Symposium panelists (from left) Hiroshi Nakanishi, Wing Thye Woo and Fukunari Kimura discuss East Asian economic integration at Keidanren Kaikan in Tokyo on March 16.

They also don't see the countries in the region retreating into a "fortress East Asia." Instead, the bloc will pursue an "open regionalism" based on a network of multiple frameworks for free trade and economic partnerships, the experts told the March 16 event organized by Keizai Koho Center.

"The important thing to realize is that the European Union is not the usual outcome of efforts at economic integration," Wing Thye Woo, a senior fellow of the Washington-based Brookings Institution, told the symposium titled, "Economic Integration in East Asia and Roles of Japan, U.S. and China."

Unlike the politics-driven European integration process, the push for integration in East Asia is a market-driven process "powered mainly by Japanese technological capacity and China's manufacturing capacity," and "integration would allow a more rational division of labor" between the two Asian powers, Woo told the audience.

Woo noted that there are divergent modes of regional economic integration. Whereas the European Union has achieved currency integration, political union and labor mobility within the bloc, the North American Free Trade Area has none of those features, he said.

In the proposed East Asian integration, there is no talk of a political union, the movement of workers within the region will be very limited, and introduction of a common currency has been discussed only as a possible option in a distant future, he said.

The European integration is unique because it has been a process driven by political considerations -- a desire for perpetual peace between the two major powers of France and Germany after World War II, he explained. A political union, he said, required a currency union.

It was also supported by the desire of the United States to strengthen ties among the North Atlantic Treaty Organization members, he said.

The EU integration was facilitated by a common political culture and cultural heritage -- the very reason that many Europeans today have problems accepting Turkey as a new member, Woo said.

The process was also aided by the fact that West European economies had similar structures so that the cost of adjustment was low -- although the benefits from an integration are higher when the members are different in terms of economic structure and development.

"Integration occurs largely from a consideration, unfortunately, of the costs of adjustment, rather than the benefits of final outcome," he added.

Meanwhile, East Asian countries -- particularly Japan, China and South Korea -- are often divided by historical issues, including anger among Japan's neighbors over its leaders' visits to Yasukuni Shrine, Woo said.

In terms of security concerns, East Asian countries belong to different international camps, and they are now in divergent stages of economic development, he said.

Clues from other blocs
At the same time, they also have in the EU and the NAFTA examples that provide clues as to which direction the world is headed, Woo said. Also, the experience of the 1997 Asian financial crisis -- especially the shock over the incompetence of the International Monetary Fund and the failure of attempts to create an Asian monetary fund -- has provided the region an incentive to pursue economic integration, he said.

Woo said that when East Asia pursues integration, it must take the form of an open regionalism because its biggest players -- Japan and China -- look to the global market, rather than just the Asian market.

He also predicted that currency integration in Asia is unlikely.

In Europe, a common currency was a "compromise among equals" because key EU members were fairly equal in size, he said.

But currency integration is not likely among NAFTA members because the United States is and will continue to be the dominant player in the region -- and therefore it sees no need to coordinate the dollar's exchange rate with other economies in the region, he said.

In Asia, Japan is by far the largest economy in the region, but there is no shortage of forecasts showing that China will become the dominant player in decades to come, Woo pointed out.

"So if there is to be a currency union, which will be the primary currency? There might well be a switch" from the yen bloc now and the yuan bloc in the future, he said.

Woo suggested that rather than being geared toward a currency union, financial cooperation in East Asia should focus on creating a regional center "of the same rank as London and New York."

"It's important to see that London has remained an important financial center even though British manufacturing capacity and economic importance has declined -- and even though Britain has a currency no one else uses," he said. "So currency unification is not a necessary condition for establishment of a financial center."

Fukunari Kimura, an economics professor at Keio University in Tokyo, predicted that economic integration in East Asia will likely be based on a network of free trade agreements among various parties, and that the very concept of East Asia could be left vague so that the bloc would remain open to the rest of the world.

Rather than deepening ties among limited members in the region, East Asian economies will pursue a looser integration that will also reach out to other parties outside the region, Kimura told the audience.

It has often been said that East Asia has achieved de facto integration through market forces but lacked institutional frameworks to back up the integration. However, Kimura stressed that institutional integration has in fact progressed in the region, with more Asian countries concluding free trade agreements -- both among themselves and with those outside Asia.

The challenge for the region is how to upgrade these FTAs -- now mostly bilateral -- into multilateral frameworks, he said.

In the annual summit of the Asia-Pacific Economic Cooperation forum last November, the United States proposed creation of a broad free trade agreement that covers all the APEC members.

Kimura noted that while the proposal was widely taken by the media as a distant possibility, key APEC members have indeed concluded a number of FTAs among themselves. Therefore, an APEC free trade accord may not be so unrealistic as long as its participants are limited to developed countries.

While FTA networks expand in Asia as a whole, the efforts are conspicuously slow in Northeast Asia -- namely among Japan, South Korea and China, Kimura pointed out.

There are no prospects for reopening the mothballed FTA talks between Japan and South Korea anytime soon. And since Japan and China have recently agreed to discuss a bilateral investment protection treaty, the negotiations will take at least two years, and conclusion of a bilateral free trade agreement is unlikely for at least three or four years, Kimura said.

In the absence of progress in FTA talks in Northeast Asia, the Association of Southeast Asian Nations will likely continue to take the lead as the "hub" of regional integration, he said. ASEAN members have slowly but steadily removed trade barriers and are also actively reaching out to countries outside the region, he added.

Kimura predicted that Japan would face a crucial phase in its global FTA strategy in the coming two years -- with the fate of its talks with South Korea up in the air and the country about to launch new talks with Australia.

The FTA talks with the two countries provide a key test for Japan's FTA strategy, which could be thrown in doubt if Tokyo is unable to conclude the talks within two years, he claimed.

Kimura described Japan's FTA strategy as "pragmatic -- in both good and bad senses."

Japan has concluded economic partnership agreements with several countries with a primary focus on maximizing the efficiency of cross-border production and distribution networks, as well as improving business environment through better investment rules and protection of intellectual property, he said.

On the other hand, Kimura noted that Japanese FTAs are often criticized abroad as being "dirty" or "not comprehensive" because they have too many items shielded from tariff cuts.

While the government says Japan's FTAs clear the minimum standard of trade liberalization, FTAs so far concluded by countries like the U.S., South Korea and Australia with their trading partners are much more comprehensive, Kimura said.

Japan has so far been able to conclude such FTAs because its partners -- mostly developing economies -- wanted more Japanese investments and technology transfers in return, but this strategy would not work with countries like Australia.

Woo of the Brookings Institution urged Japan to "lead by example" -- to lead the world in trade liberalization by "making a realistic decision" about its politically-sensitive agricultural sectors.

The high costs of domestic adjustments for liberalizing farm trade have often hampered Japan's FTA strategies, Woo pointed out.

Hiroshi Nakanishi, a professor at the School of Government at Kyoto University, said that East Asian community building is often discussed as some kind of political framework that supports and stabilizes the market-based economic integration.

But it would be off the mark to consider the European Union as a role model, he said. An East Asian community would likely be based on a bundle of multiple frameworks, rather than a single, supranational organization like the European Commission.

Today, there are various frameworks of regional cooperation in the region -- including the APEC, the East Asian Summit and the "ASEAN-plus-three" -- and it is important for them to coexist and play different roles, Nakanishi noted.

Fundamental frameworks
Currently, the ASEAN-plus-three framework that includes Japan, China and South Korea is the most economically rational basis for regional integration, whereas the APEC is now considered a framework for a comprehensive political and economic dialogue -- something that provides a sense of unity for the broader Asia-Pacific region, he said.

The East Asian Summit, launched in 2005, should meanwhile be utilized as a forum for discussing infrastructures for economic cooperation, and it was appropriate that Prime Minister Shinzo Abe, in the second summit held on Cebu Island in the Philippines in January, proposed increased regional dialogue on energy issues, antipoverty measures, defense against bird flu and natural disasters like tsunami, Nakanishi said.

One noticeable change in the discussion on regional integration in Asia, Nakanishi noted, is the attitude of the United States -- and that of Japan. Both the U.S. and Japan now realize that an East Asian community would serve their interests, he said.

That is a major change from the early 1990s, when the U.S. vocally opposed the so-called East Asian Economic Caucus initiative by then Malaysian Prime Minister Mahathir Mohammad as something that tries to exclude the U.S. from the region, he said. As the key U.S. ally in Asia, Japan was also hesitant because of the American concern, he added.

Today, the U.S. has come to realize that economic integration in East Asia must be accepted as a reality that cannot be reversed, and that pushing for its development would serve its interests, Nakanishi said.

Both Washington and Tokyo realize that China's rise is the major factor behind this integration, he said. They do not want East Asia to become an expanded Chinese economic sphere, but China's influence in the region will expand anyway whether Japan and the U.S. like it or not, so the two countries now realize that the integration would become more efficient with Japan taking part in the process, he added.

They also know that in terms of security, an Asia that excludes the presence of the United States is impossible, Nakanishi said.

The Japan Times: March 31, 2007
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