[Smart Q&A: Son Yeol] The Northeast Asian FTA Order and Korea's Strategy

YouTube Link: video.eai.or.kr/120517_smartksy_k.flv

Professor Son Yeol holds a Ph.D. in Political Science from the University of Chicago and is currently a professor at Yonsei University's Graduate School of International Studies.

Current Status of the Northeast Asian FTA Order

“The US is entering the regional FTA network, which has been led by China, with the TPP.”

“FTAs should be understood more in terms of pursuing strategic interests than economic effects.”

After five years of arduous negotiations, Korea signed the Korea-US Free Trade Agreement (FTA). While many expected significant national benefits upon signing the FTA, the international political currents surrounding FTAs have become far more complex following the entry into force of the Korea-US FTA. Following the Korea-US FTA's implementation on March 15, Korea announced the commencement of negotiations for the Korea-China FTA on May 2, and at the Korea-China-Japan Trilateral Summit on May 13, it was agreed to expedite preparatory work for the launch of FTA negotiations among the three countries within the year.

Amidst the various FTA discussions facing Korea, the Trans-Pacific Partnership (TPP) led by the United States warrants particular attention. The TPP began as a multilateral FTA among the four Pacific Rim countries (Pacific Four: P4) – New Zealand, Singapore, Chile, and Brunei. However, with the subsequent accession of Australia and Peru, and particularly the US's participation during the George W. Bush administration, it has evolved into a significant FTA poised to impact Asia. Vietnam and Malaysia have also expressed their intent to join the TPP. Notably, in November of last year, Japanese Prime Minister Yoshihiko Noda announced Japan's intention to participate in the TPP at the Asia-Pacific Economic Cooperation (APEC) summit, and preliminary negotiations are currently underway.

However, until now, FTA discussions in the East Asian region have primarily revolved around ASEAN-centric FTAs led by China. Following the conclusion of FTAs between China, Japan, and Korea with ASEAN individually, intense discussions took place regarding regional multilateral FTA frameworks, specifically the ASEAN+3 and ASEAN+6 models, with China at the center. China's proactive conclusion of an FTA with ASEAN catalyzed the East Asian FTA discourse. Subsequently, China signed FTAs with Macau, Hong Kong, and Taiwan, and is currently in discussions with Korea, thereby leading the trend of regional FTAs.

The current East Asian FTA order is characterized by the US entering the regional FTA network, which has been led by China, with the TPP. China is concerned that this situation will evolve into a competition or rivalry between US and Chinese networks. In particular, for China to join the TPP, which demands a high level of liberalization requiring not only tariff reforms but also institutional reforms, it would incur immense political costs, making China's accession to the TPP practically difficult. Nevertheless, China perceives the US's promotion of the TPP as part of its strategy to contain China.

The competition between the US and China over the FTA order stems from the strong characteristic of FTAs as instruments for pursuing strategic interests, rather than merely mutually beneficial economic cooperation measures. Once an FTA is concluded, the institutionalization of bilateral relations and cooperation deepens, making it difficult to sever ties, thus bestowing the effect of establishing a strategic partnership. The absence of any precedent for concluding FTAs with hypothetical adversaries underscores this very reason. Furthermore, the academic consensus is that the economic effects of FTAs are not as substantial as anticipated. Therefore, when considering FTA policies, these strategic characteristics of FTAs must be kept in mind.

The US's active engagement in the TPP cannot be solely attributed to economic recovery through increased exports to Asia. The US already has bilateral FTAs with more than half of the countries included in the TPP. Therefore, it can be inferred that the US intends to counter the shift towards a China-centric order in Asia's economy through the TPP. China's active pursuit of an FTA with Korea can also be understood in a similar context. Korea relies on the Chinese market for 24 percent of its total exports, while China's exports to Korea account for only 7 percent of its total. Thus, China's proactive promotion of an FTA with Korea is likely driven not by a desire to gain access to the Korean market, but by its high valuation of Korea's strategic importance in countering the US.

The Korea-China-Japan Summit and Prospects for the Future Northeast Asian FTA Order

“Low likelihood of a Korea-China-Japan FTA: ① Strategic competition between China and Japan, ② Japan's political and economic issues”

“Japan: Using the Korea-China-Japan FTA as a bargaining chip to gain concessions from the US for TPP accession”

“China: Intent to delay Japan and Korea's accession to the TPP”

From Korea's perspective, a Korea-China-Japan FTA is not a welcome development. Korea had initially aimed to secure an advantageous position among the three nations by concluding FTAs with Japan, in addition to the US, China, and the European Union. Amidst this, the discussion on a Korea-China-Japan FTA unexpectedly gained momentum, leading to an agreement among the leaders.

However, the prospects for a Korea-China-Japan FTA are not bright. Despite extensive cooperation efforts among the three countries in various issue areas such as environment and technology, none have yielded substantial results. This underscores the inherent difficulty of Korea-China-Japan cooperation. If cooperation proves challenging even in non-political areas, it is even more difficult to achieve results in issues like trade, which carry significant domestic political costs and are heavily influenced by strategic considerations.

More specifically, the low probability of a Korea-China-Japan FTA materializing can be attributed to two primary factors. Firstly, the element of strategic competition between China and Japan. As previously mentioned, it is considerably difficult for two nations in a strategic competitive relationship to conclude an FTA. Cooperation between China and Japan is currently feasible only at a very limited level. Secondly, Japan's political and economic issues. While Japan clearly harbors a desire to revitalize its stagnant economy through the shock therapy of an FTA, severe inward-looking tendencies within Japanese society, political instability characterized by frequent changes in prime ministers, and a political discourse preoccupied with domestic issues all act as impediments to Japan's ability to effectively conduct negotiations with major trading partners like China and Korea.

Given these circumstances, why are Japan and China, who are undoubtedly aware of them, actively raising the issue of a Korea-China-Japan FTA at this juncture? Firstly, Japan urgently needs the TPP for economic and security reasons. It requires a strong external stimulus for economic recovery and "third opening," and it must more actively embrace the US to counterbalance the rising influence of China. The challenge lies in the TPP's entry barriers. The TPP aims for a high level of trade liberalization, as evidenced by the US's declaration of pursuing a 21st-century standard FTA. For Japan, which has never concluded an FTA with such a high level of liberalization, including the unconditional opening of its agricultural market, participating in the TPP presents a significant burden. Therefore, it can be inferred that Japan intends to leverage the discussion of a Korea-China-Japan FTA as a means to secure certain concessions from the US during its TPP accession process.

Conversely, China perceives the TPP as a US strategy to encircle it and thus reacts sensitively, asserting that all FTA discussions are possible except for the TPP. Currently, the TPP consists of relatively small countries, with the exception of Australia, and therefore has not yet exerted decisive influence. However, if Japan were to join the TPP, it would trigger a pivotal shift in the East Asian FTA landscape, making it extremely difficult for Korea to refrain from joining the TPP as well. In such a scenario, China would face the dilemma of either meeting the TPP's accession requirements at the cost of immense domestic political costs or focusing more on building its own network. However, even in the latter case, a network from which Korea and Japan are absent would lack significant meaning, regardless of its form. Therefore, China is in a position where it must delay and contain Japan and Korea's entry into the TPP while expanding its own network. In this context, the Korea-China-Japan FTA can be viewed as part of China's delay strategy.

Korea's FTA Strategy

“Pursue both the Pacific network and the East Asian network concurrently.”

“Actively develop an East Asian FTA model.”

From Korea's standpoint, the Korea-US FTA and the TPP are part of the Pacific network, while the Korea-China-Japan FTA pertains to the establishment of an East Asian network. The crucial point is that the Pacific network and the East Asian network are not mutually exclusive choices. The Pacific network, led by the US, demands a high level of liberalization, making it difficult to weave East Asia into a network using such a model. Since East Asia does not consist of open economies like the P4 countries where the TPP originated, an FTA model is needed that can achieve regional integration while satisfying the contextual specificities and social needs unique to East Asia.

Therefore, Korea's FTA strategy should be formulated based on the development of an East Asian FTA model, and the Korea-China-Japan FTA should also be pursued within this framework. It is inadvisable to simply react to the strategic moves of China and Japan. The East Asian model that Korea must consider should, first, reflect the socio-contextual characteristics of East Asia, where income disparities are widening and the demand for welfare is increasing. In other words, if FTAs are pursued solely under the discourse of expanding exports or economic territories, they will inevitably face domestic backlash as FTAs benefiting large corporations and conglomerates. Thus, an FTA model is needed that is accompanied by domestic compensatory measures to ensure that the benefits of export expansion are shared equitably among all members of society. Second, an FTA model that contributes to job creation must be established. Third, an FTA model that coexists with developing countries within the region is necessary. To achieve this, the three countries of Korea, China, and Japan must move beyond asserting their individual strategic interests and instead form a network that demonstrates consideration for neighboring countries and sets a positive example.

Historically, despite being a nation whose economy relies on trade, Korea has pursued its FTA policies with a sense of crisis, feeling that it was lagging behind other countries in the global FTA competition and thus needed to catch up quickly. Now, a broader perspective is required, necessitating a new approach that could be termed FTA 2.0 – a strategy that considers the domestic political situations of East Asian countries and coexistence with developing nations.

The East Asia Institute (EAI) is receiving financial support as a core research institution selected for the MacArthur Foundation's 'Asia Security Initiative' program. EAI has been conducting Smart Q&A video interviews with domestic and international experts, aiming to provide timely and in-depth analyses of current issues through Q&A sessions with experts in relevant fields. This manuscript was compiled by Researcher Kim Yang-gyu (EAI Center for Asian Security Studies) and Team Leader Kim Ha-jeong (EAI Center for Asian Security Studies) based on interview content. The opinions expressed are those of the individual experts and do not necessarily reflect the views of the East Asia Institute. Please cite the source when quoting from Smart Q&A.