Global Impact of a China-Japan-South Korea Free Trade Agreement

By Joshua Gill

Posted: 3rd July 2012 09:23

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.


Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
 
For further details or to contact the firm, please email info@dezshira.com or visit www.dezshira.com.


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