[Viewpoint] Beware lost opportunities

On May 14 President Lee Myung-bak, Prime Minister Yoshihiko Noda, and President Hu Jintao held the fifth China-Japan-Korea Trilateral Summit and announced completion of an investment agreement and plans to launch negotiations on a trilateral FTA.

Back in Washington this week, I asked the audience at a Center for Strategic and International Studies (CSIS) seminar on economic integration in the Asia Pacific region whether a “C-J-K” FTA would be threatening to U.S. interests. I was surprised that about half of the Americans in the audience raised their hands and said it might be a threat to us. (The podcast of the seminar is available at www.csis.org.)

There are three main reasons why I think Americans should take a more benign view of the C-J-K FTA, and why I suspect the U.S. government ultimately will do just that.

First, despite the fairly long history of discussions on a C-J-K FTA, the official decision to launch negotiations was accelerated at the last moment, largely by the Chinese hosts of the summit. Why did Beijing embrace this FTA suddenly? The main reason was strategic, not economic.

Beijing was surprised by Japan’s interest in joining the Trans-Pacific Partnership (TPP) last year and recognized that trans-Pacific trade arrangements (including Korus) were developing much more momentum than intra-Asian negotiations that give China more influence.

Initially, the Chinese reaction against TPP in the wake of Japan’s expression of interest was to criticize the trade talks as part of a containment strategy. That zero-sum reaction did nothing to diminish the interest of Japan or other states joining TPP, and it appears that Beijing concluded it is better to energize intra-Asian FTA talks rather than continue complain about being left out of TPP. That is the essence of competitive trade liberalization: Rather than forming opposing blocs, free trade agreements can spur other countries to lower the barriers to trade so they can get back in the game.

Second, any C-J-K FTA is likely to take a very long time to do right - either that or it will have very low levels of actual trade liberalization if it is rushed. Korea is probably the least enthusiastic participant because the Korea-Japan leg of the triangle presents too much direct competition and not enough complementarity.

Even the Japan-China and Korea-China legs will be tough, though, since Beijing has shown little appetite for addressing the behind-the-border intellectual property rights and other obstacles that complicate trade with advanced industrial economies (in contrast to the comparatively easy negotiations China has done with smaller developing economies or exporters of natural resources).

This means that the trans-Pacific link will be critical for both Seoul and Tokyo to gain leverage in negotiating with Beijing. Renegotiating Korus, or (in Japan’s case) dropping TPP, will significantly weaken Seoul and Tokyo’s ability to negotiate effectively with Beijing.

That is also a fundamental truth about competitive trade liberalization. It is difficult to see any high quality C-J-K FTA emerging unless there is also momentum on the trans-Pacific front as well.

That leads to the third potential advantage to the United States: Some progress in the C-J-K FTA talks could help narrow the gap between intra-Asian and trans-Pacific trade architecture and ease the way for China’s eventual participation down the road in TPP or in FTAA (a Free Trade Area of the Asia Pacific).

The key would be for the C-J-K FTA talks to be conducted with that future in mind - moving China closer to high quality trade liberalization rather than diluting Korean or Japanese FTA standards - and that would require full implementation of Korus and successful negotiations of TPP.

So why did about half the Americans in the audience at CSIS say they thought a C-J-K FTA could be disadvantageous for the United States? I suspect that informed members of the audience who raised their hand were less worried about a trilateral FTA that would exclude the United States or distort trade and more worried that a low-quality, trilateral FTA might tempt governments to avoid the kind of significant trade liberalization represented by Korus or (potentially) TPP.

That lowest common denominator approach to trade would ultimately make it more difficult for business from the advanced economies to expand in China and it would hold back growth potential in much of Asia - and those two factors would have geostrategic implications for regional stability and integration as well.

So it is not trade distortion, but lost opportunities that should be the concern. Studies that will be published soon by another major think tank in Washington demonstrate that TPP alone would generate about $100 billion a year in wealth, TPP combined with Asean Plus China-Japan-Korea would generate about $300 billion in new wealth a year and an APEC-wide FTAAP would generate over $800 billion a year in new growth.

In other words, the trade distortion effect of FTAs is outweighed by the overall liberalizing effect, especially if competitive liberalization fuses the efforts. That certainly should be the goal of Korean negotiators in the C-J-K trilateral FTA talks.

*The author is a senior advisor and Japan chair at the Center for Strategic and International Studies in Washington.
By Michael Green