A trade bloc rises in the East

While most Indians are familiar with Asean, and businesses are aggressively seeking to tap the huge Southeast Asian market, there is a new trade bloc in the making, not too far away, that could deliver more economic benefits.

The Big-3 East Asian economies — China, Japan and South Korea — which account for roughly 35 per cent of global trade, 22 per cent of the global population and 20 per cent of the world’s GDP, kicked off negotiations in the last week of March, aimed at signing a trilateral free trade agreement.

They made small but meaningful progress in their first round of talks late last month, seeking to roll out a free trade bloc that would be the world's third largest after North America and the European Union.

THE CONTEXT

Talks between the neighbours have begun amid a slew of moves to lower trade barriers, as they seek to bolster economic growth, hit by the global financial crisis. These thriving economic ties are among the rare positive signs for relations among three traditional rivals. Historically, Japan’s colonial occupation of South Korea until 1945 and its World War atrocities in China still rankle across the region, while more recently territorial disputes over the sovereignty of a few islands have strained relations even further (Japan-China for the Senkaku/Diaoyu islands, Japan-South Korea for the Takeshima/Dokdo islets).

However, despite their ongoing differences, they are set on reaching a pact, especially now that all three countries are under new leaderships — Xi Jinping, Shinzo Abe and Park Geun-hye.

ECONOMIC MIGHT

China, Japan and South Korea are Asia’s largest, second largest and fourth largest economies. With a market of 1.5 billion people, the total GDP of the three countries was $14.3 trillion and total trade reached approximately $5.4 trillion in 2012. While China is the main trading partner for Japan and South Korea, Japan and South Korea are China’s fourth and sixth largest trading partners. These statistics underline the region’s growing weight in the world economy, after more than two decades of swift growth in China and the rise of Japan and South Korea as industrial dynamos.

The trilateral FTA would create a massive economic zone, smaller only than the North American Free Trade Agreement (NAFTA) and the European Union. As major world economies, the Big-3 are not only geographically adjacent, but also important partners in trade and investment. If these FTA talks are successful, it will be a huge boost to the region.

SYNERGIES INVOLVED

Their economic relations are complementary, so establishing this trilateral FTA will reduce the influence of many trade barriers and build a huge market.

Geographically, these three countries are neighbours, but economically, they are on different growth paths and at different development stages. Japan has the most developed economy, but the economy of South Korea, which took off in the seventies is quickly growing and catching up. China opened up its economy in the eighties, and since then its growth has been more than impressive.

They are all outward-looking and depend for growth on their relations with other economies, trading heavily among themselves. They are already highly integrated -- Japan and Korea are the major resources of FDI flow to China, while China is their major market.

So far, the strategies adopted by the Big-3 have maintained their specific interests and relative political and economic influence. In spite of this, their trilateral relationship has expanded gradually, encouraged by growing interdependence and shared economic interests.

Given the economic troubles of Europe and the United States, East Asia cannot continue to depend heavily on these markets. The trilateral FTA could greatly expedite the expansion of intra-regional market, the improvement of production capacity and efficiency.

OVERCOMING BARRIERS

There is no denying that the Big-3 are divided by political mistrust, trade barriers and diverging investment policies, that would make for difficult negotiations. First, they would have to overcome a lot of issues, including the opposition of farmers in all the three countries, and of course, the various territorial disputes that regularly strain diplomatic relations.

Negotiating a three-way deal among countries at different stages of development, and each with businesses lobbying for protection is by itself a very complex affair.

It may also take quite a while for the countries to conclude their negotiations and actually strike a treaty. Normally, it takes around two to three years to conclude FTA talks with a major trading partner, but this may take even more time, considering the importance and size of the involved countries and the fact that they are three-way negotiations. The ongoing negotiations can also be easily interrupted by any flare-up in political tensions.

Let’s not forget North Korea. Beijing faces incessant demands from Tokyo and Seoul to put more pressure on Pyongyang, whose nuclear weapons ambitions and rocket tests have alarmed the region. Any knee-jerk reaction by North Korea could derail all talks.

The lessons from the European Union suggest that economic cooperation can precede some intricate political issues in order to achieve regional integration. Market integration in East Asia would have to cope with the obstacles to a high level of cooperation.

Opportunity for India

Among the Big-3, India’s trade relations with China are the strongest, despite the fact that there is no FTA in place between the two countries. Total trade between both sides amounted to $75.59 billion in fiscal year 2011-12 (9.51 per cent of India’s total trade). On the other hand total trade between Japan and India was just $18.43 billion (2.32 per cent), and Korea-India trade was lower at $17.45 billion (2.19 per cent).

Taken together, India’s trade with the region amounts to $111.47 billion, a share of 14.02 per cent of its total trade with the rest of the world.

Although there is talk of an FTA between China and India, not much progress has been made. There are no government sponsored feasibility studies as yet and negotiations seem distant.

India signed a watered-down FTA, what they call a Comprehensive Economic Partnership Agreement (CEPA), with Japan and Korea in 2011, but the ground results are far from satisfactory. There has been a gradual increase in Indian exports and investment in both regions, but the potential remains largely untapped. In fact, the agreement seems to have largely benefited Japanese and Korean companies, which are making inroads into India.

Since an FTA with China seems a distant dream, and is likely to involve many rounds of negotiations spread over years, this is the opportune time for Indian policymakers and businessmen to study how they can leverage the CEPA with Japan and Korea, to take advantage of a trilateral FTA in East Asia and make inroads into the Chinese market.

(The author is a commentator and journalist based in Seoul.)

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