Wednesday, May 16, 2012

Prospects for a New Trading Bloc

As the European Union teeters towards possible dissolution, a new trading bloc may emerge on the other side of the Eurasian landmass.

On May 12, 2012, Trade Ministers from Japan, South Korea and China agreed to propose to the leaders' summit (held in Beijing the next day on May 13, 2012) that the three countries should start FTA negotiations by the year’s end.

On the following day, Premier Wen Jiabao, PM Yoshihiko Noda, and President Lee Myungbak concluded the Fifth Trilateral Summit Meeting in Beijing and signed the Trilateral Agreement for the Promotion, Facilitation and Protection of Investment in which the three leaders pledged to work towards establishing a free trade agreement between the three countries. In a joint declaration, leaders of the three countries promised to further enhance the “future-oriented comprehensive cooperative partnership” to unleash vitality into the economic growth of the three countries, accelerate economic integration in East Asia, and facilitate economic recovery and growth in the world.

If the three countries are able to produce an exclusive free trade zone between the three countries, it will have a huge impact on the dynamic of the global market. According to the IMF, China, Japan and South Korea accounted for a combined 19.6 percent of global gross domestic product and 17.5 percent of world trade by value in 2010. In addition, the Japanese Ministry of Trade claimed that a trilateral free trade agreement would increase Japan's GDP by 0.3 percent, China's by 0.4 percent and South Korea's by 2.8 percent.

While both Premier Wen and PM Noda expressed enthusiasm for the potential trading bloc, President Lee showed a degree of reluctance during the negotiations. Many suggest that Seoul fears that a trilateral agreement will neutralize potential gains that could be gained through a bilateral FTA with China. Immediately following trilateral talks, South Korea and China held their first meeting on a bilateral FTA on Monday. Some observers say South Korea, which aims to expand its market share in China's automobile, TV, etc., intends to prioritize the bilateral negotiations over the trilateral talks. Sharing the Chinese market with Japanese corporations would not only reduce potential gains, but, according to Professor Kim Young Han, the country would also end up relying more on Japanese core components and other technology.

In addition, the domestic situation in South Korea could play a role in President Lee’s position. Following the ratification of the KORUS FTA in March, increasing number of people are voicing concerns regarding a possible FTA with Japan.

Japan would certainly greatly benefit from opening relations with both South Korea and China. According to Nomura Securities, establishing a bilateral FTA with China will raise Japan’s GDP by 0.68 percent, which is higher than the 0.35 percent growth expected with a bilateral FTA with the United States. Furthermore, the same study estimated that the trilateral FTA will boost Japan’s GDP by 0.74 percent (much higher than the Ministry of Trade estimate), exceeding the 0.54 percent increase offered by the Trans-Pacific Partnership. In a statement, PM Noda suggested that Japan would prefer to pursue both negotiations simultaneously.

From Yomiuri Shimbun Online

However, the trilateral free trade agreement will most likely not bear fruit in the near future. AEI’s Claude Barfield notes that while the ROK-PRC bilateral negotiations have placed pressure on Japan to advance negotiations, the political turmoil and uncertainty prevent Tokyo from moving forward with any regional economic integration.

China has been proposing an intra-regional free trade zone for the past decade. Several attempts at bilateral agreements have also already occurred. In 2003, Seoul and Tokyo attempted to negotiation a FTA, but broke down after the two governments were unable to resolve their differences regarding agricultural products.

Agricultural exports will undoubtedly become a focal point in negotiations between the three countries. Both Japan and South Korea maintain massive farm subsidies and high tariffs to agricultural imports. Even so, the value of Chinese agricultural exports to Japan and South Korea in 2011 was $10.99 billion and $4.17 billion respectively. A quarter of China’s agricultural exports go to Japan and South Korea, thus Beijing is actively negotiating for the reduction of tariffs. While China promises to strike a balance in exports, domestic agriculture remains an extremely sensitive issue for both Japan and South Korea.

Meanwhile, President Ma Ying-jeou suggested on May 16, 2012 that Taiwan should join the trade pact between the three countries. Alongside aspirations for the intra-regional trade bloc, Ma also reiterated his intent to join the Trans-Pacific Partnership (TPP) trade agreement within eight years and said he expected to resume negotiations on the Trade and Investment Framework Agreement (TIFA) with the US in the near future. At the same time, he pledged to complete follow-up negotiations under the cross-strait Economic Cooperation Framework Agreement (ECFA) with the PRC.

Taiwan is most likely prompted to jump start further negotiations on the ECFA and other FTAs because of the bilateral negotiations between the PRC and the ROK. Taiwanese manufacturers compete with South Korean corporations in electronics, steel, machinery, petrochemicals, plastics and textiles. Heavily dependent on exports to China, Taiwan’s competitiveness in the Chinese market relies heavily on the special economic status bestowed on Taiwanese corporations by Beijing. If South Korean firms were given a similar edge in the Chinese market, Taiwan’s industry could be under threat. Beijing has already stated that it expects the negotiations for PRC-ROK FTA to take no more than two years.

According to Liou To-hai, director of the National Chengchi University's Center for WTO Studies in Taipei, "should South Korea sign an FTA with China ahead of Taiwan and China completing agreements on trade in goods, trade in service and investment, all the dividend that Taiwan has gained from ECFA's early harvest program could be neutralized." In addition, foreign direct investment (FDI) in Taiwan would also be affected. Since the signing of the ECFA, Japanese companies have used Taiwan as a gateway into the Chinese market, but Taiwan's special role could end as Japan is likely to shift its investment to South Korea.

2013 will see several key negotiations take shape and their results will most likely establish norms in the political economy of the region for decades to come. Northeast Asia is yet unready to establish an economic zone like the European Union, but steps that Seoul, Beijing, and Tokyo (and possibly Taipei) take today will definitely set the stage for their future growth.

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