SEOUL – Last month, the leaders of China, Japan, and South Korea agreed to begin negotiations later this year on a trilateral free-trade agreement. If the talks succeed, the global trade map will need to be redrawn. An FTA that encompasses, respectively, the world’s second, third, and 12th biggest economies (in purchasing power parity terms in 2011), with a population of 1.5 billion, would dwarf the European Union and the North American Free Trade Agreement, comprising the United States, Canada, and Mexico.
Indeed, Northeast Asia would become the third major axis of regional economic integration, following the EU and NAFTA. Until now, the region has been unable to institutionalize economic cooperation as vigorously as Europe and North America have. But if the proposals discussed in Beijing last month are realized, the resulting FTA could surpass NAFTA in its degree of integration and importance to the world economy.
In addition, the formation of a China-Japan-South Korea FTA would most likely trigger a chain-reaction. For example, the momentum could expand southward and stimulate ASEAN, which has bilateral FTAs with all three countries, to join the group. Such a turn of events would be equivalent to establishing the East Asia Free Trade Area, which the ASEAN+3 envisioned about a decade ago. If that happened, other countries – Australia, New Zealand, and, most importantly, India – might seek to jump on the bandwagon.
The US would, of course, need to respond to the conclusion of any trilateral Northeast Asian FTA in order to preserve its own role in global trade – and in the supply chains that dominate the Asian economies. It would likely seek to expand and deepen the infant Trans-Pacific Partnership, the trade agreement that President Barack Obama committed the US to last year.
In particular, the US would strongly encourage Japan to join the TPP, because the US might want a united Asia-Pacific economic community, rather than a division between Asia and the Pacific. Because Japan would not want to be disconnected from the US for strategic reasons, it might indeed accept America’s invitation.
In this scenario, both Japan and South Korea would have to find some means to bridge a Sino-centric Asia and a US-centered Pacific. Despite its smaller economy, South Korea seems to be better prepared than Japan to play this critical role. South Korea has already concluded an FTA with the US, after years of difficult negotiations, and plans to negotiate a bilateral FTA with China this year.
Thus, the key question is whether and how much Japan will be willing to take on a similar bridging role. Robust Japanese participation would mitigate Asia-Pacific polarization and contribute to building momentum for regional integration.
But the magnitude of domestic challenges that Japan faces nowadays seems too great for its political leaders to play a proactive international role. Japan’s governments have been fragile and short-lived for close to a decade, and the current debate over raising the value-added tax could cause another change of administration. Moreover, Japan’s powerful agricultural interest groups, especially the Central Union of Agricultural Cooperatives, may strengthen their opposition to both a trilateral FTA with China and South Korea and the TPP with the US.
But Japan’s leaders are being squeezed from both directions. If they do nothing while South Korea continues to conclude FTAs, Japan will lose markets in the US and China. But if they act, domestic political opposition would likely be so severe as to drive them from power. This is the main reason why it will be difficult for Japan to conclude the proposed trilateral FTA, despite Prime Minister Yoshihiko Noda’s recent endorsement of it. Indeed, only a looser FTA that would exclude each country’s sensitive economic sectors appears to be viable.
For China, political considerations seem to be the strongest motivation for pursuing a Northeast Asian FTA. But using the trilateral FTA to expand its economic and political influence would require China to increase transparency, open its service sector, and remove non-tariff barriers. In essence, it would have to accept a rules-based system for its relations with its two neighbors, something of which China’s government has been wary. One advantage for China, however, in pursuing an FTA strategy is that it is still an authoritarian state, and thus could overrule domestic opposition far more easily than could governments in Japan or South Korea.
Finally, South Korea, which has concluded FTAs with almost every important economic actor in the world – the US, the EU, ASEAN, India, and others – may be better prepared to conclude a trilateral FTA than Japan. But it, too, will have to face strong opposition from domestic agricultural interest groups and manufacturing sectors, which might mobilize even more strongly than they did in opposing the FTA with the US.
If a trilateral Northeast Asian FTA can be concluded, the three countries would be able to generate more market demand domestically at a time of weak demand from the West, and would gain greater influence in the global political economy. A trilateral FTA would also most likely contribute to stabilizing the three countries’ troublesome political relations with each other, and could provide a better environment for North Korea’s eventual economic reconstruction.
The myriad benefits of a Northeast Asian FTA are clear. The question is whether it is an ambition too far.