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    China Business
     May 23, 2012

Tri-lateral trade pact an Asian game-changer
By Brendan O’Reilly

As global economic power shifts away from the West, the leaders of East Asia's most important economies are busy laying the groundwork for the continued growth of their region based on mutually beneficial trade and investment.

Last week, Chinese Premier Wen Jiabao hosted Japanese Prime Minister Yoshihiko Noda and Republic of Korea President Lee Myung-bak in Beijing. The three leaders agreed to launch formal talks later this year to set up a trilateral free-trade agreement (FTA). This move will have significant and long-lasting effects on both the global economy and the strategic environment in Asia.

Trade between the three nations was valued at over US$690 billion last year, up from $130 billion in 1999. [1] The People's Republic of China (PRC) is already the largest trading partner of both Japan


and South Korea. Easing restrictions on trade and investment between these East Asian powerhouses should lead to even greater economic integration and growth.

Together the economies of China, Japan, and Korea constitute roughly 20% of world economic output in nominal terms. This figure, while impressive, is smaller than the European Union's 28% share of total world gross domestic product (GDP).

However, given China's continued rapid economic growth and the European Union's ongoing fiscal and political crisis, it seems entirely possible that the proposed free trade zone in Northeast Asia could very well overtake the European Union in nominal terms within a decade. Indeed, the combined GDP of China, Japan and Korea is already higher than that of the EU when measured in terms of Purchasing Power Parity (PPP).

As China's economic growth rate slows to a still-impressive annual rate of about 7.5% a year, Chinese leaders are looking for more sources of both investment and trade. Japan's ongoing economic malaise provides a strong incentive to integrate with and harness China and Korea's developing potential. Korea's economy is heavily dependent on exports, and yearns for greater access to the huge Chinese and Japanese markets.

The deepening dependence of Korea and Japan on Chinese markets will have profound geopolitical implications. These Asian powers may find themselves increasingly in China's orbit, to the detriment of American designs in the region.

According to the Joint Statement issued by the three leaders after the recent meeting in Beijing:

We reaffirmed our commitment to enhancing trilateral financial cooperation. In this regard, we welcomed the enlargement of bilateral currency swap arrangements among the three countries last year, which contributed significantly to stabilizing the regional financial markets. We agreed to promote investment by the foreign reserve authorities in one another's government bonds ... [2]

These policies, particular the drive to conduct bilateral trade in local currency, will further regional mutual-dependence and incrementally weaken the global dominance of the US dollar.

Japan is something of a latecomer to the party. China and Korea already began bilateral talks on a free trade agreement earlier this month. Some analysts believe Korea wants to conclude a bilateral agreement with China in order to negotiate a trilateral agreement including Japan from a position of strength.

Some observers have been dismissive of the proposed trilateral FTA. Politically important constituencies will need to be accommodated in all three nations, particularly Japan's heavily subsidized farmers, South Korean manufacturers, and China's gargantuan state-owned enterprises. Various exemptions meant to protect these sectors may lead to a "shallow" FTA.

Besides issues of economic protectionism, other outstanding bilateral geopolitical issues remain, especially between China and Japan. Both nations claim a chain of small, uninhabited Pacific islands called the Diaoyu by China and the Senkaku by Japan. High-level maritime talks regarding the issue are ongoing in China's Hangzhou. Furthermore, China has bristled at Tokyo's hosting of the World Uyghur Congress, a group the Chinese government brands as a separatist organization linked to terrorist groups.

China's high-level pursuit of economic integration with Japan while simultaneously maintaining a tough stance in bilateral territorial and political disputes is entirely typical of China's current foreign policy. Economic development takes precedence over nationalist sentiment and military confrontation. China views its expanding economy and foreign trade as its greatest assets in negotiations with potential rivals. The Chinese government remains committed to ensuring its neighbors of China's "peaceful rise" while upholding tough policies on issues that China views as threats to its sovereignty.

A cog in the works
After the recent meeting of the heads of state of the three countries in Beijing, the leaders issued their "Joint Declaration on the Enhancement of Trilateral Comprehensive Cooperative Partnership". This document has 50 points, covering a range of issues from cultural exchanges and sustainable development to "enhancing political mutual trust". What is most telling about this Joint Declaration was not what is said, but what it did not. The words "North Korea" do not appear anywhere in the document.

Although the three leaders made no joint declaration regarding the nuclear weapons program of North Korea (also known as the Democratic People's Republic of Korea, or DPRK), Premier Wen Jiabao did allude to the predicament: "What is most urgent is to make all-out efforts to prevent the escalation of tensions on the Korean Peninsula ... All the parties should give full play to their wisdom, remain patient and show their goodwill to alleviate conflict and return to the right track of dialogue and negotiations ... "[3]

Large-scale war is the greatest threat to increasing prosperity in East Asia. Even as China seeks greater cooperation and trade with Japan and South Korea, it remains the DRPK's main partner and patron. Worrying geopolitical fault lines still exist in the region. A recent incident may be an ominous sign of changes to come.

On May 8, a North Korean gunboat commandeered three Chinese fishing boats in the Yellow Sea. Twenty-nine sailors were captured, and reports surfaced of North Korean officials demanding 1.2 million yuan (US$189,900) to release the boats and the sailors.

The Chinese boats and crew were released on Sunday, after nearly two weeks in North Korean captivity. Liu Hongcai, the Chinese ambassador to the DPRK, was personally involved in discussions to secure the sailors release. [4] It is unclear if any ransom was paid.

The Chinese Foreign Ministry initially played down the incident as a "fisheries case". Although it is possible that this situation may be the result of a simple navigation error, other worrying possibilities remain.

North Korea may have been displaying its displeasure at China's increasing ties with North Korea's perceived enemies. The timing of the incident is especially interesting. The Chinese fishermen were captured a few days before Wen Jiabao hosted Japanese Prime Minister Yoshihiko Noda and South Korea's President Lee.

On the other hand, there is speculation that rouge North Korean commanders may have orchestrated the maritime confrontation. This too would display a worrisome trend of internal divisions and a breakdown of hierarchy in the DPRK.

Regardless of the proximate cause of incident, the implications are troubling. The DPRK leadership may have purposefully orchestrated a row with Beijing in order to extract economic aid or to threaten China in the event of deepening Chinese cooperation with South Korea and Japan. The possibility of a breakdown within the North Korean chain of command is perhaps even more unsettling.

North Korea remains a potential spoiler to continued economic growth and political stability in Northeast Asia. As old tensions between China, Japan and South Korea are superseded by the promise of mutual economic benefit, the DPRK seems to be the only regime in the region motivated primarily by fear instead of greed. The North's nuclear weapons program provides the United States with an incentive to maintain a military presence in South Korea and Japan. This American military presence in turn strains the relationship between these two powers and Beijing.

The bottom line
Ongoing tensions with North Korea contrast sharply with the optimistic symbolism of the proposed trilateral FTA. The leaders of China, Japan, and South Korea are making concrete efforts to put the past behind them and move to a new stage of East Asian history based on mutual respect and economic cooperation.

China, Japan, and Korea share a long and bitter history of antagonism and warfare. Koreans remember centuries of domination by Chinese dynasties followed by a bloody occupation by Japan and attempts at forced assimilation. Korea and China share a deep anger towards Japanese war crimes and ongoing lack of official recognition or apology. The Korean War in the 1950s reignited South Korean fears of Chinese hegemony.

Even a few decades ago, Cold War suspicions and fear clouded the relationship between these three nations. China and South Korea have had formal diplomatic relations for less than 20 years.

In light of these old tensions and rivalries, the symbolism of the three parties' formal push for a trilateral FTA is nearly as important as the FTA itself. For the leaders of China, Japan, and South Korea to come together as equals for the sake of mutual economic benefit would have been unthinkable a generation ago. Outstanding geopolitical issues remain, but the political elite of these three nations have displayed their will for a peaceful, prosperous, and integrated future.

1. China, Japan, and South Korea Free Trade Agreement. China, Japan and South Korea Free Trade Agreement, Live Trading News, May 15, 2012.
2. Joint Declaration on the Enhancement of Trilateral Comprehensive Cooperative Partnership, Chinese Foreign Ministry, May 14, 2012.
3. China, Japan and South Korea Free Trade Agreement, Live Trading News, May 15, 2012.
4. Detained Chinese fishermen released: DPRK, China Daily, May 20, 2012.

Brendan P O'Reilly is a China-based writer and educator from Seattle. He is author of The Transcendent Harmony.

(Copyright 2012 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)

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