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Service trade can boost trilateral cooperation

By Chi Fulin | China Daily Global | Updated: 2023-07-11 08:10


The Regional Comprehensive Economic Partnership provides the ideal conditions for deepening China-Japan-Republic of Korea economic and trade cooperation. While the gradual release of the RCEP dividends will create more opportunities for China, Japan and the ROK to deepen economic and trade cooperation, the deepening trilateral cooperation will play a critical role in advancing high-level opening-up in the RCEP region.

But since China-Japan-ROK economic cooperation faces severe challenges, the key to deepening the trilateral cooperation under the RCEP framework lies in rationally responding to the impacts of some non-regional countries' attempts to "decouple" from the Chinese economy and disrupt the industry and supply chains on the region's economy.

But is the complementarity among China, Japan and ROK in service trade still growing? And is there still room for the growth of service trade among the three countries?

As statistics show, the volume of service trade among the three countries is not only expanding, but it still has a relatively large room for growth. For example, from 2012 to 2021, albeit the total service trade among the three sides increased from $1.02 trillion to $1.4 trillion, its proportion in GDP was only 5.74 percent in 2021, far below the global average of 11.80 percent in the same year. According to preliminary estimates, if China-Japan-ROK service trade doubles, its share in GDP will be close or equal to the global average, creating an additional market for at least $1.4 trillion.

Huge potential demand for trade in services

That China is the largest market for Japan and the ROK means there is still huge potential demand for service trade in the structural transformation of China's economy. This will create more space for the development of service trade among the three countries. For example, from 2012 to 2021, the volume of service trade between China and Japan increased from $25.73 billion to $31.42 billion, and that between China and the ROK from $22.28 billion to $32.44 billion.

Moreover, China, for long, has had a deficit in service trade with Japan and the ROK. From 2012 to 2021, China's deficits in service trade with Japan and the ROK were as high as $109.05 billion and $40.89 billion respectively.

Take for example trade in digital services, in which the three countries are highly complementary. From 2013 to 2021, the complementarity index (a type of overlap index that measures the degree to which the export pattern of one country matches the import pattern of another) of digital service trade between China and Japan and that between China and the ROK both exceeded 1 in most years, showing that their complementarity in digital service trade is still growing.

So should the focus of trilateral cooperation shift to service trade?

At present, the proportion of service trade in total trilateral trade is lower than the global average. In 2021, the proportion of service trade in the total trade between China and Japan, China and the ROK, and Japan and the ROK, were respectively 7.8 percent, 8.22 percent and 11.06 percent — all lower than the global average of 21.4 percent in the same year. So, in order to adapt to the general trend of growing service trade, the three sides should deepen their cooperation on service trade, so as to cultivate new growth areas and upgrade the trade structure.

'Decoupling' not conducive to opening up markets

Is the opening up of the service trade market key to deepening trilateral service trade cooperation? And should the three sides stick to market rules-based economic and trade cooperation or follow a values-based approach to exclusivity?

Practices such as "decoupling and breaking supply chains" are non-market measures and not conducive to opening up markets. All the three countries are beneficiaries of market rules-based free trade. And that should be the norm in the future.

Earlier data show that 60 percent of the ROK's chips and 30 percent of Japan's semiconductors were exported to China. Whether based on their own interests or market trends, the three countries should adapt to the development trend in the RCEP region as well as that in the Asia-Pacific, boost their strategic autonomy, avoid "decoupling and breaking supply chains", and promote greater market rules-based opening-up.

Is reciprocal opening up of markets key to deepening trilateral cooperation in service trade?

The answer is "yes". For example, according to the Organisation for Economic and Cooperation and Development data, the ROK's service trade-related foreign investment access restriction index is 80 percent higher than the OECD average. And while Japan is roughly on par with the OECD average, its restriction index is twice as high as that of major developed countries such as the United States, the United Kingdom, Germany and France.

In other words, promoting opening-up of service markets is a common task for China, Japan and the ROK. To adapt to the trend of scientific and technological progress, and bring into full play their respective comparative advantages in research and development, design and manufacturing, the three countries should form a partnership in manufacturing industries to speed up the implementation of free trade policies for production equipment, technical services, and collaborative R&D, as well as to promote the free flow of personnel in the manufacturing sector in a bid to promote the integrative development of advanced manufacturing and modern service industries in Northeast Asia. And to adapt to the development trend of the digital economy, the three countries should explore the arrangements for safe and orderly flow of data.

The three countries should also, on the premise of ensuring safe and controllable flow of data, further open up their data industries, promote the full aggregation of data, and advance the formation of a data factor market in Northeast Asia.

What impact will China's high-level opening-up with a focus on service trade have on trilateral service trade cooperation?

Since 2018, China has made significant progress in opening up its service market, and fulfilled its opening-up commitments in the financial and other sectors ahead of schedule. In fact, from 2018 to 2022, the accumulative volume of the services imported by China reached $2.3 trillion.

But there is still considerable room for China to further open up its service market. For instance, China's commitment on opening up its service market is part of a positive list under the RCEP framework. But to fully adapt to the development trend of service trade and meet the requirements for the development of service trade through its own structural transformation, China should expeditiously complete its national negative list for cross-border service trade.

If China implements all these opening-up measures, its service trade will likely reach $1 trillion by 2025, of which service import will be worth about $600 billion, offering Japan and the ROK a big opportunity to expand their service trade market.

How can China-Japan-ROK cooperation be advanced under the RCEP framework? And how can the three countries play their due roles in facilitating the RCEP process?

Take the utilization rate of the RCEP rules of origin for example. In 2022, the utilization rates of the RCEP rules of origin by Chinese export enterprises was 3.56 percent and import enterprises 1.03 percent, while the number of certificates of origin Japan issued to other RCEP member states was less than 90,000, which is significantly lower than the number of certificates (673,000) of origin China issued in the same year.

There is a silver lining, though. In the first quarter of 2023, the utilization rate of the RCEP rules of origin by ROK companies exporting goods and services to Japan was 50.6 percent, and ROK enterprises importing goods and services from Japan was 30.1 percent.

The combined GDP and trade volume of China, Japan and the ROK account for more than 80 percent of the RCEP region. This means the three countries have an important role to play in not only fulfilling the RCEP commitments and advancing the RCEP process which will have a profound global impact, but also shoulder important responsibilities.

Need to eliminate all types of outside interference

To facilitate this, the three countries need to eliminate all kinds of outside interference and work together. But will China, Japan and the ROK take the lead in implementing "fully cumulative" rules of origin?

The entry into force of the RCEP agreement has provided institutional arrangements for the mutual opening-up of markets and tariff reduction for the first time, bringing the three economies under a unified framework of economic and trade rules. To that end, the three countries should start consultations as soon as possible with the aim of shortening the transition period for tariff reduction.

More importantly, the three countries should take the lead in promoting the transition of the rules of origin from "partial accumulation" to "full accumulation" and implementing "fully accumulative" rules of origin. Also, in the field of certificates of origin, Japan has introduced a policy to recognize importers' self-declaration of origin. China and the ROK should do the same to shorten their transition period.

What important role can China-Japan-ROK economic cooperation play in facilitating the high-level opening-up of the RCEP region?

Promoting the alignment of the RCEP's rules with those of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership is an important way to advance high-level opening-up in the RCEP region. Japan is the leading country in the CPTPP, and China and the ROK have both applied to join the CPTPP. And the early accession of China and the ROK to the CPTPP will help accelerate the alignment of the RCEP and CPTPP rules, as well as enable the CPTPP's total economic output to exceed that of the RCEP and substantially expand its influence in reshaping global economic and trade rules.

In the meanwhile, China, Japan and the ROK should work together to gradually align the RCEP's rules on service trade, e-commerce and competition policy with those of the CPTPP.

The RCEP agreement has created conducive conditions for China, Japan and the ROK to intensify negotiations on a trilateral free trade agreement to achieve breakthroughs in tariff reduction, market access and regional supply chain adjustment. The three countries should also take steps to eliminate external interferences and set the agenda for their FTA negotiations under the RCEP framework by including new trade issues such as intellectual property rights protection, opening up of the service sector, and environmental standards.

The author is president of the China Institute for Reform and Development.

The views don't necessarily represent those of China Daily.

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