Conclusions

The future integration of three giant economies of the world— the PRC, Japan, and the US— is likely to have important impacts on the global and regional economies. This paper has examined issues related to economic integration among the PRC, Japan, and the US. Specifically, it has considered the implications both of the global economic crisis, emanating from the US, for domestic structural reforms in East Asian economies, and of the deepening economic relationship between East Asia and the US for East Asian economies. The simulation results from a global CGE model indicate that consumption evaporation in the US and its consequent decline in demand for imports would force important structural adjustments in East Asian production and trade. With the drop of the US share in East Asian exports, East Asian economies need to reorient their exportable outputs to themselves—through greater domestic demand—and to third markets. The manufacturing sectors such as vehicles, electronics and machinery are major losers in the adjustment process in East Asian economies. On the other hand, the agricultural and service sectors are likely to gain from the expanded domestic demand. For East Asian economies, structural reform to boost service sector productivity would not only bring them important welfare gains, but also facilitate their adjustment to the correction of the US current account deficit.

Given that US demand for East Asian manufactured products will remain low and US potential growth may be permanently reduced in the aftermath of the ongoing financial crisis, an important issue for the PRC and Japan is whether they should weaken or strengthen economic ties with the US. Our integration scenario suggests that, in terms of FTA strategies, the PRC and Japan should still consider strengthening economic ties with the US, but only by bringing other East Asian economies into the integration process.

In principle, the most desirable method for trade integration would be multilateral liberalization involving all countries in the world as it would bring the largest gains to all.¹¹ However, given the uncertainties in the progress of global multilateral trade liberalization, it makes sense to consider the more feasible options of creating regional or cross-regional FTAs, such as an East Asia-wide FTA and a cross-regional FTA. The results of the three FTA sub-scenarios show that while the PRC may prefer trade integration with the US through a PRC-Japan-US FTA, other emerging East Asian economies prefer integration with the PRC and Japan. Japan may prefer to combine both intra-regional and cross-Pacific trade integration. Although an FTA among the PRC, Japan, and the US would bring important economic benefits for the PRC and Japan, it would lead to adverse welfare consequences for other East Asian economies. In contrast, a regional initiative to create an East Asia-wide FTA could produce large benefits for many East Asian economies. The PRC may wish to exercise its leadership by joining in this initiative. Ultimately all the East Asian economies should make efforts to link the region with the US, in a broad trans-Pacific FTA covering both East Asia and the US (as well as the rest of North and South America), as a promising option to reap the benefits of broader and deeper economic integration.

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