FTA a Long Way Away

By LIU XINLIAN

FTA a Long Way Away

By LIU XINLIAN

Northeast Asia’s major stakeholders forge closer ties without a formal mechanism

OPPORTUNITY FAIR: Visitors to the Taiwan Pavilion at the seventh China Jilin-Northeast Asia Investment and Trade Expo in Changchun, capital of Jilin Province, on September 6-11. Manufacturers from more than 10 countries attended the expo in search of business opportunities

“Boasting the world’s second and

third biggest economies, China and Japan, northeast Asia has been the most dynamic region in the world in recent decades,”said Chae Wook, Director of the South Korea Institute for International Economic Policy, at the Seventh China Jilin-Northeast Asia Investment and Trade Expo held on September 6-11 in Changchun, capital of northeast China’s Jilin Province.

Though the precise area of northeast Asia varies, it always includes China,Japan, South Korea, North Korea and part of Russia. In terms of economic strength,China, Japan and South Korea comprise the core of the region.

“Sadly, for a number of reasons no economic cooperation mechanism has been established in northeast Asia,” said Zhang Yunling, Director of Institute of Asia-Paci fi c Studies of Chinese Academy of Social Sciences (CASS), at the expo.

This issue has long been a topic at various meetings attended by China, Japan and South Korea. It was again heatedly discussed by experts and of fi cials participating in this year’s northeast Asia expo.

“The turbulent international economic situation has made promoting northeast Asian regional cooperation far more important than before,” said Jiang Zengwei,China’s Vice Minister of Commerce, at the expo.

“A China-Japan-South Korea free trade area (FTA) is the most realistic way of establishing a northeast Asian economic community,” said Chae.

As early as 1999, China, Japan and South Korea agreed to form an FTA by 2020 at an ASEAN summit in Manila. On October 7, 2003, leaders of China, Japan and South Korea signed a joint declaration on promoting tripartite cooperation when they met during the ASEAN Plus 3 summit held in Bali, Indonesia.

But so far, little progress has been made in the establishment of an economic cooperation mechanism in this region. Even though,northeast Asian countries haven’t slackened their pace of cooperation.

Intra-regional boom

In 2010, aggregate GDP of China,Japan and South Korea accounted for nearly 20 percent of the world’s total, their trade volume accounted for 17.5 percent of the world’s total and foreign direct investment, 9 percent.

Meanwhile, an export-driven growth model has helped the three countries accumulate more than half of the world’s foreign exchange reserves.

“The current labor division structure between China, Japan and South Korea has boosted intra-regional trade,” said Chae.

Japan and South Korea develop sophisticated technology while China is the world’s factory thanks to its low labor and production costs.

Typically, China produces and processes fi nal products with parts and pieces provided by Japan and South Korea. These fi nal products are then exported mostly to the United States and the EU.

Last year, China scored an overall trade surplus of $183.1 billion, while its trade de ficit with Japan in parts and materials stood at $88.6 billion. Moreover, China imported parts and materials from South Korea worth of $59 billion, accounting for more than half of its total imports from South Korea.

“This fully demonstrated the labor division among the three countries,” said Chae.

In 2010, South Korea became the third biggest trade partner of China and Japan was still China’s second largest trade partner.

In addition to booming intra-regional trade, investment by Japan and South Korea in China also contributed to regional economic cooperation.

At present China is the second largest recipient of Japanese investment and the biggest recipient of investment from South Korea.

“Last year South Korea’s investments in China accounted for 13.6 percent of its total overseas investment,” said Chae.

This booming intra-regional trade and investment has made the establishment of a northeast Asian economic community a necessity.

Not so optimistic

While growing intra-regional trade has sparked optimism about the potential success of regional economic cooperation, the reality is that China, Japan and South Korea are far more reliant on the U.S. and EU markets than on each other.

“Last year intra-regional trade between the region’s four major economies (including Russia) accounted for less than 20 percent of northeast Asia’s total foreign trade,” according to Qu Wei, Director of Heilongjiang Academy of Social Sciences. In the EU and North American FTA intra-regional trade stands at about 70 percent and 40 percent,respectively.

“Economic growth in northeast Asia has been highly dependent on extra-regional trade,” said Fu Jingjun, a researcher with the Institute of Asia-Paci fi c Studies of CASS.

“Most of the products traded between China, Japan and South Korea were intermediate products rather than fi nal ones and those intermediate products were finally exported to the United States after being processed and assembled in China,” he said.

“In this sense, the three countries won’t limit their economic cooperation mechanism to the region, but will always look beyond their immediate neighborhood,” said Fu.

Given the relatively low volume of intraregional trade, the bene fi ts of an FTA remain unclear. Meanwhile, different economic development levels of the region’s countries and political considerations add to uncertainties about the viability of an FTA.

“As a result of its colonization of China and North Korea last century, Japan is not active in establishing a northeast Asian regional economic community,” said Koichi Ito, Managing Director of the Economic Research Institute for Northeast Asia based in Niigata, Japan.

“The huge gap in political systems and economic development levels among northeast Asian countries means that the region cannot be a unified market like North American FTA and the EU,” said Kim Cheol, Director of the Institute of Economy with the North Korea National Academy of Social Sciences.

Cooperation on the way

The uncertain future of an FTA, however, does not mean that economic links between northeast Asia’s major economies won’t continue to grow stronger.

“As it takes time to establish an FTA, at present we should actively promote trade and investment outside of an FTA framework,and enhance sub-regional cooperation,” said Zhang of the CASS.

“The establishment of a regional economic community requires the free fl ow of people, goods and capital,” said Ito. “But different development levels of Japan, South Korea and China mean that such free movement cannot be established.”

“At present Northeast Asian countries can cooperate in fields where they share common interests, such as increasing energy efficiency, the development of new technology, logistics and cultural exchange,”said Chae of the South Korea Institute for International Economic Policy.

According to Zhang, improving regional infrastructure should be the key priority for northeast Asia’s countries.

“Northeast Asian countries should work together on planning railway, highway, sea routes and air networks, this will propel the growth of regional trade,” he said.

In May 2009, the China-Russia-South Korea-Japan joint rail-port transportation route was formally launched in Hunchun of Jilin. With a total length of 800 nautical miles, the whole route can be completed in as little as one and a half days. Located just 15 km from the Sea of Japan, Hunchun lies 850 km west of Niigata.

PORT CITY: A Russian truck enters China through Hunchun Port in Jilin Province. Hunchun, a city bordering North Korea and Russia, plans to establish itself as the gateway to northeast Asia

“Hunchun is half the distance between the more prominent port of Dalian, Liaoning Province, and Japan, allowing companies that utilize the new trade route to save one third of the time, as well as 30-40 percent of the shipping costs,” said Deng Kai, an official of the Yanbian Korean Autonomous Prefecture of Jilin.

This May a 20-km-long international railway route from Hunchun to the Russian city of Kamyshovaya was launched.

“The railway will greatly facilitate Sino-Russian trade,” said Liu Shuming,a researcher with the Jilin Provincial Development Research Center.

Liu also said that the number of flights between Yanji of Jilin and South Korea has been increasing steadily in recent years. China and Russia have also agreed to begin fl ights between Yanji and Vladivostok, Russia’s largest port city on the Paci fi c Ocean.

Sub-regional cooperation has also spurred regional development. As early as 1991, the United Nations Development Program encouraged northeast Asian countries to cooperate to develop the Tumen River region.

Starting from the Changbai Mountains of Jilin and flowing through China, North Korea and Russia into the Sea of Japan, the 525-km-long Tumen River is located at the epicenter of Northeast Asia.

In December 1995, the governments of China, North Korea, South Korea,Mongolia and Russia signed the Agreement on the Establishment of the Consultative Commission for the Development of the Tumen River Economic Development Area and Northeast Asia.

On August 30 2009,China’s State Council approved the Changchun-Jilin-Tumen Pilot Area for development and opening up.

“The pilot area has upgraded the development of the Tumen River region to a national strategy,” said Jiang Zengwei, Vice Minister of Commerce, at the expo.