Northeast Asia’s Free Trade Dream

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Northeast Asia’s Free Trade Dream

Japan, South Korea and China are slowly working towards a free trade agreement. Will old disagreements kill a possible deal?

Amid a storm of bluster and posturing in East Asia, there has been scarce analysis on recent attempts at regional integration. Despite this, the rising tensions on the Korean Peninsula have actually served to temporarily move the microscope away from maritime security issues and territorial disputes in favor of punditry over Pyongyang’s nuclear wish list. This has subsequently provided diplomats in region, especially those in Beijing and Tokyo, with the necessary breathing room to soften the tone of their vitriolic exchanges of the past year.

Last month, senior trade officials from China, Japan and Korea met in Seoul for the first round of talks aimed at concluding a massive trilateral free trade agreement (FTA). The trade pact would combine the region’s two biggest economies along with a booming South Korea market that has cracked the top fifteen globally (as measured by GDP). The initial round of discussion in Korea was more perfunctory than anything but this development should not be dismissed as a fool’s errand. After talks with his counterparts in Seoul, South Korean Deputy Trade Minister Choi Kyong-Lim stressed that this meeting was crucial for “establishing trust between negotiators from the three countries, which may play the most important role as negotiations move forward."

Critics will point to the fact that the China-Japan-S.Korea FTA has been an elusive dream for decades as a result of a multitude of factors, including disagreements over market access, exorbitant tariffs and political issues. Granted, much of this still holds true – especially the latter. China’s relationship with Japan has suffered incrementally over the past few years due to renewed clashes over the Senkaku/Diaoyu islands in the East China Sea. Moreover, Japan and Korea have been unable to fully repair frayed ties over history and their own territorial dispute, despite the near simultaneous election of two new leaders. 

But while some parts of the story remained more or less the same, others have changed. On the trade side, there is urgency for all three countries – to varying degrees – to get ahead of the curve amid a proliferation of free trade pacts and talks in the Asia-Pacific. The fast-moving Trans Pacific Partnership (TPP), a U.S.-led free trade agreement in Asia, has set off alarm bells in Beijing which is thus far excluded from the pact. Indeed, China may have the most to gain from a trilateral pact because it would allow Beijing to combat pressure and dependence on the Western market, while simultaneously undercutting the emerging TPP.

The dividends, however, would not be limited to China. A trilateral agreement would be a lift to the Japanese economy due to the fact that it would secure a privileged status with its two most prominent trading partners in the region. South Korea benefits too as it would be able to erode competition from the Association of South East Asian Nations (ASEAN) and – ironically – Japan for access to the Chinese market.

Indeed, South Korea and Japan are far ahead of China on the trade pact front for obvious reasons. Tokyo has concluded thirteen FTAs (all but four of those in Asia) and is in the process of negotiating five more, including stalled talks with South Korea. Japan is also in the exploratory stage of FTA talks with the European Union (EU), Turkey, and Colombia. Meanwhile, South Korea has not been resting on its laurels either. Seoul has eight FTAs in effect and two more awaiting ratification. It has recently adopted a frantic pace and is negotiating eleven more along with four additional talks that are still in the exploratory stage. Numbers however don’t tell the whole story as South Korea’s landmark agreements with the EU and the U.S. separates it from Japan’s cadre of pacts mainly focussed in Asia.

On the other hand, China has a considerably more modest stable of FTAs with ASEAN, Singapore and New Zealand as the crown jewels. However, China is feeling increased pressure with the aggressive TPP timeline. As a result it has been promoting the Regional Comprehensive Economic Partnership (RCEP) that would include ASEAN and the six countries that have an FTA with the group– India, Japan, China, South Korea, Australia and New Zealand. If completed the RCEP would include 3 billion people, have a combined GDP of US$17 trillion, and account for almost 40 percent of global trade. By way of comparison, a TPP agreement that did not include Japan would have 650 million people, a US$20 trillion combined GDP, and more than 40 percent of global trade.

In addition to the China-Japan-S.Korea FTA and the RCEP, China has also been pursuing FTAs on a bilateral basis. Most notably, Beijing it set to begin negotiations with South Korea as a separate channel outside of the trilateral and multilateral tracks. Earlier this week China also inked its first FTA with a European country when it signed one with Iceland. Although economically negligible in itself, this could potentially lead to China signing FTAs with other European powers.

While economic regionalism seems to be the order of the day, it is important to remain cautious in making predictions about a trilateral FTA in Northeast Asia. Unfortunately, nationalism and politics will continue to have the potential to have a spoiler effect and drag the region’s new leaders into a prolonged diplomatic fist fight.

Indeed, on Thursday South Korean officials announced that China has asked it to postpone the annual meeting between leaders from these three countries, which was set to take place in Seoul next month. Although “domestic political schedules” was the official reason Beijing gave for requesting that the meeting be postponed, the Sino-Japanese island dispute is widely believed to be the actual motivation.

At this point, however, the second round of trilateral FTA talks are scheduled for China this summer, followed by a third round in Japan before the end of the year.