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

Posted by Reading Time: 3 minutes

By Joshua Gill

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.

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. For further details or to contact the firm, please email china@dezshira.com, visit www.dezshira.com, or download the company brochure.

You can stay up to date with the latest business and investment trends across China by subscribing to The China Advantage, our complimentary update service featuring news, commentary, guides, and multimedia resources.

Related Reading

An Introduction to Doing Business in China
Asia Briefing, in cooperation with its parent firm Dezan Shira & Associates, has just released this 40-page report introducing everything that a foreign investor should be familiar with when establishing and operating a business in China. This guide is immediately available as a complimentary PDF download on the Asia Briefing Bookstore.

China-Japan-South Korea Sign Trilateral Agreement and Launch FTA Talks

ASEAN-China Center to Raise Awareness of Free Trade Area

Why ASEAN Matters For Your China Business

4 thoughts on “Global Impact of a China-Japan-South Korea Free Trade Agreement

    Hugo says:

    I really doubt that political questions can really be a hurdle for their FTA, unless it can be fanned by an outside player such as the U.S. that surely doesn’t cheer for the success of this FTA.

    Well thats partially right Hugo, these agreements always depend on how much both parties really want them to succeed, and Korea especially is heavily protectionist. But they also need to sell, and this FTA is also backed up by similar agreements ASEAN has signed with these countries. We’ll see how effective they are in due course. But better to have the franework than not. Thanks – Chris

    Someone says:

    A FTA between China, Japan and South Korea is basically unfair for China and Japan.
    1.- China is tens of times bigger and more powerful market especially due to its population with a considerably big weatlhy part.
    2.- Japan is more than twice the South Korean market, far stronger, far wealthier and willing to buy foreign products without prejudice (see Haier sales).
    3.- South Korea has an economy based on a strong brainwashing (THIS should be called a non-tariff barrier), especially towards Chinese and Japanese people and products.
    * As example of how wrong this FTA may be, we could use the Euro-Korea FTA where results are already seen on paper and it even damages the European economy. In Europe we obviously accepted this FTA to force China to open the doors (a different story). Who the hell accepts anything with South Korea if we are five times that economy, more willing to buy foreign products and open-minded population (sometimes innocent pretending to know more).

    South Korean people has an extreme prejudice against foreign products which that makes them unable to buy import products; besides this we shouldn’t forget that South Korea is small and weaker economy than both Chinese and Japanese and it wont change since its population is also shrinking.

    ETC.

    My conclusion is `better` NOT to accept any FTA with South Korea.

    NOTE: Even funny to hear from the korean president saying to Japan, far more open than south korea and without prejudice (even the opposite which is sometimes pathetic in my opinion) that Japan should not use non-tariff barriers. I can’t understand how this poorly educated person is a president (well, 6th most corrupt Asian country and he loves money under the table). Let’s think about the korean brainwashing instead, dear mediocre-president.

    @ Someone: I think any structure that helps promote trade, improves employment and contributes to the global and local economies has more pros than cons. The Koreans aren’t so bad, although their markets are tough to crack I agree.

Leave a Reply

Your email address will not be published. Required fields are marked *