China-ROK FTA would help open up wider regional trade

During his July visit to South Korea, Chinese President Xi Jinping and his South Korean counterpart Park Geun-hye pledged to endeavor to conclude the China-South Korea free trade agreement (FTA) negotiations before the end of 2014.

This is a smart strategic move for both sides. A successful China-South Korea FTA will not only bring considerable economic benefits to the two countries, but also have profound implications for economic integration and long-term security in the Asia-Pacific region.

From Seoul's perspective, entering into an FTA with China helps to achieve multiple economic and strategic objectives.

It makes strong economic sense. China is South Korea's main trading partner, largest export destination and import source, as well as main destination of overseas investment.

Trade between the two countries totaled $275 billion in 2013, equaling South Korea's trade volume with the US and Japan combined. A China-South Korea FTA will offer export sectors preferential access to China's vast market.

South Korea already concluded FTA with the US in 2012. In November 2013, it announced its interest in taking part in preliminary talks for the US-led Trans-Pacific Partnership (TPP) negotiations. Therefore South Korea will face less pressure from the US about the deal.

History has left fewer scars on the China-South Korean relationship than, for example, the Sino-Japanese relationship. There are few domestic political obstacles for the two countries to enter into an FTA. And Seoul and Beijing overlap in their shared discord with Japan, against whom they share historical animosities.

Additionally, in view of China's apparent leverage in reining in North Korea, stronger economic and political ties could benefit South Korea geopolitically. Indeed, Xi's recent visit to Seoul was a strong signal, since never before has a Chinese leader gone to South Korea before visiting the North.

From the Chinese perspective, South Korea is currently China's third largest trading partner and fifth largest source of foreign direct investment. The FTA will strengthen the already close economic relationship between the two neighboring Asian countries.

More importantly, it may be a driver to jump-start an alternative path of economic integration in the Asia-Pacific region.

At least partly in response to the challenges posed by the TPP, from which China is currently excluded, China has been active in promoting its own FTA strategy in the Asia-Pacific region.

China has already signed 12 FTAs, and is in active negotiations with a few others. The FTA helps China to take off some pressure from an emerging TPP.

China has tried to promote a China-Japan-South Korea trilateral FTA since 2011. Its completion is conceptually important for the overall East Asian economic integration, as it would facilitate more ambitious projects, including the 16-country negotiations for a Regional Comprehensive Economic Partnership.

However, due to the current tensions between China and Japan, whether Japan is committed to this trilateral agreement is uncertain.

The China-South Korea FTA will allow Korean firms to access the Chinese market on preferential terms well before Japanese corporations have the same opportunity.

Korean firms are very likely to chip away at Japanese firms' share of the Chinese market, especially electronics and auto markets where Japanese firms currently enjoy good profits.

As a result, the China-South Korea FTA will create some pressure on Japan to take the trilateral FTA more seriously.

Admittedly, a number of sensitive issues need to be carefully managed, such as China's access to South Korea's agricultural market and South Korea's access to China's auto market.

Since both China and South Korea are committed to a comprehensive and high quality FTA, the negotiations have provided a good opportunity for two to step out of the comfort zone and be bolder in agreeing on higher standards.

This is particularly important for China. A high-quality FTA will not only help China to push forward its ongoing domestic economic reforms, but also serve as a stepping stone for China to participate in other regional FTA initiatives.