Bilateral rewards from new FTA

China and South Korea should aim for free trade agreement without Japan

South Korean President Park Geun-hye has successfully concluded her historic state visit to China known as the "journey of faith". Her visit was fruitful because the Republic of Korea signed a series of cooperation agreements to further enrich the strategic partnership, increase mutual trust and lay a solid foundation for strong relations between the two sides in the future.

In fact, Park's successful visit to China has not only strengthened bilateral relations, but also reshaped relations among the Northeast Asian economic giants Japan, South Korea and China. It may therefore affect their moves toward a free trade agreement.

There has been slow progress in the China-Japan-ROK FTA negotiations. Since mid-November last year, when Chinese, Japanese and South Korean trade ministers announced the official launch of FTA talks, there has been only one round of negotiations, dealing with FTA institutional arrangements, negotiating areas, scope and mode.

The three countries haven't yet set formal deadlines for the FTA negotiations. Perhaps they all know it won't be a smooth ride, at least in the short term.

The crux of the FTA negotiations is Japan. While China strategically attaches great importance to the FTA building, and is actively promoting it in a timely manner, in a way the key rests in the hands of the Japanese. However, the Japanese have so far not maintained a positive and cooperative attitude. Japan is likely to become a drag on the FTA negotiations because of the recent geopolitical relations with China and South Korea. The FTA process urgently needs a favorable atmosphere to go forward.

As an intergovernmental institutional arrangement, successful FTA negotiations between countries need to be based on stable political mutual trust. However, Sino-Japanese and South Korean-Japanese relations have run into rough weather, because of territorial disputes. This mistrust has become a major roadblock, directly undermining their willingness to continue negotiations.

The Japanese government also lacks the determination to abandon its inefficient protection mechanism over its agricultural producers. Agricultural opening-up is undoubtedly the top challenge for the FTA negotiations. Japan is worried about the impact of cheap agricultural products from China on its market, while the liberalization of agricultural trade is an ace for China and an important bargaining power for non-agricultural product liberalization.

When Japan and South Korea substantially reduce tariffs on agricultural products, China can drastically cut tariffs on non-agricultural products. For China, if Japan does nothing to its tariff barriers on agricultural products and other "sensitive goods", the expansion effect of FTA trade will be very limited.

Japan is also overwhelmed by other FTA negotiations. At present, apart from the China-Japan-ROK FTA negotiations, Japan is also participating in the US-led Trans-Pacific Partnership and the ASEAN-led Regional Comprehensive Economic Partnership. In addition, Japan and the EU's Economic Partnership Agreements negotiations started in April.

Given such a large number of FTA negotiations, the Japanese are making a "multilateral bet", so as not to miss any opportunity to be involved in developing international rules in their national interests.

At the same time, considering the Japan-US military alliance and its need for political counterbalance against China, the Japanese government has prioritized the US-led TPP, because it believes joint participation by Japan and the US can guarantee future prosperity in the Asia-Pacific region and the development of a framework for a new economic order. It can also become a rule-making foundation for the RCEP and the future Asia-Pacific trade agreement (APEC FTA).

The rapid rise of China has led to an irrational mentality in Japan. After nearly 20 years of economic decline Japan has lost its hegemony in the Asian economy. Its strong sense of superiority is pushing it to an "opposing" stance over China-related issues.

China has actively advocated the FTA negotiations, but the Japanese government is not willing to recognize and accept Chinese dominance in the process. That has undoubtedly become another major obstacle affecting the negotiation process.

Therefore, China and South Korea should build a bilateral FTA first. Japan can join in later. This could be a new breakthrough to creating an FTA.

Since May 2012, China-ROK bilateral FTA negotiations have completed six rounds. South Korean President Park's successful visit to China will, no doubt, have injected new impetus into the previous stalemate in negotiations.

Judging from the sixth round of FTA negotiations held recently in Busan, South Korea, it was clear both sides enjoyed a constructive atmosphere, thanks to Park's successful visit to China. This has also opened an opportunity to greatly narrow the differences between the two sides.

The two countries have made substantial progress on the basic principles and agreed to include agreements on technical barriers to trade, sanitary and phytosanitary measures, e-commerce, environment, industrial cooperation, agriculture, fisheries cooperation, government procurement and another nine areas in the China-ROK FTA negotiations. Guided by the current momentum of development, China-ROK FTA negotiations are likely to be finalized in 2015.

A China-ROK FTA once reached will undoubtedly touch a sensitive nerve in Japan. As a strong competitor against South Korea, Japanese industry will face tremendous pressure in the international market.

Japanese enterprises have longed to expand and deepen economic and trade cooperation with China, just like the South Koreans, hoping their government would do everything possible to create more favorable conditions, so they can bite off a big chunk of China's expanding domestic demand, and from China's transition from the "world factory" to "world market".

They also need China to inject positive energy into Japan's weak economic growth. A China-ROK FTA would give South Korean companies a huge competitive advantage in the Chinese market.

Indeed, Japan and South Korea are competitors in the Chinese market. Chinese trade and economic relations with Japan and South Korea are interchangeable. Therefore, China can use its economic and trade interaction with South Korea to mitigate and reduce risks stemming from any stagnation in Sino-Japanese economic relations.

South Korean companies can also take advantage of the preferential terms provided by China-ROK FTA to gain a deeper foothold in competition with Japanese companies, overturning Japan's competitive advantage in automotive and semiconductor electronics.

If the China-ROK bilateral FTA goes well, the Japanese government will face tremendous pressure from its industry. It will seek to be absorbed into the China-ROK bilateral FTA, which will eventually lead to the birth of a China-Japan-ROK FTA.

The author is a professor at the Beijing-based China Foreign Affairs University.