Regional games could cloud free trade horizon

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By Liu Junhong (China Daily)
Updated: 2008-05-29 13:28

British newspaper Financial Times published an article not long ago saying the fast-growing Asian economy and the advancing regional cooperation there are ushering in the "Asian Century".

Meanwhile, the participants at a recent gathering of dignitaries from China, Japan and the Republic of Korea (ROK) - known in China as the Northeast Asian Dignitaries Meeting, in Japan as the Chinese, Japanese and Korean Dignitaries Talks and in Korea as the 30 Korean, Chinese and Japanese Dignitaries Meeting - called on the three governments to begin negotiating the China-Japan-ROK Free Trade Agreement (FTA) as soon as possible and take the leading role in creating the Asian Century.

Regrettably, however, there are still many real risks associated with a China-Japan-ROK FTA in Northeast Asia.

Chinese, Japanese and ROK leaders were invited to the first ASEAN (Association of Southeast Asian Nations) Summit following the Asian financial turmoil of 1997 and put in place the framework of cooperation between the three East Asian countries and ASEAN.

After 10 years of development, the regional multi-lateral structure has also given birth to the so-called "China-ASEAN, Japan-ASEAN and ROK-ASEAN cooperation axles" and a number of bilateral economic partnership agreements (EPA) led by Japan. All these form the cooperation pattern characterized by a "multi-axle and multi-spin-off" setup called "10+3" (the 10-member ASEAN plus China, Japan and the ROK).

Things seemed to have been going quite well from then on but the "10+3" format suddenly faced the danger of becoming redundant when participating countries of the Vientiane (Laos) conference in late 2004 decided to establish the East Asia Summit and proposed the creation of "East Asia Community" (EAC).

The United States was the first to take action by abandoning its "well-meant neglect" as some American political scientists and lawmakers began criticizing the East Asia Summit and East Asia Community in late 2004, calling them a challenge to US interests in East Asia. Some American economists too accused the regional cooperation concepts of "butchering the pan-Pacific economic circle".

In 2005, the Bush administration, citing lack of democracy at the East Asia Summit as an excuse, demanded that East Asian countries readjust their relevant policies.

In response to the US request, Japan gathered Australia, New Zealand and India and joined the East Asian summit together to add some "democratic elements" in the creation of the "10+6" format. However, Japan's initiative upset the US government because it overlooked the logic that "the US equals democracy" and prompted Washington to step directly into the East Asian scenario.

The Bush administration began refocusing its East Asian policy on the Asia-Pacific Economic Cooperation (APEC) forum in the second half of 2005 by proposing the concept of an "Asian-Pacific Free Trade Zone" in an attempt to sink the East Asia Community in the Pacific Ocean.

Washington declared it was willing to sign a bilateral free trade agreement with any APEC member within the framework of APEC, except Japan. This was a complete turnaround from a few years back, when the US twice tried to talk with Tokyo about FTA only to be avoided by the latter one way or another.

The US government also put the "10+3" format under the knife. It first announced at the 2005 APEC meeting in Pusan, ROK, it would form a political, security and economic partnership with ASEAN within 10 years and then decided to start FTA negotiations with the ROK, thus putting the "10+3" format in danger of being swallowed up and dismembered.

Japan on its part tweaked its East Asian strategy in response to the US moves: in late 2005 and early 2006 the Junichiro Koizumi government decided to sign free trade agreements with the five core members and economic partnership pacts with all 10 ASEAN countries by the end of 2007 to form a de facto East Asia community ahead of Washington and seize the steering wheel of East Asian affairs. It was later referred to as the "fast takeover of ASEAN" strategy.

By the end of March this year, Japan formed economic partnerships with all 10 members of ASEAN and accomplished its plan to seize the vantage point in ASEAN. Now it is eyeing Northeast Asia with the intent to take full leadership in maintaining order in the region to its own benefit. Another noteworthy move that Tokyo made was the departure of the "China-Japan-ROK closed-door meeting" from the 10+3 format in late 2007, which further weakened the unique regional cooperation model.

From the economic point of view, the China-Japan-ROK FTA is an ideal regional economic circle. In terms of the political and security situation, however, the three Northeast Asian nations face the risk of too many uncertainties in forming an FTA.

The fact that the economic partnership talks between Japan and the ROK were temporarily grounded in November 2007 reflected the ROK's assessment of real risks it was facing: one is that the ROK was not happy about Japan's tax reduction plan.

The ROK's LCD panel and semiconductor industries still rely on Japan for core components. Opening up its market will no doubt lead to greater trade deficit on the ROK's part and the automobile industry in particular will surely bear the brunt of a Japanese auto invasion.

Another risk lies in signs of an economic integration between the two sides on the Korean Peninsula as the Six Party Talks progress. This has led the ROK to seriously consider in what capacity it should join the EAC.

If the Japan-ROK economic partnership agreement is reached first, the ROK should join the EAC as part of the "Japan-ROK Axis", which means the ROK may or may not be the connecting point when the Democratic People's Republic of Korea (DPRK) is accepted into the EAC. If it joins the EAC as part of the whole Korean Peninsula after its economy merges with that of the north, the ROK will gain a greater voice.

The third risk is found in the fact that foreign investments now play the leading role in ROK's financial market following its opening up in 1999. Unfortunately foreign investors are very sensitive to the political risks in the DPRK (north side).

As for China, the largest developing nation in the world, Japan and the ROK are the only two of the three developed countries in Asia. According to the World Trade Organization's (WTO) exceptional rules, when a developed country signs an FTA with a developing one, the former must include all its domestic markets in the agreement while the latter can open up some of its own later.

So far Japan has been able to circumvent the WTO constraints by choosing to sign economic partnership agreements with other countries. This not only helped Japan protect its less-efficient agriculture and some other industries but also allowed its edge in investment rules, service trade and technological standards to play a key role, putting it in the direction of becoming the leader in maintaining regional order.

Both Japan and the ROK insisted on making "investment agreement" and "intellectual property right protection" part of the precondition for FTA talks with China. This shows clearly their interest is not in trade but the power to make regional rules. It also means it will no longer be a technical issue when China, Japan and the ROK try to ensure fair and reasonable conditions for trade negotiations.

The author is a researcher with China Institute of Contemporary International Relations

(China Daily 05/29/2008 page9)