November 1, 2005｜Korean Peninsula
Chang Jae Lee
Director, Center for Northeast Asian Cooperation, Korea Institute for International Economic Policy
The necessity of an ROK – China – Japan FTA is generally discussed in terms of the traditional motivation of increasing economic benefits and the circumstantial argument of responding to changes in the external environment, in the form of the spread of regionalism. This paper will attempt to provide a closer focus on the necessity of an ROK – China – Japan FTA from a new perspective, by looking at the issue from a different angle.
We frequently take as our point of departure the issues that are pointed out as obstacles to an ROK – China – Japan FTA; it is possible to identify additional needs for such an FTA, as follows.
Firstly, non-economic factors, such as the competitive relationship between Japan and China, differences in political systems, historical problems and the lack of community spirit are usually pointed out as constraints on an ROK – China – Japan FTA. However, if we approach this from a different angle, we can demonstrate the positive logic that the conclusion of an ROK – China – Japan FTA would enable the tense political relationships stemming from the detritus of history to be resolved. Furthermore, such an FTA would result in heightened awareness of a community within Northeast Asia and the easing of military tension in the region.
Secondly, there are concerns that the formation of a trade bloc through an ROK – China – Japan FTA would irritate countries outside the region and become an obstacle to the development of free trade on a global scale. However, if we analyze the spillover effects of each part of an ROK – China – Japan FTA, we can see that it can be anticipated that a regional trade treaty between major economies, such as an ROK – China – Japan FTA, would contribute to the development of free trade on a global scale by inducing additional regional trade treaties or the development of multilateral free trade, in order to minimize the damage from the trade diversion effect that would result from such an agreement. For instance, countries exporting agricultural produce when an ROK – China – Japan FTA was concluded would put pressure on the ROK and Japan to reduce tariffs on agricultural produce from countries outside the region; as this would coincide with the interests of both countries, there is a strong possibility that this would ultimately occur in the form of a reduction on tariffs at the multilateral level.
Finally, an ROK – China – Japan FTA would be a means of implementing economic reforms by defeating interest groups in those three countries. An ROK – China – Japan FTA would have positive macroeconomic effects on GDP growth and the welfare of the populace, and would act as a positive factor on the economy as a whole, but the problem is that all three countries have vulnerable industries. For example, the international competitiveness of the agriculture sector in the ROK and Japan is low, so they impose the highest tariffs in order to protect their domestic agriculture sectors from competition with other countries. It is probably as a result of this situation that those in the industry who are sensitive this fact are resistant to the conclusion of an ROK – China – Japan FTA, and there is a strong possibility that politicians will have to yield to their political pressure, in order to avoid social and political costs.
However, continued protection of vulnerable domestic industries entails immense economic costs, such as lowering the competitiveness of the economy as a whole and distorting the allocation of resources, so each country must accelerate structural adjustments in vulnerable industries. An ROK – China – Japan FTA could well contribute to increasing the competitiveness of the economies of the three countries by promoting structural adjustments in vulnerable sectors in those countries.
While it would ultimately promote the development of the economies of all three countries and free trade on a global scale, it is expected that an ROK – China – Japan FTA would also contribute to eliminating political conflict and alleviating military tension within the region by strengthening economic cooperation between the states of Northeast Asia.