East Asia Free Trade Area: Giant of the Future ???

August 25, 2010Marketsby David Caploe

East Asia Free Trade Area: Giant of the Future ???

25 August 2010. By David Caploe PhD, Chief Political Economist, EconomyWatch.com

One of our constant themes here at EconomyWatch is the importance of co-operation,

both in general, and between emerging economic powers like, say, China and India.

We believe this both in principle AND because we think it’s the only way

the new economic giants can avoid the disasters that afflicted the US

and, especially, the European powers when THEY were going through their periods of tremendous economic growth.

Given this basic orientation, we tend to be very positive toward just about ANY move towards greater co-operation,

which must, of course, take place, albeit in slightly different ways in BOTH the political and economic spheres,

as the two are always linked – two sides of the same coin, as it were.

Now this enthusiasm for political economic co-operation and inter-linking may seem a bit naïve to some,

both in general, and especially when the Eurozone – which represents precisely such an initiative –

is going through so many structural difficulties.

But despite the current – and, we have said from the beginning, quite serious – problems the Eurozone currently confronts,

we think the problem there is not THAT it was done, but HOW it was done.

That, however, is a discussion for another time and place – but one in which we eagerly look forward to engaging.

It’s in this context that we read with great, if tempered, enthusiasm that

China and South Korea are beginning what has always been a long, slow process towards significant economic inter-penetration

a move which is, of course, a profoundly political decision, for reasons the current Eurozone crisis makes painfully clear.

Even better, the move seems to be part of China’s GENERAL political approach to its neighbors,

although its tensions with its MOST important neighbor India,

in both the Himalayas and elsewhere in South Asia, remain worrisome.

Those aside, we are encouraged by the reports that

South Korea and China are likely to open free-trade talks next year,  

as South Korea’s ambassador to China said in a recent published interview.

The negotiations could be a first step toward a three-nation trade zone with Japan

and would rival the European Union and the North American Free Trade Agreement in size.

In an interview with China Daily, the state-run English-language newspaper, the ambassador, Yu Woo-ik,

cautioned that a trade pact with China would face deep skepticism from South Korea’s farming, fishing and forestry industries,

which fear being undercut by cheap Chinese imports.

But the ambassador also was quoted as saying that the agreement would be in South Korea’s long-term interests.

The Chinese have been striking similar agreements with some of South Korea’s economic competitors,

 like Taiwan and countries in Southeast Asia.

Asked about Mr. Yu’s remarks, the South Korean Ministry of Foreign Affairs and Trade said

no decision had been made on whether or when to open formal negotiations with China.

Two-way trade between China and South Korea amounted to $141 billion last year;

South Korea sends a quarter of its exports to China.

The two nations have said they will increase their bilateral trade to $300 billion a year by 2015.

South Korea and China completed a feasibility study for a possible trade accord in May,

and at the time they agreed to have more consultations on

agriculture, fisheries and other sensitive areas before deciding to begin formal negotiations.

“We don’t know how long those consultations will last and what results they will bring about,”

Kim Jin-wook, director of the ministry’s free-trade accord policy planning division, noted in the wake of the interview.

“Until those consultations are over, we cannot say whether and when formal negotiations for an F.T.A. will take place.”

China has been more aggressive in pursuing a trade deal with South Korea than vice versa,

South Korean officials said.

When South Korea’s president, Lee Myung-bak, met with China’s premier, Wen Jiabao, in May,

Mr. Wen told South Korean business leaders that negotiations for a trade agreement would begin “within a year.”

South Korea said no such schedule was set.

Still, members of Mr. Lee’s governing Grand National Party have recently called for negotiations with China

for a trade pact to help South Korean firms in the face of a “Chiwan economy.”

The recent trade deal between China and Taiwan “can deliver a serious blow to our companies,

which have been engaged in fierce competition with Taiwan for the Chinese market,”

Kim Moo-sung, the floor leader of the governing party, said in a speech in July.

“The government must prevent us losing all the market by pushing for an F.T.A. with China.”

In the United States, President Obama is struggling to win support from his party’s legislators for a free-trade pact with South Korea

that has gone unratified by Congress for more than three years, as noted in this article from the New York Times.

The accord is strongly opposed by the beef and auto industries in the United states, as well as by labor unions,

which say it fails to end what they say are unfair restrictions on United States auto and beef sales in South Korea.

The White House has pledged to address those concerns.

But South Korea’s trade minister said in June that talks were complete and that the agreement would not change.

In this sense, South Korea is maintaining a bit of a contradictory position.

From above, it’s clear that part of what’s holding them back with such an accord with China are

objections from specific, and politically influential industries like agriculture / fisheries / and forestry.

Yet at the same time, when equally powerful interest groups in the US –

notably the auto and beef industries –

make similar complaints about South Korea, the attitude is, “well, too bad, what’s done is done.”

On the one hand, each position is understandable:

the South Koreans fear being overwhelmed in their own market by cheaper goods –

whether agricultural, fish or timber from China, or beef and autos from China or America –

although we think concerns about inferior products like US autos are really overblown.

On the other hand, there is no question that a country like South Korea –

despite its unusual level of government / industry co-operation

MUST have “controlled” economic relations with BOTH China AND the US.

It needs to find a niche somewhere between rising, and, it must be said, fading economic giants –

which is precisely why their Ambassador to China insists such a move is indeed in South Korea’s long-term interests,

whatever current players may be shaken up in the process.

This is especially so because, by all accounts,

Beijing is making trade pacts a centerpiece of its commerce strategy –

which, of course, is simultaneously a political strategy –

signing or starting agreements since early 2007 with

New Zealand, Taiwan, Singapore, Peru and ASEAN, the 10-nation Southeast Asian alliance.

This approach is even more significant if the “preliminary discussions” for a trade pact between South Korea and Japan

about which no one should hold their breath, unfortunately,

since these “preliminary” talks have been going on for eight years now – end up creating results.

Here the issues are even more difficult, for a combination of political and economic reasons.

Economically, Japan and South Korea are not just often direct competitors in several sectors,

but have also near enough wage levels – especially compared to China –

that the “margin for maneuver” is even smaller than it is with either of them vis-à-vis China.

At the same time, the structural similarities between the two countries mean

it could be even more in their mutual interest to strike some kind of deal that would reduce trade barriers between them.

Unfortunately, that potentially beneficial economic move is complicated by significant political factors

that are not so much interest-group related, although there IS an element of that,

but spring instead from the early years of the 20th century, when Korea was a Japanese colony,

and, even more, from World War II, when, among other things, Korean “comfort women” were used for the pleasure of Japanese military forces.

Here, the relative unwillingness of many on the Japanese right to even acknowledge the reality of these events

creates a structural impediment to co-operation with South Korea,

especially when they are often not addressed, let alone apologized for, in Japanese schoolbooks.

Again, the interpenetration of politics and economics.

That said, if South Korea and Japan could reach a trade accord,

the alliance could potentially begin a process to remove tariff barriers among three of the four largest Asian – and now world – economies.

But here again, political factors are key players in economic actions.

For just as the “comfort women” cast a shadow over Japanese – South Korean relations,

the invasion of China by Japan in 1931, and atrocities like the so-called “rape of Nanjing”, hang over its relations with China as well.

The potential economic fruits of a three-way free trade zone among China

which, as everyone knows, has just overtaken Japan as the world’s second largest economy –

Japan, and the scrappily successful South Korea, are, literally, world-changing in their implications:

such a free trade zone would immediately challenge on several levels the EU and NAFTA

in a way China itself clearly recognizes it cannot yet dream of achieving on its own.

The question is whether there is the political will in all three countries to overcome

not just currently active economic interest groups,

but the undigested memories of historical wounds that still have not healed.

Frankly, we think it is in the interests of all three countries, not least Japan

whose economy has been dead in the water since the collapse of the Tokyo real estate market in 1989,

and the foolish political decision to let their TBTF banks avoid a realistic statement of their losses,

a mistake now being repeated by both the US and the EU,

a move which will end up as destructive for them as it has been for Japan

to make a real effort to take responsibility for a terrible past.

In this regard, they could learn a lesson from Germany,

whose sustained efforts to confront the crimes of the Third Reich have been both exemplary and successful,

transforming what was once Europe’s pariah into a respected and prosperous “normal” nation.

But that too is a discussion for another day.

In the interim, they would all do well to consider the potential fruits of a three-way free trade zone

that could immediately rival both NAFTA and the European Union.


By David Caploe PhD

Chief Political Economist


President / acalaha.com


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