Time for a trilateral FTA

Chinese Prime Minister Wen Jiabao has proposed that South Korea, China and Japan sign a free trade agreement, marking a shift from China’s earlier position calling for a bilateral deal with Korea alone. The country even concocted a road map on the procedure - with an eye to completing joint feasibility studies this year and starting formal negotiations in 2012. In short, it wants to speed up the process.

The government has no reason to reject the proposal. A free trade framework works best for trade-reliant economies like Korea’s. China is a major trade and investment partner, bigger than the U.S. and European Union markets combined. If the Chinese economy deteriorates, Korea would be more heavily impacted than by the slowdown and crisis in the U.S. and Europe. As such, Seoul must carefully balance diplomatic relations and political ties with the U.S. and China. Whether it is bilateral or tripartite, an FTA with China is not a choice but a necessity.

But the right strategy for engaging China in free trade talks must be devised. The treaty itself is not the ultimate goal. What is more important is to draw out terms that can benefit Korean companies. The main reason behind China’s sudden proposal is its rivalry with the U.S. both in Asia and on the global stage. Washington has been increasingly vocal in Asian affairs as it increasingly moves to try and contain China’s meteoric rise.

Washington has been initiating the Trans-Pacific Partnership aimed at creating the world’s largest free trade zone in the Pacific. Japan has recently declared it will join the talks. Once the Korea-U.S. FTA takes effect, China could find itself as something of an outsider in a regional tariff-free trade bloc. China has only become more aggressive in pushing for free trade negotiations with Korea after Seoul and Washington took steps toward finalizing the deal in April 2007.

As Beijing appears more eager to sign a pact, the government can use this as leverage to secure more favorable terms, especially in the farming and fisheries sectors. Differences in these sectors have stalled FTA talks between Seoul and Beijing since 2004, despite the two sides reaffirming their commitment to a pact in 2008.

Cheap Chinese products pose a severe threat to the local farming and fisheries industries, so these must be opened up restrictively and incrementally in order to win greater liberalization in services, investment and intellectual property rights. We must use the occasion of the FTA’s ratification to tantalize China.