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Sectoral Implications of a China-Japan-Korea FTA
Following the agreement between the leaders of China, Japan and Korea at the historic Manila Meeting in November 1999, a joint research on economic cooperation between the three countries has been undertaken by the Development Research Center of the State Council (DRC) of China, the National Institute for Research Advancement (NIRA) of Japan and the Korea Institute for International Economic Policy (KIEP) since 2001.
In 2003, the three institutes embarked upon the second phase of joint research on "Long-term Economic Vision and Medium-term Policy Direction," starting from a three year project on "Economic Effects of a Possible FTA (Free Trade Agreement) between China, Japan and Korea." Last year's joint study showed that all the three countries would benefit from the trilateral FTA in terms of economic welfare gains and GDP growth. Additionally, the majority of business people surveyed about the FTA in the three countries looked favorably at a CJK FTA.
After 2003's overall analysis on the subject, the three institutions conducted a joint research on "Sectoral Implications of a China-Japan-Korea FTA" covering agriculture and manufacturing sectors. It will be followed in 2005 by a comprehensive concluding report on the economic effects of a CJK FTA with policy directions.
On the basis of this year's study, the following policy recommendations are proposed jointly to the leaders of China, Japan and Korea by the three institutions involved in the joint research project.
Utilize FTA Policy as Means of Trade Liberalization
This study on sectoral implications of a China-Japan-Korea FTA clearly shows that a regional trade agreement (RTA) such as a CJK FTA is likely to result in worldwide trade liberalization producing either other RTAs or facilitating multilateral trade liberalization to minimize losses caused by trade diversion. For instance, while with a CJK FTA, agricultural products exporting countries would exert pressure on Korea and Japan, it would also be in the interest of Japan and Korea to lower their tariffs on agricultural products to non-member countries. The same logic applies to the Chinese automobile sector. This time countries of major automakers such as the EU and United States would be involved. Therefore, a CJK FTA, which involves major players in many sectors, is likely to expand into a larger RTA like an East Asian FTA or bring about other bilateral FTAs involving one of the three Northeast Asian countries and a non regional country. Another alternative would be to lower their tariff rates multilaterally.
Jointly Set the Goal of a China-Japan-Korea FTA
Apart from the positive effects on the overall economies of all three countries such as welfare gains and GDP growth, and above mentioned positive effects of a CJK FTA in terms of East Asian economic integration and worldwide trade liberalization, just announcing a CJK FTA as a goal by the three countries can deepen intra-regional trade and avoid overproduction capacity in some industries. In particular, given the nature of the three countries' medium and long-term industrial policy and major companies' development or investment strategies, the lack of clear indication regarding the formation of CJK FTA can worsen the emerging overcapacity of some sectors like petrochemical and steel industry in Northeast Asia. Therefore, it is important for the three countries to agree on a CJK FTA as a common future goal in the near future.
Adopt a Gradual Approach in Pursuing a China-Japan-Korea FTA
Despite benefits a quick implementation of a CJK FTA would bring, the existence of sensitive sectors in some industries is a serious obstacle to its realization. Therefore, a CJK FTA must be approached gradually. In this regard, they may face temptation of excluding certain sensitive sectors and products. However, for a CJK FTA to facilitate further FTAs and worldwide trade liberalization, it must cover all sensitive sectors and maximum items. Thus, in order to maximize the number of items covered, when a CJK FTA is negotiated, a phase-out period approach is preferable to complete exclusion. A phase-out period can reduce readjustment costs by providing firms engaged in sensitive sectors time to restructure.
Accelerate Structural Adjustment in Sensitive Industries
In order to alleviate the adjustment burden of sensitive industries of the three countries highlighted in the study, each country must embark upon immediate structural adjustment. At the same time, they must devise a comprehensive system to meet the challenge of high social costs such as reeducation, job training, social safety net, compensation schemes and regional development. In this regard, structural adjustment of sensitive sectors must be approached by taking into account their particular status in their economy and society.
Future Agenda of Joint Research Work
Joint research on " Economic Effects of a Possible FTA between China, Japan and Korea" will be concluded in 2005 with more concrete and comprehensive policy direction and policy measures, taking the complexity and urgency of the issues into consideration. Therefore, for 2005, it is recommended to further study the possible effects of the CJK FTA on several industries, which were not addressed this year. In order to conclude the current joint research project with more concrete policy implications, we need more intensive cooperation with both business and government sectors of the three countries to reflect their practical view and ideas.
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