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Where Is the Breakthrough in Asia’s Regional Cooperation Strategy?

Apr 29 , 2014
  • Zhang Monan

    Senior Fellow, China Int'l Economic Exchanges Center

At the Boao Forum, Premier Li Keqiang stated the regional cooperation policy of “speeding up the strategy of Asia free trade area and build an Asian community.” Where is the breakthrough of an Asian free trade area? In my opinion, China should promote the Asian economic integration process with the priority on a China, Japan and South Korea Free Trade Area (FTA). 

Zhang Monan

At present, regional FTAs have become a weather vane of world trade liberalization.  As WTO Doha negotiations fell into a stalemate and the multilateral trading system was experiencing difficulty, regional, cross-regional, as well as bilateral and multilateral trade negotiations are gradually becoming a new world mainstream trend. This trend is causing a fundamental change in the formation of world economic, trade and investment landscape. 

The tide of regional FTA is very high in Asia. According to the Asian Development Bank statistics, by the end of 2013, the number of free trade agreements in Asia had increased from 36 in 2002 to 109, with another 148 free trade agreements under negotiation, totaling 257. These numbers show a momentum far stronger than other areas in the world. 

Within recent years, as the global economic center “moves east” and the trade scale enlarges, it is imminent to speed up Asian economic and trade integration. Data shows that in the past ten years the proportion of Asian trade with Europe and the U.S. dropped off markedly, but the proportion of intra-regional trade went up significantly. Therefore, the intra-trade gets stronger and has formed a Sino-centric value chain and “ a new wild goose queue model.” After the 18th National Congress of the Communist Party of China, Chinese free trade area strategy sped up and China has signed 12 free trade agreements with countries and areas such as ASEAN, Pakistan, New Zealand, Peru, Costa Rica, Switzerland, Hong Kong, etc., with the total trade exceeding 1/4 of China’s total import and export. In comparison, the China-Japan-South Korean FTA negotiation that started in 2002 obviously falls behind the progress of Asian free trade areas. 

In fact, China-Japan-South Korean FTA should be the most important part of China’s Asian FTA strategy. Complementary advantages in China-Japan-South Korean industries are the FTA basis. The population of these three countries takes account of 74% of East Asian total population, and 22% of world population; their economic output accounts for 90% of East Asian output and 20% of world output; and their total trade accounts for 70% of East Asian total trade and 20% of the world total trade. The proportion of combined GDP of these three countries in the world GDP keeps growing, up to 21.59% in 2012 from 18.02% in 2002. 

At present, the intra-trade of these three countries only accounts for 21% of their total trade, and the investment among them only accounts for 6% of their total. These numbers are not in conformity with their economic scale (accounting for 20% of the world economy and more than 70% of Asian economy), much lower than EU (with its intra-trade at 65%) and North America (with its intra-trade at over 40%). Therefore, establishing a China-Japan-South Korean FTA will have great economic and trade benefits. According to a model-based prediction, if a China-Japan-South Korean FTA covering trade of goods, service trade and investment is established, Chinese GDP will gain 1.1% to 2.9%, Japan 0.1% to 0.5%, and South Korea 2.5% to 3.1% respectively. 

The establishment of China-Japan-South Korean FTA will produce a great industrial effect, as well as be beneficial for their industrial restructuring, and would gradually upgrade the area’s industrial division level and resource allocation efficiency. In the pattern of world labor division based on industrial transfer, Japan will be the biggest capital exporter and also a main source of high technology at the same time. South Korea is both an “absorber” of Japanese capital and high technology and also plays a role of providing China with some investment, medium technology and some intermedium products. While absorbing capital and technology from Japan and South Korea, China provides them with a large number of natural resources and primary products. An easy flow and integration of production factors like commodities, capital and labor within these three countries will help reduce their production cost, enhance the general contentment and social welfare of their consumers, as well as upgrade the Asian division level of value chain, thus further promoting the area’s comprehensive economic partnership and the development of economic integration of the whole Asia-Pacific region. 

Although China-Japan-South Korea FTA has enjoyed a general consensus in the economic and industrial fields, it is still hampered by political factors and so on. In particular, Japan’s territorial disputes with China and South Korea have become a big obstacle to the promotion of China-Japan-South Korean FTA, and have actually stalled the FTA negotiation plan. Looking into the future development, however, for the sake of their real economic interests, China, Japan and South Korea will still maintain their bilateral trade pattern of “economy comes first and politics second”, and China should actively take initiative and play a leading role in the negotiation. 

In choosing free trade strategy, it is possible to “do the easy part first, that is, establishing FTA with South Korea first and with Japan afterwards.” Negotiations of an FTA between China and South Korea could be accomplished first. Because of heavy reliance on trade with China, South Korea is actually more concerned about the bilateral FTA negotiation with China while at the same time giving attention to TPP. South Korea has clearly taken the bilateral FTA negotiation as the most preferred option. Currently, FTA negotiation between China and South Korea has started and both sides have shown a positive attitude, making the bilateral negotiation easier than that of China-Japan FTA and Japan-South Korea FTA, even much easier than that of China-Japan-South Korean FTA. Therefore, the negotiation between China and South Korea is most likely to be accomplished first with a substantive result. In view of the fact that Japan and South Korea have similar sensitive industries and demands in the areas of investment and service, negotiation of China-South Korea FTA will contribute to seeking a reasonable negotiation way and gaining experiences, as well as forming a model of dealing with all sorts of sensitive industries and sensitive products, thus providing lessons and paving the way for establishing China-Japan-South Korea FTA 

Zhang Monan is a researcher at the China Center for International Economic Exchanges.

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