Japan-Korea FTA cornerstone of the East Asian Community

Author: Yoichi Funabashi

Japanese Prime Minister Yukio Hatoyama has recently told Foreign Minister Katsuya Okada that there are three key policy issues in the area of diplomacy that he intends to tackle while he is in office.

They are: Pressing ahead with his proposal to create an East Asian Community, signing a free trade agreement with South Korea and resolving the thorny Northern Territories dispute with Russia.

By its very nature, diplomacy involves delicate negotiations. Much depends on what arguments are used to win over the other party. Thus, in this regard, no matter what efforts Japan might exert, there is no guarantee it will win.

In dealing with Russia, Hatoyama must figure out how far Prime Minister Vladimir Putin and President Dmitry Medvedev, who constitute a dual leadership structure, will operate in sync.

An even bigger question is whether Japan has anyone capable of serving as a behind-the-scenes negotiator and communicating clearly with those in power at the Kremlin.

Efforts are being made to flesh out details for the proposed East Asian Community. But rather than concentrating on creating a new framework, a more realistic approach would be to accumulate a series of separate policies, such as an FTA between Japan and South Korea, as a means of solidifying the foundation for the regional grouping.

That being the case, working on a Japan-South Korea FTA should probably be Hatoyama’s priority. But this doesn’t mean it should be taken up because the other two issues are difficult to address. The FTA issue is important in its own right.

The FTA issue has a deep strategic significance for both Japan and South Korea in this era of drastic change in the international environment. I’m referring to reform of global governance, the relative decline of the United States, the rise of China and the crisis facing the North Korean regime.

At a Cabinet meeting on March 19, Hatoyama said that promoting economic partnership arrangements took priority because they would help him his goal of creating an East Asia community. Meeting with his ministers on March 25, Hatoyama again stressed the importance of reaching an FTA between Japan and South Korea. Serious negotiations on an FTA first began in December 2003. However, the talks were suspended in November 2004 at the request of Seoul.

While no serious discussions have been held since, South Korean officials have recently begun expressing an interest in reviving the issue. Meeting with Okada in February, South Korean President Lee Myung-bak indicated his desire to reach an agreement.

According to 2009 trade figures, South Korea accounts for 6 per cent of Japan’s total trade. In contrast, for South Korea, trade with Japan accounts for 10 per cent of its total. However, imports from Japan account for 15 per cent of South Korea’s total imports.

Trade between Japan and South Korea has been marked by a constant trade deficit on the part of South Korea. The country currently has an annual deficit with Japan in the region of 3 trillion yen (US$32.172 billion). This is because South Korea depends on Japan for the bulk of its capital goods as well as the intermediate goods used in finished products that are then exported.

South Koreans fear that once an FTA is established, Japanese cars, home appliances and steel products will flood their market. For its part, South Korea is calling on Japan to further open its agricultural and fisheries markets, remove nontariff barriers and make the government procurement process more transparent.

What makes these requests difficult is that Japan already has an annual trade deficit of 100 billion yen with South Korea in agricultural and fisheries products. South Korea’s main exports to Japan are bonito and tuna, shochu and kimchi. Japanese, for their part, fear that cheap South Korean marine products, such as squid and nori, will wreak havoc on the domestic market.

On top of such concerns, territorial and historical issues cast a large shadow over bilateral relations. If controversy should erupt over these issues, trade negotiations would suffer.

During a visit to South Korea in March, farm minister Hirotaka Akamatsu was told by Yu Myung-hwan, the minister of foreign affairs and trade, that since this is the 100th anniversary of Japan’s annexation of Korea, many South Koreans consider it to be a ‘year of humiliation.’ Yu urged caution, noting that emotions were again running high over the territorial issue.

In working toward an FTA, Japan will need to pay the utmost attention to South Korean sensitivities over territorial and history issues.

It is important that both Japan and South Korea understand the strategic significance that makes an FTA between the two countries so vital. For one thing, both Japan and South Korea have a global presence that can contribute to the peace and stability of Asia and the world.

In November, South Korea will host the Group of 20 summit meeting, while Japan will be the venue for a meeting of the Asia-Pacific Economic Cooperation (APEC) forum.

A Japan-South Korea FTA would be instrumental in pushing for a further opening of the global trade system. It would also help Asian regional integration. Integrating the markets of the closest neighbors in Asia will become the cornerstone of the East Asia community.

Secondly, a Japan-South Korea FTA would provide momentum for the creation of a Free Trade Area of the Asia Pacific (FTAAP), something that should be considered as an FTA vision for the entire APEC region. Such a development would help to re-energise APEC.

Furthermore, both Japan and South Korea are democracies and allies of the United States. Working closely together and further opening up their markets will likely serve to strengthen democracy in Asia and the world as well as maintain and develop a liberal internationalist order. It is also expected that the two nations can complement the presence and influence of the United States in Asia.

With the rapid emergence of China as an economic power, some have suggested that China could move to vertically integrate the members of the Association of Southeast Asian Nations (ASEAN) and other Asian countries into its domestic market. For their part, Japan and South Korea should pursue, through cooperation with ASEAN, a principle of Asian regionalism that is horizontal, or in other words, equal among nations. A Japan-South Korea FTA would provide a solid footing for such a move.

Last fall, the ministers in charge of trade and economy from Japan, China and South Korea agreed to start studying the benefits of an FTA in a group of experts from both the public and private sectors. From the standpoint of Asian regionalism, it would be more advantageous for Japan and South Korea to first work on an FTA and then seek another that includes China.

Finally, South Korea needs a robust economic base that would allow it to adequately absorb huge shocks if unification occurs between the North and the South. An integrated Japan-South Korea market would serve as a solid buffer that could provide ‘strategic depth’ and allow all of Northeast Asia to absorb any unification shock. Japan has so far signed FTAs with Singapore, Chile, Thailand, Switzerland and six other nations as well as the ASEAN bloc.

At a March symposium on the East Asia community sponsored by the Japan Institute of International Affairs, Hatoyama gave a speech in which he said, ‘I do not believe that Japan until now has thought strategically about economic cooperation, or in other words, FTAs.’

He was spot on in that regard, but the question that should be asked is why no such strategic thinking emerged. The answer is weak political leadership; and in particular, the indecisiveness of the prime minister’s office.

In the case of Japan, and for that matter, many other nations as well, forces that want to protect agricultural interests have tended to oppose FTAs. It has been said that industry groups representing those in the trading of squid, nori and bonito have resisted moves toward a Japan-South Korea FTA.

The Hatoyama Cabinet seems to believe that the Democratic Party of Japan-led government, which is unfettered by such vested interests, will be able to achieve a breakthrough. During his meeting with Yu, Akamatsu expressed just such a positive attitude when he said, ‘Let us begin from areas where we agree. We can just begin in those areas that are a benefit to both sides.’

As for Japan’s automobile exports, an issue that is of utmost concern to South Korea, Japanese policymakers are apparently taking the stance of waiting until the time is ripe, suggesting that the current 8 per cent tariff need only be gradually reduced.

At a Cabinet meeting on March 25, Yoshito Sengoku, the state minister in charge of national policy, was placed in charge of spearheading the effort to achieve a Japan-South Korea FTA. The move is clearly aimed at strengthening the political leadership.

However, it appears the prime minister’s office has yet to decide if Sengoku will chair the Cabinet ministers committee meetings on this issue.

When the DPJ first proposed the creation of a ‘national strategy bureau,’ whose official English translation is now the National Policy Unit, some people expressed dissonance between the fear-inducing images conjured up by the term ‘national strategy’ and a DPJ-led government.

But is that really the case? What is being asked of Japan right now is a redefinition of the role of government as well as a strategy to revitalise its economy and society. That means applying strategic thinking to an incoherent campaign manifesto as well as the poetic principles that tend to get ahead of specific policy measures. Focus and selection is another way of framing the word strategy, and it does not simply mean coordination.

Now is the time to utilise the National Policy Unit to inject strategic thinking into policy decisions.

Yoichi Funabashi is Editor-in-Chief of the Asahi Shimbun in Tokyo.

This article was first published here at the Asahi Shimbun.

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  • Karen Dynan

    The three most developed large countries of East Asia–Japan, Taiwan, and South Korea–should band together and open not only to trade among themselves, but also band together for free trade negotiations with China. Each has technology, management, marketing, and manufacturing prowess that China wants. The three of them together will have large enough leverage to truly extract concessions from China.

    Separately, China will use the fear of any one of them getting an advantage in China to scare the other two into hasty and not-well-thought-out trade agreements with China.

    Divided they will fall; united they will stand.