JOINT REPORT OF THE ASEAN-JAPAN

CLOSER ECONOMIC PARTNERSHIP EXPERT GROUP (AJCEPEG)

Executive Summary

1. Pursuant to the decision of the 8th AEM-METI Consultations, an ASEAN- Japan Closer Economic Partnership (CEP) Expert Group was
   established to conduct a study on ASEAN-Japan economic cooperation.  The Expert Group was tasked by the Ministers to report the outcome of
   the study to the 9th AEM-METI Consultations in September 2002.

2. ASEAN and Japan represent a market of 590 million people (approximately 11% of the total world population), and a total GDP of US$ 4.9 trillion (approximately 18% of global GDP).  Japan is an important trading partner for ASEAN.  From 1993-2000, the share of Japan's trade with ASEAN averaged 15.04% while the share of ASEAN's trade with Japan averaged 14.74%. Annual value of exports from Japan to ASEAN and vice-versa during the same period averaged US$ 62.7 billion and US$ 46.4 billion, respectively. Bilateral trade between ASEAN and Japan in 1999 accounted for 14.3% and 13.8% of their total global trade, respectively.

3. Japan has made substantial investments in ASEAN, accounting for 18.4% of total FDI into ASEAN in year 2001. Although ASEAN has always been a major destination for Japanese investors, over the last decade, Japan's share of total global investments into ASEAN decreased from about 28% in 1991 to 18.4% in 2000.

4. Given the global challenges and the evolving developments in the multilateral trading environment, and the current state of ASEAN- Japan relations, it has become necessary for both ASEAN and Japan to enhance and deepen economic collaboration.

5. In order to maximize complementarity between the ASEAN and Japanese economies, the Expert Group identified areas that are in need of improvement, including addressing barriers that impede the flow of trade in goods, services, and investments between the two regions. The Expert Group likewise explored areas where economic relations between ASEAN and Japan could be further enhanced, including liberalization, facilitation and cooperation in the areas of goods, services and investments.

6. A numerical analysis was conducted using the Global Trade Analysis Project (GTAP) model to simulate the implications of an ASEAN-Japan CEP, particularly, the impact of a free trade area involving the complete elimination of tariffs. The GTAP analysis indicated that:

1. While both ASEAN and Japan's trade expansion and economic growth will be boosted, ASEAN will enjoy a greater expansion in exports and economic growth compared to Japan. Under the CEP, by the year 2020, the export volume from ASEAN to Japan will increase by US$ 20,630 million, which is equivalent to 44.2% of that of 1997 (base year); the export volume from Japan to ASEAN will increase by US$ 20,022 million, which is 27.5% of that of the base year.

2. The expected rates of return for both ASEAN and Japan will increase as a result of stimulating domestic demand. This will bring about an increase in both domestic and international capital flow as well as capital accumulation that is vital for economic development and the future.

3. An increase in foreign direct investment will also bring about technology transfer and a positive multiplier effect to the country receiving investments and will enhance its, domestic productivity. In addition, an increase in imports will promote competition in the domestic market.

4. By the year 2020, GDP will increase by 1.99% for ASEAN and by 0.07% for Japan. Conversely, welfare will increase by US$ 4.59 billion (0.13%) for Japan and by US$ 5.589 billion (2.61 %) for ASEAN from the base year of 1997.

7. The Expert Group acknowledged that because of data accessibility and software constraints, it was not possible to project all the likely effects of the CEP quantitatively through the numerical analysis undertaken. It was agreed however that the numerical analysis was still a useful analytical tool that provides a broad understanding of the impact that the CEP may have on economies and industries.

8. The ASEAN-Japan closer economic partnership would not only transcend beyond mere economic benefits but also improve the presence of ASEAN and Japan in the international community and in international fora. The CEP would contribute to regional stability and security through economic development.

9. The Expert Group recommends that concrete measures in realizing a framework for ASEAN-Japan CEP, including elements of a possible FTA, be taken immediately.  At the same time, an appropriate and flexible timeframe for the realization of the CEP shall be established taking due account of the economic levels and sensitive sectors of each country.

10. To realize the CEP, the Expert Group recommends, for consideration by the Ministers and, upon their decision, for endorsement by the Leaders, that a committee be established by the year 2003 to commence consideration of the framework that would provide the basis for the realization of the CEP. The following common understanding and guiding principles should be taken into account:

1. To enable economic factors to move freely between ASEAN and Japan, to promote economic activities possible with standardized and transparent systems, a CEP between ASEAN and Japan should be realized. The realization of the ASEAN-Japan CEP would boost the future development of an economic area covering East Asia.

2. The realization of the ASEAN-Japan CEP should focus not only on the liberalization or promotion of trade, services and investment, but also on a wider range of areas, including measures to improve the business environments, and the ensuring of stable and sustainable development and other areas of cooperation (comprehensiveness of sectors) and should embrace all the countries within the ASEAN-Japan region (comprehensiveness of countries). In addition, each measure shall be implemented under the principle of reciprocity and mutual benefits, as far as possible.

3. The integrity and solidarity of ASEAN should be taken into due consideration, and from this point of view, the results of bilateral efforts should be reported on a regular basis to all appropriate bodies.

4. In order to ensure the development of ASEAN as a region, due consideration to the different levels of economic development among the countries within the region will be given. The interests of ASEAN's new members should be considered through technical cooperation and capacity building, and the gradual and longer time frame in implementation of the liberalization-related measures under the CEP.

5. For countries which are not members of the WTO the Government of Japan will continue to provide Most Favored Nation (MFN) treatment as stipulated in Article 1 of the General Agreement on Tariffs and Trade (GATT).

6. While giving due consideration to the economic level and sensitive sectors of each country, implementation of concrete measures for the CEP should take into account the principle of flexibility and special and differential treatment.

7. ASEAN and Japan should create the necessary mechanism such as the dispute settlement mechanism under the ASEAN-Japan CEP.

8. The CEP shall be consistent with and conform to with the requirements of the WTO, taking into account the outcome of the WTO discussions on regional trading arrangements (RTAs).

11. In conclusion, it has become apparent that the formation of a closer economic partnership including elements of a possible FTA, will bring about increased trade volumes, GDP and employment, as well as economies of scale and acceleration of structural reforms. It will also give rise to a virtuous circle whereby regional stability brought about by economic development, will in turn form the basis for further future development.

REPORT ON THE JOINT STUDY ON THE
ASEAN-JAPAN CLOSER ECONOMIC PARTNERSHIP
ASEAN-JAPAN CLOSER ECONOMIC PARTNERSHIP EXPERT GROUP
(ACEPEG)

SECTION ONE -INTRODUCTION
 

1.1. OVERVIEW

1. ASEAN and Japan first established informal relations in 1973. The ties were later formalized with the establishment of the ASEAN-Japan Forum in March 1977. Since then, the ASEAN-Japan Forum has been held once every 18-24 months. In early August 1977, the Japanese Prime Minister H.E. Mr. Takeo Fukuda met with the ASEAN Heads of Government at the Second ASEAN Summit in Kuala Lumpur. The Japanese Prime Minister H.E. Mr. Noboru Takeshita met with his ASEAN counterparts in Manila during tile Third ASEAN Summit in December 1987, where ASEAN and Japan announced "a new partnership towards peace and prosperity."

2. At the apex of the dialogue process is the ASEAN-Japan Summit. Japan also participates in a series of consultative meetings with ASEAN which includes the ASEAN Regional Forum (ARF) , the Post Ministerial Conferences (PMC) 10+1 and 10+10, ASEAN Economic Ministers-Minister of Economy, Trade and Industry (AEM-METI) Consultations, ASEAN-Japan Forum, ASEAN Senior Economic Officials-Ministry of Economy, Trade and Industry (SEOM-METI) Consultations, Joint Planning Committee (JPC) Meeting, ASEAN-Japan Economic Council (AJEC) and the ASEAN-Japanese Businessmen's Meeting (AJBM). The ASEAN-Tokyo Committee also assists in conducting and maintaining the dialogue with Japan

3. The PMC 10+1 and 10+10 meetings offer an opportunity for Ministers to review contemporary political, security, economic and development cooperation issues affecting relations between ASEAN and its Dialogue Partners. Japan also participates in the ARF, which takes stock of key regional political and security issues that concern the region. Regular Dialogue meetings such as the AEM-METI Consultations and the ASEAN Japan Forum are held at the ministerial level to provide a more in-depth review of economic and functional cooperation between the two regions.

4. A unique feature of ASEAN-Japan cooperation is the ASEAN Promotion Centre on Trade, Investment and Tourism in Tokyo, which was set up in 1981 under the Agreement Establishing the ASEAN Promotion Centre on Trade, Investment and Tourism between ASEAN Member Countries and Japan. The Centre is jointly funded by contributions from Japan and ASEAN Member Countries.

5. In addition to being one of ASEAN's most important economic partners, Japan is a major contributor to development cooperation activities in ASEAN. Japan makes substantial contributions to the ASEAN Cultural Fund, which was established in December 1978. The Fund finances projects and activities on culture and information that are designed to promote cultural interaction with Japan and awareness among the peoples of ASEAN.

6. Japan also provides technical assistance to ASEAN through several programmes, such as the Japan-ASEAN Cooperation Promotion Programme (JACPP), the Intra-ASEAN Technical Exchange Programme (IATEP) and the Japan-ASEAN Exchange Programme (JAEP). Established in 1983, the JACPP is aimed at promoting economic cooperation between Japan and ASEAN as well as the transfer of technology from Japan to ASEAN. The IATEP, on the other hand, was launched in 1987 to promote exchange of technical scientific personnel among ASEAN Member Countries. The JAEP, launched in 1988, aims to promote awareness and appreciation of ASEAN among the Japanese and ASEAN studies in Japan through academic exchanges.

7. Japan also funds ASEAN youth development activities through the Japan Scholarship Fund and the ASEAN-Japan Friendship Programme for the 21st Century which was started in 1984. From 1984 to 2001, 14,942 youths from ASEAN visited Japan on short study tours and home-stay visits with Japanese families under a programme organized by the Japan International Cooperation Agency (JICA).

1.2.         SUMMIT AND MINISTERIAL DECISIONS

8. 
   The 7th AEM-METI Consultations on 7 October 2000 in Chiang Mai, Thailand agreed that a study on ASEAN-Japan economic integration be conducted. Subsequently, at the 8th AEM-METI Consultations on 12 September 2001 in Ha Noi, Viet Nam, the Ministers endorsed the Terms of Reference, which led to the establishment of the ASEAN Japan Closer Economic Partnership (CEP) Expert Group. The Expert Group was tasked by the Ministers to report on the outcome of  its Study at the next AEM-METI Consultations in September 2002.

9. The scope of work in the Terms of Reference approved by the Ministers for the Expert Group include:

1. To recommend measures on how to further enhance ASEAN-Japan economic cooperation and integration towards CEP.

2. To adopt a building block approach to the discussions by initially focusing on specific areas where clear and concrete outcomes could be achieved.  Success in the initial areas would then serve as a good basis for working on other important sectors.

3. While the Expert Group would utilize previous studies on ASEAN- Japan linkages, it can also commission studies or research to be undertaken within the period to the Ninth AEM-METI Consultations to assist it in the task of formulating appropriate recommendations.

10. The following reporting mechanism was also approved by the Ministers:

1. The SEOM-METI Consultations shall monitor the work of the Expert Group.

2. The Ninth AEM-METI Consultations scheduled to be held in Brunei Darussalam in September 2002 will consider the report of the Expert Group.

3. The outcome of the ASEAN-Japan study will be presented to the ASEAN-Japan Summit in Cambodia in 2002.

11. The 7th ASEAN Leaders Summit in 2001 welcomed the establishment of the Expert Group and agreed to give their full support in fostering a CEP as a means of strengthening ASEAN-Japan cooperation.

SECTION TWO - GLOBAL SCENARIO, CHALLENGES AND OPPORTUNITIES

12. The post-Cold War world economy has moved into an era of full-scale globalization or the era of "mega-competition".  This era of globalization has accelerated the movement towards regional integration or regionalism. The increasing progress of regional integration in the Americas and Europe in recent years was aimed to develop a more advanced and attractive economic environment, especially for corporations that are developing global business activities. Through further promotion of economic partnerships among neighboring countries that are already progressing toward economic unification, countries respond strategically to the era of mega-competition.

13. At the same time, it is also significant to note that, in accomplishing regional integration, countries, given their diverse geographical, cultural and historical backgrounds, can create a community that shares certain values and systems necessary for them to jointly face and deal with the challenges of globalization. The financial crisis of 1997 and the terrorist attacks on 11 September 2001 in the United States remind us of the importance of partnership and cooperation in Asia.

14. Given these circumstances, Asia, perceived to have been left behind in the global move towards the development of regional integration, now faces a turning point. Through the large-scale East Asian networks created by the corporations that have powered the "miraculous" economic development of East Asia, the region itself has been evolving into one economic area. In order to make the networks stronger and more advanced, East Asian countries are now beginning to deepen economic partnerships with other countries in the region. The accession to the World Trade Organization (WTO) of China and Chinese Taipei accelerated this emerging trend.

2.1. RECENT TRENDS IN ASIA. EUROPE AND THE AMERICAS

15. Europe and the Americas took an approach to maximize the benefits to their regions and their individual countries through the establishment of the single European Union (EU) market and North American Free Trade Area (NAFTA), which secured markets and sped up the pace of structural reforms by liberalizing and facilitating more advanced trade and investment and by harmonizing systems within the region. At the same time, economic partnerships were also being pursued in Asia. These include, among others, the establishment in 1992 and the subsequent expansion in 1997 of the ASEAN Free Trade Area (AFTA) and the inauguration of the South Asian Preferential Trade Arrangement (SAPTA) in 1995.

16. In the East Asian region, active moves toward regional integration are being made. In addition to the AFTA, at the ASEAN-China Summit Meeting in Brunei Darussalam in November 2001, the Leaders endorsed the Framework on Economic Cooperation between ASEAN and China and agreed on the establishment of an ASEAN-China free trade area within 10 years. The year 2002 saw the conclusion of the Japan-Singapore Economic Agreement for a New Age Partnership in January. In March 2002, consensus was reached on setting up a joint study group - comprising government officials, prominent academics and business leaders - that would look into a Japan-Korea Free Trade Area (FTA).

17. These developments indicate intensifying economic solidarity of each of the three regional poles, namely: Europe, the Americas and Asia, in the world economy.

2.1.1. ASIA

18. Several countries in Asia are currently negotiating bilateral and regional free trade arrangements with countries in and outside the Asian region.

19. ASEAN  ASEAN is currently advancing economic partnerships with countries such as Japan, China, CER (Australia and New Zealand), Republic of Korea (ROK) and India.

20. ASEAN-China At the ASEAN-China Summit in Brunei Darussalam in November 2001, Leaders from both regions agreed to enhance further enhance economic cooperation and economic integration, including the establishment of a free trade area (FTA) between ASEAN and China. The ASEAN and Chinese Leaders also agreed to have an "early harvest" under the Framework Agreement of Economic Cooperation.

21. The establishment of an FTA between ASEAN and China will create an economic area with 1.7 billion consumers, regional GDP of about $2 trillion and total estimated trade volume at US $1.23 trillion. It will be a one of the largest FTA in the world in terms of population size, GDP and trade volume.

22. A Framework Agreement on ASEAN-China Economic Cooperation is expected to be finalized and signed by the Leaders at the ASEAN-China Summit in Phnom Penh, Cambodia in November 2002. The Framework Agreement provides for an Early Harvest Package, which includes market access and economic cooperation activities particularly in the five priority areas identified by the Leaders, i.e. agriculture, investment, information and communications technology, human resource development and the Mekong Basin development. The Framework Agreement also inscribes provisions for the negotiation of a free trade area (FTA) in goods, services and investments to be realized within 10 years.

23.  ASEAN-CER  At the 6th AEM-CER (Closer Economic Relations) Consultation in September 2001 in Viet Nam, the Ministers endorsed the Framework for the AFTA-CER CEP including its Initial Work Programme. The framework will be formalized by a Ministerial Declaration to be signed at the 7th AEM-CER Consultations in 2002 to accelerate the realization of the CEP. The Ministers also agreed to establish an AFTA-CER Business Council, comprising high-level representatives from the respective business communities, to further revitalize involvement of the private sector in the implementation of the CEP.

24. The ASEAN-CER Expert Group on CEP has had three meetings wherein various issues relating to the Joint Ministerial Declaration of the AFTA-CER CEP framework and the implementation of the Initial Work Programme were discussed. The AFTA-CER Business Council has also been established and its inaugural meeting was held in Malaysia in July 2002.

25. ASEAN-India.  India has a strong interest in forging greater linkages with ASEAN. A study has been conducted to evaluate the current state of play in trade and economic linkages between ASEAN and India and several policy-cum-institutional framework measures for the deepening and broadening of ASEAN-India relations have been suggested. These include, among others, market access issues; trade facilitation measures such as harmonization of standards, simplification of documents; and trade promotion. The study also recommended the establishment of a Regional Trade and Investment Area (RTIA) comprising India and ASEAN member states. The RTIA process may start with the formation of a Free Trade Area (FTA) and gradually evolve into an RTIA covering other economic sectors added to trade.

26. An Expert Group has been established by the ASEAN and Indian Senior Economic Officials. Its task is to look into the recommendations of the Study,  emphasizing initially facilitation and promotion measures to enhance ASEAN-India economic cooperation.

27. Thailand. Thailand has strongly supported and constructively contributed to the strengthening of economic cooperation and integration at global, regional, and sub-regional levels through her membership of, in particular, ASEAN, MIMST-EC, OMS, WTO, APEC and ASEM. At the bilateral level, Thailand has made progress in her bilateral consultations and arrangements with a number of countries including Australia, Bahrain, India and Japan with a view to fostering long-term economic partnership and complimenting the multilateral trade liberalization.

28. The bilateral arrangements have proceeded at different paces. Currently, the most advanced development has been the commencement of the bilateral  negotiations with Bahrain and Australia for the formation of the CEP and the Closer Economic Relations, respectively. A joint feasibility study on India-Thailand Free Trade Area has been conducted by a working group comprising officials from both sides and the study is scheduled to be concluded by October 2002. Furthermore, a Working Group on Japan-Thailand CEP has been set up to prepare the groundwork and modality for a possible CEP.

29. Singapore. Singapore is strongly committed to free trade and the multilateral trading system. In addition, Singapore strongly believes that trade efforts undertaken in regional fora such as APEC, ASEM and ASEAN, as well as under bilateral Free Trade Agreements (FTAs) can accelerate the momentum of trade liberalisation and strengthen the multilateral trading system.

30. In this context, Singapore has conducted bilateral negotiations with a number of countries. To date, Singapore successfully completed negotiations and' signed bilateral FTAs with New Zealand on 14 November 2000, Japan on 13 January 2002, and with the European Free Trade Association on 26 June 2002. The Japan-Singapore Economic Agreement for a New Age (JSEPA) is expected to come into force in the second half of 2002, after the Agreement has undergone the necessary legislative 'processes in both countries. Singapore is also holding bilateral negotiations with Mexico, Canada, Australia, and the United States, with the talks at various stages of development.

31. The Philippines. The Philippines is firmly committed to fair and liberal trade and have espoused this view consistently in bilateral, regional and multilateral fora.

32. The Philippines is also strongly committed to the multilateral trading system of the WTO even as the country seeks to further expand trade particularly in the region. Following the Japan-Philippine Summit in May 2002, the Philippines is currently exploring the feasibility of establishing an economic partnership agreement with Japan. In this regard, a preparatory consultative meeting was held be1:weel"l the Philippines and Japan in Tokyo on 14 August 2002. A working group between the Philippines and Japan is slated to meet in Manila in October 2002.

33. Japan. Regarding Japan's external economic policy, although its main framework is through the multilateral one centered on the World Trade Organization (WTO), Japan began to place much value on a multi-layered external economic policy that utilizes various fora, including the regional and bilateral ones.

34. In particular, the 2002 Basic Policy of the Council on Economic and Fiscal Policy (CEFP) clearly presents economic partnership agreements (EPA) and free trade areas (FTAs) as important tools for invigorating the economy in an era of globalization. From this standpoint, Japan puts priorities on economic partnerships in East Asia and with other regions like Mexico with which Japan has close interdependent economic relations. In this regard, Japan particularly acknowledge that it is important to form an "East Asia Free Business Area" through means such as concluding economic partnership agreements, which will further invigorate the economy in East Asia.

35. In the formation of an "East Asia Free Business Area," considering past partnerships and the accumulation of assets, Japan is placing top priority on strengthening the Japan-ASEAN relationship as well as the Japan-ROK relationship. The Japan-ASEAN Comprehensive Economic Partnership proposed by Prime Minister Junichiro Koizumi in January 2002 emphasized its relationship with ASEAN. Japan's first free trade arrangement, i.e. the Japan-Singapore Economic Agreement for a New Age Partnership signed on 13 January 2002, can be seen as a concrete manifestation of Japan's forward-looking economic programmes.

36. To pursue the Japan-ASEAN Comprehensive Economic Partnership, along with a partnership with ASEAN as a whole, Japan is also pursuing bilateral measures aimed at accelerating this overall partnership. For example, the Japan- Thailand Summit Meeting in April agreed to set up a Working Group on Economic Cooperation between Japan and Thailand. Then at the Japan-Philippines Summit Meeting in May 2002, Philippine President Gloria Macapagal-Arroyo raised the possibility of setting up a working group for CEP between Japan and the Philippines as earlier cited.

37. Japan also promotes bilateral cooperation with non-ASEAN countries such as the ROK and Mexico. Japan and Korea signed the Bilateral Investment Treaty between the two countries in March 2002. Based on the Japan-ROK Summit Meeting in March, a joint study group of business, academia and the government regarding a Japan-Korea free trade agreement was initiated in July 2002. As for Japan and Mexico, a joint study group of business, academia and the government aimed at strengthening the economic relationship between the two countries has been operating since 2001; they announced their recommendations in July 2002.

38. ASEAN + 3. Regarding ASEAN + 3 (Japan, China, and the Republic of Korea), the East Asia Vision Group submitted a report to the ASEAN + .3 Summit Meeting in November 2001 that included a recommendation to establish an East Asia Free Trade Area. Based on this report, the East Asia Study Group is deliberating on the modalities for East Asia cooperation, including the possible establishment of an East Asia free trade area. The group is scheduled to submit its own report to the ASEAN+3 Summit Meeting in November 2002.

39. Japan. Korea and China. At the ASEAN+3 Summit in Brunei Darussalam in November 2001, the Leaders from Japan, Korea and China had an informal summit where it was agreed that an Economic Minister's Meeting among the three countries would be established. The details of a possible economic partnership among Japan, Korea and China will be discussed.

2.1.2. EUROPE

40. The European Economic Community (EEC) which was established in January 1958 completed a customs union and a common agricultural policy by 1968. In November 1993, the Maastricht Treaty went into effect. The establishment of the 12-nation European Union (EU) initiated political and economic integration in the region. The currency integration in 1999 paved the way for the introduction of the Euro in January 2002.

41. In addition to strengthening integration, the EU is also moving towards enlargement. The EU established the European Economic Area (EEA) , which is more advanced than a free trade area, with Norway, Iceland and Liechtenstein in January 1994. It is also strengthening relationships with the nations of Central and Eastern Europe and has just concluded Europe Agreements individually with 10 Central and Eastern European countries. Furthermore, the EU is pursuing the establishment by 2010 of a free trade area with Mediterranean countries.

42. The EU is also moving to build regional cooperation relationships with a wider range of regions that include countries other than its neighbors. For countries in Central and South America, the EU finalized a free trade agreement with Mexico in July 2000 and with Chile in April 2002. It is also negotiating similar arrangements with MERCOSUR. With the United States, the EU agreed on a Transatlantic Economic Partnership at the US-EU Summit meeting in May 1998. Based on the action plan for the Partnership, efforts toward trade liberalization are being advanced. With countries in Africa, the Caribbean and the Pacific, the EU has forged the Cotonou Agreement.

2.1.3. THE AMERICAS

43. The North American Free Trade Agreement (NAFTA), comprising Canada, the United States and Mexico, went into effect in January 1994. NAFTA advances the strengthening of relationships within the countries of Central and South America, and in December 1994, the three countries of NAFTA agreed to enter into negotiations on Chile's entry into NAFTA.

44. Countries in the American region are also embarking on free trade initiatives either among themselves or with countries outside region. Mexico, for example, is seeking free trade agreements with countries outside of NAFTA and is currently studying the possibility of an FTA with several Asian and South American countries. Conversely, Chile had already entered into free trade agreements with Canada (July 1997) and Mexico (August 1999). She is currently negotiating such an agreement with the United States and Korea.

45. At the Summit of the Americas, where 34 countries of the Americas (excluding Cuba,) participated, it was agreed that negotiations to establish the Free Trade Area of the Americas (FTAA) will be concluded by 2005.

46. The trade policy of the United States, competing with the move toward deepening of EU integration, has placed emphasis on establishing and deepening NAFTA. In recent years, the United States has begun to seek economic partnerships with Asia. For instance, it is currently negotiating a free trade agreement with Singapore. In April 2002, the ASEAN Economic Ministers-US Trade Representative Meeting (AEM-USTR) in Bangkok agreed to look into the proposal of the US-ASEAN Business Council for an ASEAN-US free trade agreement. The US Government recently passed the Trade Promotion Authority (TPA) Bill which incorporates the Fast Track authority for its Executive Branch in order to speedily negotiate not only FTAs with other countries but also in the new round of multilateral trade negotiations under the WTO.

2.2. WTO, ASEM, APEC

2.2.1. WORLD TRADE ORGANIZATION (WTO)

47. Since the Second World War, multilateralism centered around the General Agreement on Trade and Tariffs (GATT) and the International Monetary Fund (IMF) which supported the development of the world economy. Last year China and Taiwan acceded to the WTO, and in November 2001 at the WTO Ministerial Conference in Doha, Ministers agreed on the Doha Development Agenda. The agenda for negotiations are broad and include improvement of market access, clarification of existing rules such as anti-dumping, new areas such as investment and competition, the trade and environment, and the improvement of dispute settlement procedures. In addition, it was decided that the negotiations would be concluded not later than 1 January 2005.

48. Japan and the countries of ASEAN actively participate on their own initiative in the WTO's negotiations and are aiming to develop and enhance international common rules, and create an environment for free and transparent international economic activities.

2.2.2. ASIA-EUROPE MEETING (ASEM)

49. The first Asia-Europe Meeting (ASEM) was convened in March 1996 in Bangkok, Thailand. Ten countries from Asia -Brunei Darussalam, China, Indonesia, Japan, Korea, Malaysia, the Philippines, Singapore, Thailand and Vietnam - the 15 EU partners and the European Commission met together. This meeting has developed a framework for cooperation focusing on politics, culture, and economic relations, e.g. Trade Facilitation Action Plan (TFAP) and the Investment Promotion Action Plan (IPAP). At the Third Meeting in Seoul, ROK in October 2000, the "Asia-Europe Cooperation Framework (AECF) 2000" was adopted, setting out a vision for activities over the first ten years of the new millennium.

2.2.3. ASIA PACIFIC ECONOMIC COOPERATION (APEC)

50. The Asia-Pacific Economic Cooperation (APE C) is a system for regional cooperation which aims to liberalize and facilitate trade and investment within the APEC region. APEC was the first to conceptualize "open regionalism" whereby countries outside the region share equally in the results.

51. At the informal APEC Summit Meeting held in Bogor, in Indonesia in November 1994, the Bogor Declaration, which espoused the following goals for liberalization, was adopted: "... complete the achievement of the goal of free and open trade and investment in the Asia-Pacific, no later than the year 2010 for industrialized economies and no later than the year 2020 for developing economies." The following year, at the Leaders Meeting in Osaka, the Osaka Action Agenda was drawn up towards the achievement of the Bogor Declaration. At the 2000 Informal Summit Meeting, while regional trade agreements were positioned as something that could make a contribution to APEC and its principles, it was noted that this should be consistent with WTO rules and its regulations.

52. At the 2001 Informal Summit Meeting, the Shanghai Accord attached to the Le:3.der:3' documentation further elaborated the track of the Bogor Declaration. Under the said Accord, it was agreed that the development of a "Pathfinder Approach," whereby joint activities would be initiated and implemented by those economies whose preparations were complete, would be encouraged.

SECTION THREE -OVERVIEW OF ASEAN-JAPAN ECONOMIC RELATIONS

3.1. CURRENT STATUS

53. ASEAN and Japan have a combined population of 590 million people (approximately 11% of the total world population), and a combined GDP ofUS$4.9 trillion (approximately 18% of global GDP). Together with China, which has continued to develop with astounding speed in recent years, ASEAN and Japan form a major economic region in East Asia which makes it one of the three global economic poles.

54. Furthermore, ASEAN and Japan continue to be important trading partners for each other as trade and investment statistics show. (In the year 2001, Japan  accounted for 16% of ASEAN's total exports whereas 16% of Japan's total exports went to ASEAN. During the same year, Japan accounted for 18% of total FDI flows into ASEAN.

55. ASEAN and Japan complement each other strongly and could reap the benefits of mutually reinforcing economic development though strong business collaboration. Given this background, since the 1970s, both ASEAN and Japan have been promoting partnership and cooperation in various fora such as the ASEAN-Japan Forum and the ASEAN-Japan Economic Ministerial Meeting, and in a broad range of areas, including trade, investment, and development aid. Approximately 40% of Japan' Official Development Assistance, in 1999 was provided to ASEAN countries.

56. After the Plaza Accord of 1985, Japanese corporations began to actively undertake direct investment in ASEAN. Through the development and advancement of the industrial structure, the expansion of exports to Japan, and the creation of employment opportunities in ASEAN, Japanese corporations thereby played an important role in the development of East Asia. Through the creation of a system of international division of labor with ASEAN, the process also had the effect of accelerating structural reform in Japan itself. The process has therefore been mutually beneficial for ASEAN and Japan. As ASEAN began to achieve substantial levels of economic growth, the ASEAN-Japan relationship has evolved into an equal partnership despite the intra-regional economic divide.

3.1.1. TRADE

57. Japan continues to be an important trading partner for ASEAN. At its peak in 1995, trade between Japan and ASEAN reached US$121 billion. This fell to US$113 billion in 1997. In 1998, trade decreased further to US$ 81 billion but recovered in 1999 when trade between the two regions increased to US$88 billion. The main reason for this fall was the regional economic crisis. In 2000, the trade value recovered to reach a total of US$113 billion. (Chart 3-1)

58. From 1994 to 2000, ASEAN's trade with Japan accounted for 14-20% of total ASEAN trade. Japan's share of trade with ASEAN region was at a decreasing trend until 1998 after which the trend started to recover. Trade with Japan in 1993 accounted for 20% of ASEAN's total trade and this figure declined to 14.1% in 1998. A slight recovery was experienced in 1999 when it increased to 14.3%. In 2000, Japan's share of total ASEAN trade was 16%. (Chart 3-2)

59. ASEAN had sustained trade deficits with Japan for a long time. The trade deficit of US$ 36 billion in 1995 was the largest deficit ASEAN had with Japan. In 1998, the deficit dropped to US$12 billion and in 1999, due to the recovery from the economic crisis, the trade deficit was US$13 billion. As exports from ASEAN to Japan increased in 2000, trade deficit was reduced to US$9.4 billion and in 2001, a small trade surplus with Japan was achieved. (Chart 3-3)

60. ASEAN is a major regional trading partner for Japan. Japan's exports to ASEAN rose from 11.6% of her total export in 1990, to reach a peak of 17.9% in 1996. This share decreased after the economic crisis, but since 1998, it has started to show signs of steady recovery, to stand at 13.5% in 2001. Japan's imports from ASEAN have steadily shifted from 12.7% of her total import in 1990, to reach a level of 15.6% in 2001. (Chart 3-3)

61. The structure and changing pattern of trade between Japan and ASEAN reveal that a complementary relationship exists between the two regions. For instance, in the machinery and equipment industry, the division of labor is advancing and deepening, as evidenced by the increasing volume of intra-industrial trade. In the past, exports from Japan to ASEAN were mainly represented by machinery and equipment, which comprises general machinery, electrical machinery, and transportation machinery. Then from 1990 to 2000, the share of electrical machinery exports from ASEAN to Japan rose sharply (Chart 3-4). In the past, too, exports from ASEAN to Japan were mainly represented by machinery and equipment, mineral fuels, food products and raw materials. From 1990 to 2000, while the share of mineral fuels, food products and raw materials in ASEAN's exports to Japan decreased, the share of machinery and equipment such as electrical machinery and general machinery increased (Chart 3-5).

62. The changing pattern of trade could be attributed to the dissemination of technology, which has provided a more advanced production base for the region.  Further, the lowering of trade and investment barriers within the ASEAN region has created an environment whereby corporations are now able to transcend national borders and have more freedom to select production bases for their business activities.

63. Japan, recognizing the importance of prompt and proper customs procedures, has promoted computerization of procedures such as the introduction and development of the Nippon Automated Cargo Clearance System (NACCS). In addition, Pre-Arrival Examination System, which enables conducting examinations before the arrival of cargoes, and Simplified Declaration Procedures, which allow importers to receive cargoes before duty payment were introduced. These measures have been taken to address the increasing workload on import-export clearance.

64. In the area of trade facilitation, in particular on customs procedures, Japan has supported a number of ASEAN countries bilaterally as well as in international fora such as APEC and the WCO. Japan regards ASEAN countries as one of the most important region of the world. Both the numbers of trainees to Japan, and the number of Japanese experts dispatched to ASEAN countries are increasing.

3.1.2. INVESTMENT

65. Japan has made substantial investments into ASEAN, accounting for 18.4% of total FDI into ASEAN in year 2001. This reflects the historical trend that ASEAN has always been a major destination for Japanese investors. However, over the last decade, Japan's share of total global investments into ASEAN, decreased from 28% in 19910 to 18.4% in 2000 (Chart 3-6).

66. Japanese investments in ASEAN largely contributed to economic development in ASEAN, secured employment opportunities, and promoted a highly developed industrial structure in ASEAN. At the same time, Japanese investments also accelerated structural reforms in Japan and this proved to be mutually beneficial for both sides.

67. For Japanese corporations, investment in ASEAN is an important financial asset, and from the point of view of investment distribution in Asia, ASEAN is also an important destination. When comparing with investment in China from Japan, investment in ASEAN from Japan has always been larger. (Chart 3-7) To date ASEAN has been creating a variety of attractive systems, and Japanese corporations have made use of such systems to go into ASEAN, which is reflected in tile scale of Japanese investment in ASEAN.

68. However, at the same time, in the midst of advancing globalization, Japanese corporations are becoming more sensitive to the business environment in investment destinations and their demand levels are increasing. When choosing ASEAN countries as investment destinations, Japanese corporations have placed importance on "political and social stability," "low cost," "quality of the labor force," and "future potential in domestic markets."

69. Given the emergence of China as a production base, it is important for ASEAN to increase the attractiveness of its own business environment through a steadier implementation of the ASEAN Free Trade Area. By pursuing Japan-ASEAN CEP, ASEAN's attractiveness as a destination for investment would be further enhanced.

70. In addition, from the point of view of providing important elements for economic growth, Japan is expecting that ASEAN investment in Japan will increase.

3.1.3. SERVICES

71. The enhancement of trade in services will not only bring about new linkages in production factors in different countries and promote the international division of labor but also provide opportunities to improve productivity. In particular, enhanced efficiency in services sectors, which play vital roles in industrial infrastructure (such as finance, transport, communications, logistics and energy), would not only affect these sectors but would also improve efficiency in other industries.

72. In 2001, the value of trade in services from Japan to ASEAN was US$ 8.25 billion, and value of trade in services from ASEAN to Japan was US$ 11.06 billion. Japan's balance of trade in services with ASEAN posted a deficit. ASEAN's share of Japan's total trade in services accounted for 12.4% for export credits, and 9.8% of import debits, which makes ASEAN an important centre for trade in services, on par with Europe, the Americas and other Asian regions. (Chart 3-8)

73. Trade in services between Japan and ASEAN while fluctuating slightly from 1995 to 2001 has not changed significantly. The share of Japan's total services received from ASEAN reached its peak in 1997 although it declined thereafter. ASEAN's share of services from Japan hardly changed and has remained stable during this-period (Chart 3-9).

74. Tourism is a booming sector the services trade between ASEAN and Japan. In 2000, 3.8 million Japanese visited ASEAN, representing a fifth of the total number of Japanese overseas travelers and almost 10% of all ASEAN tourist arrivals. The number of Japanese visitors to ASEAN have been increasing steadily since 1992, except for the years of 1997 and 1998. The number of Japanese tourists to ASEAN recovered rapidly after the regional fmancial crisis, increasing by more than 10% per year in 1999 and 2000. Compared to the increase in total Japanese visitors overseas of 3.5% and 9% in the two respective years, it is clear that ASEAN is becoming more popular among Japanese. From ASEAN, there are about 380,000 visitors to Japan in 2000. Both ASEAN and Japan continue to promote tourism as an important sector offering a wide range of experiences from eco-tourism, beaches, ethnic cuisine, rich and diverse cultures, to shopping and sightseeing. Tourism could therefore be an important service sector for consideration under the ASEAN-Japan CEP.

3.1.4. OTHER AREAS

75. Through the various frameworks that exist between Japan and ASEAN on the bilateral and plurilateral levels, various forms of economic cooperation have been implemented not only in trade and investment, but also in a broad range of sectors such as intellectual property, standards and conformity, and energy, (ANNEX 1).

76. Through the Official Development Assistance (ODA) and other programmes, Japan has continued to provide support to ASEAN's efforts and has promoted private sector initiatives. ASEAN member countries are also cooperating with Japan in the "Asian Development Bank -Greater Mekong Sub-Region (ADB-GMS)" and the "Forum for Comprehensive Development of Indochina," in which Japan is playing a central role. Japan has provided technical assistance to ASEAN in a number of programmes.

77. To promote closer economic cooperation, the ASEAN Economic Ministers continued to engage Japan regularly at both senior official and ministerial level. The idea of an AEM-MITI Economic and Industrial Cooperation Committee (AMEICC) was mooted in 1997, and endorsed at the ASEAN-Japan Summit Meeting held in Kuala Lumpur, Malaysia in December 1997. The objective of AMEICC is to take over the work of the defunct CLM-WG. Instead of just focusing on CLM, the AMEICC has expanded the coverage to all ASEAN countries. In 1998, AMEICC was formally established to enhance industrial cooperation between ASEAN and Japan for improving ASEAN competitiveness.

78. The AMEICC operates on three pillars:
               (a) improvement of ASEAN competitiveness
               (b) enhancement of industrial cooperation
               (c) development cooperation assistance to new members
    Under the AMEICC framework, eight working groups were established on specific cooperation areas, and they are formulating and implementing various cooperation projects, such as the Centers of Excellence (COE) programme under the Working Group on Human Resource Development and the Roving Expert Program for developing supporting industries under the Working Group on Automobile Industry.

79. The Japan-ASEAN General Exchange Fund (JAGEF) was established in July 2000 in order to facilitate the effective implementation of Japanese economic cooperation with ASEAN, promote transfer of technology and inflow of Japanese investments, promote trade and exchange of personnel between Japan and ASEAN, strengthen the functioning of ASEAN-related departments in the new members of ASEAN as well as of the ASEAN Secretariat, and support other mutually agreed activities.

80. ASEAN and Japan have recognized the importance of human resources necessary for the development of an economic base of new member countries and have cooperated through the development of industries in these countries by 1:ltil.izing JETRO programmes, the dispatch of Expert and training schemes.

81. The ASEAN University Network/Southeast Asia Engineering Education Development Network (AUN/SEED-Net), which was jointly organized by the ASEAN University Network (AUN) and the Japan International Cooperation Agency (JICA) was inaugurated on 23 April 2001 in Bangkok. The AUN/SEED-Net, a sub- network under the ASEAN University Network, will implement a plan on human resource development in the engineering field, particularly by assisting in realizing upgraded standards of engineering education; improved ability of teaching and research staff; stronger linkage between the industry sector and member institutions; and establishment of a databank, web site and communications network.

82. The Japan-ASEAN relations, not only is partnership in areas such as trade and investment in the real economy deepening, but closer economic relations have been built up in other areas of economic cooperation.

3.2. FUTURE PROSPECTS

83. In recent years, there have been some noteworthy changes in these favorable relations between ASEAN and Japan.

84. Together with intensified competition brought about by globalization, Japanese corporations have become more sensitive than before to the business environment in investment locations and their demand levels are increasing in order to realize optimal procurement, production and sales on a global scale. The recent developments in China and its rapid growth are having a significant influence on ASEAN-Japan relations.

85. Although the course for recovery is on track, the 1997 Asian financial crisis and the influence of the long-term stagnation of the Japanese economy, together with that of the terrorist attacks in the United States, has slowed down the recovery of the ASEAN economies. Furthermore, if social and political stability as a basis of future development were affected, this would pose a threat to the further stable development of ASEAN.

86. ASEAN and Japan, while maintaining basically favorable relations, are facing a number of challenges. For Japan, the importance of ASEAN as a partner will not change. This can be understood from the fact that since the time of the 1997 financial crisis, while investment in ASEAN from the rest of the world has dwindled, Japan has maintained its significant share of investment in the region. In addition, Japan is an indispensable partner for economic development in ASEAN. Building on the foundation of relations that ASEAN and Japan have developed up to date, it is now necessary for both to tackle bravely the challenges facing both parties in their quest for greater development and prosperity in the future.

3.3. COUNTRY REPORT [To be annexed]

87. Country reports, which discuss the various aspects of bilateral economic cooperation between Japan and individual ASEAN Member Countries, are appended to this Joint Report. The country reports also include the views of some Member Countries on possible avenues for the expansion of ASEAN-Japan economic relations in the context of the ASEAN-Japan CEP.

SECTION FOUR -TOWARDS IMPROVEMENT OF TRADE, SERVICES AND INVESTMENT

4.1 TRADE. SERVICES AND INVESTMENT BARRIERS

88. The Expert Group has identified areas that needed to be improved in order to maximize complementarity between ASEAN and Japan and the cumulative effect of partnership and cooperation that has been built up in a variety of sectors, and to further deepen economic partnership.

89. In their work, the Expert Group pointed out the following measures/issues perceived as barriers to the flow of trade, investment and services between ASEAN and Japan:

4.1.1. TRADE

90. In general, tariff is one of the main issues in improving market access. Both sides are concemed about high rates and tariff peaks. However, both ASEAN and Japan agreed that an analysis of trade-weighted tariffs beyond the average would better explain the extent to which tariffs are causing barriers.

91. With regard to non-tariff issues, the Expert Group shared the view that the following areas are important: various kinds of regulations, import quotas, customs clearance procedure, and government procurement.

92. The Expert Group also noted the specific interests of Japan and ASEAN on tariff and non-tariff issues. For Japan, her interests lie in the reduction of tariffs on manufactured products, acceleration in customs clearance procedures, prevention of smuggling and in increasing transparency in implementing the procedures required on foreign contractors in the commission of public work projects. ASEAN's interests, on the other hand, lie in the improvement of market access in the agriculture, fishery and forestry sectors in Japan, and simplification of sanitary and phytosanitary measures (SPS).

4.1.2. INVESTMENT

93. The Expert Group was of the view that the business environment is crucial for investors in deciding investment destinations. In this regard, various regulations on FDI may sometimes inadvertently bring about serious impediments to business activities.

94. With regard to investment-related regulations, the Expert Group recognized that the following may serve as barriers: regulations concerning the introduction of foreign capital, performance requirements, withdrawal regulations, royalty regulations, and a lack of transparency in legislation.

95. Regarding business environment, the Expert Group shared the view that despite continuing efforts, further improvements in the following aspects can attract more investment: the speed of customs clearance procedures and appropriate protection on intellectual rights. The Expert Group agreed that investment would also be encouraged by the existence of sufficient supporting industries and adequate industrial infrastructure.

4.1.3. SERVICES

96. The Expert Group recognized that easing restrictions on foreign capital participation in some services sectors can revitalize trade in services. The following are examples of some foreign capital restrictions: the prohibition on the entry of foreign capital and limits on the foreign capital ratio in certain services sectors, such as finance, telecommunications, logistics and construction.

97. The Japanese side has expressed a particular concern for the improvement in ASEAN countries' domestic regulations and their application in the construction sector, in particular. On the other hand, the ASEAN side recognized that it is necessary to form some kind of mechanism that makes ASEAN countries think of Japan as a desirable destination for its trade in services. Moreover, ASEAN has expressed a keen interest to penetrate the Japanese services trade for its professional, semi-skilled, and skilled workers.

4.2. ENHANCEMENT OF ECONOMIC RELATIONS BETWEEN ASEAN AND JAPAN

98. To further deepen the complementarity of ASEAN and Japan and to facilitate further economic development while resolving the challenges, ASEAN and Japan should realize a CEP which would ensure the free movement of various factors related to economic and cultural activities under a more open and transparent environment, with a view to the establishing a future free trade area in the entire East Asian region.

99. The formation of a CEP will bring about increased trade volume, GDP and employment, as well as the effects on economies of scale and the acceleration of structural reforms. It will also give rise to a virtuous circle whereby regional stability brought about by economic development \vill in turn form the basis for further future development. By improving their appeal as destinations for investment, ASEAN and Japan will not only invigorate economic activity within the region, but \vill also draw in investment from other regions.

100. Regarding the free movement of economic factors, it is vital that market access be improved. This would include the reduction or elimination of tariffs and market entry regulations, as well as further liberalization of foreign direct investments (FDI) and facilitation of the movement of natural persons.

101. Accordingly, in realizing a CEP, an effective and desirable means is to realize the initiative for ASEAN-Japan Comprehensive Economic Partnership, which covers a wide range of areas such as trade, investment, services, and incorporates elements of a possible free trade area (FTA) while proceeding in the areas where implementation is possible. In order to maximize the effects of the economic partnership, the following factors should be incorporated: i) capacity building regarding administrative enforcement; ii) the development of hard and soft infrastructure, such as a broad logistical network and the digitalization of trade- related procedures, which would facilitate economic activities in the region; iii) cooperation concerning the implementation of various activities for the enhancement of business environment; and iv) cooperation in financial, environmental and energy sectors to minimize the impediments to sustainable development in the region.

102. In concluding an FTA, compliance with WTO rules must be ensured. In addition, it is also required that due consideration be given to the different levels of economic development and to sensitive sectors in ASEAN countries, particularly the new ASEAN members, and Japan. For example, the Japanese agricultural sector, into which ASEAN is trying to expand its exports, is one of the sensitive sectors for Japan. The Japanese side has stated that for Japan, the liberalization (the reduction and elimination of tariffs) of her agricultural sector is difficult because of the importance of food security and the negative impact of structural reforms in the domestic agricultural, forestry and fisheries industries. ASEAN countries have their own sensitive sectors and due consideration should also be given.

4.2.1. TRADE

4.2.1.1 Liberalization

103. It is necessary that the establishment of an FTA be consistent with the WTO Agreements, especially Article XXIV of the GATT and Article V of the GATS.

104. The most important means of achieving liberalization is tariff reduction. By mutually reducing tariffs, ASEAN and Japan would have room to increase two-way trade. Tariff reductions are possible through the multilateral level, as is the case in the WTO although in a deeper form. While giving due consideration to sensitive sectors on each side in order to achieve results promptly, the most effective and preferable means is to conclude an FTA.

105. In case an FTA is concluded, it would be important to have an agreement on rules of origin premised on the concession of tariffs in order to prevent the circumvention of goods from third countries. Although in principle rules of origin should be neutral to trade, there are cases when these rules are formulated or operated on an arbitrary basis or excessively restrictive resulting to protectionism. In cases where two or more countries are involved in the production of goods, their origin must be determined according to mutually agreed criteria.

106. Under the ASEAN Free Trade Area (AFTA) , tariff concessions under the Common Effective Preferential Tariff (CEPT) Scheme would be available for products with at least 40% ASEAN content by value. On the other hand, the Japan-Singapore Economic Partnership Agreement (JSEPA) adopts the Change in Tariff Classification Criteria (and partially adopts the Ad-Valorem Criteria) as its rules of origin.

107. Apart from tariffs, it would also be important to review non-tariff barriers to further expand trade.

4.2.1.2 Facilitation

108. To further promote trade under the ASEAN-Japan economic partnership, trade liberalization should be supported by trade facilitation activities such as simplification of customs procedures, harmonization and digitalization, and inter- and intra-corporation trade-related procedure digitalization. Mutual assistance aimed at strengthening appropriate enforcement of laws to curb smuggling and measures for improving exchange of information among customs authorities in ASEAN and Japan would also be important.

109. With regard to government procurement, securing procedural transparency and providing more opportunities for participation would increase ASEAN-Japan trade.

4.2.1.3. Cooperation

110. To complement trade liberalization and facilitation, cooperation activities, including capacity building, should be identified in order to enhance economic partnership between ASEAN and Japan. In giving shape to new cooperation arrangements, it would be important to review the existing cooperation projects to avoid duplication and targeting.

111. Customs Cooperation. As for the cooperation aimed at trade facilitation in the field of customs, the following points are important: i) simplification of customs procedures; ii) maintaining transparency and reliability; iii) promoting information exchange; and iv) introducing risk management methods to maintain the prompt and proper customs clearance. In addition, it is desirable to improve communications between customs officials of ASEAN countries and Japan, to discuss promptly and efficiently on specialized and technical agendas surrounding customs procedures.

112. Capacity Buildinq on Trade and Investment. Given the rapid development in the multilateral trading system, capacity building and technical assistance programmes are necessary to acquire more knowledge and promote greater understanding concerning dispute settlement mechanisms contained in ASEAN and the WTO rules, as well as improvement of investment regulations, transparency in investment rules and support for the swift accession of Cambodia. Laos and Vietnam to the WTO. Capacity building exercises could include training of officers.

113. Standards and Conformance Sustems. Several measures are important to develop and establish compatible and responsive standards and conformance systems in the ASEAN and Japan region, among others:

1. strengthening cooperation between ASEAN and Japan based on information exchange and policy dialogue on standards and conformance policies;

2. possible establishment of Asia Standardization Center; and

3. promoting capacity building of standardization organizations in --ASEAN countries based on ASEAN Standards and Conformance Cooperation Program.

114. ASEAN and Japan will consider mutual recognition arrangements between each ASEAN country and Japan in the future, if the criteria stipulated in the relevant articles of the TBT (Technical Barriers to Trade) Agreement are fulfilled by the relevant ASEAN country and Japan.

115. Business Environment. In order to spur trade and investment between ASEAN and Japan, it would also be necessary to undertake activities that would promote awareness and greater understanding of the business environment. Activities could include dispatching of missions, holding trade and investment seminars, and providing more information concerning the investment regime through cooperation with related organizations, e.g. JETRO and the ASEAN-Japan Centre.

4.2.2. INVESTMENT

116. Promoting investments between Japan and ASEAN will make significant contributions to the ASEAN and Japanese economies, i.e. securing economic development; employment opportunities through increased productivity; advancing a highly-developed industrial structure through increasing investment in research and development; and structural reforms through optimal allocation of funds.

4.2.2.1. Liberalization

117. In order for ASEAN to improve the investment environment in the ASEAN region and to maintain and enhance its competitiveness as a destination for investment, the Framework Agreement on the ASEAN Investment Area (AlA) has been concluded, thus advancing liberalization and facilitation of investment in the region. This agreement includes the following measures:

(a) In respect to opening up of industries and granting of national treatment to ASEAN investors, the Temporary Exclusion List ending dates are as follows:

For manufacturing sector:

2003 for ASEAN 6 and Myanmar

2010 for Vietnam, Lao PDR and Cambodia

 

For other sectors:

2010 for ASEAN 6 and Cambodia

2013 for Vietnam

2015 for Lao PDR and Myanmar

 

(b) For non-ASEAN investors, the date is 2020. The 4th AlA Council meeting in 2001 agreed to shorten this to 2010 for ASEAN 6 and 2015 for CLMV.

118. To strengthen economic partnership between ASEAN and Japan, liberalization and facilitation of investment should be a vital element. It is hoped that the liberalization measures being advanced under the AlA Agreement \vill be implemented jointly ahead of schedule with Japan, and those measures will be implemented in a two-way process.

119. To this end, one of the possible means would be to incorporate investment liberalization as an element of a CEP. This means of liberalization is the way to realize a deeper form of investment at an early stage.

4.2.2.2. Facilitation

120. In order to facilitate investment between ASEAN and Japan in the era of globalization where freedom in choosing investment destinations is increasing, it is of utmost importance for both sides to make their business environment appealing to companies from both sides.

121. With regard to the grant of intellectual property rights and enforcement measures, the following activities are strongly advocated:

(a) Improving of awareness of importance of legislation and protection of intellectual property rights in ASEAN countries;

(b) Enhancing of the efficiency of general office administration;

(c) Securing examination within reasonable time;

(d) Strengthening of enforcement.

122. To facilitate trade and investment flows between Japan and ASEAN countries, ASEAN and Japan should explore possible avenues for collaboration to curb anti-competitive activities, such as monopolistic behavior, through various means that may include information exchange and capacity building.

123. In their effort to enhance cross-border investment flows, both parties acknowledge that investors are attracted to an environment that has sufficient and appropriate infrastructure and acceptable degree of public security and safety and wholesome urban environments.

4.2.2.3. Cooperation

124. Based on the general concept of cooperation as shown in 4.2.1.3, priority should be given to areas that would improve the business environment and areas that would contribute to investment facilitation between ASEAN and Japan:

(a) To further enhance the attractiveness of ASEAN countries as a destination for investment, it is vital that the number of industrial human resources, including experienced engineers and middle management, be expanded. In particular, a quantitative increase in the number of engineer's equivalent to university graduate level is required.  To this end, in addition to human resource development in individual organizations in ASEAN countries, it is important to positively promote overall human resource development and technology transfer by making use of various cooperation schemes.

(b) Training enforcement officers and information exchange to realize highly effective enforcement of intellectual property rights.

(c) The development of wide-ranging hard infrastructure, such as ASEAN-wide logistic networks, which bring direct benefits to practical business, and in "soft" areas, such as digitalization of common trade- related procedures in the private sectors.

(d) Developing SMEs and supporting industries.

(e) Promoting capacity building for experts in controlling anti- competitiveness activities, and regional cooperation by facilitating the exchanges of information and experience relating to the regulation of anti-competitive activities that would have an adverse impact on trade and investment.

(f) Other areas of cooperation in investment

ASEAN and Japan share the view that the following cooperation activities could contribute to promoting investments in the region:

i.  Promotion activities to increase investor awareness of investment opportunities in ASEAN and Japan.

ii. Dialogues to focus on obtaining investor inputs on improving the investment environment in ASEAN and Japan

iii. Transparency-related activities to enhance FDI flows to ASEAN and Japan

iv. Capacity building and technical cooperation.

4.2.3. SERVICES

125. Between Japan and ASEAN, the liberalization and facilitation of trade in service sectors such as finance, construction and telecommunications will realize a deeper economic integration and further promote mutual economic development.

4.2.3.1. Liberalization

126. There are two possible paths to promote liberalization of trade in services between ASEAN and Japan: liberalization through the WTO negotiations and/or liberalization through an agreement on trade and services.

127. Trade in services negotiations in the WTO began in 2000 and is scheduled to conclude by 1 January 2005. Japan and some ASEAN members have submitted their initial requests. Agreement has been reached that WTO members will submit their offer lists by 31 March 2003. It is important that the countries of ASEAN and Japan make efforts to expand and substantially improve their commitments for liberalization through the WTO negotiations.

128. The conclusion of an agreement on trade in services between ASEAN and Japan could result in substantial and swift liberalization in services sector. In such an event it would be necessary to be consistent with the WTO rules. Under Article V of the GATS, an agreement to liberalize trade in the service sector can only be concluded once the following conditions have been satisfied: (a) that the agreement has "substantial sectoral coverage," and (b) that it provides for the absence or elimination of substantially all discrimination.

129. To promote liberalization of trade in services, ASEAN and Japan could consider undertaking measures such as relaxation of investment regulations in the service sector.

4.2.3.2. Facilitation

130. In order to facilitate trade in services between ASEAN and Japan, the following efforts are important:

(a) Ensuring transparency of investment rules in the service sector.

(b) Facilitating participation of foreign companies in government procurement bidding, such as construction.

(c) Facilitating the movement of persons

4.2.3.3. Cooperation

131. Cooperation towards the liberalization and facilitation of trade in services will include capacity building in accordance with the WTO framework as an important measure.

4.2.4. OTHER AREAS

132. By promoting effective cooperation in various sectors in accordance with the cooperation guidelines described in 4.2.1.3, both ASEAN and Japan would enjoy economic benefits and strengthen economic partnership. Specifically, the following measures can be considered:

(a) Facilitating the movement of business people

Facilitating the entry and temporary movement of business people to

support the intensive economic activities between the two sides. In order to facilitate the dispatch and assignment of engineers and business people from ASEAN to Japan and vise-versa, it is important to consider the following: transfer within intra-corporation; entry and residency permits for people who have knowledge at an appropriate advanced level pertinent to natural sciences and human sciences, based on an employment contract between the host company and the employee; and temporary entry and stay for short term business visitors. In addition, it .is also important to enhance transparency in immigration procedures such as the issuance of visas and residency stay permits, to specify standards for obtaining work and residency stay permits, and to simplify and hasten the procedures for entry.

(b) Cooperation for securing stability and sustainable development

In order to maintain and enhance the attractiveness of the ASEAN-Japan region as a destination for investment and a place for business activities, it is important to secure economic and political stability and enhance the certainty of development for the future. Therefore it is essential to enrich basic conditions for economic development in the ASEAN-Japan region through implementing the following activities:

(i) Policy coordination towards energy security. It is foreseen that energy demand in the Asian region will further expand in the future, given the rapid pace of economic development. At the same time, challenges exist such as dependence on areas outside the region for petroleum, in particular, the increasing dependence on the Middle East, and the need for a response to global environmental issues. In order to promote further development in the Asian economy, it is important that efforts be made to improve the energy security of each country in the Asian region. To this end, it is necessary for the following to be promoted: sharing of long-term energy supply and demand forecasts for each ASEAN country and Japan" improvement in energy use effectiveness, use of oil alternate energies and the securing of a stable demand for and supply of petroleum.

(ii) Coordination for environmental protection. Environment problems, including those transboundary in nature, will have adverse impacts on the society and the economy of the ASEAN countries and Japan. Therefore, it is pertinent to enhance the existing cooperation between ASEAN countries and Japan to address and mitigate such problems. In this respect, it is important for ASEAN countries and Japan to continue to ensure that the relevant environmental agreements and regulations are implemented accordingly.

(iii) Food security / forest protection. The nutrition-deficit population of about 500 million people remains in Asia, and easing of poverty and strengthening of the food security are common problems in Asian countries. In such circumstance, the "Study on East Asia Rice Reserve System" and "Development of ASEAN Food Security Information System", which were agreed at the meeting of the ASEAN agriculture and forestry ministers and ministers of the Republic of China, Japan and Republic of Korea (AMAF+3) last October, are important projects aimed at strengthening of the food security. The projects focused on encouraging farmers organizations and the extension of techniques and management of fisheries resources, according to the level of development stages and agricultural conditions of the ASEAN countries. Deforestation and forest degradation continue to be a concern, so it is important for Japan, as one of the world's largest wood-importing country, and ASEAN to cooperate in order to achieve sustainable forest management and promote afforestation in the region.

(c) Cooperation in individual industrial sector

(i) Information and communications technology in order to work towards the expansion of e-commerce and bridging the digital divide in ASEAN countries and Japan, it is important that the AJCEP promote the development and standardization of a common ICT infrastructure, the establishment of related legal framework, the movement of highly-qualified ICT engineers and provision of training and skills-upgrading for ICT engineers.

(ii) Automobile sector. To ensure the sound development of the automobile industry in the ASEAN-Japan region, measures such as introducing ECE-based technical regulations and mutual recognition systems- within ASEAN are important from the perspective of improving safety and quality performance, and environment protection.

(iii) Bio sector. In order to enhance the competitiveness of bio-industries-in ASEAN and Japan, there is a need for partnership and increased  investment in this area. Joint human resources development, and information and personal exchanges among bio-engineers are also important.
(iv) Tourism sector. In order to realize the smooth and speedy movement of holidaymakers to and from Japan and ASEAN, it is important that institutional factors of both sides such as the requirements for tourist visas be improved. Through the activities of fora such as the ASEAN+3 meeting and the Tourism WG of the ASEAN-Japan Centre, it is important for ASEAN to become aware of the needs of the tourism sector and conduct policy dialogues on the possible cooperation measures for promotion of tourism.

(v) Mega-Projects. With a view to enhancing economic partnership further, it is also important to explore possible areas for large-scale cooperation projects ("Mega Projects") between ASEAN and Japan.

(d) Other Areas. It is also useful to consider having trade related rules such as anti-dumping and safeguards, and methods of dispute settlement to further facilitate trade between ASEAN and Japan.

SECTION FIVE -ASEAN-JAPAN CEP

5.1. FRAMEWORK FOR ASEAN -JAPAN ECONOMIC RELATIONS

133. Based on the foregoing discussions and in order to strengthen ASEAN-Japan economic partnership, there should be a common understanding between ASEAN and Japan. The following understandings and principles are appropriate in order to move on to the next step:

(a) In order to enable economic factors to move freely between ASEAN and Japan, and to promote economic activities possibly with standardized and transparent systems, a CEP between ASEAN and Japan should be realized. The realization of the ASEAN-Japan CEP would boost the future development of an economic area covering East Asia.

(b) The realization of the ASEAN-Japan CEP should focus not only on the liberalization or promotion of trade, services and investment, but also on a wider range of areas, including measures to improve the business environment, and the ensuring of stable and sustainable development and other areas of cooperation (comprehensiveness of sectors) and should embrace all the countries within the ASEAN-Japan region (comprehensiveness of countries). In addition, each measure shall be implemented under the principle of reciprocity and mutual benefits, as far as possible.

(c) The integrity and solidarity of ASEAN should be given due consideration, and from this point of view, the results of bilateral efforts should be reported on a regular basis to appropriate bodies.

(d) In order to ensure the development of ASEAN as a region, due consideration to the different levels of economic development among the countries within the region will be given. The interests of ASEAN's new members should be considered through technical cooperation and capacity building, and the gradual and longer timeframe in implementation of the liberalization-related measures under the CEP.

(e)For countries which are not members of the WTO, the Government of Japan will continue to provide Most Favored Nation (MFN) treatment as stipulated in Article 1 of the General Agreement on Tariffs and Trade (GATT).

(f) While giving due consideration to the economic level and sensitive sectors of each country, implementation of concrete measures for the CEP should take into account the principle of flexibility and special and differential treatment.

(g) ASEAN and Japan should create the necessary mechanism to resolve disputes under the ASEAN-Japan CEP.

(h) The CEP shall be consistent with and conform to the requirements of the WTO taking into account the outcome of the WTO discussions on regional trading arrangements (RTAs).

(i) The initiative for ASEAN-Japan Comprehensive Economic Partnership, including elements of a possible FTA, should be realized as early as possible. As such, measures under the CEP should begin in areas where implementation is feasible.

5.2. IMPLICATIONS OF AN ASEAN-JAPAN FREE TRADE AREA

134. If ASEAN and Japan were to realize the CEP that covers a \vide range of areas for economic cooperation, including elements of a FTA, it is expected that there would be significant economic effects on the economies of both ASEAN and Japan:

(a) Trade volume between Japan and ASEAN will increase through the trade creation effect and the trade diversion effect that accompany the reduction and elimination of tariff.

(b) Following the integration of markets, investment from outside of the region will increase based on the potential for the establishment of procurement, production and sales systems within the region.

(c) For the reasons mentioned in (a) and (b), not only will investment from Japan to ASEAN increase, but investment from ASEAN to Japan can also be expected.

(d) Increasing trade and investment will raise productivity through dissemination of technology, and improved productivity will result in further progress in capital accumulation. Accordingly, employment as well as GDP in ASEAN and Japan will increase.

(e) Following the reduction and elimination of barriers, structural reforms in Japan and the ASEAN countries will be advanced through enhanced competition in the region following the reduction and elimination of barriers.

(f) Consumer profit will increase since the people of Japan and ASEAN will have a wider range of choice in products and services.

(g) Together with movements to integrate economies in other areas, an even wider strengthening of economic partnership in East Asia will be accelerated.

5.2.1. NUMERICAL ANALYSIS OF THE IMPACT OF AN ASEAN-JAPAN CEP

135. By using a general-equilibrium dynamic model, known as the Global Trade Analysis Project (GTAP) Model, a quantitative analysis of the effects that tariff reductions have on the macro-economy and each industry of ASEAN nations and Japan was done.

136. The model also showed the indirect positive effect of tariff reductions on technology transfer, as a result of the increase in exports and FDI flows between Japan and ASEAN, as well as competition promotion effect on domestic markets through an increase in imports.

137. As a result of this analysis, the following effect is expected if ASEAN and Japan are to realize the CEP:

(a) Both ASEAN and Japan's trade and economic growth and welfare will be boosted. However, in comparison to Japan, ASEAN as a whole will enjoy a greater expansion in exports and economic growth.

(b) GDP will increase by an amount equivalent to 1.99% and 0.07% of the corresponding GDP from the base year of 1997, for ASEAN and Japan, respectively. Welfare will likewise increase by US$ 4.59 billion equivalent to 0.13% of that in 1997 for Japan and by US$ 5.59 billion equivalent to 2.61 % for ASEAN from the base year.

(c) The export value from ASEAN to Japan will increase by US$ 20,630 million, which is equivalent to 44.2% of the corresponding export value in 1997, and the export value from Japan to ASEAN will increase by US$ 20,022 million, which is equivalent to 27.5% of the export value in 1997. The export value from ASEAN to the world will increase by US$ 11,661 million, equivalent to 2.9% of that in 1997 and that from Japan to the world will increase US$ 24,730 which is equivalent to 5.0% of that in 1997.

(d) In both ASEAN and Japan, by realizing the CEP, the expected rate of return will increase because of a stimulated domestic demand. It will bring about an influx of both domestic and international capital and capital accumulation that is vital for economic development for the future. (Capital accumulation will increase by 3.33% of that in 1997 for ASEAN and 0.08% for Japan).

(e) Increase in foreign direct investment will bring about technology transfer and a ripple effect to the country receiving investment and will enhance domestic productivity. In addition, an increase of imports will promote competition in the domestic market.

138. The detailed analysis of the impact of the CEP, based on the GTAP Model, appears in ANNEX 2. Because of data accessibility and software constraints it is difficult to quantify all effects of CEP through numerical analysis. However, this is still a useful analytical tool to have a broad understanding of the impact that the CEP has on economies and industries.

139. Taking into consideration the removal of non-tariff barriers, trade facilitation measures, expansion of human exchanges, economic cooperation in other areas that are difficult to quantify , the actual positive effects of realizing CEP are indeed expected to be greater than the figures reported.

5.2.2. BEYOND ECONOMIC BENEFITS

140. The effects of the ASEAN-Japan CEP would transcend beyond mere economic benefits to improve the presence of ASEAN and Japan in the international community and in international fora. It would also contribute to regional stability and security through economic development. In addition, the creation of community consciousness in ASEAN and Japan resulting from the CEP would cultivate a path towards further strengthening the ASEAN-Japan economic area.

(a) Japan and ASEAN will be able to enhance their presence in the international community and international fora; common position on issues can be taken to realize common benefits.

(b) The realization of the CEP will lead to regional economic stability and contribute to the maintenance and enhancement of political and social stability. As a result, it is expected that regional conflicts will diminish and regional security will be enhanced, in the long-run, thus contributing to world peace.

(c) The stabil5zation of the ASEAN and Japanese economies resulting from the CEP will allow for economic coexistence and co-prosperity that will contribute to the political stability of individual nations and regional security. Regional stability will improve the investment environment through increasing predictability and will realize a virtuous circle that brings further economic development.

(d) Facilitating the movement of goods, persons, and services will foster a communal consciousness among the peoples of ASEAN and Japan that will cultivate a path to form a common ASEAN-Japan identity.

(e) The strengthening of economic partnership between ASEAN and Japan will promote economic growth and make Asia a growth center, which in turn will be a driving force for the world economy.

SECTION SIX -RECOMMENDATIONS AND CONCLUSION

141. The Expert Group recommends that concrete measures in realizing the Framework for ASEAN-Japan CEP be taken immediately in order to carry out the objectives of the ASEAN-Japan CEP. The Expert Group further recommends that an appropriate and flexible timeframe for the realization of the ASEAN-Japan CEP, including elements of a possible FTA, should be provided for, while giving due consideration to the economic level and sensitive sectors of each country.

142. To consider an ASEAN-Japan CEP, consultations should be promptly initiated in accordance with modalities that incorporate the following points:

(a) In order to strengthen the ASEAN-Japan economic partnership, a committee, comprising government representatives from the ASEAN countries and Japan, should be established. Individual countries may complement the work of the committee with inputs from the business and academic sector.

(b) The committee should be established within 2002 or early in 2003, and should start consideration of specific measures to realize the CEP taking into account the guiding principles indicated in paragraph 133. The committee will consider developing the Framework ,which would provide the basis for concrete plans and elements for the realization of the ASEAN-Japan CEP.