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Free trade now!

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East Asia’s economic growth is motoring ahead thanks in part to free trade agreements (FTA).  It’s a pity that Japan, the country most in need of a growth stimulus, is being left behind.

The last decade has seen a whole web of FTAs emerge in East Asia mainly centered around ASEAN.  The ASEAN countries now have their own FTA, and China, Japan and Korea each have FTAs with ASEAN, as well as FTAs with some individual ASEAN countries.

The missing piece in the puzzle in East Asia’s FTA scene is an agreement between the Big 3 of China, Japan and Korea.  The proposal has been on the table for some time.  But in part due to Japanese caution, it is now bogged down in a study group. 

According to Japan’s new ambassador to China, Uichiro Niwa, a former president of the trading house Itochu Corp, “Though the talks have been going on for 10 years, nothing has been achieved”.  It’s a pity.  An FTA between China, Japan and Korea would be a very concrete step towards building an East Asian Community that Japan talks of so much.  China is already the biggest trading partner of both Japan and Korea, with regional trade among China, Japan and Korea accounting for about 55 per cent of trade of these three countries.  Japanese and Korean investment in China also keeps growing.

While Japan is sitting back, comfortably cautious and conservative, China is charging ahead.  The Chinese have just signed an FTA with Taiwan (“Economic Cooperation Framework Agreement”), whose new government has palled up with Beijing.  China has been Taiwan’s most important trading partner since 2007.  More than 70,000 Taiwanese companies already operate in China, and over one million Taiwanese business people work there.   

Around 250 types of mainland products will immediately be able to enter Taiwan with reduced or no tariffs.  Taiwan gets a better deal with 500 products being able to enter the mainland duty free.  The agreement will also eventually allow many more businesses from each side to invest in the other.  Taiwanese businesses will enjoy many advantages in the huge mainland market relative to their Korean and Japanese counterparts.  14 of Korea’s 20 key export items already faced competition from Taiwanese goods. 

This could be a major accelerator for FTAs in East Asia.  Apparently, China has given Taiwan the green light to negotiate FTAs with other countries, provided the one-China policy is respected.  Already, Taiwan and Singapore have started work on an FTA, and other ASEAN countries will no doubt follow.  And Korea, which feels that Taiwan has stolen a march on it, is keen on quickly negotiating an FTA with China.  This is the only way that Korea can stop Taiwan from winning a competitive edge.

What this means in sum is that China will soon have FTAs with everyone, while Japan is partly left out of the picture.  Japan desperately needs to get back into the picture for several reasons by sealing FTA with China and Korea. 

First, as Asia’s leading democracy Japan should take a leading role in developing the East Asian Community.  Second, trade with its East Asian neighbours is Japan's only realistic source of economic growth in the future.  Trade with China and Korea is already booming, but there is much more potential.  Also, trade barriers in China entice many Japanese enterprises to invest in China to jump over these barriers (“tariff hopping”).  Freer trade might keep some of this investment at home, and provide a much-needed boost for the anemic Japanese economy.

What is holding Japan back from rushing to an FTA with China and Korea? 

Japan’s FTA discussions with Korea have been blocked for many years for political reasons as well as concerns about agriculture and motor vehicles.  Hopefully the recent apology by Prime Minister Naoto Kan can help pave the way for reconciliation and better cooperation.  

Regarding China, the conventional wisdom is that Japan’s agricultural protection is the big constraint – Japan’s farmers allegedly block an FTA.  This old-fashioned logic may not be up-to-date.  Japan is now exporting many high quality agricultural products to China’s emerging middle class who love Japan’s high quality products like Nigata rice.  The Chinese are so enamored with Japan agricultural products that Japanese beef is now being smuggled into China, notwithstanding the outbreak of foot-and-mouth disease in Japan.  With some imaginative negotiations, it must be possible to convince Japanese farmers of the benefits of free trade with China. 

Many keen observers think that the real reason holding Japan back from an FTA with China is political.  In short, Japan and its bureaucrats are afraid of China and its emerging power.  They would like to conclude an FTA with Korea, before moving on to China.  That could take years.

Japanese bureaucratic fear can be seen everywhere.  Following the East Asian financial crisis, the ASEAN Plus Three (Three being China, Japan and Korea) was launched as a major process of economic and political cooperation.  Fearful of China’s domination, under Japanese leadership the “East Asian Summit” was created, based on the ASEAN Plus Three formula, but adding on India, Australia and New Zealand.  In fact, Japan is now very active courting India as a counterweight to China.  India may well be an emerging giant, but its dynamism and market size are nothing compared with China.

Is there any realistic hope for creating an FTA between China, Japan and Korea?  We can only rely on the Japanese business community, not the bureaucrats, to push for this.  Hopefully they will. 

Ambassador Uichiro Niwa recently said “Unless Japan proceeds with the FTA with China, Japan will sink”.