Jun. 29 – Last
month, at the Fifth Trilateral Summit between China, Japan, and
South Korea the three countries jointly announced their intent to begin
negotiations on a trilateral free trade agreement (FTA) by the end of 2012. The
announcement raises questions not only about the impact of the successful negotiation
of such an agreement, but also about its feasibility.
While the result of the Summit (namely the Joint
Declaration on the Enhancement of Trilateral Comprehensive Cooperative
Partnership) proudly declares that trilateral cooperation first began in 1999,
relations between the three countries have hardly been without incident in the
past few years. China-Japan and South Korea-Japan disputes over islands in their
respective bordering seas as well as fishing disputes between the countries are
just a few of the myriad disagreements between the countries.
However, all three countries recognize the impact a
regional FTA could have on their economies. In 2010, the combined GDP of the
China-Japan-South Korea region accounted for approximately 20 percent of the
global total. Furthermore, an FTA for the region would initiate massive tariff
reductions for an estimated 17.5 percent of all global trade and foreign direct
investment, based on figures for the same year. This means that the potential
economic implications of the proposed trilateral FTA could eclipse those seen
under similar agreements such as NAFTA, ASEAN or the European Union.
The city of Qingdao, China is anticipating the success of
trilateral negotiations and has applied to the Ministry of Commerce as well as
to the provincial government for permission to construct an economic
cooperative area with tax incentives that would emulate an eventual FTA.
In addition to the example set by the Qingdao economic
cooperative area, bilateral trade agreements between the countries could also
potentially set the precedent for the eventual trilateral FTA. China and South
Korea are already pursuing bilateral trade agreements, and will hold the second
round of their FTA negotiations in Jeju, South Korea in early July. This
follows their joint announcement in May that they would pursue formal FTA
negotiations with a predicted two-year timeline.
While any concrete agreements are still a long way off,
the impact of such deals is still possible to ascertain. The success of a
trilateral FTA, or even a China-South Korea FTA, would place South Korea in a
precarious position due to its existing FTA with the United States. As it
attempts to cultivate relationships with the United States and China, it will
be forced to adopt non-aligned stances on both economic issues as well as the
political issue of North Korea.
Increased regional trade due to an FTA could also usher
in greater usage of the Chinese renminbi as the de-facto regional trade
currency. This trend could spill over into greater Asia as more countries vie
to join a successful China-Japan-South Korea trade bloc. ASEAN has already had
a vision for an all-encompassing regional East Asian FTA for a decade now, and
the organization currently has bilateral trade agreements with all three
countries. So if negotiations prove fruitful with regards to the
China-Japan-South Korea trilateral FTA, the Southeast Asian organization will
surely push for an ASEAN+3 FTA.
However, despite the gathering anticipation of a
China-Japan-South Korea FTA, there are still many political hurdles. South
Korea has a presidential election scheduled for December of this year while
China has its 18th National Congress coming up this fall. New leaders could
present different political visions and stall progress on negotiations.
Although, when the FTA is finally codified and signed, its impact will
assuredly extend far beyond the three countries involved.
Joshua Gill
Business & Investment Opportunities
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