Jan 26, 2010 | 23:41 GMT

5 mins read

China, Japan, South Korea: A Trade Agreement on the Horizon

South Korea was scheduled to host a meeting Jan. 26 for government, business and academic leaders from Japan and China to launch research into the feasibility of a trilateral free trade agreement. Free trade agreements have become especially popular in East Asia, where export-oriented economies are seeking ways to shield themselves from dependency on consumption in the United States and Europe. China, South Korea and Japan will each try to squeeze the most political and economic benefits out of the others. A deal is possible, but not soon.
South Korea was scheduled to host a meeting Jan. 26 with Japan and China to begin a joint research project into the feasibility of a trilateral free trade agreement (FTA). The meeting included government, business and academic leaders and marks an attempt to pave the way for official FTA negotiation. The proposed FTA received at least theoretical support from Japanese Prime Minister Yukio Hatoyama, Chinese Premier Wen Jiabao and South Korean President Lee Myung Bak at a meeting in Beijing in October 2009. While an FTA will take a long time to hammer out, each of the three states has national interests invested in making the idea a reality. East Asia is the most fertile ground for FTAs. Throughout the region, countries provide labor-intensive manufacturing and export goods to wealthier, consumer-driven economies. In recent decades, especially with the rise of information technology, the internationalization of supply chains has led to a high degree of interdependence among these states. With trade such an important factor in their national livelihoods, these states are seeking ways to expand and bolster their trade revenues and create more opportunities. Hence the optimistic embrace of FTAs across the region, from Singapore to Japan, expanding the degree of openness provided by the World Trade Organization. China has 14 bilateral FTAs, mostly with Southeast Asian states, including one with the Association of Southeast Asian Nations (ASEAN) that took full effect on Jan. 1. Both Japan and South Korea have concluded trade agreements with ASEAN and multiple other countries. East Asian states have also forged numerous trade pacts with partners across the Pacific. All of these states are looking to gain greater access to each other's markets and goods, while at the same time seeking to minimize the competition this brings to their domestic industries. For several years, China, South Korea and Japan have discussed forming an agreement. Japan has the second-largest economy in the world; however, China is a close third and, with rapid growth rates, is likely to surpass Japan when the final 2009 tally is announced. South Korea is the 13th-largest economy. Combined, their gross domestic products reach over $10 trillion. All three states are among the world's leading producers of industrial and agricultural goods, with China and Japan in the top few and South Korea near the top 10. All three are also major trading countries — exports account for roughly 15 percent of Japan's economy, 35 percent of China's economy and 50 percent of South Korea's economy. Moreover, they each rely on international trade to provide them with the raw materials and energy they need to power their industries (even China, endowed with much greater natural resources than the others, has in recent years exceeded domestic resources of key inputs). A further impetus for East Asian giants to forge trade deals is the growing awareness that demand in the major American and European external markets is weakening — especially after the adjustments of the most recent global recession. To prepare for the future, Asian states are seeking local markets as a supplement. Ultimately, they imagine that a trilateral Northeast Asian deal would lay the foundation for a greater East Asian low-tariff area, which has been proposed separately by Beijing, Tokyo and Seoul. But for this to happen, the three powers must agree among themselves. Of course, Japan, South Korea and China approach FTAs from different directions. Japan is saddled with the developed world's greatest debt burden after two decades of flaccid growth and state-funded life support. Worse, its population is shrinking rapidly. Japan's goal is to turn its massive capital into investment, harnessing foreign labor and raw materials to try to find a technological answer to its shrinking powers. China has a massive population and manufacturing heft, but its production is mostly on the low end of the value spectrum, and it needs to import know-how and technology from more advanced states. South Korea, in a position similar to Japan but without the deep fiscal flaws, will compete with Japan for investment opportunities and markets in China, while at the same time attempting to preserve its share of low-end exports to Japan. As with any FTA, there are strategic interests in addition to economic ones. Japan is attempting to reap as much benefit from China's growing economic power as possible, while not letting China overwhelm it. Tokyo also wants to win itself more freedom of action from the United States, particularly by focusing on the Asian sphere, where there is labor and resources to capture. China will seek to restrict foreign intrusion (such as Japanese investment) that could pry its wealthy regions away from central control. China also wishes to tighten the economic bonds with Japan and South Korea so as to counterbalance their security alliance with the United States — the strategy being that the closer the two countries are with China, the less likely they are to encourage any future American attempts to weaken China. South Korea's goal — as always — is not to be crushed by the two greater powers but to remain in the thick of whatever new relationships are developing, while moving quickly to seize opportunities that emerge. In the end, China, South Korea and Japan will try to squeeze the most political and economic benefits out of each other while leveraging each other to hedge against the global changes that threaten them. The joint research project begun in Seoul on Jan. 26 is only the beginning of the beginning — formal negotiations are still a ways off, and they are almost universally tortuous when it comes to FTAs. Still, the geopolitical fundamentals for a deal do exist.

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