The Importance of CJK FTA for the Development of Trilateral Cooperation April 7, 2016 Chang Jae LEE Korea Institute for International Economic Policy
Contents I. Brief history of CJK FTA II. Reasons why a CJK FTA is needed III. Prospects for the CJK FTA 1
A decade of preparations for the CJK FTA Trilateral Joint Research on CJK FTA (2003-2009) DRC of China, NIRA/IDE-JETRO of Japan, KIEP of Korea Official Tripartite Joint Study for a CJK FTA Based on the recommendations of the Trilateral Joint Research, the leaders agreed to launch an OTJS at the Second Trilateral Summit Meeting in Beijing in October 2009. Joint Study Committee for a CJK FTA: May 2010 - December 2011 At the Fifth Trilateral Summit Meeting in Beijing, in May 2012, the leaders of the three countries agreed to start the CJK FTA negotiations within the year. In November, 2012, the Trade Ministers of the three countries announced the launch of the CJK FTA negotiations. 3
CJK FTA negotiations The first round: in Seoul on March 26-28, 2013 The second round: in Shanghai on July 29 - August 2, 2013 The third round: in Tokyo on November 26-29, 2013 The fourth round in Seoul on March 4-7, 2014 The fifth round: in Beijing on September 1-5, 2014 The sixth round The working level meeting: in Tokyo on November 24-28, 2014 The Chief Delegate level meeting: in Tokyo on January 16-17, 2015 The seventh round The working level meeting: in Seoul on April 13-17, 2015 The Chief Delegate level meeting: in Seoul on May 12-13, 2015 The eighth round The working level meeting: in Beijing on July 20-24, 2015 The Chief Delegate level meeting: in Beijing on Sept. 23-24, 2015 The ninth round The working level meeting: in Hakone on December 14-18, 2015 The Chief Delegate level meeting: in Tokyo on January 18-19, 2016 4
Why is a CJK FTA necessary? Natural FTA partners Neighboring countries All three countries have formed many FTAs Major trading partners Commonalities Strong manufacturing sectors, less competitive service sectors Cultural similarities Participation in RCEP (Regional Comprehensive Economic Partnership) negotiations Current situation: Slow economic growth and difficulties in trade To turn obstacles into motivating factors Political and security tension in Northeast Asia 5
Natural FTA partners Being neighbors, the three countries are natural partners for a regional trade agreement (RTA). RTA: FTA, Customs union, Common market All three countries have formed many FTAs China: 12 FTAs (with 18 countries) are in effect Japan: 14 FTAs (with 16 countries) are in effect Korea: 14 FTAs (with 51 countries) are in effect However, among the three countries, there was no FTA until quite recently. The Korea-China FTA has been in effect since December 20, 2015. The Korea-Japan FTA negotiations started in December 2003 and have been stalled since November 2004. 6
Current status of FTAs in China Signed and in effect ASEAN Pakistan Chile New Zealand Singapore Peru Hong Kong* Macao* Costa Rica Iceland Switzerland Korea Signed but not in effect Australia CJK FTA RCEP Negotiations launched GCC Norway Sri Lanka Maldives Georgia Note: * Closer Economic Partnership Arrangement Source: Ministry of Commerce, PRC. 7
Current status of FTAs in Japan Signed and in effect Singapore Mexico Malaysia Chile Thailand Indonesia Brunei ASEAN Philippines Switzerland Viet Nam India Peru Australia Signed but not in effect Mongolia TPP CJK FTA RCEP Negotiations launched Canada Colombia European Union GCC Korea Source: Ministry of Foreign Affairs of Japan. 8
Current status of FTAs in Korea Signed and in effect Chile Singapore EFTA ASEAN India European Union Peru United States Turkey Australia Canada China New Zealand Viet Nam Signed but not in effect Colombia CJK FTA RCEP Negotiations launched Central America* Ecuador Japan Mexico GCC Indonesia Note: * Panama, Costa Rica, Guatemala, Honduras, El Salvador, Nicaragua Source: Ministry of Trade, Industry and Energy of ROK. 9
Natural FTA partners: Major trading partners Major trading partners (in 2014) For China, Japan and Korea were the third and fourth largest export destinations, respectively, while they were the second and the largest import sources, respectively. For Japan, China and Korea were the second and the third largest export destinations, respectively, while they were the largest and seventh largest import sources, respectively. For Korea, China and Japan were the largest and the third largest export destinations, respectively, while they were the largest and the second largest import sources, respectively. Shares of intra-regional trade among the three countries (in 2014) China s exports: 10.7%; China s imports: 18.0% Japan s exports: 25.8%; Japan s imports: 26.4% Korea s exports: 31.0%; Korea s imports: 27.4% 10
China s trade dependency on Japan and Korea - Exports - - Imports - (%) Source: Calculated from IMF. 2015. Direction of Trade Statistics.
Japan s trade dependency on China and Korea - Exports - - Imports - (%) Source: Calculated from IMF. 2015. Direction of Trade Statistics.
Korea s trade dependency on China and Japan - Exports - - Imports - (%) Source: Calculated from IMF. 2015. Direction of Trade Statistics.
Commonalities China, Japan and Korea have strong manufacturing sectors but their service sectors are relatively weak. So, they could utilize the CJK FTA to make their service sectors more competitive. Cultural similarities Confucianism, Buddhism Chinese characters ( 漢字 ) Belong to Northeast Asia, East Asia and the Asia-Pacific ASEAN+3 framework, East Asia Summit, APEC A CJK FTA would be a first step toward a Northeast Asia Economic Community RCEP Participating the RCEP negotiations since May 2013 11 th round of negotiations were held in February 2016 Target year: 2016 14
Additional rationale: Current economic difficulties Slow GDP growth (2015) Japan: 0.4% Korea: 2.6% China: 6.9% Difficulties in trade All three countries have recently experienced difficulties in trade. In particular, in 2015, both exports and imports of all three countries decreased markedly. Low level of intra-regional trade The level of intra-regional trade among the three countries has continued to decrease since 2004. 15
Japan s GDP Growth Rate (Quarterly annualized rate, %)
Korea s GDP Growth Rate (Quarterly annualized rate, %)
China s GDP Growth Rate (Quarterly annualized rate, %)
Current Status of Trade in China, Japan and Korea (Growth rates, %) 2012 2013 2014 2015 China Japan Korea Exports 7.9 7.8 6.0-2.7 Imports 4.4 7.3 0.7-18.4 Exports -2.9-10.5-3.4-9.9 Imports 3.6-6.1-2.4-20.6 Exports -1.4 2.1 2.3-8.0 Imports -0.9-0.8 1.9-16.9 Sources: IMF. 2015. Directions of Trade Statistics; KITA; JETRO, Japan s International Trade in Goods.
Trends of Exports in China, Japan and Korea 10 5 0-5 China Japan Korea -10-15 2012 2013 2014 2015
Trends of Imports in China, Japan and Korea 10 5 0-5 -10 China Japan Korea -15-20 -25 2012 2013 2014 2015
Shares of intra-regional trade in CJK (Unit: percent) Source: Calculated from IMF. 2015. Direction of Trade Statistics. 22
Regional introversion index of CJK Source: IMF. 2015. Direction of Trade Statistics. 23
To turn obstacles into incentives Political and security tension in the region is often considered the major obstacle to CJK FTA. Caused by legacies of past history including territorial disputes In fact, we witnessed that deteriorating political relations among the three countries produced negative effects on their economic cooperation and ongoing CJK FTA negotiations. By reversing the way of thinking, in order to reduce the regional political and security tension, we do need to enhance economic cooperation among the three countries. A CJK FTA could contribute to reducing regional political and security tension by reviving economic cooperation among the three countries. 24
Prospects for the CJK FTA: Variables Current economic situations Given the economic and trade difficulties, the three countries could be more cautious about their sensitive sectors, thus more reluctant to further liberalization. RCEP The CJK FTA among the three countries would normally be simpler to conclude than an RCEP with 16 participants. Since China, Japan and Korea are members of the RCEP, when the CJK FTA is concluded, it could contribute to the formation of RCEP. In fact, the three countries could either be stumbling blocks or facilitators for the formation of RCEP. Problem: the process of CJK FTA negotiations seems to be lagging behind the RCEP process TPP Ratification process may take a long time 25
Prospects for the CJK FTA: Future directions Trade in goods: Further liberalization is needed to make the three economies more competitive Trade in services and investment Given the relative weakness of service sectors, more attention should be given to further liberalization of service sectors. In order to deepen economic integration among the three countries, investment liberalization should be encouraged. Trade and investment facilitation Non-tariff barriers should be substantially eliminated Political leadership is needed A CJK FTA should be regarded by the leaders as not only a key institutional instrument to facilitate trade and investment among the three countries, but also a first step toward a new era of cooperation for Northeast Asia. 26
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