Sino-Korea FTA a win-win arrangement for both countries

SEOUL - After seven years of preliminary talks, Chinese Commerce Minister Chen Deming and South Korean Trade Minister Bark Tae Ho announced on May 2 the start of the formal negotiations for the Sino-Korea free trade agreement (FTA).

Around two weeks later, leaders of China, South Korea and Japan said in the fifth Trilateral Summit Meeting that the trilateral FTA talks would be launched within this year, vowing to immediately start preparatory works including domestic procedures and working level consultations.

Those actions were in line with the prevailing global trend of regional economic cooperation as seen in various examples such as the European Union (EU), the North America Free Trade Agreement ( NAFTA) and the Association of South East Asian Nations (ASEAN).

As the World Trade Organization (WTO) framework failed to reach a compromise, bilateral and multilateral agreements began to replace the WTO framework as the main platform for regional cooperation.

Analysts here said that the planned Sino-Korea FTA is expected to spur the integration of East Asia's three major economic powers, China, South Korea and Japan.

"After the Sino-ASEAN FTA and the Korea-ASEAN FTA being signed, if the Sino-Korea FTA is to be reached as planned, the bilateral trade pact is highly likely to develop into the three-way agreement among China, South Korea and Japan, leading to the East Asia Free Trade Agreement (EAFTA)," Dong Yan, a research fellow at Chinese Academy of Social Sciences (CASS), said in an article.

Incentive for China to pursue regional economic cooperation became more imperative after the 2008 global financial crisis. The world's largest exporter faced more pressure from its traditional export markets such as the United States and the EU due to its continued trade surplus with its major trading partners.

"Sluggish demand for Chinese products in the EU and the US, as well as escalating trade friction with other nations has spurred China to consider alternatives. Under these new circumstances, China may accelerate its pace in regional cooperation," said Liu Jinhe, a research fellow at Samsung Economic Research Institute (SERI).

Liu said that China's ambition to promote growth through domestic demand may motivate the world's No 2 economy to seek regional cooperation.

"Boosting domestic demand will require a lengthy time to show results as the economy depends on the low labor costs, which led to a comparatively weak domestic consumption. China needs to find a new route and FTAs are one alternative," Liu said.

If the Sino-Korea FTA is implemented as planned and the pact develops into the EAFTA in the end, the deepening regional cooperation can increase China's influence in Asia against the Trans-Pacific Partnership (TPP), which is viewed as a de-facto free trade pact between the US and Japan.

The EAFTA involves ASEAN Plus Three such as China, South Korea and Japan, while the Comprehensive Economic Partnership in East Asia (CEPEA) involves ASEAN Plus Six such as China, South Korea, Japan, Australia, New Zealand and India. The TPP, on the other hand, involves 10 countries such as the US, Japan, Singapore, Malaysia, Vietnam, the Philippines, Australia, New Zealand, Chile and Peru.

In terms of impact of regional trade liberalization on real GDP growth, the EAFTA and the CEPEA were estimated to benefit China, South Korea and Japan more than the TPP, according to the Nomura Economic Research. For the US, the EAFTA and the CEPEA would have a negative impact on the economy's real GDP growth.

Kwon Young-san, an economist at the Hong Kong-based Nomura International, said that South Korea can benefit the most from the planned FTA with China.

"We estimate a bilateral Korea-China FTA would increase Korea's GDP by 3.7 percent in the long term, greater than the 1.6 percent lift from its FTA with the US or 1.5 percent from its FTA with the EU," said Kwon Young-sun.

According to Nomura estimates, China is the trading partner country that would have the greatest impact on South Korea's real GDP growth among others if an FTA is put in place. The US ranked second and the EU third. Japan was in the fourth place.

The Sino-Korean economic cooperation has rapidly developed over the past two decades. Bilateral trading volume surged from just $5 billion in 1992, when both countries normalized their diplomatic ties, to $220.6 billion in 2011. The figure was larger than $100.8 billion with the United States and $103.1 billion with the EU.

Average growth of trade between the two countries was even faster than those with other trading partners. The bilateral trade grew around 25 percent over the past two decades, far above the average trading growth for both China with around 18 percent and South Korea with about 9 percent, according to the SERI.

For South Korea, China, now the world's second largest economy, is the largest trading partner.

For China, South Korea is the third-largest trading partner, the third-largest export destination and the second-largest source of its imports. In terms of importance, South Korea is of less importance than the US and the EU.

The South Korean finance ministry noted that if the bilateral FTA is implemented, it will generate positive effects equivalent to the already-implemented free trade deal with the US and the EU.