This is a background paper that was prepared for an event held at the Carnegie Endowment for International Peace on Japan and U.S. Perspectives on Southeast Asia Development.

Masahiro Kawai
Masahiro Kawai is a professor in the Graduate School of Public Policy at the University of Tokyo. He previously served as dean and CEO of the Asian Development Bank Institute.

Member countries in the Association of Southeast Asian Nations (ASEAN) have long been pursuing economic integration among themselves, and at the end of 2015 their efforts culminated in the launch of the ASEAN Economic Community (AEC). The AEC is an attempt to achieve a single market and production base, a competitive economic region, equitable economic development, and integration into the global economy.1

One of the great successes of ASEAN is that its member states have substantially reduced their intra-association tariff rates over time. The advanced ASEAN member states have already achieved virtually zero tariff rates on imports from other ASEAN countries, and the less advanced members, called the CLMV (Cambodia, Laos, Myanmar, and Vietnam), have also made efforts to reduce their tariffs, promising to eliminate them completely by 2018.

The ASEAN Economic Community Blueprint 2025, which lays the groundwork for AEC, does not set an ambitious goal for ASEAN, such as the creation of an EU-like economic community. Rather, it consists of five interrelated and mutually reinforcing characteristics expected to support ASEAN’s vision for the AEC: a highly integrated and cohesive economy; a competitive, innovative, and dynamic ASEAN; enhanced connectivity and sectoral cooperation; a resilient, inclusive, people-oriented, and people-centered ASEAN; and a globally competitive ASEAN that attracts investment from abroad.2 Given that ASEAN has already identified all of these characteristics in the past, the 2025 blueprint seems to indicate that the association wishes to implement its commitments in order to achieve a truly integrated economic community.

Japan-ASEAN Trade and Investment Relations

Japan and ASEAN have been deepening their mutual economic interdependence through trade and foreign direct investment (FDI). ASEAN is the second-largest trading partner for Japan following China, and Japan is the fourth-largest trading partner for ASEAN, following the association itself, the Asian newly industrialized economies (the NIEs of Hong Kong, Singapore, South Korea, and Taiwan), and China. Japan and ASEAN have also strengthened FDI interdependence with each other. ASEAN is the third-most important outgoing-FDI partner for Japan, following the United States and the European Union, and Japan is the third-most important source of FDI for ASEAN, following the European Union and the Asian NIEs.

For Japan, FDI in emerging Asian nations, and particularly in ASEAN, has generated consistently higher rates of return than FDI in traditional markets such as the United States and the European Union, making ASEAN the most important investment region for Japanese multinational corporations. They invest most in ASEAN’s emerging economies, and from them they earn the highest rate of return on investment. Thus, Japan has come to regard ASEAN as a promising production base.

ASEAN’s Integration With Asia-Pacific Through Free Trade

After establishing the Asian free trade area (FTA), ASEAN successfully concluded five major FTAs with six nations: China (2005), South Korea (2007), Japan (2008), Australia and New Zealand (2010), and India (2010). In addition, ASEAN began FTA negotiations with the European Union in 2007, though not much progress has been made. Individual ASEAN member states have also concluded a series of bilateral FTAs.

Based on the growing web of FTAs in the region, ASEAN and these six other Asia-Pacific economies began to consider creating a larger regional FTA, called the Regional Comprehensive Economic Partnership (RCEP). Essentially, RCEP is an ASEAN-centered FTA among the ten ASEAN member states and their six FTA partners. 

However, before it can become a reality, RCEP must overcome a number of challenges. The greatest obstacle to the partnership is the wide spectrum of trade liberalization that exists among its potential members. Additionally, although ASEAN has made FTAs with each of the six non-ASEAN candidates for RCEP, those six nations do not all have FTAs among themselves. The completion of RCEP negotiations would require these missing FTAs to be put in place.

RCEP is not the only trade deal being discussed in the Asia-Pacific. Four of the ten ASEAN countries (Brunei, Malaysia, Singapore, and Vietnam) and three of the six non-ASEAN countries (Australia, Japan, and New Zealand) considering RCEP are set to become founding members of the Trans-Pacific Partnership (TPP). According to models by the international economics professors Peter Petri and Michael Plummer, TPP will generate large gains for its ASEAN members (particularly Vietnam and Malaysia) but losses for ASEAN states that are not part of TPP. This suggests that all ASEAN members should aim to join TPP to protect their economic interests.3

TPP sets a high bar for participation, and several major economies in the Asia-Pacific, including giants such as India and China, will need to implement structural reforms before they can join. In response to the exclusive nature of TPP, China is proposing a large, more inclusive zone called the Free Trade Area of the Asia-Pacific (FTAAP). FTAAP ought to be seen as the ultimate goal of RCEP and TPP. In order to succeed, FTAAP should take a long-term approach, beginning as an expanded version of RCEP by around 2025 and aiming to bring its member states up to the standards of TPP by 2035.

China and India should first focus on forging RCEP and other trade and investment agreements and implement structural reforms in order to join TPP down the road. This would give ASEAN an opportunity to gradually integrate itself with other economies in the Asia-Pacific region and would no doubt boost its economic growth and create jobs. Such a large Asia-Pacific FTA would also benefit Japan, increasing its growth potential enormously.

As ASEAN strengthens external integration through RCEP, TPP, and FTAAP, it faces further challenges of maintaining its own centrality. This is expected to require ASEAN to complete the AEC agenda, deepen it, and move it to the next stage of internal integration. To do so, ASEAN members may seriously consider the formation of a customs and economic union, while increasingly acting together in pursuing external integration.

Conclusion

Japan has long supported ASEAN in its outward-oriented industrialization through official development assistance, trade, and FDI, thereby helping integrate ASEAN into regional supply chains. ASEAN has pursued market-driven economic integration among its members and with other East Asian economies through trade and FDI, which led to the creation of the AEC and the ASEAN+1 FTA s. In the medium term, it is in the best interests of all ASEAN members to deepen the AEC, forge RCEP, and join TPP. Both Japan and ASEAN can benefit from such integration. At the same time, ASEAN needs to seriously consider becoming a customs and economic union to ensure its centrality.

Masahiro Kawai is a professor in the Graduate School of Public Policy at the University of Tokyo. He previously served as dean and CEO of the Asian Development Bank Institute.

Notes

1 Association of Southeast Asian Nations, ASEAN Economic Community Blueprint (Jakarta: ASEAN Secretariat, 2008), 6, http://www.asean.org/wp-content/uploads/archive/5187-10.pdf.

2 Association of Southeast Asian Nations, ASEAN Economic Community Blueprint 2025 (Jakarta: ASEAN Secretariat, 2015), http://www.asean.org/storage/images/2015/November/aec-page/AEC-Blueprint-2025-FINAL.pdf.

3 Peter A. Petri and Michael G. Plummer, “ASEAN Centrality and the ASEAN-US Economic Relationship,” Policy Studies No. 69, East-West Center, 2014, http://www.eastwestcenter.org/publications/asean-centrality-and-the-asean-us-economic-relationship.