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The author is an associate research fellow with the China Institute of International Studies
Recent progress made in negotiating a free trade agreement （FTA） among China， Japan and the Republic of Korea （ROK） reflects the great enthusiasm shared by all sides regarding regional integration. During the first round of talks held in Seoul in late March， the three countries reached consensus on signing a comprehensive and high-level FTA， agreeing to establish working groups in 10 areas including trade and investment as well as a conference of experts on intellectual property. They also scheduled two additional rounds of negotiations later this year. Despite the agreements， clear differences shown during the negotiations hinted that fierce competition may hamper their upcoming cooperation.
Changing dynamics
From either a regional or a global perspective， China， Japan and the ROK are all important economies. In 2011， the three sides jointly released a feasibility report about a future FTA， pointing out that their total GDP amounted to over $12 trillion in 2010—19.6 percent of the world’s total that year. Their import and export volumes respectively accounted for 18.5 percent and 16.3 percent of the global totals， while the inflow and outflow volumes of their foreign direct investments comprised 9.2 percent and 12.8 percent of the world’s totals.
They are also the dominant forces in the vigorous East Asian economic region. In 2011， their sum GDP reached $14.28 trillion， about 72.3 percent of the total of the 16 East Asian countries. Since East Asia is often regarded as the engine of world economic growth， the three economies’ influence on the world economy is self-evident.
However， since the three are all export- oriented economies， the level of economic integration among them remains fairly low. Despite the rapid development of regional trade， the trade volume among the three countries still falls below one-quarter of their total foreign trade volume. Meanwhile， regional trade volumes inside the EU and the North American FTA bloc respectively are 64 percent and 40 percent of the total trade volumes of their member states. As the three leading economies in East Asia， their trade relationship will certainly concern the development of East Asia’s regional cooperation.
The 16 East Asian countries agreed to begin negotiations on the Regional Comprehensive Economic Partnership （RCEP） in 2013. But even a bilateral FTA has yet to be signed among the top three economies， which is discouraging at a time of their rapid collective economic growth. If the three economies can greatly enhance their level of economic integration， a real economic center will emerge in East Asia. The slow progress of the FTA closely relates to the gaps of economic development between the three countries. China， Japan and the ROK are in three different development periods as developing， developed and emerging industrial countries respectively. Economic relationships among them are complementary， taking on more of a vertical division of labor. Therefore， for a long time， tariffs on goods， except agricultural goods， have had no obvious influence on their trade relations.
Take the China-Japan trade relationship as an example： China’s average tariff standard on mechanical and electrical products is higher than that of Japan， but China still became Japan’s top export market. In 2012， statistics from Japan showed that about 54 percent of Japan’s exports to China consisted of mechanical and electrical products， while these products accounted for only 44.9 percent of China’s total exports to Japan. That’s because there is still an obvious technical gap between the two sides. Also， Japan exports to China based on its advanced industrial structure. Consequently， when China’s exports to Europe shrank due to the European debt crisis， Japan’s exports to China suffered as well.
Currently， Japanese and ROK products are very competitive， and Chinese products are catching up. Vertical gaps among the three economies are narrowing， while their competition on the horizontal level is getting fierce. This is an important reason why Japan has become enthusiastic about the trilateral FTA. Now the three countries must decide whether the FTA should aim at promoting mutual competition， or the integration of the three countries’ industries.
Political competition
The trilateral FTA will play a crucial role in future Asia-Pacific regional economic cooperation. The cooperation of the three countries bears on the choice of a regional cooperation path， which may affect regional political and security landscapes.
There are several targets and path choices in regional cooperation given differences in economic structures and development levels. The United States has been attempting to raise the Asia-Pacific region’s free trade mechanism to a higher level. But its aggressive attitude has continually been met with strong resistance in East Asia. Most East Asian countries’ economic development levels are not high enough to participate in full economic competition. Protecting the right of development of relatively weaker countries is still a major key to regional cooperation. There are two possible models for regional cooperation： building a regional mechanism as a pioneer of a global mechanism and enhancing regional comprehensive competitiveness through cooperation. The first focuses on full competition regardless of national differences and the establishment of a completely consistent system， while the second pays more attention to ensuring the fairness of development， addressing differentiation and pushing forward regional cooperation step by step.
Likewise， there are two paths to boosting free trade in the Asia Pacific. One is through Trans-Pacific Partnership （TPP） agreement negotiations， which the United State is powerfully pushing. The TPP attempts to come up with a zero-tariff FTA with high standards on a series of systems including labor and intellectual property， so as to make a model for a global trade system. The other is through the RCEP negotiations of the 16 East Asian countries. The RCEP places more value on enhancing comprehensive competitiveness and internal cohesion in the region. As the United States has politicized regional cooperation and considered the TPP as a tool to disrupt East Asian cooperation so as to maintain Washington’s advantage against China， competition over the two paths has turned into competition between China and the United States over dominance in the AsiaPacific region.
Many East Asian countries， including Japan， have taken a two-pronged tactic by participating in both negotiations. In the past， Japan signed economic partnership agreements with other East Asian countries to restrict free trade to non-agricultural sectors， because of its domestic political need to strongly protect agriculture. However， during a visit to the United States in February， Prime Minister Shinzo Abe decided to join TPP negotiations based on international political needs. In Japan， Abe’s action was perceived as the beginning of an attempt to weave an economic network to besiege China， after trying to diplomatically surround the country. Meanwhile， the trilateral FTA was considered as China’s attempt to win over Japan.
Further complicating the matter are deepseated political disputes that continue to cast a shadow over trilateral economic cooperation. For instance， Abe’s recent push to make changes to Japan’s pacifist Constitution has jeopardized mutual trust among the three countries.
China’s priorities While seeking an FTA， China must consider its own demand along with the international environment. Free trade， which helps bring into play different countries’ complementary advantages and promote fair competition， is conducive to propelling development. But the level of free trade must suit a country’s economic development. China faces challenges in its choice of a free trade pattern at a time when the country undergoes an economic transition and the world economy enters a new phase of technological innovation.
China’s economic transition is not a problem of being driven by internal or external demands， but rather one of economic development capability being internal-oriented or external-oriented. During the past 30-plus years， China’s pace of reform has lagged far behind the pace of opening up. It has overly depended on low resource costs and imported technology， while neglecting independent innovation. Now it has lost its low-cost advantage， and tariffs will no longer be a major trade obstacle.
The next round of global economic competition will focus on technology， systems and social governance levels. Under the new conditions， developed countries may regain their lost frontier of industrial production following a new round of production transfer in a low-tariff free trade environment. China should therefore consider FTA negotiations as an impetus for driving the progress of its own undertakings.
Recent progress made in negotiating a free trade agreement （FTA） among China， Japan and the Republic of Korea （ROK） reflects the great enthusiasm shared by all sides regarding regional integration. During the first round of talks held in Seoul in late March， the three countries reached consensus on signing a comprehensive and high-level FTA， agreeing to establish working groups in 10 areas including trade and investment as well as a conference of experts on intellectual property. They also scheduled two additional rounds of negotiations later this year. Despite the agreements， clear differences shown during the negotiations hinted that fierce competition may hamper their upcoming cooperation.
Changing dynamics
From either a regional or a global perspective， China， Japan and the ROK are all important economies. In 2011， the three sides jointly released a feasibility report about a future FTA， pointing out that their total GDP amounted to over $12 trillion in 2010—19.6 percent of the world’s total that year. Their import and export volumes respectively accounted for 18.5 percent and 16.3 percent of the global totals， while the inflow and outflow volumes of their foreign direct investments comprised 9.2 percent and 12.8 percent of the world’s totals.
They are also the dominant forces in the vigorous East Asian economic region. In 2011， their sum GDP reached $14.28 trillion， about 72.3 percent of the total of the 16 East Asian countries. Since East Asia is often regarded as the engine of world economic growth， the three economies’ influence on the world economy is self-evident.
However， since the three are all export- oriented economies， the level of economic integration among them remains fairly low. Despite the rapid development of regional trade， the trade volume among the three countries still falls below one-quarter of their total foreign trade volume. Meanwhile， regional trade volumes inside the EU and the North American FTA bloc respectively are 64 percent and 40 percent of the total trade volumes of their member states. As the three leading economies in East Asia， their trade relationship will certainly concern the development of East Asia’s regional cooperation.
The 16 East Asian countries agreed to begin negotiations on the Regional Comprehensive Economic Partnership （RCEP） in 2013. But even a bilateral FTA has yet to be signed among the top three economies， which is discouraging at a time of their rapid collective economic growth. If the three economies can greatly enhance their level of economic integration， a real economic center will emerge in East Asia. The slow progress of the FTA closely relates to the gaps of economic development between the three countries. China， Japan and the ROK are in three different development periods as developing， developed and emerging industrial countries respectively. Economic relationships among them are complementary， taking on more of a vertical division of labor. Therefore， for a long time， tariffs on goods， except agricultural goods， have had no obvious influence on their trade relations.
Take the China-Japan trade relationship as an example： China’s average tariff standard on mechanical and electrical products is higher than that of Japan， but China still became Japan’s top export market. In 2012， statistics from Japan showed that about 54 percent of Japan’s exports to China consisted of mechanical and electrical products， while these products accounted for only 44.9 percent of China’s total exports to Japan. That’s because there is still an obvious technical gap between the two sides. Also， Japan exports to China based on its advanced industrial structure. Consequently， when China’s exports to Europe shrank due to the European debt crisis， Japan’s exports to China suffered as well.
Currently， Japanese and ROK products are very competitive， and Chinese products are catching up. Vertical gaps among the three economies are narrowing， while their competition on the horizontal level is getting fierce. This is an important reason why Japan has become enthusiastic about the trilateral FTA. Now the three countries must decide whether the FTA should aim at promoting mutual competition， or the integration of the three countries’ industries.
Political competition
The trilateral FTA will play a crucial role in future Asia-Pacific regional economic cooperation. The cooperation of the three countries bears on the choice of a regional cooperation path， which may affect regional political and security landscapes.
There are several targets and path choices in regional cooperation given differences in economic structures and development levels. The United States has been attempting to raise the Asia-Pacific region’s free trade mechanism to a higher level. But its aggressive attitude has continually been met with strong resistance in East Asia. Most East Asian countries’ economic development levels are not high enough to participate in full economic competition. Protecting the right of development of relatively weaker countries is still a major key to regional cooperation. There are two possible models for regional cooperation： building a regional mechanism as a pioneer of a global mechanism and enhancing regional comprehensive competitiveness through cooperation. The first focuses on full competition regardless of national differences and the establishment of a completely consistent system， while the second pays more attention to ensuring the fairness of development， addressing differentiation and pushing forward regional cooperation step by step.
Likewise， there are two paths to boosting free trade in the Asia Pacific. One is through Trans-Pacific Partnership （TPP） agreement negotiations， which the United State is powerfully pushing. The TPP attempts to come up with a zero-tariff FTA with high standards on a series of systems including labor and intellectual property， so as to make a model for a global trade system. The other is through the RCEP negotiations of the 16 East Asian countries. The RCEP places more value on enhancing comprehensive competitiveness and internal cohesion in the region. As the United States has politicized regional cooperation and considered the TPP as a tool to disrupt East Asian cooperation so as to maintain Washington’s advantage against China， competition over the two paths has turned into competition between China and the United States over dominance in the AsiaPacific region.
Many East Asian countries， including Japan， have taken a two-pronged tactic by participating in both negotiations. In the past， Japan signed economic partnership agreements with other East Asian countries to restrict free trade to non-agricultural sectors， because of its domestic political need to strongly protect agriculture. However， during a visit to the United States in February， Prime Minister Shinzo Abe decided to join TPP negotiations based on international political needs. In Japan， Abe’s action was perceived as the beginning of an attempt to weave an economic network to besiege China， after trying to diplomatically surround the country. Meanwhile， the trilateral FTA was considered as China’s attempt to win over Japan.
Further complicating the matter are deepseated political disputes that continue to cast a shadow over trilateral economic cooperation. For instance， Abe’s recent push to make changes to Japan’s pacifist Constitution has jeopardized mutual trust among the three countries.
China’s priorities While seeking an FTA， China must consider its own demand along with the international environment. Free trade， which helps bring into play different countries’ complementary advantages and promote fair competition， is conducive to propelling development. But the level of free trade must suit a country’s economic development. China faces challenges in its choice of a free trade pattern at a time when the country undergoes an economic transition and the world economy enters a new phase of technological innovation.
China’s economic transition is not a problem of being driven by internal or external demands， but rather one of economic development capability being internal-oriented or external-oriented. During the past 30-plus years， China’s pace of reform has lagged far behind the pace of opening up. It has overly depended on low resource costs and imported technology， while neglecting independent innovation. Now it has lost its low-cost advantage， and tariffs will no longer be a major trade obstacle.
The next round of global economic competition will focus on technology， systems and social governance levels. Under the new conditions， developed countries may regain their lost frontier of industrial production following a new round of production transfer in a low-tariff free trade environment. China should therefore consider FTA negotiations as an impetus for driving the progress of its own undertakings.