Push for a Korea-Japan FTA first

Choi Byung-il
The author, a professor of economics at the Ewha Womans University Graduate School of International Studies, is president of the Korea Foundation for Advanced Studies.

The long-awaited Korea-Japan-China trilateral summit was held in Seoul five years after the last one in Chengdu, China, in 2019. In the ninth meeting in May, the leaders of the three countries promised to “speed up discussions on striking a trilateral free trade agreement (FTA) with the goal of concluding a free, fair, comprehensive and high-level FTA with its unique value.” The discussions on the tripartite trade deal dates back to 2012, but no substantial progress has been made since. Can such a “comprehensive and high-level FTA” be signed among the three stakeholders?

Over the past five years, the global trade environment experienced a seismic shift. The global supply chains — designed to secure materials and parts at cheap prices and fast speed, assemble or mass-produce goods in countries that can provide cheap labor and export them to the rest of the world — started to crack. The mask crisis during the Covid-19 pandemic exposed fatal defects of the supply networks. The globalization era’s business model based on the maximization of profits through production in foreign countries at minimum costs began to shake after the pandemic. Building factories in one’s own territory where the government can control them has become a new normal. Political control has taken the place of economic efficiency in many countries.

America’s methodical checks on China’s rise — initiated by former U.S. President Donald Trump and succeeded by incumbent President Joe Biden — are the biggest culprit of the fragmentation of the supply chains. The only consensus in the extremely divided U.S. politics is the faith that the country can safeguard its free and democratic systems only by reducing its reliance on China for chips, second batteries, medical supplies and rare earths. Regardless of whether Trump returns to the White House or Biden is re-elected president in the November 5 election, Uncle Sam’s restrictions on China will continue. The disintegration of the global supply chains is just the prelude to a massive rebuilding of the supply chains focused on China as the “factory of the world.”

In a dramatic turn, the global chip industry is converging on the United States. A rush to build semiconductor factories in America with weak competitiveness in wages, energy prices and transport infrastructure is a fait accompli, not science fiction. The era of new industrial policy has arrived to attract investments in the homeland with the bait of massive subsidies. The crusade launched by America was heartily joined by the European Union and Japan. Taiwanese chip giant TSMC is building factories in the state of Arizona after the start of its chip production at Kumamoto, Japan. Samsung Electronics is building chip factories on a large swath of land 800 times bigger than a football field. Subsidizing domestic companies was initiated by China. After China announced its ambitious Made in China 2025 plan, the United States, the EU and Japan strongly criticized it for violating the World Trade Organization. They were once major players of multilateral trade systems, but are destroying them now.

The advanced economies, which once stigmatized newly independent countries’ industrial policy to develop their domestic industries based on subsidies as an “inefficient political game,” are now defending their new industrial policy as a “strategic game to achieve economic security.” A strong denunciation of their double standards will not change anything. They would gladly brush off the international order they created, just to protect their national interests. Even if other WTO members file complaints about their new industrial policy with the appellate body, it can’t hear appeals due to a leadership vacuum. The Doha Development Agenda — the WTO’s first initiative on multilateral free trade negotiations — has been put on hold for more than two decades. The WTO failed due to economic powers’ pursuit of self-interests. Could the three leaders’ reaffirmation in Seoul of an “open, transparent, indiscriminate and rule-based multilateral trade system centering around the WTO” be realistic under such circumstances?

For Korea to overcome the crisis from the vegetative state of a multilateral trade system, which contributed to the country’s economic advancement, the government must seek practical interests over nominal ones. Let’s go back to the FTA, which Korea hurriedly struck with China. Even after signing comprehensive and high-level FTAs with the United States and the EU, respectively, Korea voluntarily gave up pushing for such a comprehensive, high-level FTA with China — its largest trading partner — primarily because the government feared vehement resistance from farmers and the dire consequences of the full-fledged import of Chinese agricultural produce. The government pushed aside the merits of broadening consumer choices and dismissed the idea of protecting food sovereignty by toughening up food safety requirements.

Despite its advantageous position as the only manufacturing powerhouse that struck FTAs with both the United States and the EU, Korea was browbeaten by China’s highly calculated slow move. Irritated by no progress in the services and investment areas, where Korea had a strong competitive edge over China, Seoul hastily concluded a products-focused FTA with Beijing, handing over the areas of services and investments to the next round of negotiations. The Korea-China FTA was close to “a half-baked trade deal.”

Ten years have passed since then, but the second phase of the FTA negotiations is still in limbo. China resorts to its signature “slow moving” with no show of interest or sincerity. Some Korean companies even had to suffer losses from investing in China after their hands were tied by draconian regulations for security reasons. Moreover, China went on to impose trade retaliations on a country it struck an FTA with. Korea hoped for a constructive role from China over the denuclearization of North Korea, but that wish went down the drain. After South Korea deployed the Thaad anti-missile system to defend itself from North Korean nuclear threat, China launched trade retaliation on South Korea. Its FTA with China was of no use.

The axiom of “actions speak louder than words” also applies to international relations. Due to the lack of a determination to protect multilateral trade systems and a retrogression of China’s reform and opening, an ambition to achieve a “comprehensive, high-level FTA among Korea, Japan and China” has become a pipe dream. Even if they reach the goal after hard work, it will likely not be reciprocal given the dramatic transformation of trade from “a means for mutual prosperity” to “a tool for self-survival.”

Humanity once believed that a brisk exchange of products, money and people between countries with different regimes helps reduce international conflicts. The faith that trade paves the way for peace formed the ideological and philosophical foundation of the liberal international order. The solid creed and teaching receded with the advent of an all-out hegemony war between the United States and China in the 21st century. Heavy reliance on other countries for trade made certain countries directly exposed to the threat of trade weaponization. After territorial disputes arose in the East China Sea, Beijing banned exports of rare earths to Japan. Without them, Japan cannot manufacture electronic products and medical equipment. After Korea deployed the Thaad missile defense system, China suspended its group tours to Korea and Hallyu, the Korean wave, suffered a critical blow in China.

In the era of economic security, we can open our future only when we consolidate our supply networks for core materials, draw up effective strategies to avert the weaponization of trade and tackle the challenge with a strong resolution. In this respect, we need to pay attention to the botched Korea-Japan FTA, which was left unattended for 20 years. Japan is the only country Korea could not sign a bilateral FTA with among its major trading partners. Despite attempts to rekindle discussions on the FTA since 2004, the two countries lacked visions and strategies for a free trade deal. Japan initially took a defensive posture toward trade liberalization, but turned to an aggressive one with its participation in the Trans-Pacific Partnership (PPP) to effectively deal with the structural and behavioral problems stemming from China’s non-market economy. While Trump forced Uncle Sam out of the PPP, Japan kept it safe together with other members. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which evolved from the PPP, was a crucial option for Korea to ensure its survival in the trade weaponization era. The need for Korea to join the CPTPP was repeatedly mentioned, but it couldn’t move to the next stage. Some trade experts harbor skepticism about the trade agreement the United States withdrew from.

If so, how about reigniting the talks on the failed Korea-Japan FTA? The two countries, which share democracy and market economy, can secure strategic space to weather tough challenges in the age of economic security. I propose that the government place a priority on pushing for a “comprehensive, high-level Korea-Japan FTA” over pressing on with a more distant “Korea-Japan-China FTA.” If Seoul and Tokyo can do what they can now, they can surely build the momentum for a “comprehensive, high-level FTA” among the three in the future.

Translation by the Korea JoongAng Daily staff.