SINGAPORE — China’s entrance into the World Trade Organization does not represent a threat to the economic well-being of either Japan or the ASEAN countries. Rather, it marks the beginning of an axis of virtue in East and Southeast Asia and trade and investment opportunities for all.

Likewise, Japan’s recently concluded free-trade agreement with Singapore can serve as a long-term model for other, similar agreements between Japan and member states of the Association of Southeast Asian Nations, although sensitive sectors like agriculture will continue to be a problem.

These were just several of the comments that marked a symposium titled “Economic Partnership Between ASEAN, Japan and China: Opportunities and Challenges,” held March 25 in Singapore. The symposium, jointly sponsored by the Singapore-based Institute of Southeast Asian Studies (ISEAS) and Keizai Koho Center (Japan Institute for Social and Economic Affairs), featured a distinguished panel of guest speakers from Japan, China and several ASEAN countries and attracted nearly 150 government, business and academic leaders from around the world.

Panelists were divided into two sessions. The first session, “Japan-ASEAN Economic Relations,” included Mohamed Ariff, executive director of the Malaysian Institute of Economic Research; professor Norio Gomi, of Rikkyo University Graduate School; Tubagus Feridhanusetyawan, head of the economics department at the Center for Strategic and International Studies, Indonesia; and Narongchai Akrasanee, adviser to Thailand’s deputy prime minister on economic affairs, chairman of Seranee Holdings, and former minister of commerce. The session was chaired by professor Chia Siow Yue, director of the ISEAS.

Professor Tommy Koh, director of Singapore’s Institute of Policy Studies and ambassador-at-large for Singapore’s Foreign Ministry, gave the opening address. Speaking in a personal capacity, Koh began by suggesting that Japan-China-ASEAN relations represented an “axis of virtue,” a counterbalance, he hinted, to the so-called “axis of evil” that was proclaimed by U.S. President George W. Bush.

“Why have I chosen to describe the partnership among ASEAN, Japan and China as an ‘axis of virtue’? Because I believe this partnership is good for each of the three parties, good for the region and good for the world,” he said.

Koh offered five requirements that ASEAN must meet in order to make the “axis of virtue” a successful one. ASEAN must get its political and economic house in order, broaden and deepen economic integration between members, reduce tariffs from 5 percent to zero, expand the ASEAN free-trade agreement to cover trade in services, and harmonize rules on investment so that Southeast Asia will become, in effect, one economy with 10 states.

Despite these policy recommendations being reminiscent of those undertaken by the European Union, Koh said it would be a mistake to see ASEAN in the same way.

“ASEAN is, today, a regional grouping of good neighbors, whereas the EU is a regional grouping based more on the model of a happy family. In the good neighbors model, barriers at the borders are abolished, but the definition of common rules is limited to that which is required to ensure a level playing field for trade. Members are free to pursue their own development path, cooperating where they share common values,” he said.

“On the other hand, in the happy family model, the countries share a political will to build a community and pool their sovereignties. This leads to policy integration, the establishment of a common market, harmonization of standards and regulations, and redistributive policies between richer and poorer members.” Despite the economic progress of the past few decades, Koh said he did not believe that ASEAN was yet ready to progress from a collection of good neighbors to a happy family.

On ASEAN-Japan relations, Koh said that Japan proved it was a great friend of the region during the 1997 Asian financial crisis, providing aid to the region through both an International Monetary Fund plan as well as bilateral economic assistance under the Miyazawa plan.

“Prime Minister Junichiro Koizumi has proposed the ASEAN-Japan Closer Economic Partnership. ASEAN should welcome the prime minister’s proposal and work with Japan to give it substance,” Koh said.

And despite Japan’s economic doldrums and growing interest in China, Koh told the audience that ASEAN’s prosperity remains linked to Japan’s.

“ASEAN needs a strong and revitalized Japan just as Japan needs a more integrated and competitive ASEAN. Japan does not want to put all it’s investment eggs in the China basket, and ASEAN can be an alternative basket for Japanese investment eggs, provided we set our own house in order,” he said.

With China now in the WTO, many ASEAN countries are unsure whether to be excited or concerned. But Koh sounded an optimistic note, saying that ASEAN no longer perceived China as a political threat that exports communist revolution, and that economic ties between ASEAN and China grow stronger.

“Dr. Supachai Panitchpakdi, the director general designate of the WTO, notes that two-way trade between ASEAN and China has been expanding at the average annual rate of 20 percent. With China’s accession to the WTO, there will be even more room for expanding trade between ASEAN and China.”

However, even within ASEAN, there are economies, like Singapore, Malaysia and Thailand, whose economies are essentially complementary to China’s, and those of other ASEAN nations, which are competitive. Koh added that China itself was very well aware of the mixed feelings in Southeast Asia toward it’s entrance into the WTO.

“In order to allay our concerns, China has therefore offered to conclude a free-trade agreement with ASEAN. This was a brilliant move on China’s part, and ASEAN did the right thing by accepting China’s offer,” Koh said.

“China no longer views ASEAN as a Western-inspired vehicle which is inimical to China’s interests. On the contrary, China views ASEAN as a friend of China and as a truly indigenous Southeast Asia entity which is in charge of its own destiny.”

On Japan-ASEAN relations, Mohamed Ariff began by tracing the history of Japan’s economic relationship with Southeast Asia over the past 40 years.

“In the 1960s and 1970s, the relationship was based upon the flying-geese model of economic production, with Japan as the lead goose. But that model has since changed, with FDI becoming more important. In the process, Japan discovered that ASEAN countries were not just offshore bases to export to a third market, but back to Japan as well,” he said.

However, ASEAN and Japan are not yet equal partners. Severe gaps in income, wages, and gross domestic product between Japan and ASEAN nations are part of the reason, but Ariff noted that there was a great difference in trade figures.

“Unlike Japan, ASEAN countries are very dependent on trade, in the sense of both imports and exports. In ASEAN, trade accounts for 134 percent of ASEAN’s GDP, while the figure for Japan is only 18 percent of GDP,” said Ariff. The reason for the large disparity, he said, is that Japan has a huge domestic market.

“For ASEAN, Japan is the second largest market for exports. Looking at Japan’s FDI in lesser developed countries, we see that it is falling, from 36 percent in 1997 to 23 percent in 1999. Total ASEAN share of Japanese FDI also fell from 11 percent in 1997 to just 5 percent in 1999,” he added.

Although Ariff said it was likely that China would overtake Japan as the most important ASEAN trading partner in about 20 years, recent moves by the Japanese government suggest that the Japan-ASEAN relationship may be getting back on the right track.

“Prime Minister Koizumi’s statements that more comprehensive economic cooperation between Japan and ASEAN is necessary is a move in the right direction,” Ariff said.

For Rikkyo University’s Gomi, there are three key trends for the Japan’s relationship with the ASEAN region.

“The first is the widening gap between ASEAN nations, especially the gap between the more developed ASEAN nations and Cambodia, Laos, Myanmar, and Vietnam. The second is the rise of China, and the third is Japan’s economic crisis,” he said.

Gomi acknowledged that the second trend, the rise of China, has become an issue of concern in Japan, although different areas of China are growing at vastly different rates.

“China has the world’s seventh largest GDP, but the economic divide between the coastal and the inland areas is widening. Even though China is expanding in sectors like mobile phones and personal computers, 70 percent of the economy is still agriculture,” Gomi said.

Like Koh, Gomi suggested that, in order to attract more FDI, ASEAN must get it’s house in order.

“ASEAN must formulate it’s own comprehensive market and there must be coordination between governments and multinationals,” he said.

One ASEAN country of great concern is Indonesia. The 1997 Asian currency crisis, combined with political unrest, has made the country less attractive for foreign investment. In his address, Tubagus Feridhanusetyawan admitted that Indonesia faced huge political and economic problems that were not going to be solved overnight.

“Indonesia’s economy is moving from one that is monopolistic and oligopolistic to one that is private-sector led, while our political system is moving from an autocratic regime to a democracy. These changes are taking place at the same time, but without any real planning or preparation,” he said.

While the government predicts that GDP for fiscal 2002 will be between 3 and 3.5 percent, Tubagus said that around 5 to 6 percent is needed to strengthen the financial situation. Government debt accounts for about 100 percent of GDP, of which about half is domestically owned and the remainder foreign owned.

Although the Indonesian Parliament is, Tubagus said, moving to become more strong and aggressive after decades as serving as a rubber-stamp body, a major reason why change will take time is because Indonesia’s legal system remains weak.

“Businesses investing in Indonesia will continue to face great uncertainty because of our weak legal system . . . while the legal rules of the game are unclear and keep changing,” he said.

What is needed most, he said, was investment in three key areas: electricity, transportation, and telecommunications.

“Indonesia is like a big boat in a storm. If they remain on board, they will face various difficulties, including the risk of sinking. But if they go overboard now, they will miss the boat. For new players, it’s a question of short-term risk vs. long-term potential,” he said.

One of the ASEAN countries hardest hit during the 1997 Asian financial crisis was Thailand. Although the country has made major strides toward recovery since then, Narongchai Akrasanee said that there was still more work to be done.

“One of the major problems Thailand faces is that our growth rate is too low. We are only averaging around 2 to 3 percent annually. The economy must grow at around 4 to 5 percent a year to overcome current economic problems,” he said.

The good news for Thailand is that sectors like manufactured exports, tourism, telecommunications, and agriculture have showed positive gains recently.

On the other hand, Narongchai said, the construction, banking, and transportation sectors,a s well as industry in general, have not been doing well. “A major problem is a fiscal deficit of $4 billion, and public debt of $68 billion, or 60 percent of GDP.

With low inflation, of only 2 percent, there is now real incentive for entrepreneurs and exports are falling. In that sense, there is some similarity with Japan,” he said.

In the second session, the focus was on Ambassador Koh’s entire axis, i.e., Japan, China, and ASEAN. With China now a member of the World Trade Organization, concern is growing throughout the region that China will prosper at the expense of her neighbors, but the panelists were generally optimistic.

Professor Chia Siow Yue noted that China is actually one country with many different regional economies that are marked by sharp differences in economic development, comparative advantage, and competitiveness levels.

“The country’s ascension to the WTO will expose both the strong and the weak sectors of China to international competition. China will be a competitor for markets and foreign investment, but it will also be a market and investment destination. So is China a threat? The answer will depend on whether or not country’s economy is competitive or complementary to that of China’s, and on the supply-side on capabilities to exploit the opportunities available in China,” she said.

Chia echoed Koh’s praise for the Chinese proposal to form a China-ASEAN free-trade zone, a proposal the Chinese made in November 2001.

“A joint ASEAN-China study proposes establishing a free-trade area within 10 years, with a combined market of 1.7 billion people, and a combined GDP of $2 trillion,” she said. Approval to start negotiations was formalized at the seventh ASEAN summit last November.

On Japan-ASEAN relations, Chia said that the recently concluded Japan-Singapore Economic Partnership Agreement marks a departure from multilateralism. While noting this agreement was reached in a relatively short period of time, Chia was less enthusiastic about a proposed Japan-ASEAN free-trade agreement, wondering if Prime Minister Koizumi simply made the suggestion out of fears about the ASEAN-China initiative.

“To model a Japan-ASEAN agreement on the Japan-Singapore agreement will be difficult. How, for example, do you handle agriculture, a major export of ASEAN but a highly sensitive issue in Japan?”

C. H. Kwan, a senior fellow at the Research Institute for Economy, Trade, and Industry in Japan’s Ministry of Economy, Trade, and Industry, then tackled an issue of growing political concern in Japan: the rise of China and a feeling that Japan will not be able to compete. He identified several areas of particular concern to Japan, including the yuan, Chinese agriculture, and the IT revolution.

“Many people in Japan do see China as a threat, and partially, this is based on an optimistic view of the Chinese currency. Japanese conventional wisdom vis a vis the yuan has gone from devaluation to revaluation,” he said.

“As for agriculture, in the past, there was concern about who would feed China. But now, there is a movement to erect safeguards against Chinese agricultural products. And, as far as information technology is concerned, the concern has gone from a huge digital divide between Japan and China to Chinese IT firms leapfrogging past Japanese firms,” Kwan said.

Though Kwan said that Japan’s loss of confidence is due to the ‘China Syndrome,’ he also warned that China was being made a scapegoat by many Japanese business leaders and government policymakers.

“Many in Japan are simply using the rise of China to hide their own mistakes,” he said.

And, despite widespread concern in Japan over China, many Japanese firms are rushing to invest, as Makoto Ebina, executive fellow and head of International and Monetary Issues at the Fuji Research Institute Corporation, noted.

“Investment in China by Japanese companies will no doubt increase in the future. According to a recent survey by the Japan External Trade Organization, 95.7 percent of Japanese companies replied that they intend to increase their future investment in China. Another survey done by the Japanese Bank for International Cooperation on FDI of Japanese firms investing overseas showed that, from 1999 to 2001, China ranked first on a list of most attractive countries for mid-term investment, and that 81 percent of the respondents said that China would be prosperous market in the future,” Ebina said.

Yet ASEAN remains, and will continue to remain, important for Japanese firms. “The JETRO survey also showed that 98.5 percent of Japanese firms will stay and continue their ASEAN operations. They are doing so because of market enlargement due to the ASEAN free-trade agreement, the huge amount of investment they already have in ASEAN countries, to avoid the risk of overconcentrating in China, and because they are satisfied with the current ASEAN network,” he said.

The final panelist, Wang Wei, who is an associate professor at the Institute of World Economics and Politics, Chinese Academy of Social Sciences, spoke on what China’s entry into the WTO would mean for East Asia. Two areas in particular are likely to be affected: telecommunications and the auto industry.

“The Chinese telecommunications market is now the largest market among WTO members, with 145 million mobile phone users alone. Now that China is in the WTO, the number of foreign investors will reduce the market share of Chinese enterprises, but it will also mean market expansion and improvement of the efficiency of telecommunications services as a whole.”

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