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Roadblocks for a Japan-Korea
FTA
By Naoko Munakata
(Used
by permission of the Pacific Forum CSIS)
Over the
weekend, South Korean President Roh Moo-hyun and
Japanese Prime Minister Koizumi Junichiro announced they
will strive to start negotiations "at an early date" -
presumably this year - to create the largest bilateral
free-trade area in East Asia. It will include 170
million affluent people with a combined gross domestic
product (GDP) of US$5 trillion, about three-fourths of
the entire East Asian economy.
As neighbors, US
allies, and members of the Organization of Economic
Cooperation and Development (OECD) with large and highly
developed economies, the two countries could set a
standard for economic integration in the region.
Moreover, this pact would have important political
overtones for the two countries, and for their most
important ally, the United States. For economic,
political, and strategic reasons, the two sides should
move promptly forward with the strong support of the
United States.
The Japan-ROK (Republic of Korea)
free-trade agreement (JKFTA) was conceived shortly after
a historic summit meeting in 1998 between former ROK
president Kim Dae-jung and then Japanese prime minister
Obuchi Keizo. While it was formulated years ago, the
JKFTA was not the first FTA to be negotiated among East
Asian governments. Japan has been more enthusiastic
about a JKFTA than South Korea and has waited for the
Korean side to come on board for the past five years.
The greatest source of Korean hesitation is the fear
that the elimination of tariffs would increase South
Korea's structural trade deficit vis-a-vis Japan. That
fear is not unrealistic, since the average South Korean
tariff rate is higher than that of Japan. Koreans are
concerned that JKFTA is not going to be a balanced deal.
The history issue has added to the Korean hesitation.
The problems are not limited to those between
the two countries. South Korea is also concerned about
how Beijing will react. Then Chinese premier Zhu Rongji
proposed a feasibility study of a trilateral FTA among
China, Japan, and South Korea last November. Koizumi
responded that Japan would consider an FTA with China as
a long-term project while watching as China implemented
its World Trade Organization (WTO) commitments and that
Japan's current priority was an FTA with South Korea.
While China is not ready for an FTA with Japan and Korea
- Chinese scholars point out that it cannot compete with
them without a manufacturing tariff - China is not happy
to be left behind by a JKFTA. Now that China has
replaced the US as the largest market for South Korean
exports (when combined with Hong Kong), it is difficult
for Korea to dismiss China's views.
The Roh
administration, with its vision of South Korea as the
"hub" of Northeast Asia, is trying to overcome these
hesitations. A JKFTA would not just mean intensified
competition; it would allow South Korea to attract
foreign businesses that want to sell in Japanese
markets. Roh also showed his leadership in preventing
history issues from derailing bilateral relations while
urging continued efforts by Japan to reduce the Korean
public's mistrust. Roh's vision of a Northeast Asian
community of peace and co-prosperity would also ease
Beijing's anxiety.
The negotiations won't be
easy, since both countries have many sensitive items. A
JKFTA would increase Korean exports of apparel, leather
goods, agricultural produce and fish, and Japanese
exports of high-end machineries, metal and chemical
products. The most serious problems lie in manufacturing
- rather than agriculture - since both countries are
highly industrialized. More than 30 percent of Japan's
imports from South Korea and more than 70 percent of ROK
imports from Japan are manufactured goods with tariffs.
Despite successful Korean exports of vegetables such as
tomatoes and bell peppers to Japan, agricultural sectors
in both countries are generally not internationally
competitive and do not pose significant threats to each
other. Japan's Ministry of Agriculture, Forestry and
Fisheries is not opposed to the JKFTA negotiations,
brightening the prospects for conclusion of a
deal.
Washington is most likely to be indifferent
to this initiative. Its own FTA with South Korea is not
on the agenda because of the stalemate over Korea's
screen quota, abolition of which is a precondition to a
bilateral investment treaty (BIT) with Korea, which in
turn is a precondition to FTA negotiations. A kneejerk
reaction to JKFTA would focus on trade diversion
effects, but the administration of US President George W
Bush has issued encouraging statements on liberalization
at all levels, including Asian-only initiatives such as
the efforts of the Association of Southeast Asian
Nations (ASEAN) to conclude an FTA with Japan, South
Korea and China.
JKFTA has strategic value for
the United States, however, and deserves more than
benign neglect from Washington. It would force Japan and
South Korea to overcome their extreme political
sensitivity to negotiations over manufacturing and
prepare them for liberalization on a most-favored-nation
basis to be achieved through the Doha Development Agenda
of trade talks. The agreement would stimulate domestic
economic reforms, such as deregulation and FDI
promotion. To add to that stimulus, Washington may want
to break the current logjam and launch its own BIT and
FTA negotiations with South Korea.
A JKFTA would
also enhance the sense among Japanese and Koreans that
they are in the same boat, which will help in
consolidating their positions in dealing with the North
Korean crisis. They do not have much time, though. If
Tokyo and Seoul allow sharp differences over this issue
to surface, the damage to bilateral ties could be so
large that the political momentum for a bilateral FTA
would disappear. Many in South Korea seem to see Japan
and the United States as countries on the other side of
the ocean with a different perspective on the dangers
posed by North Korean military action. This perception,
in addition to Korean nationalism, lies at the bottom of
their differences regarding the willingness to discuss
tougher measures vis-a-vis North Korea should dialogue
fail.
Washington's full blessing of the JKFTA as
well as its renewed interest in an FTA with South Korea
would be another reassuring sign of alliance solidarity,
one that is particularly welcome after the planned
redeployment of the US forces has triggered anxiety
about US security commitments on the Korean Peninsula.
Naoko Munakata is senior fellow at the
Research Institute of Economy, Trade and Industry
(RIETI) and visiting scholar at the Sigur Center for
Asian Studies, George Washington University. She can be
reached at munakata-naoko@rieti.go.jp.
This article is used by permission of the Pacific Forum CSIS.
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