When Giants Talk

When three of the world’s biggest exporters talk about a common Free Trade Agreement (FTA), some see the makings of an economic miracle, while other countries express concern. When premier Wen Jiabao hosted Japanese Prime Minister Yoshihiko Noda and South-Korean President Lee Myung-bak in Beijing in May, global exporters number one (China), number four (Japan), and number seven (South Korea) made plans to discuss the matter in the near future. Two weeks later, Beijing and Tokyo decided to begin paying their commercial transactions in yen and yuan, and not just the US dollar. The size of the three economies – by far the biggest in East Asia and among the top ten in the world- would make any alliance an epic change. Chinese news agency Xinhua reported an ad hoc study that concluded that an FTA would have a beneficial impact on all parties, China with +2,9% of its GDP, Korea with +3,1%, and Japan with +0,5%, a win-win situation for all involved.
Truth is, the three countries have been economically integrated for a long time. China is already Japan and South Korea’s biggest trading partner. Since 2001, trade between the three Asian giants increased from 163 to 754 billion US dollars at a rate of 17% each year. China, South Korea, and Japan have all emerged from reconstruction and underdevelopment, the former two being now fully industrialized while the latter is well on the way. The three economic giants have become the example to follow, and not just in Asia.
Following 20 years of delocalization, China has become the main destination for Japanese and Korean multinational corporations. Their investments have created wealth, consumption and employment, but have also caused an identity question that is still unresolved: How do we judge the nationality of a product? If a computer, or stereo equipment, a refrigerator, or an air conditioner is designed in Japan, partially manufactured in Korea, and finally assembled in China, to whom do we account the export? According to a widespread – and unscientific – opinion, China is the culprit for exporting too much, but its flow of goods belongs to the globalized world.
All of the premises exist for an FTA to go forward, and Premier Wen has been clear in outlining the main reason for why it is now likely to happen: “In response to a slow economic recovery and rising trade protectionism around the world, many countries are seeking to strengthen regional economic integration to expand their market share and raise their competitiveness.”
For every premise, however, there is a contradiction. Their basis consists of conflicts of interest, political, economic, and social divergences that are the fruit of long standing cultural animosities. The colonization of Korea and the occupation of China by Japan are not forgotten, in a bitter and never-ending post-war reconciliation. The three countries also do not belong to any specific common economic organization, although they have relations through multilateral organizations and quite often within the Asean+3 structure, although none of the other countries in Southeast Asia even remotely compare in size or scope. The three giant economies are at the same time complementary and competitive. Any lowering of obstacles to trade – both tariff and non-tariff – is likely to meet internal resistance within the various societies. China needs to be more respectful of IPR, international law, and environmental standards, since Korea and Japan would be forced to make available for China their best technology, but they would also need to give up protectionism of their agricultural exports, a traditional banner for ideology and the popular vote.
The negotiations will be long and arduous, and not without internal divisions, but years from now they might turn the stormy northeastern Pacific into a placid Asian lake. If the Asian giants were to turn to each other rather than be in conflict, the geo-economic landscape of the region would change dramatically. The pax Americana of the postwar period stands to lose the most, and the White House has proposed a Trans-Pacific Partnership as a means to remain relevant. Beijing sees this initiative as a way to contain its rise; Seoul is still mulling its commitment, while Tokyo has already given its approval. The many competing initiatives are the harbinger of a new balance of power, and a sign that the economy is driving the change. Good news, if it means that competition finally prevails over conflict and that the military will be relegated to the last, ultimate, resort.