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Strike one for trade agreements in Northeast Asia

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In Brief

Northeast Asia is a geo-politically complicated region. The two Asian giants Japan and China have at best a difficult political relationship. South Korea has unresolved history issues with Japan. The cross-Strait relationship between Taiwan and China appears to be improving but will always have to be treated with care.


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North Korea’s isolation and unpredictability hang over the region like a dark cloud.

Apart from the hermit kingdom of North Korea, the economies of Northeast Asia are nonetheless deeply interdependent. Economic interdependence has grown from signing on to global trade and investment, not because of special ties among the region’s economies themselves. Northeast Asia’s economic integration constrains the behaviour of leaders and makes the management of broader relations easier.

Trade is driven by proximity, scale and comparative advantage. So it’s not surprising that, through the removal of barriers to trade and the opening up of economies to competition, economic links have grown thick between neighbours in Northeast Asia.

Economies that depend so much on each other have incentive to deepen economic cooperation further. Beyond trade in goods, investment and trade in services require establishing a presence in the host country and the movement of people across borders. Attending to frictions, disputes and taking advantage of opportunities recommends institutional harmonisation and policy cooperation as a collateral responsibility in managing high levels of economic interdependence.

There are many ways in which countries can build the trust and cooperation necessary to capture the benefits from high levels of economic interdependence. Taiwan and mainland China signed an Economic Cooperation Framework Agreement to remove trade, investment, postal and air travel barriers across the Strait and normalise economic relations. That framework aims to deepen the economic relationship step-by-step.

Free trade agreements (FTAs) are another instrument favoured for promoting and managing high levels of regional economic interdependence. While FTAs have proliferated globally and in Asia since the turn of the century, Northeast Asia’s first FTA came into effect only six months ago with the signing of the China–South Korea FTA. A free trade agreement requires removing barriers to trade, investment and commerce between FTA partners — they are preferential in their nature. The negotiation of FTAs usually requires high levels of political will and trust between countries as they give preferential access to their markets while maintaining barriers against trade with others.

Truly liberalising trade agreements that reach deep into an economy behind the border are difficult to negotiate even among close allies, as the Australia–US FTA demonstrated. The AUSFTA agreement excluded many sensitive sectors from opening to competition, to the detriment of the Australia–US economic relationship.

In this week’s lead essay Jeffrey Schott and Eujin Jung argue that the South Korea–China FTA was also a disappointing agreement. The negotiators ‘cut too many corners in the rush to complete the deal’ and the deal ‘excludes too much economic activity’.

South Korea has been one of the most active and successful in Asia at completing FTAs. It used FTAs with major partners like the United States and the EU to make progress in liberalising its own agricultural sector and reforming its economy. Unlike other countries that have signed many FTAs, South Korea seemed to act strategically, using them as levers for domestic reform.

But as Schott and Jung explain, ‘[u]nlike South Korea’s comprehensive FTAs with the United States and the EU, its pacts with China have not done much to change South Korean or Chinese policies and will therefore provide only limited returns.’

The South Korea–China FTA negotiators were in a hurry. The FTA looks like a political trophy that has ‘award for participation’ written all over it. They left negotiations on investment and services open until at least 2018. The market access for goods which they negotiated falls well short of that in their other agreements. Neither side wanted to use the FTA to push domestic reform.

Schott and Jung conclude that politics trumped economics in the South Korea–China FTA. That is often the case. Both countries missed the opportunity for using the South Korea–China economic relationship as a lever for reform. The result is that this bilateral FTA will largely be ignored by business and likely fade into obscurity.

The difficulties in bilateral political relations, mean that progress with Northeast Asian economic integration is more likely be made in trilateral cooperation between China, Japan and South Korea (CJK). The CJK relationship offers the promise of subsuming the difficulties between China and Japan under a broader Northeast Asian framework for economic cooperation.

Just as a bilateral FTA between the United States and Japan was too difficult politically and needed the Trans-Pacific Partnership (TPP) agreement as cover, Japan and China have been able to complete an investment treaty with South Korea involved in 2012.

Delaying negotiations on investment and services agreements between China and South Korea is exactly what Australia and China also did in their bilateral agreement, ChAFTA. Delaying appeared better than signing a weak or meaningless agreement and leaves the door open to achieving liberalisation in investment and services for China and South Korea. There is also opportunity to create mechanisms beyond FTAs to deepen cooperation. FTAs are usually one-shot deals with phased-in implementation. In ChAFTA and many ASEAN agreements, ongoing cooperation or triggers to identify and remove further barriers to economic exchange are included.

China, Japan and South Korea are also involved in the ASEAN plus six Regional Comprehensive Economic Partnership (RCEP) which aims to conclude by early 2017. A strong CJK agreement or RCEP outcome will trump the disappointing market access for goods in the South Korea–China FTA.

Cooperation in Northeast Asia can occur in many and all of these theatres and progress made where possible. Bilateral or trilateral cooperation needs to be consistent with, and push towards, broader regional cooperation because the wider the grouping, the easier it will be for China and Japan, and other important but difficult relationships, to be managed more productively.

The EAF Editorial Group is comprised of Peter Drysdale, Shiro Armstrong, Ben Ascione, Ryan Manuel and Jillian Mowbray-Tsutsumi and is located in the Crawford School of Public Policy in the ANU College of Asia and the Pacific.


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