[Analytics] Japan-South Korea tensions could dash China’s hopes for a trade deal

Disputes between South Korea and Japan could hamper China’s ambitions of a negotiating a three-way trade deal with its two neighbours. Photo: EPA-EFE. Sketched by the Pan Pacific Agency.

Any escalation of the trade and political disputes between Japan and South Korea could jeopardise Beijing’s hopes of securing a trilateral trade deal with the two countries, observers say. Kyodo news agency reported on Friday that Japan was preparing to remove South Korea from its so-called white list, which reduces trade restrictions between the two sides, as early as August 2. Once approved by the Tokyo government, South Korea’s new status would take effect within 21 days. Laura Zhou specially for the South China Morning Post.

Meanwhile, according to South Korean media, Seoul has called off its talks to join the Japan-led 11 member Comprehensive and Progressive Trans-Pacific Partnership – successor to the failed Trans-Pacific Partnership and now the biggest trade bloc in the Asia-Pacific region.

The latest tensions – triggered by an unresolved dispute over Korean forced labour during Japan’s 1910-45 colonial rule of the Korean peninsula – are playing out against a backdrop of negotiations for yet another major trade deal, the Regional Comprehensive Economic Partnership (RCEP), due to wrap up in China on Wednesday.

The RCEP is a proposed 16-nation pact between the 10 members of the Association of Southeast Asian Nations (Asean) along with China, Japan, Australia, India, New Zealand and South Korea. Negotiations for the deal are expected to be completed by the end of the year.

Beijing sees a trade pact with Japan and South Korea as an important part of its effort to push forward regional economic integration and diversify its markets in the face of a growing sentiment against free trade led by US President Donald Trump’s more aggressive trade policy.

The differences between Japan and South Korea have highlighted the political vulnerability of the three largest economies in northeast Asia, despite their high economic interdependence. Together with China, they account for nearly 24 per cent of global gross domestic product, more than the European Union and second only to the trade grouping of Canada, Mexico and the United States.

The incentive to strike a deal for a market of about 1.5 billion people – the combined population of the three countries – has run high since last year’s diplomatic thaw between Beijing and its two neighbours.

A shift in policy by Pyongyang, to prioritise economic growth over weapons development, as well as the flurry of summits between North Korean leader Kim Jong-un and Trump, also reduced instability and uncertainty in favour of greater economic integration.

Speaking at a press conference in Beijing on Monday, Li Chenggang, China’s assistant minister of commerce, said speeding up negotiations on the China-Japan-South Korea free-trade agreement was a priority for China, which next month hosts a northeast Asian trade expo in Changchun, Jilin province.

While observers have warned that the simmering dispute between Washington’s key allies in Asia would compromise its influence in a region on the front line of China-US rivalry, many believe there would be collateral damage to the ongoing negotiations over the trilateral free-trade agreement.

The deal, first proposed in 2002, seemed to gain momentum in April last year when leaders of the three countries convened in Tokyo for their first meeting since 2015 and reached a consensus to a comprehensive speeding up of negotiations, according to a statement by the Chinese commerce ministry.

So far, 15 rounds of talks have taken place, most recently in Japan in April, when the trio pledged to “further step up liberation on trade and investment to incorporate high-standard rules to create a RCEP-Plus free trade agreement”, China’s commerce ministry said at that time.

“Trilateral FTA negotiations have proceeded through gradualism, informality and lower-profile approaches as a realistic way for the development of cooperation, which in turn is due to the political fragility generated by Japan’s strained bilateral relations with China and Korea concerning persistent historical and territorial disputes,” said Takashi Terada, a professor with Doshisha University in Kyodo, Japan.

“This particular structural problem in northeast Asia is a fundamental vulnerability to the sound development of trilateral cooperation,” he said.

Jeong Hyung-Gon, a senior research fellow at the Korea Institute for International Economic Policy, said political issues – ranging from territorial disputes and wartime history – had become “the most serious hurdle that the three countries need to overcome” to push forward economic integration, despite their impressive economic and technological progress.

“Considering the size of the economy, the proximity and potential economic growth, there is a potential to create one of the largest economic blocs in the world. Thus a China-Japan-South Korea FTA is a viable option to spur economic cooperation among the three countries,” he said.

The dispute between South Korea and Japan could have a detrimental effect on the negotiations of a trilateral deal, Jeong said.

“The formation of the FTA is considered an exception to the most favoured nation principle in the WTO, because the preferences that parties to a free-trade area exclusively grant each other go beyond their accession commitments,” he said.

“But the trade war Prime Minister Shinzo Abe launched against neighbouring South Korea is exactly opposite behaviour.”
Jeong said the frayed ties between Seoul and Tokyo meant the annual meeting of the leaders of the three countries, which Beijing is to host this year, would likely be postponed.

Observers agreed that establishing a northeast Asian economic bloc was never going to be an easy task, especially with the huge differences in market openness among the three nations.

Masahiro Kawai, a professor at the University of Tokyo, said Japan’s farming and fisheries industry and South Korea’s manufacturing were among the most contentious issues – with Japan wanting more opportunities in South Korea’s car and machinery market, which Seoul is reluctant to offer.

Meanwhile, South Korea, which had the least competitive farming sector of the three countries, was seeking greater access to Japan’s agricultural market, he said.

Japan was also seeking further access to China’s manufacturing sector, Kawai said. With all these issues, “resolving the dispute quickly would not accelerate the negotiations either”, he said.

“A more likely scenario would be to complete the RCEP negotiations first and then work on an FTA that is of much higher standard than the RCEP,” Kawai said.

“The RCEP includes countries like India and less developed Asean members and that makes it difficult to achieve a high-standard FTA.”

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