concerning
A Free Trade Agreement among China, Japan and Korea
Introduction
Since 2003, three research institutes representing China, Japan and Korea have jointly undertaken a study on a possible Free Trade Agreement among the three countries (termed a "CJKFTA" below). Following an assessment of the macroeconomic impact of a CJKFTA and a survey of businesses in 2003, the three institutes conducted sector studies ranging over the agriculture, automobile, electronics, fisheries, textile, and steel sectors and sections of the service sector in 2004 and 2005.
Continuing their study of a CJKFTA in 2006, the institutes decided to extend the previous sector studies to cover a broader area of the service sector. They also decided to examine other important issues, including rules of origin (ROOs) and sensitive sectors in the existing Free Trade Agreements (FTAs) concluded by China, Japan, and Korea. This report first presents a general perspective on regional trade agreements in Northeast Asia, followed by the major findings of the joint study of the research issues for 2006. Finally the report presents the conclusions of the study together with policy recommendations.
Summary Conclusion of the Joint Study in 2006
Our joint research from 2003-2005 identified major macroeconomic benefits from an FTA among China, Japan and Korea. The CJKFTA will be a win-win-win strategy for the three countries, bringing macroeconomic benefits to them all. Business surveys indicated that the majority of the business sector of the three countries generally supported early realization of a CJKFTA. Our industrial impact studies identified various policy implications, issues and challenges, but the general conclusion was that a CJKFTA would be desirable and any measures required to overcome the difficulties in achieving it should be considered.
The study conducted in 2006 has implied that China, Japan and Korea should pursue a strategy aiming at early establishment of a high-quality CJKFTA. Broad coverage in a CFKFTA, including service trade liberalization, would bring greater benefits to all the countries. The service sector of each of the countries generally displays a comparative disadvantage, and improvement of productivity will be a challenge to each, in particular in important areas such as logistics and the wholesale and retail trades. On the other hand, extensive exemptions of service industries from a CJKFTA would weaken the effect of enhanced competition achieved through trade liberalization, thus reducing the overall benefits provided to the three countries by the FTA.
China, Japan and Korea have each been extensively involved in signing and negotiating FTAs with other partners. The rules of origin (ROOs) of the FTAs concluded by the three countries might be incompatible with each other. Incompatibility between the ROOs and the resulting increase in trade costs would seriously reduce the economic benefits of a CJKFTA as well as an East Asia-wide FTA. The existence of incompatible ROOs in the FTAs, together with numerous exempted items, would impede the establishment and functioning of cost-effective production networking in East Asia.
Joint Policy Recommendations (1)
Recommendation 1: Reaffirm that the formation of a CJKFTA should be achieved as a mid-term goal
Our joint report in 2005 recommended that the formation of a CJKFTA should be established as a mid-term goal. The joint research in 2006 identified an increasing need to reaffirm this recommendation, given the increasing pursuit of FTAs by the three countries, in addition to reaffirming the necessary of considering a region-wide FTA in East Asia.
Recommendation 2: Recommendations from the Study in 2006
Based on the findings of joint research in 2006, the three representative institutes jointly offer the following policy recommendations:
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a. A CJKFTA should include liberalization of the service industries
Service trade among China, Japan and Korea is increasing in importance. A CJKFTA should include extensive liberalization of the service industries, in particular in the important areas, such as logistics and the retail and wholesale trades.
b. The governments of China, Japan and Korea should endeavor to minimize incompatibilities between the ROOs in the FTAs concluded by the countries
China, Japan and Korea should be aware of the importance of minimizing the incompatibilities between their FTAs in terms of rules of origin (ROOs). Information concerning the ROOs in FTAs that are under negotiation or have been agreed upon should be exchanged among the three countries.
c. The number of excluded items in a CJKFTA should be minimized
The number of exceptional items exempted from tariff concessions should be minimized to the extent possible. This is extremely important in ensuring economic benefits from such an FTA. It would be pragmatic, however, to allow limited transition periods before liberalization and to introduce compensation schemes, so as to mitigate short-term adverse impact and ensure broad-based domestic support.
Recommendation 3: Research Agenda in 2007
Recognizing the importance and the urgency of forming a CJKFTA, the three institutes jointly recommend that the remaining important research issues should be completed in 2007, to enable China, Japan and Korea to design an ambitious and high-quality CJKFTA. At the same time, the three institutes recommend that government officials from China, Japan, and Korea be invited as observers of the process of joint research in 2007. It is also recommended that all the participants in the joint study in 2007 give serious consideration to how to further advance the study, and that the results of these considerations be reflected in the 2007 report.
note:
1 : These recommendations do not necessarily imply official agreements between the governments of the three countries.
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