asia, the cost of cross-bordertransportation of goods is expected to drop further as the full impacts are felt of the ASEAN Free
Trade Agreement (AFTA) and the ASEAN-China FTA. Thus, the production networks in East Asia
are likely to advance further, centering on the electronics industry.
Regarding industrial policy, it has become more difficult to raise the local content for
automotive parts and components through policy intervention, as seen in the abolition of local content
regulations on automotive parts and components in Thailand through trade-related investment
measures (TRIM) agreement of the World Trade Organization (WTO). However, the agglomeration
forces in the automotive industry (savings on transportation and inventory costs, closer cooperative
relations between assemblers and parts suppliers, etc.) that proved to be a factor conducive to higher
local content should work independently of policy intervention. As the opposite forces ofagglomeration and dispersion apply to industrial location to make any precise forecast difficult, the

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combination of the growing production networks with neighboring countries and rising local content islikely to remain in place for the foreseeable future.

Changes in Local Content Ratios (1990 to 2000) *Automotive**
Other manufacturing
Electricity/gas/water
Metal products
Clothing
Basic metals
Other mining industries
Paper-pulp
Services

3.9
3.6
2.2
0.4
0.2
-0.1
-0.6
-0.6
-0.7

Agriculture
Construction
Food
BicyclesSpinning
Chemical products
Petroleum refining
Basic chemicals
Lumber/wooden products

-0.9
-1.2
-1.2
-1.5
-1.5
-1.7
-1.8
-2.2
-2.3

Commerce/transportation
Crude oil
Machinery
Rubber products
Ceramics/sand and gravel
Other electric machinery
Other transportation equipment
Precision equipment
Electronics products

-2.4
-2.6
-3.9
-3.9
-4.0
-4.1
-4.2
-5.5
-5.6

* Figures represent the percentage changes in the average local content ratios in eight East Asian countries from 1990
to 2000.
** The shaded items show manufacturing industries.
Source: Calculated by the author on the basis of the 1990 and 2000 international input-output tables for Asia.

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Chapter 2: Intra-regional Policy Coordination Necessary through Trade
Facilitation
Ryuichi Ushiyama
Senior Economist, Japan Center for Economic Research

Intra-regional trade is expanding smoothly in East Asia. The ratio of intra-regional trade has
already topped 50%, reaching a level higher than that of the North American Free Trade Area
(NAFTA) and also narrowing the gap with that of the European Union (EU) year by year.
Lying behind the stronger interdependence were moves to build a network of intra-regional
division of labor among multinational corporations led by Japanese companies. As multinational
corporations set up production bases in multiple countries with a view to higher production efficiency
and lower costs, traffic of parts and components became active between those production footholds.
However, there still exist many countries in East Asia that impose high tariff rates, while
numerous nontariff trade barriers remain in place, including import bans and quantitative import
restrictions. Significant barriers also exist in the field of investment, such as restrictions on the scopeof industries foreign capital can enter and equity ratios. These barriers should be reduced and/or
abolished for the sake of a further expansion of intra-regional trade.
Many companies look to an improvement in trade facilitation measures that streamline
and/or unify trade-related procedures and systems. International organizations and researchers alikepoint out that complex trade-related procedures and systems are hampering trade to a larger extent
than by tariff rates. Among trade facilitation areas, this chapter focuses mainly on tariffs, rules oforigin and standards and certification.
Regarding tariffs, various questionnaire surveys indicate that many Japanese companies
operating in East Asia are facing difficult situations. More specifically, frequently cited problems
include arbitrariness in tariff classification and assessment, complex procedures and complex andunderdeveloped systems. Concerning rules of origin, companies complain about complicatedprocedures to obtain certificates of origin and also voice concerns about divergent rules of origin as aresult of free trade agreements (FTAs) and economic partnership agreements (EPAs). In the area ofstandards and certification, there are countries that discriminate against imports with the use of theirown standards that are not consistent with international standards.
In these trade facilitation areas, the World Trade Organization (WTO) and the Asia-Pacific
Economic Cooperation (APEC) forum are trying to improve and/or harmonize trade rules. However,efforts through the WTO take time to forge consensus because so many member states are involved,
while it is difficult to set binding trade rules via APEC. Consequently, it is now important to improve
and/or strengthen trade rules on a bilateral basis through FTAs/EPAs. Japan has already beenpromoting an exchange of information as well as human resources between customs’ offices under

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EPAs with some East Asian countries, and has also concluded arrangements on the mutual recognitionof standards and certification for electric appliances and some other products.
However, efforts to formulate common intra-regional rules in trade facilitation areas will
become essential if the future establishment of an East Asian Community is to be brought into view, as
companies are expanding operations to conduct procurement, manufacturing and sales in various
countries in the region, further heightening the need to provide indirect support to such region-wide
corporate management. Japan should take the initiative in improving and harmonizing customs’ rules
and rules of origin within the framework of ASEAN + 3 (Japan, China and Korea), and should also
encourage developing countries in East Asia to promote institution-building and enhance theirimplementation capabilities through financial assistance and technical cooperation such as the sendingof human resources.

Trade Liberalization and Trade Facilitation
Trade liberalization

Trade facilitation▼Tariff reduction- Reduction of protective tariffs- Reduction of financial tariffs▼Abolishment of nontariff tradebarriers▼Export/import procedures and services- Export/import licensing and customs clearance, internationaltransportation, port procedures, etc.
▼Export/import systems- Tariff systems, animal and plant quarantine systems, etc.
▼Private-sector procedures and services- Trade transactions (financial aspects and physical aspects)▼International systems- Standards and certification systems, etc.
Source: Excerpts from Japan International Cooperation Agency (2003), “Tojokoku heno Seido Seibi
Kyouryoku (Institution-Building Cooperation in Developing Countries)”

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Chapter 3: Distribution Cooperation in East Asia
Yukiko Fukagawa
Professor, School of Political Science and Economics, Waseda University

In East Asia after the currency crisis, a string of large-scale construction of infrastructures,such as airports, ports and roads, are under way in many countries. Following the economic rise of
China and India, the region has become dominated by optimism about the expansion of intra-regional
trade and movements of natural persons, triggering the resumption of projects frozen or postponed
after the currency crisis. In addition, massive infrastructure investment is mostly pressured by the
intra-regional competition that the export in consumer goods demand swift application ofever-changing technologies and ever-shortened leading time in the Supply Chain Management (SCM).
The intensive industrial agglomeration and the division of labor network for manufacturing industries
in East Asia have made the comparative advantage in SCM a way to survive intense competition. For
countries trying to win the competition, the establishment and improvement of logistics infrastructure
are indispensable to continue to attract foreign direct investment.
Needless to point out, however, the expansion and modernization of distribution facilities,
particularly the capacity for exports, alone do not ensure reductions in the service costs. Even whenbastion ports and airports are well developed, inadequate domestic links between the ports and airports
by land, water and air do not help enhance efficiency. Moreover, considering the links with thedomestic facilities, such as roads and storage warehouses and time and security costs including
customs procedures and settlements, the logistics costs in East Asia actually still exceed those inindustrialized countries.
Respective countries can take the lead in improving their infrastructures but should be moreconcerned about the total cost including the software and the public services. Especially for the
purpose of efficient linkage, cooperation such as in regulations and information exchange are expected
at the regional level.
In the competition of huge infrastructure building in East Asia, Japan is faced with the riskthat its own physical infrastructure could be outdated and left behind with delayed standardization.
Despite this, however, the fact still remains that only Japan in the region has accumulated
sophisticated knowledge and technologies of its own in abundance. At present, the logistics systemcovering all of East Asia is rather limited among the major points, but the efforts to link them as the
network by providing aggressive and strategic support would yield fairly significant effects. The
logistics cooperation should be made into one of major pillars of cooperation linked to free trade
agreement (FTA) negotiations, especially if the very practical and non-political characters are
considered.

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In fact, logistics cooperation should contribute greatly to improving the management
environment of Japanese companies operating in the region. On the other hand, cooperation has the
merit of helping to strengthen the international competitiveness of East Asian countries. Support forthe promotion of the connection and standardization of electronic data interchange (EDI) systems ofmajor ports and airports, which goes beyond simple customs cooperation, should represent an“investment” convincing enough to taxpayers, and should be implemented as a strategic economic
cooperation including the supports for latecomer economies.
The latecomers actually have their advantage in logistics. The combination of a string ofconditions, such as (1) governments and local large corporate groups capable of strong standardization
initiatives, (2) young societies that quickly absorb information technology (IT), (3) industrial
structures led by electronics may be suitable for introducing RFID（Radio frequency identification）
known as “electric tags”.

In fact, the efforts for better logistics have been already initiated by theprivate sector, but they still need active participation by the government for further deregulation,system conversion and standardization.

For Japan, the logistics initiative could also present thepossibility of innovating Japan’s seamless logistics further, which has tended to fall victim to thevertically segmented administrative system so far.
Comparison of Logistics Costs of Japanese Companies (FY2004)
12％
Share of distribution cost
物流コストのシェア

10

8

6

4

2

0

世界
World

アジア
Asia

中国
China

NIEｓ
NIES

ASEAN4ASEAN4North
北米
America

EU
EU

Source: Prepared on the basis of Ministry of Economy, Trade and Industry,“Kigyo Katsudo Kihon Chosa (Basic Survey on Business Activities by Japanese firms)”(FY2004)

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Chapter 4: Agriculture/Food Problems Key to the East Asian Community
SchemeMasayoshi Honma
Professor, Department of Agricultural and Resource Economics, The University of Tokyo

In Japan’s free trade agreement (FTA) and economic partnership agreement (EPA)
negotiations so far, the handling of agriculture has not been one of the biggest issues. In the case of
establishing an East Asian Community, Japan cannot steer around the agriculture problem as
agricultural imports from the region’s other countries are likely to increase. In considering agricultural
trade with the East Asian Community, Japan’s farm imports from the Association of Southeast Asian
Nations (ASEAN) are likely to be mostly tropical farm products, except for rice and poultry fromThailand. Not many products compete directly with domestic agriculture and tariff rates for them are
fairly low. Imports that are expected to give rise to competition in rice and other sensitive farm
products are those from China and Korea. This chapter presents an overview of agriculture andagricultural trade of Japan, Korea and China, mulls over the handling of agriculture in the FTA
negotiations until now, and then points out some problems involved. Using such an approach, thechapter examines how best to solve the regional agricultural problems in order to move toward thecreation of the East Asian Community.
In seeking economic cooperation under FTAs and EPAs with the aim of establishing the East
Asian Community, there are a number of issues to be addressed in the agricultural field, besides efforts
to reduce and eliminate tariffs on agricultural products. Global agricultural trade, not limited to East
Asia, has already entered an era of intra-industry trade, and this means that natural conditions andfactor endowment alone do not determine comparative advantages. In particular, large quality
differentials are emerging for vegetables and fruits depending on varieties and producing areas, andrice, a land-intensive crop, is no exception. Problems are concerned with trade barriers other thantariffs. In particular, common standards for quarantine systems are an essential factor.
Given the risk of vermination, easy compromises on quarantine systems or the lowering ofsafety standards are not warranted. That is precisely the reason why East Asia-wide consultations andcommon rules are necessary. At the World Trade Organization (WTO) as well, common standards areunder consideration under the SPS Agreement on quarantine, but little progress has yet been made. It
will be of great significance to establish common quarantine rules in East Asia ahead of similar
developments at the WTO. If countries in the region can cooperate in creating a unified quarantine
system, doing so could also serve as a model for future multilateral consultations.
There also are areas other than quarantine that require common rules. One such example isthe protection of varieties of agricultural crops. Japan has developed and nurtured many new varietiesof rice, fruits, vegetables, flowers and ornamental plants. However, there is an unending incidence of

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developed high-quality seeds and seedlings being taken out overseas and bootleg versions of thesevarieties being produced in other countries. In order to contain this phenomenon, common rules toprotect intellectual property rights are necessary. Under such common rules, efforts to develop new
varieties can be undertaken in any of the East Asian countries without discrimination and active
research and development investment can be expected.
The East Asian Community envisions not only the free movement of goods but also theliberalization of the movement of capital, labor and services. This freedom should be promoted inagriculture as well. In particular, the free movement of agricultural labor makes the new developmentof agriculture in East Asia possible. While Japan’s agriculture industry has been seeking to save laborthrough mechanization, there remain many labor-intensive jobs on farmland, and access to cheap labor
would help realize a substantial reduction in costs. It also opens the way for farm workers from East
Asian countries to acquire agricultural techniques in Japan and make good use of the techniques inpromoting agriculture in their home countries. Even now, many Japanese vegetable growers andlivestock farmers are accepting foreign workers under the foreign trainee system. However, Japan
should develop a system under which foreign farm workers can be hired as fully qualified workers.
It is important to consider the agricultural problem in the region as an issue of the broader
East Asian economy at large, instead of treating it just as a problem in the agriculture sector. At thesame time, it is important to position the problem as a food problem for all of East Asia to beconsidered in conjunction with economic cooperation and technical assistance as well as humanexchanges and direct investment. It is necessary to promptly launch an international forum on
agricultural problems for a comprehensive discussion of agricultural problems that can be found in
East Asia. The desire is not to limit participants in the forum to those concerned with agriculture but toinclude people with various backgrounds to discuss agriculture in the whole of East Asia. By shedding
light on the future direction of agriculture in East Asia through discussing ways to cooperate in thedevelopment of agriculture in monsoon Asia, this endeavor also represents a path toward building an
Asian version of Common Agricultural Policy, which, unlike the European Union (EU), stays open to
the outside world.
Various Economic and Agricultural Indicators for East Asian Countries (2003)
Population
Per capita
Ratio ofRatio of agricultural
Agricultural(1 million)
GDP (US$)agriculture
workforce to total
trade balance
to GDP (%)
population (%)(1 million US$)
Japan
127.7
31,2371.4
3.4-35,294
Korea
47.7
9,993
4.0
8.2
-7,761China
1,311.7
965
15.4
64.9
-6,569Thailand
62.8
2,016
9.0
54.1
6,828
Indonesia
219.9
786
17.5
46.3
2,587
Malaysia
24.4
3,889
9.5
16.6
5,247
Philippines
80.0
974
14.7
37.7
-1,206
Vietnam
81.3
482
23.4
66.1
973
Note 1: The ratio of agriculture to GDP is for 2002.
Sources: FAO, FAOSTAT; UN, National Accounts Main Aggregates Database; IMF, International Financial Statistics.

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Chapter 5: The East Asian Economy in 2020
―An Analysis of Economic Effects of the Community
Mitsuyo Ando
Assistant Professor, Graduate School of Economics, Hitotsubashi University

In recent years, free trade agreements (FTAs) and economic partnership agreements (EPAs)
have been actively established, negotiated and studied in East Asia. FTAs/EPAs are likely to havesignificant economic impacts on FTA/EPA members as well as non-members. In particular, theimpacts would be greater if the contents of FTAs/EPAs are extended to include not only liberalizationof trade in goods but also broader economic aspects; liberalization of trade in services, investment
liberalization, trade and investment facilitations including simplified customs procedures and mutual
recognition of standards, and economic cooperation in utilization of human resources, assistance tosmall and medium enterprises (SMEs), and so on. This chapter examines the impacts of theestablishment of an East Asian Community in 2020 on the member economies, using the computable
general equilibrium (GGE) model, which is the most popular tool for the analysis of FTAs andeconomic integration, and discusses what is desired in creating the Community.
We focus on the effects of trade liberalization (removal and reduction of trade barriers toboth exports and imports) and trade and investment facilitation measures as the economic impacts ofthe establishment of the East Asian Community in 2020. In order to examine the effects of trade andinvestment facilitations, six scenarios in total are examined: three scenarios assume different patternsof trade liberalization and the rest consider those of facilitation measures in addition to tradeliberalization. Our results indicate that the implementation of facilitation measures would havesignificant economic impacts in terms of gross domestic product (GDP), economic welfare, and trade.
While trade liberalization through tariff elimination and reduction per se is important, theimplementation of trade and investment facilitation measures beside trade liberalization would bringgreater benefits to the member economies. If trade and investment facilitations can lower the
cross-border services link cost, their implementation would promote further development ofinternational production and distribution networks extended in East Asia.
For trade liberalization, given the situation that the World Trade Organization (WTO)
negotiations over agricultural trade liberalization has got stuck, we examine the case of full
elimination of trade barriers in all industries including agriculture as well as the cases of noliberalization of agricultural trade and partial reduction of agricultural trade barriers. Our results
suggest that the economic impacts would be greater in the case of partial reduction of agricultural
trade barriers than in the case of excluding the agricultural sector from trade liberalization, and also
greater in the case of full elimination of trade barriers, including the agricultural sector, than in the

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case of partial reduction in agricultural trade barriers. Therefore, it is important for each economy,
including Japan, to promote trade liberalization in all industries including agriculture toward thecreation of the East Asian Community in 2020.
Our results also imply that the larger the coverage in terms of membership is, the greater the
benefits to the members would be. The Community among the Association of Southeast Asian Nations(ASEAN) + 6 would bring not only positive effects to Australia, New Zealand and India, who are not
the member of ASEAN + 3, but also greater effects to each member of ASEAN + 3.

Compared withthe case among ASEAN, ASEAN + 1 or ASEAN + 2, the establishment of the Community among
ASEAN + 3 would bring the greater economic benefits than that among the limited membership, andthe establishment of the Community among ASEAN + 6 would bring the greater benefits than thatamong ASEAN+3. The broader the coverage of economies participating in the Community is, thegreater the benefits the Community members would gain from their economic partnership are.
This chapter does not consider the economic impacts of foreign direct investment. If capital
accumulation proceeds through the creation of the Community, in particular through increased inflows
of direct investment to developing countries, however, the establishment of the Community can be
expected to bring economic effects greater than those suggested by the simulation analysis in thischapter. The improved trade and investment facilitations would lower cross-border services link costs,
resulting in enhancing further direct investment. In creating the East Asian Community, it is desirable
to liberalize trade, including the agricultural sector.

Furthermore, it is indispensable to implement

trade and investment facilitation measures in addition to trade liberalization within the region.
Trade Liberalization and Facilitation in East Asia in 2020: Comparison of Economic Effects
ASEAN

ASEAN +China

ASEAN +
Korea

ASEAN +Japan

ASEAN +
China +
Korea

ASEAN +
China +Japan

ASEAN +
Korea
+JapanASEAN + 3 ASEAN + 6

Real GDP growth: cumulative real GDP growth, relative to the base line (% point)
0
-0.01
0
0.17
-0.01
0.39
0.23
0.44
0.55
Japan
-0.01
0.75
-0.02
-0.04
1.2
1.6
-0.07
2.02
2.13
China
0
1.58
0
0
1.72
1.89
0
2.03
2.11
Hong Kong
-0.01
-0.06
0.49
-0.03
2.16
-0.19
1.48
3.06
3.2
Korea
0.55
0.92
0.86
1.12
1.22
1.48
1.42
1.77
1.99
Indonesia
2.74
3.57
3.26
4.84
4.07
5.62
5.34
6.09
6.47
Malaysia
1.32
1.84
1.79
2.95
2.3
3.42
3.4
3.85
4.1
Philippines
2.26
2.88
2.55
3.29
3.17
3.88
3.57
4.16
4.39
Singapore
1.81
2.62
2.17
3.67
2.95
4.42
4.01
4.74
5.04
Thailand
1.2
2.13
1.76
1.77
2.66
2.68
2.33
3.2
3.31
Vietnam
-0.01
-0.02
-0.02
-0.04
-0.03
-0.06
-0.05
-0.09
1.35
Australia
-0.01
-0.02
-0.01
-0.02
-0.03
-0.05
-0.04
-0.07
1.85
New Zealand
-0.02
-0.04
-0.04
-0.05
-0.06
-0.08
-0.07
-0.1
1.36
India
-0.01
-0.02
-0.01
-0.02
-0.04
-0.06
-0.03
-0.08
-0.1
Taiwan
0
0
0
0
0
-0.01
0
-0.01
-0.01
NAFTA
0
0
0
0
0
-0.01
-0.01
-0.01
-0.02
EU (15
-0.01
-0.01
0.01
-0.02
-0.03
-0.04
-0.03
-0.06
-0.07
Rest of the world
Source: Author’s simulations.
Note: The simulation results in the above table are all for the case of Simulation 6 (trade liberalization and facilitation in allindustries).

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Chapter 6: Information Technology Cooperation in East Asia
―Toward International Standardization of Information andCommunications Technology
Toshie Oki
Senior Consultant, Global Business and Strategy Cluster, Research & Consulting Division
The Japan Research Institute, Limited

East Asia’s information and communications market (in terms of the number of users) has
grown to largely surpass that of Europe or the United States. Yet, the region remains dependent on
Europe and North America for much information technology (IT) and applications.
Amid the progress in the globalization of markets, international standardization of IT is
becoming a matter of course. The acquisition of international standards has become an important task
not only for business corporations but also governments as it significantly influences the international
competitiveness of states. Unless adopted as standards, even excellent technologies would lose value
and only increase development costs.
As a method of standardization, de facto standards determined by markets, or international
standardization following the spread of products or technologies, was previously the dominant trend.
In recent years, however, de jure standards, or the practice of establishing standards before the spreadof products or technologies through forum activities, including consortiums, or standard-settingorganizations, are becoming prevalent. Either way, international standards are not necessarily
applicable to excellent technologies but rather depend on successful efforts to garner the support of as
many corporations and governments as possible or involve as many markets as feasible.
In European countries and the United States, private and government sectors are joining
hands to obtain international standards, and in the European Union (EU), member states are doing thesame in union. Europe has standard-setting organizations within the region, and also has research anddevelopment programs designed to develop technologies that are highly likely to become international
standards, while European governments are contributing to activities of international standard-settingorganizations such as the International Organization for Standardization (ISO) and the International
Telecommunication Union (ITU). In all, they have a well-developed system in place for theacquisition of international standards.
Until recently, activities to obtain international standards were mainly seen in Europe and theUnited States. If economic cooperation among countries and regions in East Asia is to advance to leadto the future realization of economic integration, it requires the region to establish an environment
where people, goods, money and information can move smoothly across borders, thereby requiring the

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standardization of related technologies and applications within East Asia. Since the standardization of
IT before its dissemination has now become the dominant trend, it is highly likely that East Asian
countries, if they mutually cooperate, can set international standards created in East Asia. Candidates
for such standards may include technologies that help narrow the digital divide in East Asia, such asradio network technology including next-generation cellular phones and software that takes advantage
of open-source software.
In East Asia, countries that have large enough markets as well as technology development
capabilities are Japan, China and Korea. Already, a joint project by these three countries is under way.
It seems desirable that as the first step, Japan, China and Korea cooperate in building a mechanism forsystematic joint technology development and then push ahead with the standardization of technologies
in East Asia. Such a mechanism needs to be adjusted to fit East Asia, where corporate relationships
have some way to go before reaching maturity, not identical with the mechanism in Europe that“assumes the cooperation among competing companies in order to share the cost and risk involved in
the research and development of technologies evolving into international standards.”
Moreover, as witnessed in the three-way project of Japan, China and Korea where joint
development efforts are in progress, companies in East Asia keep rivalry intact. It seems probably
difficult for East Asian companies to develop the attitude of cooperation while competing, as seen in
Europe, in a short period of time. Governments in the region are being called upon to strive to develop
common rules for intellectual property rights, so that companies in the region will be able to cooperatein joint technological development.

Information and Telecommunications Markets in East Asia (2005)
Country

Japan
China
Korea
Total forJapan, China
and Korea
U.S.
EuropeAsia
World

Fixed-line
phones(1,000circuits)
58,780350,433
23,745432,958
177,947
327,862
598,004
1,263,368

MarketCell phones(1,000subscribers)

Internet(1,000users)

94,745
393,428
38,342526,515

64,160111,000
33,010208,170

201,650
676,274875,732
2,168,434

185,000
269,605
368,438
964,272

Share in the global market
Fixed-line
Cell phones
Internet
phones
4.7%
27.7%
1.9%
34.3%

4.4%
18.1%
1.8%
24.3%

6.7%
11.5%
3.4%
21.6%

14.1%
9.3%
19.2%
26.0%
31.2%
28.0%
47.3%
40.4%
38.2%
100.0%
100.0%
100.0%
Combined share of Japan, China andKorea in Asia
72.4%
60.1%
56.5%

Note: “Asia” in the table includes some countries in South Asia and the Middle East.
Source: www.itu.int

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Japan Center for Economic Research

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Chapter 7: Intensifying Cultural Exchanges
Shigesaburo Kabe
Senior Economist, Japan Center for Economic Research

Cultural exchanges in East Asia have become quite intense over the past decade, when they
are captured in terms of data on trade in culture-related goods, movement of people and subcultures.
The value of transactions in culture-related goods totaled $4.1 billion in 2004, growing 2.7 times from
$1.5 billion in 1994. The movement of people within the region increased similarly, with a rapid
expansion of arrivals in and departures from economically-rising China and steady increases in
two-way flows of people among countries in the region.
An examination of the movement of people in 1995, 2000 and 2004 shows steady increases
in the number of both departures and arrivals in Asia as a whole, with the movement of people topping
the one-million-mark both ways. Until recently, the flow of people into Japan was rather limited
against active flow from Japan into Asian countries. In 2004, however, the movement of people to andfrom Japan topped one million, with institutional changes, including simplified procedures to obtainvisas, apparently contributing to the increased flow of people.
Behind the robust flows of people is the fact that people in East Asia have come to sharevalues in ordinary life as a result of the rise of the urban middle class as economic growth helped raise
the standard of living. The purchases of home electronic products, car ownership and living in
high-rise condominiums are the phenomena commonly seen among urban residents of East Asia
countries, and opportunities to come into contact with foreign cultures are also increasing through theInternet and other means while sitting in the comfort of their homes.
Cultural exchanges usually occur spontaneously on an individual basis. However,considering that an accumulation of individuals’ interest and understanding of another country would
help generate a national sentiment toward that country, cultural exchanges have a significant role toplay in the process of the integration of East Asia. For countries at relatively similar stages ofdevelopment, the foundation for cultural exchanges, if any, could provide underlying support for theirbilateral relationship even when they are faced with difficult political and economic ties. Even for
countries at different stages of development, cultural exchanges can be expected to perform the role ofnarrowing the gaps in political or economic interchanges. Given these circumstances, policy responses
to help develop an environment for smooth cultural exchanges are needed. Necessary initiatives in thisarea include the easing of restrictions on imports of cultures, wider acceptance of the movement ofpeople from other countries, protection of intellectual property rights and language policy.

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Restrictions on the importation of cultures are often adopted for the protection of homeindustries and traditional culture, but such restrictions should be held down to the minimum necessarylevel. Though there is no end seen to such restrictive measures, including China’s hostile measuresagainst foreign animation films in a bid to nurture a domestic industry, a natural inflow of culture is
unstoppable. However, an inflow of subculture, even when spontaneous, may be seen as a cultural
invasion if that inflow is too strong. Meanwhile, the protection of intellectual property rights is a
desirable response in the interest of culture exporters, and also represents a necessary step in theimmediate future in terms of realizing stable cultural exchanges over the long term.
For acceptance of the movement of people, the basic policy priority is to develop an
environment that motivates people of other countries to come, regardless of whether their purpose istourism, work or immigration. The basis of this movement policy, with support measures that may benecessary, is to help those with plans for extended stays build stable relationships with hostcommunities.
Finally, assuming the realization of the integration of East Asia, language policy emerges asa major issue in promoting cultural exchanges. This would require a continued accumulation of carefuland considerate discussions on whether a single language should be designated or languages ofmember states should be respected.
Movement of People in Asia (in terms of entrances and departures)
ヒトの移動(2004年)
Movementof people (2004)
10 million or more
千万人以上
百万人以上
1 million or more
Less than 1
百万人未満
million

199

125

1254
China
中国
(13億）
(1.3 billion)

274

369

213

121

Taiwan台湾(2200万）(22 million)
333

2303

6267

316

ASEAN
ASEAN(
5.5億)(550 million)

234

Hong Kong

香港(700万）(7 million)

244(48
million)(4800万）

112

348

284

Korea
韓国

175

141

105
Japan
日本
(1.3億）(130 million)

Sources: Statistics provided by respective countries/regional authorities and World Tourism
Statistics (provided by the Asia-Pacific Tourism Exchange Center)

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Japan Center for Economic Research

Asia Research Report 2006

Chapter 8: Regional Monetary and Financial Coordination in East Asia
Eiji Ogawa
Professor, Graduate School of Commerce and Management, Hitotsubashi University

East Asia has made progress in regional financial and monetary coordination after
experiencing the Asian currency crisis in 1997. Regional financial and monetary coordination is being
undertaken on the basis of the recognition that the double mismatching of currencies and maturities inthe balance sheets of local financial institutions caused the Asian currency crisis. Specifically, theASEAN (the Association of Southeast Asian Nations) + 3 (Japan, China and Korea) Finance
Ministers’ Meeting built a network of bilateral currency swap arrangements to manage a currency
crisis under the Chiang Mai Initiative (CMI). In contrast, the ASEAN + 3 Finance Ministers’ Meetingand the Executives’ Meeting of East Asia-Pacific Central Banks (EMEAP) are promoting the Asian
Bond Markets Initiative (ABMI) and the Asian Bond Fund (ABF), respectively, to help improve thefinancial system heavily dependent on banks.
It is necessary to conduct surveillance of the regional economies using exchange rates as a
new surveillance criterion. As an indicator for that purpose, it is necessary to create a regionalmonetary unit and use this unit to conduct surveillance.
As a common policy issue in the above-described regional financial and monetary
coordination, the creation of the regional monetary unit is under study as an indicator of surveillanceof the regional economies or as a denotative currency for Asian bonds. One of the proposed regionalmonetary units is the Asian Monetary Unit (AMU).
The AMU and the AMU deviation indicator may be useful for the surveillance process
among ASEAN + 3 countries. The AMU is calculated as the weighted average of the currencies of 13
countries, including all of the ASEAN + 3 countries. The AMU deviation indicator for each country
currency can measure the extent of its divergence from the AMU. Both the AMU and the AMU
deviation indicator are expected to contribute to exchange rate policy coordination in East Asia andalso to the enhancement of the surveillance function of the monetary authorities.
The common regional monetary unit can be used as a denotative currency in international
trade transactions and international financial transactions in the private sector. The Asian Bond
Markets Initiative and the Asian Bond Fund/Initiative, with the purpose of nurturing a market forbonds denominated in local currencies in Asia, are organizing funds for investment in bonds
denominated in currencies of the region’s countries and addressing the creation of bonds denominatedin the basket of Asian currencies. In the creation of the regional monetary unit to be used in the private
sector, efforts are needed to enhance the convenience of such a monetary unit for private sector users.
As the convertibility of currencies in current transactions and capital transactions, or the relaxation of

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foreign exchange control, and liquidity affect the user friendliness of currencies, improved
convertibility and liquidity of currencies would become necessary. While the Asian Bond Fund II(ABF II) for investment in domestic currency bonds issued by sovereign and quasi-sovereign issuers
does not cover yen-denominated bonds, a proposal has also been forwarded for the core AMU that
includes the yen, to be used by the private sector.
Regional monetary coordination in Europe has been undertaken in stages, from theintroduction of the European Currency Unit (ECU) in 1979 to the introduction of the single currency
euro in 1999. Similarly, in East Asia that consists of countries in varying stages of economic
development, the desire is to promote regional monetary coordination in stages. It is necessary tomove ahead with regional monetary coordination in East Asia in stages in response to stages anddifferences of economic development for the region’s countries. In such a graduated evolution ofregional monetary coordination in East Asia, the creation of the regional monetary unit is an important
process as the first step.
Table 3. The core-AMU
East Asian currencies
Thequalification
core-AMUofqualificationof East Asian currencies
FX Spot Market
Country

SovereignCredit Rating(S&P) 1FX Forward Swap Market

Regulatory Regulatory
on Current on Capital Liquidity 3
Account 2 Account 2

Regulatory2

core-AMU
Liquidity 1Month Swap
within Bid-Ask Spread qualification(%)
1year 3 in May 2006
4

Japan

AA-/Positive

○

○

Good

○

Good

0.01

Yes

HongKong

AA-/Stable

○

○

Good

○

Good

0.02

Yes

Korea

A+/Stable

○

△

Good

△

Good

0.11

Yes

Singapore

AAA/Stable

○

○

Good

△

Good

0.03

Yes

ThailandA/Stable

○

△

Good

△

Good

0.1

Yes

Malaysia

A+/Stable

△

△

Good

△

Good

0.19

No

Philippines

BB+/Negative

△

△

Good

△

average

0.19

NoIndonesia

BB/Positive

○

○

Good

△

average

0.79

No

China

BBB+/Positive

×

×

Good

×

Poor

-

No

Note:
1. The data of Sovereign Credit Rating (S&P) are from the website of Asiabondsonline. Each credid rating and outlook is for each Longterm Local Currency Sovereign Bond.
2. Each contry's regulatory information is from its central bank and monetary authority website. ○ means no restrictions, △means some
restrictions, and × means transactions are restricted for non residents.
3. Each market liquidity information is from Asian Currency Handbook 2005 (Deutsche Bank).
4. Each 1month swap bid-ask swap spread in May 2006 is calculated by the same procedure of Ogawa and Shimizu (2004). All spot rates
and forward rates are collected from Bloomberg currency composit pages and Prebon Yamane Asia Region pages on sample days.

Source: Shimizu and Ogawa (2006)

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Japan Center for Economic Research

Asia Research Report 2006

Chapter 9: Energy Security and Regional Cooperation in East Asia
Hiroyuki Ishida
Senior Economist, International Strategy Analysis Group,
Strategy and Industry Research Unit, The Institute of Energy Economics, JapanIn Asia, against the backdrop of high economic growth, the consumption of primary energy
is likely to increase to 5.01 billion tons of oil equivalent by 2020 from 3.06 billion tons of oil
equivalent in 2004, with China expected to account for about half of the forecast increase. As asubstantial rise in oil production in Asia is unlikely, net imports of crude oil are likely to expand from
710 million tons in 2005 to 1.39 billion tons in 2020, with the dependence on imports estimated to risefrom 55% to 84%. Consequently, the region’s dependence on the Middle East for oil imports is
expected to rise, while the traffic of crude oil through the Straits of Malacca is also likely to expand.
Faced with such an energy situation and also partly because of the recent spike in crude oil
prices and the destabilization of the Middle East situation, Asian countries are showing a growinginterest in energy security. In order to strengthen energy security toward 2020, it is necessary to curb
energy (oil) imports, secure stable imports of energy (oil) and enhance the ability to respond to
emergencies. Curbing imports of oil being in short supply in the region requires efforts to rein inenergy demand by stepping up energy-saving efforts. For ensuring stable oil imports, efforts to lower
the excessive dependence on oil from the Middle East by diversifying import sources are important,
together with the safeguarding of import routes. On top of such peacetime efforts, a strengthening of
the ability to deal with emergency situations is essential, and from this perspective, an expansion of oilstockpiles and the building of an oil sharing system are desired.
In Asia, the need to further enhance energy security through regional cooperation is
gradually being recognized. Energy efficiency in Asian countries other than Japan is low, relative toindustrialized countries, and this apparently indicates the large potential for energy saving in Asia.
Since enhanced energy efficiency helps strengthen industrial competitiveness, regional cooperation ona business basis becomes important. Also, as the diversification of sources of oil imports requires
massive investment in the development and production of such sources as well as the transportation ofoil, cooperation by multiple countries sharing the same objective is desirable over single-country
approaches to boost the feasibility of such diversification. Nationalism over resources is rising in
oil-producing countries, giving rise to concerns over a possible deterioration in the investment
environment. If oil-consuming countries in Asia, an important customer base for oil producers,
cooperate in enhancing their joint bargaining power, such cooperation may go a long way toward
improving the investment environment.
Further, countries along sea lanes for importing crude oil and countries using such lanes needto cooperate in sharing the cost of efforts to secure the safety of the sea lanes. In other areas, in order

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to increase the economic effect of oil stockpiles in emergencies, an expansion of stockpiles in Asiaand the smooth functioning of oil sharing accommodation among countries in the region are important.
Therefore, it may become necessary to consider an Asian version of the oil sharing system, with Japanand Korea leading the effort.

Primary Energy Consumption by ASEAN + 3
1,400

1 million tons of oil equivalent

1,313

Oil
Gas
Coal
Nuclear power
Hydro power

1,200
1,000
800

871

600
400
250
119
111

200
2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

0

Source: BP Statistical Review of World Energy June 2006

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Japan Center for Economic Research

Asia Research Report 2006

Chapter 10: Multilateral Security in the Asia-Pacific Region－Possibility of Strategic Convergence of the Multilayer Mechanism
Ken Jimbo
Assistant Professor, Faculty of Policy Management, Keio University

For the multilateral formation of stable international order, it is important that majorcountries have a common sense of order about peace and stability and that there exist international
security rules to support the common sense of order. However, in the post-Cold War Asia-Pacificregion, it was difficult to establish a regional security mechanism and develop it as a system toeffectively contain the causes of disputes and ease tensions, due to the diversity that characterizes theregion. In addition, partly due to divisive points over the sense of security about regional peace andstability, major countries in the Asia-Pacific region have yet to reach the state where they accept acommon system and approach toward security.
While the structure is not yet fully in place to ensure, as a system, responses to a presumablesecurity crisis in accordance with the level of crisis, it is important to consider how to build amechanism that can recognize latent as well as overt divisive factors in regional security, ease tensions
before something happens and resolve conflicts when they actually occur.
Presently, there are three different modes of security in the Asia-Pacific region: (1) bilateralalliances between Japan and the United States and between the United States and South Korea that
represents bilateral security relationships; (2) web-type security that can be described as a web of more
open security relationships; and (3) cooperative security that focuses on nonmilitary dimensions suchas politics and diplomacy rather than on military dimensions.
Regarding bilateral security relationships, the United States and its allies and friendly
countries from around the mid-1990s have regarded the alliances as the linchpin of security order andmultilateral security as a secondary factor that complements the former. That is, only when bilateralalliances such as the Japan-U.S. alliance are maintained in a stable manner can the agenda for regional
security cooperation be determined.
The web-type security helps develop a multifaceted regional approach to common security
issues and also advances policy coordination including multilateral joint military cooperation. For
example, this primarily focuses on cooperative actions by East Asian countries in response to
cross-border problems such as terrorism, illegal drug transactions, acts of piracy and the proliferationof weapons as well as disaster relief operations and search and rescue activities. While maintaining
bilateral alliances as the cornerstone, this transforms the system of bilateral arrangements into a more
open web of security relationships by drawing it into the pattern of expanded dialogue and cooperationsuch as multilateral cooperation (for example, cooperation among Japan, the United States and Korea,

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Japan Center for Economic Research

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ASEAN + 3, ARF, etc.).
An effort of preventive diplomacy by the ASEAN Regional Forum (ARF) established in
1994 can be cited as a framework of cooperative security. Unlike collective security, cooperative
security does not involve forcible measures but seeks to put a structure for peace in place in member
states by focusing on nonmilitary aspects such as politics and diplomacy rather than on military
aspects.
In fleshing out preventive diplomacy by the ARF, it is necessary to push ahead withinstitution-building, such as providing the ARF chairman with specialized staff, promote coordination
to keep preventive diplomacy from being regarded as interference with domestic affairs, and sort out
the relationship between preventive diplomacy by the ARF and the response and deterrent function ofexisting bilateral alliances.
It is important to build a multilayered security mechanism for East Asia through the strategic
fusion of the above-described three different modes of security and to have each of the three mutuallycomplement each other. In doing so, it is also essential to develop a relationship between web-typesecurity and cooperative security and other frameworks of security. There can be hope for cooperative
relationships of major countries about the order of regional security only through these efforts.
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