Investment by Japanese companies in East Asia increased dramatically from the mid-1980s against a backdrop of sharp yen appreciation following the Plaza Accord. During this period, a string of Japanese manufacturing bases was established in Southeast Asia, including in Thailand, Indonesia, the Philippines and Malaysia. Then, from the 1990s through to the 2000s, the technologies and expertise of Japanese companies gradually took root in the local region. For example, when the automotive industry first moved into Southeast Asia, it relied on importing parts, but gradually local procurement increased.
During the same period, parts and products started being manufactured across several countries following a phased reduction in customs duties on industrial products in the Southeast Asia region as well as the development of distribution and communications networks. In this way, Japanese companies expanded the value chain across the entire region.
The Trade in Value Added (TiVA) statistics published by the OECD illustrate how the value chain has spread throughout the world, and they suggest that in this era of globalisation, bilateral free trade agreements alone are no longer enough.
Moving into the 21st century, Japan signed an Economic Partnership Agreement with Singapore in 2002, followed by bilateral economic partnership agreements with Malaysia in
2006, Thailand in 2007, Indonesia, Brunei and the Philippines in 2008, and Vietnam in 2009. In 2008, the ASEAN-Japan Comprehensive Economic Partnership Agreement (AJCEP) was signed with ASEAN as a whole, but this is not enough. The next goal is to build a regional free trade zone incorporating the
region-wide value chain.
In this respect, there is a need to promote economic integration in East Asia: ASEAN has signed free trade agreements with China, Korea and other countries besides Japan, and plans to establish the ASEAN Economic Community (AEC) by the end of 2015, to which can be added the China-Japan-Korea FTA and the Regional Comprehensive Economic Partnership (RCEP) comprising ASEAN plus six countries. This is one of the pathways to a Free Trade Area of the Asia-Pacific (FTAAP), a free trade zone on the scale of APEC.
To ensure that this kind of economic integration in East Asia is effective and achieves sustained and balanced economic growth, it is important to establish both a “hard” and “soft” infrastructure in parallel with the promotion of economic integration, and to enhance connectivity across the entire region.
Specifically, “hard” infrastructure includes the need, for example, to repair the East-West Economic Corridor in the Mekong region and the Southern Economic Corridor, and to improve distribution by upgrading bridges. Japan has contributed to this by providing funding and technological cooperation. Concerning “soft” infrastructure, there is a need to keep international consistency in mind and overhaul the legal systems in ASEAN countries, including customs procedures. On this point, Japan has offered support including despatching experts.
By promoting the economic integration of East Asia in this way, Japan aims to develop together with East Asia. In this process, it is hoped that TiVA will provide useful hints as to the appropriate form of economic integration.
With East Asia expected to increase further in importance as a global centre for growth through economic integration, it is essential for the OECD to strengthen its ties with this region in order to play a leading role in global governance. As the first country in East Asia to gain membership of the OECD, it should indeed be Japan’s role to build bridges between the OECD and East Asia. Japan will chair this year's OECD Ministerial Council Meeting in May, and one of the topics to be raised is “Strengthening ties with Southeast Asia”. The Ministerial Council Meeting should be seized as an excellent opportunity to strengthen this role.
*Keidanren is a confederation of Japanese business and a member of the Business and Industry Advisory Committee to the OECD.
©OECD Observer No 298, Q1 2014