Japan should quickly deregulate its markets and reform its policies so it can take part in the rapid economic growth of East Asia, the Ministry of Economy, Trade and Industry said in a annual report released Tuesday.

In the White Paper on International Trade 2002, the ministry said the importance of East Asia, including China, is increasing as a manufacturing base and a market for Japan, which is facing a rapidly aging population and slowing domestic demand.

The report, subtitled “East Asian Development and Japan’s Course,” was approved by the Cabinet on Tuesday.

To strengthen economic ties with the rest of East Asia, Japan should promote freer movement of goods, services and people; it should harmonize investment rules and other economic regulations, and also realize proposed free-trade agreements with South Korea and the Association of Southeast Asian Nations.

The report says speed is the key as countries accelerate their moves to form FTAs, casting concerns over the possibility of Japan being left out of the worldwide trend toward freer trade.

It says that if Japan is left out of an East Asian free-trade bloc, the hollowing out of domestic industry would accelerate as more companies move abroad.

However, the report also says that FTAs are complementary to a multilateral framework in promoting free trade and that it is vital for Japan to strategically and flexibly utilize a multilayered approach toward trade liberalization.

This year’s report also points to the need for Japan to make a transition to a value-added industrial structure and promote innovations.

To achieve these goals, it says Japan should create industrial agglomerations centered around universities that would turn out creative employees and allow companies to come up with innovative products.

It offers the textile industry in Italy and California’s Silicon Valley as examples of the the type of academic-economic clusters it has in mind.

The report also suggests that Japan should promote innovations through reforms and that it deregulate social and economic systems so that companies can operate in a freer environment.

In another section, the report criticizes the recently imposed U.S. safeguard tariffs on steel imports, saying the measure is defeating its purpose of encouraging structural reforms.

The World Trade Organization allows countries to implement safeguard measures to temporarily alleviate the harm done to domestic industries by rapid import surges, but the report says safeguard steps should be avoided if possible since they bring injurious side effects to consumers.

In this context, the report notes that a series of protective measures used by the U.S. to benefit the steel industry since the 1970s has become a life-support system for a chronically ill industry.

Despite the U.S. explanation that its steel policy is designed to give domestic industry breathing room in the midst of a barrage of suffocating imports, the report says the so-called safeguard tariffs have only kept the industry from initiating much-needed reforms.

To avoid the chronic use of safeguards, the report stresses that they be coupled with measures to induce industry to make efforts to achieve structural reform.

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