China-South Korea FTA

By+YU+YINGLI

DURING President Xi Jinpings state visit to the ROK in July， China and South Korea pledged to conclude negotiations on a free trade agreement （FTA） before the end of this year. Since China and South Korea established diplomatic relations 22 years ago， trade between the two countries has grown at an average yearly rate of 23 percent. In 2012， bilateral trade reached a new high of US $256.3 billion. Today， China is South Koreas top trading partner and largest export destination， while South Korea is Chinas third-largest trading partner. The bilateral FTA will take trade between the two countries to an even higher level. Bearing in mind that South Koreas exports to Chinas mainland are projected to grow by US $27.76 billion annually， both sides stand to realize their 2015 trade goal of US $300 billion， so consolidating the foundations of their political and economic relations.

More Balanced Bilateral Trade

The China-South Korea FTA is a major step towards East Asias long-awaited economic integration. It was during a meeting with ROK Prime Minister Lee Hae-chan back in 2005 that Premier Wen Jiabao proposed initiating FTA negotiations. The two countries announced establishment of the strategic cooperation partnership in May 2008， during ROK President Lee Myung-baks visit to China. The two sides subsequently signed， in October 2009， the Joint Research Report on the China-ROK Midto-Long Term Development Plan on Economic Cooperation and Trade. The document clearly proposed pushing forward and discussing， under the principle of reciprocity， the establishment of a China-ROK free trade area. In 2010， while attending the fourth Summit of the Group of Twenty （G20） in Toronto， Chinas President Hu Jintao and ROK President Lee Myung-bak met on the sidelines. The two leaders once again broached the matter of initiating FTA negotiations， and of facilitating bilateral economic cooperation and trade. In May 2012， while commemorating the 20th anniversary of the establishment of diplomatic relations， China and South Korea formally announced the commencement of China-ROK FTA negotiations， and committed to signing the FTA within two years. After 12 rounds of arduous negotiations， the two sides have reached the fi nal stages.

The China-South Korea FTA is expected to strike a balance in their bilateral trade. Over the long term， Chinas trade deficit with South Korea has remained high， accounting for 30 percent of the total bilateral trade. South Korean customs statistics show that， in 2013， the countrys trade surplus with China stood at US $62.82 billion. This surplus is attributable both to South Koreas overseas investment structure and to the countrys trade protection measures in certain fields. Guided by the principle of fundamentally balanced interests as agreed by the two sides， therefore， the FTA will help adjust bilateral trade to a more balanced and reasonable level.

Apart from trade in goods， the FTA will cover a wide range of fi elds such as trade in service， intellectual property， fi -nance， and investment. It will also mark Chinas foray into high-standard FTA negotiations， with the aim of forging a strategy on free trade areas and thus advancing establishment of a global highstandard free trade area network.

During FTA negotiations the two sides have also given full consideration to respectively sensitive fields， namely， South Koreas agriculture and Chinas electronics and machinery， so accumulating valuable experience for forthcoming negotiations.

Having transformed itself into a super free trade center， concluding the bilateral FTA will greatly expand South Koreas global economic involvement. FTAs between South Korea and the U.S.， EU， ASEAN， and India have raised their combined GDP to 60 percent of the world total. The FTA with China will expand this global proportion of South Korea and its free trade partners to 70 percent.

Political Games

Competition and cooperation coexist in the planning and negotiation of the China-South Korea free trade area and of the China-Japan-South Korea free trade area. They embody a contest of the three countries economic and political strength.

The idea of a China-Japan-South Korea free trade area was raised before that of the China-South Korea FTA. The three countries leaders first addressed the concept at a summit in 2002.

Relevant institutions of the three countries have conducted intensive studies on the potential economic gains of the trilateral free trade area. A research team under their joint guidance conducted in 2003 a survey of the three countries listed companies and some of their enterprises. The results showed that 85.4 percent of Chinese companies， 78.7 percent of Japanese firms， and 70.9 percent of South Korean businesses had a positive attitude towards establishing the trilateral free trade area.

The three countries command an extraordinarily large market of more than 1.5 billion consumers， the trilateral trade volume having topped US $690 billion in 2011， according to the ChinaJapan-ROK Cooperation （1999-2012） white paper released by Chinas Ministry of Foreign Affairs. Moreover， China has been Japan and the ROKs largest trading partner for years. Globally， the three countries GDP accounts for 75 percent of East Asian GDP and 19.6 percent of global GDP； their trade volume is a global third after the EU and the U.S. A study by Japans Mitsubishi Research predicts that the establishment of a trilateral free trade area will increase Chinas GDP by 1.63 percent； that of Japan by 0.23 percent； and South Koreas by 1.84 percent.

At the fifth China-Japan-South Korea trilateral summit in May 2012， leaders of the three countries agreed to initiate negotiations on the trilateral free trade area， and signed an agreement on promoting， facilitating， and protecting investment. In November of the same year at the ASEAN summit， the three countries announced that they would commence FTA negotiations.

Japan originally planned to start negotiations for a Japan-ROK FTA which China would join at a later， more appropriate time. However， China and South Korea started their bilateral FTA negotiations beforehand， so putting Japan at a disadvantage as regards the trilateral FTA negotiations.

Several factors account for this situation. The first is rivalry between China and Japan for the dominant role in the process of East Asias economic integration. The two sides have treated FTA negotiations as another arena in which to vie for political strength. China gained a high reputation for its excellent handling of the 1998 Asian financial crisis， which was what triggered East Asias economic integration process. During the first decade of the new millennium， Japans stagnancy and Chinas rapid development were East Asias most striking features. This instilled in Japan a sense of crisis. After China signed the FTA with ASEAN， Japan hastened to sign an FTA with ASEAN countries. In advancing the establishment of the China-Japan-South Korean free trade area， Japan displayed irrational hesitation due to a fear of los-ing its dominant role in the process.

The second factor is that of the disputes over Chinas Diaoyu Islands and fermentation of other historical issues. This has disrupted China-Japan relations， so casting a shadow on trilateral FTA negotiations.

In addition， the U.S. is promoting the Trans-Pacific Partnership Agreement（TPP）， driven by its strategy of returning to the Asia-Pacific region. This is another reason for postponement of the ChinaJapan-ROK FTA talks. Japan formally joined the TPP negotiations in July 2013， so becoming the main force blocking China economically. Under this backdrop， it is highly unlikely that Japan will proactively advance the trilateral FTA negotiations.

Lastly， its imbalanced trade makes Japan even more cautious about establishing the trilateral free trade area. In 2011， Japan showed its first trade deficit in 31 years， that to China standing at US $21.7 billion. This makes Chinas open market an especially sensitive issue for Japan.

However， were the China-South Korea free trade area to be set up， Japans US $5.3 billion in exports to China would be replaced by those from South Korea. This should motivate Japan to start FTA talks with China. In the long term， establishment of the China-South Korea free trade area will speed up negotiations on the China-Japan-South Korea FTA. In the short term， however， due to tense China-Japan relations， even though Japan begrudges China and South Koreas reaching an FTA， it might nonetheless sustain suspension of the trilateral FTA talks.

Forge a High-standard Asia-Pacific FTA

At the 2014 Meeting of APEC Ministers Responsible for Trade， Chinas proposal to carry out feasibility studies on establishing an Asia-Pacific free trade area was echoed by the ministers of trade and representatives of 21 member nations. The Asia-Pacific free trade area， first proposed in 2006， has been an important goal for APEC. However， fettered by multitudinous members at different development stages， the matter has made no substantial progress even after eight years of discussion.

Multiple FTAs currently exist in the Asia-Pacific region. They include the TPP and the Regional Comprehensive Economic Partnership （RCEP）， initiated by ASEAN， which China， Japan， South Korea， Australia， New Zealand， and India have joined. Owing to different levels， standards， contents， and rules， however， these FTAs are fragmented. To advance establishment of an Asia-Pacific free trade area， therefore， the related parties must consider how to coordinate the diversified FTAs in the region.

After the U.S. introduced the TPP， a proposal was raised to connect the TPP with the RCEP. Dominated by the U.S.， the TPP has high negotiation standards. The RCEP， meanwhile， is formed of ASEAN countries with China as an important participant， and features comparatively low standards. Hence， certain commentators hold that the two FTAs could run in parallel in the future AsiaPacific free trade area， either through China participating in the TPP or the U.S. joining the RCEP.

However， others regard the TPP and RCEP as incompatible， because they are two disparate systems. The focus of the RCEP is on protecting traditional free trade interests by lowering tariffs， removing non-tariff barriers， strengthening interconnection and communication， and coordinating the related countriestrade measures. To facilitate investment， it adopts the positive list based on national treatment after admission. In contrast， the TPP guarantees the interests of a liberalized global economy in addition to those related to trade， and promotes measures to ensure unified rules. In practical operations， the TPP aims to realize higher-level liberalization of trade in service and to facilitate investment with national treatment before admission， guided by a negative list. Therefore， it is possible to upgrade the relatively low-standard FTA to the level of the high-standard one， but not to combine the two.

China is of course going all out to advance to the high-standard governance system. The China （Shanghai） Pilot Free Trade Zone is Chinas major step towards adapting to the new trend of global economic and trade development. China-U.S. talks on investment and trade agreement also feature the national treatment before admission plus negative list mode. China-South Korea FTA negotiations cover a wide range of fields including trade in service， intellectual property， finance， and investment. Hence， in this sense， the establishment of the China-South Korea free trade area will promote bilateral trade and contribute to the future high-standard Asia-Pacific free trade area， and even to a global free trade area.