Pacific Money

Korea Should Stay Out of the TPP – For Now

Given its regional and security interests, bilateral FTAs appear to make more sense for the time being.

Initiated in 2003, The Trans-Pacific Partnership (TPP) negotiations currently encompass 12 Asia-Pacific countries: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the U.S., and Vietnam. While these parties do have a number of free trade agreements (FTA) among them, significant gains can still be made through the inclusion of disciplines not covered under previous agreements. Covering 8.6% of world trade and almost 40% of global GDP, the TPP is a key piece of the Obama Administration’s rebalance to Asia. The negotiating parties are working hard to finish an agreement by the end of 2013, although it is highly uncertain whether or not they will achieve this goal, given the amount of negotiating that remains.

A competing agreement has also been launched, the Regional Comprehensive Economic Partnership (RCEP), which includes the Association of Southeast Asian Nations (ASEAN: Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei, Burma, Cambodia, Laos, and Vietnam) and the six countries with which ASEAN has FTAs (Australia, China, India, Japan, New Zealand, and South Korea). Though RCEP would be less comprehensive and ambitious than the TPP, it would cover over 50% of the world’s population and 27% of global GDP; there also seems to be some potential for the U.S. and Russia to join. While negotiations are not complete, RCEP is projected to be implemented in 2015.

The U.S. invited South Korea to join the TPP negotiations in late 2010. Although Korea demurred, the country has been following the process closely. In the wake of Japan’s recent accession to TPP talks, Korea has been named as one of the countries most likely to join next. U.S. negotiators have continued to encourage Korea to join, pointing out that the TPP will address issues that were not covered under the Korea-U.S. FTA (KORUS FTA), such as state-owned enterprises (SOEs) and regulations integration. As the Assistant U.S. Trade Representative Wendy Cutler noted in an April speech, "We do think it's natural and logical for Korea to join this negotiation. We think they would have a lot to offer."

However, Korea seems content to remain outside the TPP. Earlier this year, Minister of Strategy and Finance Hyun Oh-seok noted, “Regarding the U.S.-led TPP, Korea will comprehensively review current conditions of the negotiations, its effects on the Korean economy, developments of Korea-China FTA, the China-Japan-Korea FTA and RCEP negotiations, and then cautiously determine Korea’s joining and the best timing.” In June, Seoul announced a new trade policy roadmap in which Korea would become the linchpin of East Asian economic integration.

Korea has pursued an ambitious strategy of pursuing bilateral FTAs in order to develop a global FTA network; currently, this network covers 60% of the global economy. Korea has FTAs with ASEAN, Chile, the European Union (plus Lichtenstein, Iceland, Norway, and Switzerland), India, Peru, Singapore, and the U.S., while FTAs with Columbia and Turkey are awaiting implementation. Seoul is also negotiating FTAs with Australia, Canada, the Gulf Cooperation Council, Indonesia, Mexico, New Zealand, Vietnam, China, Japan, trilaterally with China and Japan, and the RCEP, and is in pre-negotiation stages with Central America, Israel, Malaysia, and MERCOSUR (Argentina, Bolivia, Brazil, Paraguay, Uruguay, and Venezuela). When the current and planned negotiations are complete, almost 90% of its trade will be covered.

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In assessing whether Korea should join the TPP, China is a key issue. China sees the TPP as a U.S.-led initiative to contain Chinese growth, in parallel to U.S. efforts to constrain China’s increasing military power. As an apparent confirmation of China’s worries, the U.S. has stationed Marines in Australia, increased exercises with the Philippines, and sent Defense Secretary Chuck Hagel in late August on a tour of Southeast Asian nations to seek permission for increased U.S. military rotations and use of bases.

China also sees the TPP as a U.S. attempt to put into place a trade regime that China eventually will have to join but in which it won’t have any say on the rules. The U.S. has not officially invited China to join and during TPP negotiations has insisted on standards that would be difficult for China to meet, like intellectual property, SOEs, environmental protection, and labor rights. Chinese apprehensions about the TPP could lead to a downturn in Chinese-U.S. relations and perhaps reduce the likelihood of finding a diplomatic solution to the South China Sea disputes.

China has responded by forging ahead with the RCEP and its own FTA negotiations, including a Korea-Japan-China FTA, for which a third round of negotiations is slated for later this year. South Korea meanwhile seeks to complement the KORUS FTA with a Korea-China FTA; a seventh round of negotiations on that is coming this month. Since the two normalized relations in 1992, bilateral trade has grown from $6.3 billion to $215.1 billion last year. China is Korea’s main trading partner, representing 25% of exports and 16% of imports. Korea is China’s third-largest trading partner.

For this reason, and given that China seems to be the only country with any influence on North Korean decision-making, the South needs to keep China happy. A South Korea-China FTA would further reinforce the importance of South over North Korea, emphasizing the extensive China-South Korea trading relationship, compared to the economic assistance the North needs from China. China-South Korean trade is 35 times larger than Chinese-North Korean trade.

Although China’s attitude towards the TPP has softened somewhat in recent months, with some officials and analysts recently arguing that China should participate, this is unlikely in the near future. By staying out of the TPP, Korea can avoid upsetting its number one trading partner; and, as Korea has or is negotiating bilateral or multilateral FTAs with all the TPP countries, non-participation will not be too economically disadvantageous. At least for now, given its wider geopolitical and security interests, not joining the TPP is Seoul’s best choice.

Ashley Hess is a Kelly Korean Studies Fellow at Pacific Forum CSIS.