China, Japan, Korea Trade in Goods and the Approach. to CJKFTA

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1 China, Japan, Korea Trade in Goods and the Approach to CJKFTA National Academy of Economic Strategy, Cass Research Dept. of International Trade and Investment, Director Dr. Feng Lei, Senior Research Fellow 1. The Development of CJK Trade in Goods Trade in goods is not only the basis of the international economic and trade relations but also the starting point of the development of FTA. The development practices of current FTAs have overstepped the scope of goods trade and involve other issues, such as service trade, investment arrangements, competition policies, environment and labor. Despite the expansion of issues, the negotiation on goods trade is always the foundation of FTA. Without the appropriate arrangement of goods trade, the rest issues will lose the progress foundation to bottom on. In light of the development of CJKFTA, the significance of goods trade lies in the division framework of manufacturing among China, Japan and Korea which will play an important role for the next 10 years at least. This paper will explore the interdependency of goods trade among the three countries and illustrate the material bases which affect their wishes to establish CJKFTA. 1.1 Trade in goods from China to Japan and to Korea Table 1: China s goods trade data ( ) unit: billion U.S. $ Year Exports Imports total to Japan to Korea total from Japan from Korea

2 source:the United Nations commodity trade database Figure1:Ratio of China s exports to Japan and to Korea to the total exports relatively: source:the figure is produce by the author according to table is the turning year for the export ratio of China to Japan. Before 1996, the exports ratio to Japan continued to rise and reached the peak of 20% in the year of After that, the ratio went up and down. Since 2001, the radio kept decreasing and hit bottom of 8% in The export ratio of China to Korea has been basically stale during the past two decades. The ratio was 3% in 1991 and slightly rose to 4% in It is obvious that the financial crisis in 1998 and global economic crisis in 2008 had negative effect on exports and the radio decreased from 5% of pre-crisis to 3%and 4% relatively. Comparatively, China s goods exports kept rising from U.S. $ 71.8 billion in 1991 to U.S. $ billion and increased by 26 times. During the period, the exports to Japan rose from U.S. $ 10.2 billion to U.S. $ billion and increased by 14 times which lagged behind the growth rate of China s total export. It shows that the dependency on Japan market went down. At the same time, the exports to Korea rose by 39 times which was U.S. $ 2.2 billion and U.S. $ 82.9 billion in The growth rate was higher than that of China s total exports and illustrated that the dependency on Korea market went up. 2

3 Figure 2:the ratio of China s imports from Japan and from Korea to the total imports: source:the figure is produce by the author according to table 1. The changes of imports from Japan were divided in Before the year, the ratio rose faster. It was 16% in 1991 and rapidly rose to 23% in After 1994, the ratio was decreasing to 11% in 2011 which was the bottom during the past 21years. The imports from Korea turned in Before 1998, the ration was increasing from 2% in 1991 to 11% in 1998 and then swung up and down by 3% percent until it reached the peak of 12% in In 2011, the ration fell back to 9%. China s total imports was U.S. $ 63.8 billion and rose to U.S. $ billion, which increased by 27 times. China s imports from Japan increased by 27times from U.S. $ 10 billion to U.S. $ billion in the period, which illustrated that the growth rate fell behind that of total imports and the import dependency on Japan was decreasing. In the period, the imports from Korea rose by 147 times from U.S. $1.1 to U.S. $162.7billion, and the growth rate was far above that of total imports which showed us that the import dependency on Korea was increasing. 1.2 The goods trade of Japan with China and Korea Table 2:Japan s goods trade: unit: billion U.S. $ Year Exports Imports total to China to Korea total From China from Korea

4 source:the United Nations commodity trade database Figure 3:the ratio of Japan s exports to China and to Korea to Japan s total exports: Source: this figure is produce by the author according to table 2. The ratio of Japan s exports to China to its total exports gradually climbed from 3% of 1991 to 6%of 2000 and then rapidly rose to 20% of The growth rate is 3% in the first decade and 14% in the late decade. In the period, the ration of Japan s exports to Korea went up and down between 4% and 8% and kept stable at the level of 8% after Japan s total exports were U.S. $ billion in 1991 and U.S. $ billion and increased by 2 times. In the same period, Japan s exports to China rose by 18 times from U.S. $ 8.6 4

5 billion to U.S. $162 billion. The growth rate is far above that of the total exports and the comparison illustrate that Japan s increase of export volume benefits from the expansion of exports volume with China. In the corresponding period, Japan s exports to Korea grew by 3 times from U.S. $ 20.1 billion to U.S. $66.2 billion. The growth rate is a little more than that of the total exports and Japan has benefited from the expansion of goods exports volume too. Comparing China market with Korea market, their role in Japan exports has slightly changed. Because the exports to China account for one fifth of Japan s total exports, Japan highly depends on China market instead of Korean. Figure 4:the ratio of Japan s imports from China and from Korea to Japan s total imports: Source: this figure is produced by the author on the basis of table 2. The ratio of Japan s imports from China rose from 6% of 1991 to 21% of From 1991 to 1993, the ratio was less than 10% and gradually rose by 1% year by year. During 1994 to 2002, the ratio was in the range between 10% and 20%. In the period of 2003 to 2011, the ratio was stably above 20%. In 2008, it was slightly below 20% because of the negative influence of the global economic crisis. From 1991 to 2011, the ratio of Japan imports from Korea maintained at the level of 4% and 5% without fluctuation. Japan s total imports volume was U.S. $236.7 billion and U.S. $855.4 billion in 2011 and increased by more than 3 times. In the corresponding period, the imports from China increased from U.S. $14.2 billion to U.S. $183.9 billion and rose by nearly 13 times which was higher than the growth rate of the total imports. The imports from Korea grew from U.S. $12.3 billion to U.S. $ 39.8 billion and climbed by more than 3 times which was basically flat with the total imports growth rate. 1.3 Korea s goods trade with China and Japan 5

6 Table 3:Korea s goods trade: unit: billion U.S. $ Year Exports Imports total To Japan To China total From Japan From China source:the United Nations commodity trade database Figure 5:the ratio of Korea s exports to China and to Japan to Korea s total exports: Source: the figure is produced by the author on the basis of table 3. 6

7 The ration of Korea exports to China increased from 1% to 24% of 2011, and the corresponding data to Japan decreased from 17% of 1991 down to 7% of The greatest concern is the role transition of China and Japan in Korea s exports in the past 21 years which shifted from mainly exporting to Japan to mainly exporting to China. The transition happened during 1998 to 2001 in the global and regional context of Asian financial crisis. In addition, China s entry into WTO in 2001 accelerated the growth of Korea s exports to China. Because of China s WTO commitment and economic development, not only the share in target market exceeded Japan but also the trade volume overcame Japan for 5 years since Figure 6: the ratio of Korea imports from China and from Japan to Korea s total imports: Source: this figure is produced by the author on the basis of table 3. Japan used to be the important origin of goods and the ratio was 26% in 1991 but decreased to 13% in In the period, the ration from China increased from 4% to 16%. It is interesting that the sum of the two ratios was 29% in 1991 and 30% in Even though there is little difference between the two, but the ratio of goods origins has changed and the direction was reversed. Through the above analysis, we concluded that there were several obvious changes among three countries goods trade interdependency. Firstly, the sum ratio of China s exports to Japan and Korea is decreasing from 17% to 12%, and the change included that the ratio of Japan market declined by 6% and the ratio of Korea market rose by 1%. The sum ratio of China s imports from Japan and Korea is increasing from 18% to 20%, including the negative 5% contributed by Japan market and positive 7% contributed by Korea. Secondly, the sum ratio of Japan s exports to China and Korea climbed from 9% to 28% 7

8 including positive 17% from China market and positive 2% from Korea. The sum ration of Japan s imports from China and Korea increased from 11% to 26% mainly contributed by China market and the ratio of Korea kept flat. Thirdly, the sum ratio of Korea s exports to China and Japan rose from 18% to 31% and the ratio of China increased by 23% and that of Japan decreased by 10%. The sum ratio of imports from China and Japan declined from 30% to 29% including positive 12% of China market and negative 13% of Japan market. 1.4 The relation of goods trade and GDP The link between goods trade and GDP underlines the attitude of one country to goods trade. Table 4 lists the ratios of goods trade to GDP of the three countries relatively and compared with those of EU, NAFTA and global average level. China s ratio is 50%, Japan s accounts for 29% and Korea reaches 97%. Correspondingly, that of EU is 25%, NAFTA 29% and global average is 26%. Table 4:Goods Trade and GDP: 2011 unit: billion U.S. $, % 2011 GDP Goods trade The ratio China % Japan % Korea % EU % NAFTA % Global average % Source: these data come from website of IMF and China s Department of Commerce and ratios are calculated by the author. The ratio of trade in goods to GDP illustrates the role of goods trade has changed in the three countries respectively and then influences their attitude to establish CJKFTA. 2. Chinese scholars general views on CJKFTA The earlier research focused on the interplay among the three countries, paid attention to the influence of monetary policy and exchange rate policy on the macro-economy, explored the connection between the appreciation of Yen and the exports increase of China and Korea and studied the influence of depreciation of RMB on China s exports increase and the growth to Japan and Korea (Shi Zhuxian, 2001). Paying attention to the China-Japan-ROK FTA establishment prospect, we believe that the establishment of FTA is inevitable, but in the short term it can not be completed. Taking into account the ASEAN reality, we will seek to accelerate the three "10+1" cooperation process (Lu Xinde, Shao Zhiqin, 2002). To establish the institutional foundation for the regional economic cooperation is in line with their long-term interests, but it should been seen that the development of institutional cooperation between Japan and Korea is slow and the coordination both in the global or regional scale based on common interests and bargaining power has not yet formed. On the basis of cooperative 8

9 research on the possibility to establish the FTA among the three countries, we will improve the existing government dialogue and coordination mechanism, and cooperatively research regional trade liberalization and industry division of labor relations among the three countries (Zhang Xiaoji, 2003). Cooperation space in East Asia include financial and trade as well as non-traditional security fields. But the more significant is the cooperation process itself among different levels of development, different ideologies, and different cultural backgrounds as well as many historic grievances of nation and region. The potential power of collaboration on trade-potential is greater than that on the financial aspect, and the unavoidable problems are cooperation power, the axis of cooperation and political environment, (Chai Yu, 2004). CJK FTA will promote the regional GDP growth, increase employment, expand the scale of trade and investment, and speed industrial gradient transfer, therefore all of the three countries will benefit from the FTA. But in short term, developed Japan has comparative advantage in the industry and will capture more benefit and in medium and long term, because developing China possesses development potentiality and market space superiority, it will benefit larger (Song Qun, Chen Chang Ying, 2004). Establishing CJK FTA regional integration is an inevitable requirement of competition in the world economy. Because the three economies are highly complementary, the FTA is a "win-win" choice. Nevertheless, we need to harmonize their cooperation motives and properly consider tripartite trade balance. Considering Japanese and Korean active investment in manufacturing of China and insufficient investment in the third industry, we can try to take the sub-regional cooperative approach from junior to senior morphological development (Tangxiu Lian, 2004). Taking technical cooperation and trade facilitation as the starting point for comprehensive economic cooperation, CJK FTA is the key to promote regional cooperation in East Asia and to cooperate in specific field for the institutional arrangements of the FTA. (Liu Xiangfeng, 2005). China, Japan and Korea share the same object countries as FTA partner, however they achieve it through different paths. China's FTA strategy is to stabilize imports market of raw materials and export markets, and its practicality and flexibility is very strong. Japan emphasizes on bilateral EPA system, covering trade and investment, while Korea's strategy is to optimize the economic structure and institutional arrangements for trade as the most important objects (Liu Zhongli, Sheng Wei, 2008). Trade liberalization of the manufacturing sector is the largest contributor to the overall benefits of CJKFTA and the FTA will allow the three countries to achieve win-win situation on the macroeconomic level (Zhang Qideng, 2008). China, Japan and Korea should strengthen intra-regional trade in order to cope with the development model which highly depends on external demand and is difficult to change in short term (Tian Zhong Qing, 2010). China, Japan and Korea diverge on the agricultural products trade, manufacturing, competition and investment agreements. Therefore, establishing China-ROK free trade area in advance may become a path selection to achieve behavioral CJK FTA (Shen Ming-hui, 2011). CJK FTA establishment must be within the framework of "10 +3" and WTO to accelerate the three "10 +1" cooperation process (Yuan Chang Jun, 2011). China, Japan and Korea have signed investment agreements which create the conditions to promote free trade area negotiations. CJKFTA can help boost economic and trade but has the different influence on their major industries. However, the lack of political trust, various interest demands and external interference makes more difficult the tripartite integration (Xu Mei, 2012). 9

10 3. The approach to CJKFTA Ten years ago, the government set up the trilateral joint study group to study the feasibility of FTA. Although the research results are valuable, the will on FTA negotiations was reached until recent years. Due to a variety of factors, this process is not smooth. 3.1 Uncertainty is the basic characteristics of the road to CJK FTA The first uncertainty is the uncertainty on willingness. Political will is the key factor to determine CJKFTA. Turbulence in Northeast Asia region dominates the economic cooperation development context. Without the political level support intention to cooperate, CJK FTA would only be an illusory vision and difficult to be the front. The second one is environmental uncertainty. The global economy is still in deep morass of financial crisis with the U.S. economic downturn and the deadlock of European debt crisis. Even though the rise of China's economy has made important contributions to the growth of the global economy, it was ridden by trade friction. As a symbol of the United States return to Asia, Trans-Pacific Partnership will become its paving tools to carry out its willpower, which brought a new variable to the regional pattern of the game. The third one is uncertainty on trade. In the past 10 years, Japan and Korea have achieved a certain degree of progress in their respective trade area, but national economic structure and trade structure has undergone tremendous changes. The pattern of trade in goods, which largely dominate economic and trade cooperation between the three countries, as well as the closely related cross-border investments, has also undergone a change in nature, causing subtle changes of the country's need for FTA. From the point of view of existing research, economic effect of the trilateral FTA is greater than any group of bilateral economic effects of the FTA. Japan and Korea FTA negotiations have been shelved for many years, Korea has launched FTA negotiations with China, and while China-Japan FTA negotiations have not yet put on the agenda. Japan and Korea promised to launch FTA negotiations in 2012, but the regional tensions caused by "island dispute" is tantamount to pour cold water to FTA negotiations. 3.2 Trans-Pacific Partnership Agreement (TPP) Firstly, we should concern America's leading thinking and TPP content. When U.S. participates in regional trade arrangements, its consistent idea is that trade and investment arrangements relating to labor standards and environmental standards should be included into the negotiations. While those issues cannot be achieved in the Uruguay Round negotiations, U.S. instead focuses on the development of regional trade arrangements, such as NAFTA and the free trade zone with the six countries of Central America, and finally achieves its demands on the labor and environment under the international economic and trade rules. In the TPP negotiation and implementation process, the basic idea continues to be 10

11 implemented. When the United States formally proposed in 2009 the program to expand the Trans-Pacific Partnership, making TPP breaking the traditional model of free trade agreements in order to achieve a comprehensive free trade agreement as the goal including all goods and services and to negotiate wide-ranging issues involving agriculture, labor, environment, government procurement, investment, intellectual property protection, trade in services, rules of origin, safeguard measures and other aspects. This model can both help to clarify the existing crisscross bilateral trade agreements among members and on the other hand provide an important platform for the United States-led regional trade arrangements to pursue its implementation of new international trade rules. Secondly, TPP will be considered as an important factor in the development process of the CJKFTA. TPP's predecessor is a four state-sponsored Trans-Pacific Strategic Economic Partnership in 2005 by Brunei, Chile, New Zealand and Singapore. In 2008, the United States announced its participation and invited Australia and Peru to join the negotiations, and then Malaysia, Vietnam, Canada has also successively joined the negotiations. China, Japan and Korea's relations with the TPP is quite wonderful. On March 15, 2013, Japan formally announced to join the TPP negotiations, while Korea is in a dilemma whether to participate in or not and China has not been invited to participate in the negotiations for a variety of reasons. In addition, ASEAN newly proposed the regional Comprehensive Economic Partnership (RCEP), the so-called "10 +6" mode including 10 ASEAN countries, Australia, New Zealand, Japan and Korea and India. If this vision is realized, the 16-nation unified market will be established through the reduction of tariffs and non-tariff barriers. This initiative covers China, Japan and Korea, which increase variables of CJK FTA development. 3.3 "10 +3", three "10 +1", CJKFTA The development of CJKFTA is inseparable with ASEAN s Regional partnership. Co-operation of China, Japan and Korea with ASEAN is not only the wishes of the three countries in the development of their free trade areas, but also the important factors on the development of the three countries free trade zones and profound impact on the three countries trade zone needs. Firstly, the "10 +3" provides a new idea for CJK FTA development. Through 1997 Asian financial crisis, the East Asian countries recognized the importance of regional economic cooperation. The early vision of the "East Asian economic bloc" later changed to "East Asia Economic Forum," and then in 1997 ASEAN leaders' informal meeting held in Kuala Lumpur formed a so-called "10 +3" Summit mode and the three "10 +1" mechanism for bilateral summit. In 1999, the third Summit issued a "Joint Statement of 11

12 East Asian cooperation," emphasized on promoting dialogue and cooperation among East Asian countries and identified eights priority areas of cooperation including economic, monetary and financial, social and human resource development, science and technology, development cooperation, culture and information, political, security, and transnational issues. In 2000, "Chiang Mai initiative was concluded by "Finance Ministers' Meeting in Chiang Mai, marking that the East Asian cooperation has taken an important step. In the same year, the "10 +3" leaders began a formal meeting and impelled the 10+3 free trade zone from a concept to the channel of the institutionalization. In 2004, "10 +3" Summit formally proposed the establishment of the East Asian free trade area, therefore the world change into a three-plate pattern. In 2011, the ASEAN East Asia Summit took the "10 +1" and "10 +3" as the co-main channel to promote East Asian integration process. China has been proactively pushing forward the development of an East Asian FTA. Since 2002, China has urged for faster establishment of the FTA several times. In addition, three recommendations were made in 2011 which included (1) carrying out substantial actions to speed up the establishment of the East Asian FTA, (2) performing the core functions of ASEAN and (3) doing it by a gradual and from easy to hard approach under the FTA framework to take care of the different development needs of the countries. Secondly, Potential Economic and Trading Scale and the Role in Global Economy should be concerned. The proposed ASEAN, China, Japan, Korea FTA will form an economy with a GDP of U.S. $15 trillion and a trading scale of U.S. $8 trillion, accounting for 20% and 40% of the world s total respectively. Such scale is comparable to that of the existing North American FTA (GDP: U.S. $18 trillion; trading scale: U.S. $530 million) and the European Union (GDP: U.S. $17.6 trillion; trading scale: U.S. $4.5 trillion) and leads to a tripartite balance of forces in the world. The uncertainties over the global economy caused by the US economic slowdown and the ongoing European debt crisis have made the Asian economy the major engine of global growth. The Chinese economy which maintained long-term steady growth has become an important factor for global economic stability. The ASEAN, China, Japan, Korea FTA will establish a three-area pattern for the world economy which is beneficial to the balancing of regional economic development. It will also foster free trade in the world, representing a significant contribution towards a better framework for global governance. From the perspective of carrying out the functions of the WTO in world trade, the potential and positive influence of the ASEAN, China, Japan, Korea FTA proves once again the proportional relationship between the size of FTA and its influence on free trade promotion and the efficiency enhancement of WTO s regulations. The larger the FTA is, the stronger the promotion of free trade is. Thirdly, there are two possible paths to achieve CJK FTA. There are two possible paths for the realization of the FTA, which will be discussed below. 12

13 The first path is from three 10+1 to one China, Japan and Korea may form a FTA with ASEAN respectively, and then the three "10 +1" may be integrated to form the "10 +3" FTA. China and ASEAN: In 2001, China and ASEAN have agreed to establish a free trade area in 10 years. In November 2002, the "China-ASEAN Framework Agreement on Comprehensive Economic Cooperation" is signed and officially launched negotiations. After the formal establishment of China - ASEAN Free Trade Area on January 1, 2010, bilateral trade volume exceeded U.S. $ 300 billion in 2011 and achieved 24% annual growth. During the period, the two sides advanced the opening of the market by carrying out an Early Harvest Plan in 2004 where products of common interests or those of complementary nature were picked out for faster and bigger tariff reduction, so as to facilitate the implementation of the Framework Agreement. Since the onset of dialogue between China and ASEAN in the 1990s, bilateral trade volume has expanded by 37 times in 20 years, significantly pushing forward bilateral trade development and regional trade liberalization. Japan and ASEAN: The Japan-ASEAN Comprehensive Economic Partnership Agreement was signed in October In 2004, Japan signed a free trade agreement with Singapore, and specified the objective of completing the negotiations with the six founding ASEAN members by 2012 and the transitional arrangements for the remaining four members of different economic development. Korea and ASEAN: The idea of Korea-ASEAN FTA was put forward by the Korean side during the Korea-ASEAN summit in October 2003, followed by a meeting of experts held for the first time in The FTA talks started in During the ninth Korea-ASEAN Summit in December 2005, the Agreement on Trade in Goods under the Framework Agreement on Comprehensive Economic Cooperation and the Joint Declaration on Comprehensive Cooperation Partnership were signed. The second path is to directly form a China, Japan and Korea FTA under negotiation among the three nations. The first one is the Joint Study on FTA. While private studies emerged in 2002, the Joint Study on FTA was inaugurated in During the sixth East Asia Summit in 2011, it was suggested to complete the study within the year. The second basis is the China-Japan-Korea Investment Agreement.The negotiation was launched in 2007 and completed in early The Agreement among the three governments for the Promotion, Facilitation and Protection of Investment was officially signed in Beijing in May 2012, laying the foundation for the trilateral FTA talks. The third one is the FTA talks. During the sixth East Asia Summit in 2011, the three countries proposed to start talks in On the day the Investment Agreement was signed, the consensus about launching FTA talks in 2012 was reiterated. However, as a non-economic 13

14 factor, the heightened international tension in Northeast Asia caused by island disputes has imposed unpredictably negative impact on the start and development of the trilateral FTA talks. If we isolate and compare the two approaches, it is clear that the former would be an easier pathway allowing China, Japan and Korea to form a FTA with ASEAN or part of its members respectively first and gradually extend the influence to the East Asian economy. Consequently the horizontal and vertical integration of the East Asian economy would be advanced with the ultimate objective of establishing the ASEAN, China, Japan, Korea FTA. The latter approach is more complicated in light of the difficult factors underlying the prospect of the China-Japan-Korea FTA. Nevertheless, if the two approaches can be associated together by adopting the former approach and at the same time maintaining the negotiations between China, Japan and Korea, the interest of the different sides may be better served, helping achieve the early establishment of the ASEAN, China, Japan, Korea FTA. Bibliography 1. Shi Zhuxian, Jiang Xuelei, Li Longzhen, Shi Shengdong. the Analysis on Mutual Economic Impact among Japan and Korea. The World Economy, Phase 4,

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