“Towards a Common Market?

Economic Integration in Asia”

Speech by Yasuo Hayashi, Chairman and CEO of JETRO

at the 38th St. Gallen Symposium in Switzerland
on May 15th, 2008

Good evening, ladies and gentlemen. I would like to extend my gratitude to the symposium
organizer for giving me this opportunity to speak here today, and also thank all of you for
joining us.

I assume many people here are wondering whether East Asia is headed towards economic
integration and a single market similar to that of the EU. Today, I will try to answer this
question and speak about why Japan is pursuing East Asian economic integration. I will
also introduce what a new research institute, to be established this June, is doing
towards the integration and talk about the importance of closer economic ties between
East Asia and Europe.

1. Progress of East Asian Economic Integration and Japan

In East Asia, economic integration proceeded on a de facto basis, as firms, mainly from
Japan, built production and procurement networks spanning the region, including ASEAN
and China. The production network is now driving profits for firms, and governments in the
region are working to follow up this company-led integration with institutional level
frameworks, such as free trade agreements (FTAs) and economic partnership agreements
(EPAs).

Last month, Japan and ASEAN completed the signing of the ASEAN-Japan
Comprehensive Economic Partnership, or AJCEP, which is now in its final stage before
taking effect. ASEAN already has FTAs in place with China and South Korea, and is in
talks with India and Australia/New Zealand (as one) on agreements. Therefore, it is
expected that within the year East Asia will have five FTAs in place with ASEAN at one end,
making it the hub of the region’s integration drive.

One of the major reasons why Japan strongly supports this move towards increased
integration in the region is that we are facing a declining birthrate and aging population. For
Japan to maintain its economic power and enjoy sustainable growth in the future, amid
such factors, we need to tap into the dynamism of booming East Asia. The Japanese

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government considers FTAs and EPAs as valuable tools for this purpose.
With the completion of the five ASEAN+1 FTAs expected later this year, East Asia is now
examining the creation of an economic partnership framework that would cover the whole
of the region.

To facilitate this wider-area economic partnership, there are two approaches. The first is
through EAFTA, or East Asia Free Trade Agreement, which would include the “ASEAN
Plus 3” countries, namely ASEAN plus Japan, China and South Korea. The other approach
is through CEPEA, or the Comprehensive Economic Partnership in East Asia, which would
include the ASEAN Plus 3 countries and India, Australia and New Zealand.

Lately, the uncertainty surrounding the global economy has been increasing due to
aftershocks from the US sub-prime mortgage crisis and soaring raw material and food
prices. According to the IMF’s World Economic Outlook released last month, the global
economy is expected to grow 3.7%, which is down 1.2 points from the previous year.
Based on figures in the outlook, JETRO calculated contribution ratios of East Asian
countries to world economic growth based on purchasing power parity. The results showed
that ASEAN Plus 3 accounted for 37.2% and ASEAN Plus 6 48.0%, or nearly half of global
economic growth.

In the decade since the first ASEAN Plus 3 Summit, held in the wake of the 1997 Asian
currency crisis, participating countries (namely, ASEAN members, Japan, China and South
Korea) have forged closer ties. EAFTA is backed by these close ties, and is now being
studied by a private sector group.

Meanwhile, CEPEA, consisting of 16 countries, would extend beyond just trade in goods to
areas such as investment, services, intellectual assets and others. The possibility of
CEPEA is also being studied by a private sector group, for which JETRO is acting as
secretariat. This study was commissioned at the second East Asia Summit in January
2007.

The times when Japan was the only economic powerhouse in East Asia are over. The
region is now in an era when emerging countries, such as China and India, are driving
regional growth. Deeper economic integration will add to dynamism of these countries and
enhance the region’s overall growth. At the same time, Japan can also bring back its
dynamism through FTAs and by pursuing the area’s wider economic integration.

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2. Role of ERIA in Supporting East Asian Economic Integration

The region faces many challenges, however, in deepening economic integration. One tool
to help address these issues is ERIA, or the Economic Research Institute for ASEAN and
East Asia, which will be established this June. ERIA’s creation was proposed by Japan at
the Second East Asia Summit (in January 2007), and officially confirmed at the Third East
Asia Summit in November 2007. ERIA is now working together with research institutes in
the ASEAN Plus 6 countries, the ASEAN Secretariat and the Asian Development Bank
towards its full establishment.

As preparatory stage activities, ERIA has been carrying out test-run studies and research
projects aimed at “Deepening Integration,” “Narrowing Development Gaps” and achieving
“Sustainable Development”, all at the same time. Through studies in this direction, ERIA is
seeking practical measures for improving distribution networks, fostering small and
medium-sized enterprises and addressing environmental and energy issues.

To help firms further optimize their production networks and strengthen competitive edge at
the local level, East Asia needs to become “the world’s largest seamless business space,”
allowing people, goods, capital and services to move freely. The mission of ERIA is to
propose commercially viable, functional and effective policies, which would facilitate this, to
the East Asia Summit.

At the ERIA Tokyo Forum held this past March, Mr. Fujio Mitarai, the Chairman of Japan’s
Business Federation (and Chairman and CEO of Canon), expressed his expectations for
such a business space. He said, “In the future, East Asian countries need to create a
business environment that allows companies with global operations to have the liberty to
carry out their business under the same rules no matter where they are in East Asia, as in
the EU, where there is a free-flow of people, goods, capital and services, and which
functions like a single country.”

ERIA’s early projects are already bearing fruit. One study showed that it is possible to
narrow East Asia’s development gaps while deepening regional economic integration.
Some countries in East Asia, such as Japan, Australia and Singapore, have per capita
GDPs of more than US$30,000, compared to Myanmar, for example, which has a per
capita GDP of just US$280. That is a gap of more than 100 times.
It is generally said that economic integration expands income gaps. The ERIA study I just
mentioned, however, suggests otherwise. East Asia’s economy has developed by utilizing
these gaps. Multinational companies have been dividing production processes and finding
optimal locations for each process, based on the income levels and geographical

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advantages of each place. Through this, they have built production networks across the
region. However, as economic activities accumulate and efficiency improves, the negative
effects increase—such as pollution, higher wages and more traffic congestion. But
according to the study, the less developed countries, such as Cambodia, Laos, Myanmar
and Vietnam, can address these problems while furthering their development, by reducing
their service-link costs and becoming a part of the region-wide production networks.

Another ERIA study examined how the reduction of service link costs in these countries
can benefit them. The study suggests that reducing these costs, as I mentioned, is a
pre-requisite to their joining East Asia’s production networks and that implementation of
customs facilitation, along with infrastructure building, is essential. Customs facilitation
includes single-window electronic customs clearance, arrangements or licenses that allow
cargo trucks to cross borders (“truck passport system”), rules of origin and also
harmonization of rules & standards. Infrastructure building includes (highway projects that
encompass the Indochina peninsula, namely,) East-West and North-South Economic
Corridors, as well as an “Asian Highway.”

This slide (slide 7) shows the effect on each area’s GDP growth in 2025, when the
East-West highway is constructed and trade facilitation implemented. As you can see,
greater economic effects are seen especially in north to central Vietnam and southern
Laos.

From this slide, the GDP of Danang in Vietnam, where the highway starts, is expected to
gain just 13 points if the highway is built but customs facilitation is not carried out. The
figure jumps 129 points if customs facilitation is included in the equation. Also, the GDPs of
Savannakhet in Laos and Mukdahan in Thailand, both points on the East-West highway,
would rise 1.7 and 1.4 times, respectively.

These ERIA findings suggest that, against what is generally thought, deepening economic
integration, combined with adequate policy measures, can help narrow economic gaps and
add to development.

3. The Importance of EU in East Asia’s Economic Integration

The process of East Asian economic integration should be open to countries outside of the
region. ERIA will cooperate with researchers and institutions outside the region in its
studies, and make policy recommendations that take into account other countries’
viewpoints. This is one way to create greater synergy between Asia and Europe.

OECD Secretary-General, Angel Gurria, shares this view. He said in a video message at

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the ERIA Tokyo Forum that the establishment of ERIA will open a new cooperative synergy
between OECD and ASEAN and East Asian countries. He also said that there is a
remarkable coincidence between the agendas of OECD and ERIA, and that there are
many fields for possible cooperation between the organizations. Such cooperation, he said,
would bring benefits to East Asian countries as well as add to the development of Europe.

In the light of possibilities for FTAs among Japan, China and South Korea in the near future,
as suggested at an eminent person’s meeting of those countries held last month, East Asia
will continue standing at the center of global growth. So we could say, amid the rapid
progress of globalization, the future prosperity of European industries also depends on the
extent to which EU companies can produce globally competitive products, using their
advanced technologies, and the potential of Asia, which boasts competitively priced
industrial parts and materials as well as high global competitiveness.

There is a study going on to examine the scope of a proposed Japan-EU Economic

Integration Agreement, or EIA, conducted by private sector task forces in Japan and the
EU. I understand that the EU side is showing less interest in including FTAs in this EIA, due
to tariff rate gaps between them, saying, since Japan’s tariff rates for industrial products are
much lower than those of the EU, if tariff eliminations are implemented among the parties,
the EU side will be worse off. In my opinion, EU businesses should look at the Japan-EU
EIA from a different and more positive angle. Having such an agreement with one of the
most technologically advanced countries in East Asia would help the EU tap into the
region’s dynamism, by building frameworks for freer trade and investment between the two
regions. To do so, I believe the EU also needs to open up its own market to East Asia. In a
closed and protected market, production costs are doomed to rise, causing industries to
lose competitiveness in the long run. This is why I think the EU and East Asia should work
together to build a better and closer relationship.

Thank you.