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Dynamism of International Division of Labor of the 21^st Century Brought About by Regionalism

I feel a bit disappointed each time I am asked that simple but important question, “Is trade liberalization actually a good thing?” Theories on international trade, my area of expertise, are here for explaining the need for trade liberalization. Such a question makes me wonder what we have been doing.

There are two ways to approach theories on international trade: one is from the economics standpoint where government is well-distanced from the real world economy and is capable of always implementing optimal political measures; and the other is from the political economics standpoint where political measures are formed through interactions mainly involving the economy. Following these paths makes it theoretically possible to justify free trade reasonably and with convincing evidence, even though it may not be always easy to comprehend. So why then have we been unable to fully persuade the general public? It must be because no sufficient policy debate has been presented in the area of international trade studies in a way suited to actual situations of the constantly globalizing economy.

Richard Baldwin calls today’s globalizing economy the age of a second unbundling (fragmentation in units of production processes and tasks). Here we find a completely different form of international division of labor from the age of the first unbundling (separation of production and consumption) that took place in the preceding century. The international economic order required therefore also differs. However, economic and politico-economic analyses have not matured enough to suit the new age. Not only theoretical studies but also political debates and quantification of outcomes of political measures have lagged far behind the actual economy.

East Asia is the area where the second-phase unbundling has most progressed, especially for the manufacturing industries in the form of production networks. Japanese companies have played important roles in configuration of these networks. This is also where the source of Japanese companies’ competitiveness is found. The economic partnership agreement (EPA) Japan concluded with ASEAN countries incorporates various political modes beyond mere tariff elimination for further activating the production networks. It has the potential to serve as a prototype of 21^st century regionalism. And competition has now begun among regions for configuring a new model of international economic order. The Trans-Pacific Strategic Economic Partnership Agreement (TPP) is one such attempt. Economic integration in East Asia also has a potential for exercising leadership.

To begin with, configuration of an international economic order fit for the new age and establishment of 21^st century regionalism are tasks for Japan to perform. Yet Japan has not fully understood the historical significance of the new movement and has been concerned only about near-term domestic politics. The situation has accelerated decline of its relative position in international society.

This article seeks to explain the significance of trade liberalization in the new age, using economic and politico-economic theories, clarify its impact on the international economic order, and based on these discussions deliberate the path to be taken by Japan in economic diplomacy.