Japan-ASEAN Comprehensive Economic Partnership

Transcription

1 Japan- Comprehensive Economic Partnership By Dr. Kitti Limskul 1. Introduction The economic cooperation between countries and Japan has been concentrated on trade, investment and official development assistance for several years. The Japanese economic cooperation strategy has contributed to the economic prosperity of the Southeast Asian economies for the last decades. At the same time, Japan has also used economies as destination of her industrial relocations. This is to target a cost minimization of its production, especially, labor and land cost of countries. The practice on cost leadership principle in the beginning of 1990 has been added by product differentiation through economic integration strategy as shown by the relocation of industries, especially automobile industry and electronics and electrical machinery industry to. Through AICO, Japanese industries in could be linked to restore their specialization and division of labor. At the beginning, a mother company could monitor her subsidiaries rightly from Japan. Currently, the Japanese firm has becoming a resident company of any host country. Clearly, -Japan economic relationship has been deepened and bringing prosperity to both sides. The relation with Japan has come to spectacular after the emergence of the People Republic of China (here after called China) as competitor and market destination of. The triangle relationship has changed. trade with China has been expanding. Japan has diverted her investment from towards China in order to restore her competitiveness of labor intensive industries. The objective of this note has two folds. First, we would like to assess the Japanese economic strategy towards selected member country especially Cambodia, Laos, Myanmar, and Thailand or CLMT. This is through investment, trade, and ODA strategy. In this note, we will assess from angle of trade direction. Second, we would like to propose a new chapter of economic cooperation between Japan and. 2. Assessment of Japan- Economic Cooperation Intra- trade, as percentage of total trade increased by 1.99%, from 22.12% in Extra- (trade with major trading partners) grew by 3.1% in terms of export and 1% in terms of import during 2001 to For Q1 2003, data shows that the United States (US), the European Union (EU), Japan, China (PRC excluding Hong Kong), and Republic of Korea remained to be significant trading partners of. Other emerging trading partners have high growth potential are Russian, New Zealand, Australia and China. trade with India, Canada slows down. It is noted that Japan has significant trade surplus with. Trade deficit with Japan can be postulated as result of direct investment from Japan in to. 1

2 Relocation of industries to has been driven by comparative advantage of countries as cost of labor and land is concerned. Influx of direct investment from Japan was accentuated by Japanese Yen appreciation after Table 1: Trade, 2002 (in US$ Million) Country Total Export Intra Export Total Import Intra Import Total Trade Intra Trade Brunei D. 2, , , Cambodia 1, , , Indonesia 57, , , , , Malaysia 93, , , , , Myanmar 2, , , , , Philippines 35, , , , , Singapore 125, , , , , Thailand 63, , , , , Total 381, , , , , Source: secretariat Table 2: Trade with Major Trading Partners, Q (in US$ Million) Countries Export Import Trade Balance Intra- 20, , , , Australia 1, , , Canada China 3, , , EU 7, , , , India 1, , Japan 5, , , , Korea 3, , , New Zealand Pakistan Russian

3 USA 9, , , Rest of the World 32, , , , World 86, , , , Note: Intra- trade covers only Brunei D., Cambodia, Malaysia, Myanmar, Philippines, Singapore, and Thailand. Source: secretariat Even though, we can not prove empirically the positive relationship between Japanese direct investment in to and trade deficit overtime. Trade with rest of the world, and intra- trade is main engine of growth. Japanese firm is major exporter of manufacturing products to rest of the world. Trade deficit with Japan is result of capital and intermediate goods import by Japanese firms and its subcontracting activities. Capital deepening of Japanese firms in may cause a low Total Factor Productivity of, even though contribution from labor factor is impressive. The emergence of China into the world economy has diverted direct investment of Japan away from. China has comparative advantage not less than as far as skilled labor cost is concerned. It has large market size that can attract Japanese firms. In all respect, Japanese investment can be seen as strategic move to balance its industrial relocation i.e., China and. The assessment of -Japan relationship can be concluded as follows: 1) Japanese investment in to contributes to economic growth through trade. 2) The higher growth can result in deepening of trade deficit with Japan. 3) The emergence of China poses both threat and opportunity for. Trade with China is expanding to exploit large market opportunity. Chinese export of capital to can be seen as new round of direct investment into. 4) Japanese firm exploiting cheap labor cost in considers of moving to China. The inconclusive tariff reduction in under AFTA may cause inefficient investment cooperation by Japanese firms across border as result of exclusion of sensitive list. It has caused inconsistent tariff structure imposed on import of intermediate and finished products. It delays trade liberalization in. It diverts Japanese direct investment in to. 5) As Japanese market is not fully liberalized for primary industry especially agriculture and food processing products, Japan- trade arrangement (FTA), if initiated, may aggravate trade deficit with Japan for most of members, except only the case of Singapore. In conclusion, Japan- relation during last decades may be appropriate economic model. Japanese investment was engine of growth. We may need to construct new economic model to represent the relation in new environment. 3. The Japanese Role in the Growth in Region A new chapter of -Japan economic cooperation can be started with the role of Japan in re-engineering growth potential of countries. Japan- Economic strategy can be assessed from a triad relationship between Japan-- China. The mapping of this triad can be viewed from dimension of 1) Market size or size of consumer demand; 2) Source of supplies both raw materials, capable and abundant 3

4 human resource, advancement of production technology level; 3) Convergence of the market economy framework under FTA. 3.1 Market size and Purchasing Power As far as the size of consumer demand is concerned, China PRC has much larger size of her consumer demand as compared with combined as a whole. Nonetheless, if effective demand is measured, Japan should be the most attractive market destination for both China and products. This is because Japan has sophisticated consumer demand with high purchasing power as compared with China and. Currently, it is noted that Japanese market as destination of agriculture product and processed food could not be accessed by. This is why Thailand would like to pursue FTA with Japan on this chapter. and China could access to Japanese market quite significantly on lower end of manufacturing product as result of direct investment in these areas and the process of backward import in to Japan. Clearly, the high purchasing power of Japan can be used as engine of growth for s and Chinese agriculture and industrial development. The Japanese strategy towards and China is to optimize its welfare gain from trade creation with respect to cost of investment and ODA (resource used) in to and China. The combined market of Japan--China has several levels of market sophistications. Trade creation through steps of liberalization, welfare can be reaching its esteem level. 3.2 Source of Supplies of Raw Materials, Human Resource and Technology Currently, Thailand is directing its neighboring policy towards a true partnership for development. The ODA grant and soft loan policy is designed to serve this purpose. Thailand looks at Lao PDR, Cambodia and Myanmar as its market and source of raw material supplies. In order to create effective demand, Thailand needs to help its neighbors sincerely. The special tax preferential scheme of (ASP) is unilaterally provided to Lao PDR, Cambodia and Myanmar. The partnership in international rice price agreement with Vietnam, the rubber price agreement with Indonesia and Malaysia has raised the price of these commodities satisfactorily. The human resource development and technology transfer will be listed in the CLMT dialogue. The closer relationship was announced that may try to become EU type of region. A dream can not be true, if without the initiative under the triad relationship of framework of +3. In this regard, input from Japan who has superiority in production technology and China as medium technology provider is necessary. The gain from technology transfer can optimize the use of human resource in the triad. 3.3 Convergence of Market Economy Framework under FTA. 4

5 Today, management of economic system is becoming closer to one another, no matter the skeleton of economic philosophy was believed. The Market economy is key word for CLMV and for as a whole. Nevertheless, these emerging economies would need to structure their market system to suit with their predominant structure. The -China-Japan is three different economies according to their democratic polity. Some countries may rely more on the top-down process, while the others have more feature of bottom-up decision making process. The Japanese initiative for Japan- Comprehensive Economic Partnership can be visualized through the progress of FTA between Japan-Thailand (JTEP), Japan-Philippines, Japan-Malaysia, and Japan-Indonesia. More basic agreement has been achieved with Vietnam under the Japan-Vietnam Investment Agreement. This is not to mention the Japan-Singapore FTA which has progressed ahead of the other members. Here, we can see that there is no barrier for FTA to proceed. Yet, it can not be assured that each FTA can congruently add to the jigsaw of multilateral agreement in broader framework. The PRC China moves to reach FTA with can be seen as China and Thailand have had agreed on the Early Harvest on selected items of goods. Although, Japan has trade volume with (107,200 millions USD) exceeding China- (548,000 millions USD), the pace of trade creation between China- has increased with rapid rate. It is clear that +3 is converging rapidly towards market oriented economy with freer trade arrangement, no matter what are their original economic systems i.e., heavy or weak government intervention, flexible (managed float) or fixed exchange rate regime. The Japanese role as head of the growth engine for Asia and Pacific needs to look carefully on the congruence of bilateral agreement under FTA and multilateral agreement framework. As Japan has tremendous investment flow in to and China. The flow need to be assessed such that the economic welfare of Japan--China triad is optimized. Recently, Japanese FDI flow in to has been declining since economic crisis. After year 2003, it can be visualized that Chinese capital in to will be significant and may surpass that of Japan in the next 10 years. The outflow of investment resource from China is replaced by the inflow of investment from Japan in to China together with FDI from US and EU. This is a remarkable period where Japan-- China play important role. 4. Conclusions We have shown that trade creation of Intra- is becoming significant. It is an output of FDI and ODA flow from outside. Japan contributes importantly to growth and development. Nevertheless, the skewed trade relationship between and Japan has caused trade deficit for. This can not be solved simply relying on FDI. The capital deepening of manufacturing industries in may cause more trade deficit between Japan and. The bilateral trade arrangement or FTA could not solve problem at hand as Japan is reluctant to open its market for agriculture product and processed food from. The multi-functionality of agriculture is key excuse for protection. The international trade and investment relationship has changed since the emergence of China. Now bilateral relationship between Japan- has turned in to Triad of three players Japan--China. On the positive side, market size or 5

6 effective demand has been expanding according to their purchasing power which determined by income per head. and China is destination of FDI and being sources of raw materials and human resources. The Japanese strategy is to optimize its own consumer welfare through trade creation given its cost of resource flow from Japan in to China and. Currently, the Triad relationship is not completed as FDI flow on one hand could progress on the manufacturing supply in and China. The flow of supply could not meet with effective consumer demand in Japan. The exploitation of vast Chinese market is not effective as it still has low purchasing power per head as compared with and Japan. The trade creation of trade in Japan--China is sufficient condition of welfare optimization, adding on top of the flow of FDI and ODA as necessary condition. The Initiative for Japan- Comprehensive Economic Partnership can be materialized only if the trade creation can be significantly achieved among Japan- -China, step-by-step along every stage of comparative advantage. The economic rationale is clear but political maneuvering of conflicting interest groups in each country has no solution so far. 6