logo logo

Trilateral free trade agreement

Korea Times

Trilateral Free Trade Agreement

28 April 2005

By Kang Hee-Joon

BLOOMINGTON, Indiana - Not too long ago, the entire country and the National Assembly agonized over the ratification of Korea-Chile Free Trade Agreement (FTA). Its final National Assembly passage was delayed from the strong opposition of many people, particularly from farmers. The government has successfully negotiated a Korea-Singapore FTA, which has not yet been ratified. Since there is little trade in the agricultural sector, its passage will be easier.

It is remarkable to learn that the government is either negotiating or planning to negotiate with as many as 50 countries to complete their FTAs by 2007. Some of those countries belong to the same organization, such as the Association of South East Asian Nations (ASEAN). If you count the number of such organizations that the government is dealing with, the number is still 13. Korea may soon have as many as 15 FTAs.

What is exactly a Free Trade Agreement? Why is there an explosion of interest now?

A FTA is an agreement among two or more countries to promote their foreign trade. Although it is called a free trade agreement, trade between partners involved is not completely free. Trade will be freer than before the agreement and freer than when compared with other non-members. It is a type of preferential trade treatment in favor of members and against non-members.

Naturally, Koreas exports and imports with Chile went up after the FTA. Both countries lowered their trade barriers, including tariffs. In the negotiations, Korea wanted Chile to lower their tariffs on what Korea was good at producing and Chile also wanted Korea to do likewise on what Chile was good at producing. Some agricultural products are not included, however, because Korea wanted to protect its domestic producers. At the same time, some manufacturing products were excluded, because Chile wanted to protect its domestic producers.

Through the FTA, consumers in both countries buy and enjoy more products because of the reduced prices. Export prices, at least in the short run, do not change. Sellers can charge the same prices as before. Both countries thus benefit from the FTA, because of this creation of new trade.

On the other hand, there will be some trade diversions. When Korea lowers its tariffs from Chile, but not from Mexico, goods from Chile will be relatively cheaper in comparison with those from Mexico. Some of those imports from Mexico may be diverted to Chile, because Chile, but not Mexico, is Korea’s preferred trading partner. Likewise, some of those imports of Chile from, say, China, will be diverted to Korea, because Korea, but not China, is now Chile’s preferred trading partner.

In spite of all the diplomatic disputes on Japanese past history and Dokdo, Korea and Japan want to negotiate their FTA by the end of this year. Both countries must have realized that their exports are very important to their economy. Their economy currently not doing very well may be an extra incentive for both countries.

In addition, Korea is currently in talks with ASEAN and Canada. When President Roh visited India and Russia, they agreed to investigate a possible FTA with those countries. Korea is also exploring FTAs with other countries, including Mexico, the European Union, the United States and China.

Many believe that a Korea-Japan FTA is easier to negotiate than an FTA between, say, Korea and China. China does not have a long track record of being a good trade partner. Also the agricultural sector will be a sticky point, because the trade volume of the sector between Korea and China is large.

It is easy to see why those FTAs, which can be easily negotiated, will not be very valuable. The more potential conflicts there are between the two partners and the harder it is to achieve any agreements for an increase in trade, the greater the benefits will be for both countries.

Since there are many issues and obstacles to be negotiated between Korea and China, an FTA between Korea and China will be all the more important and significant. The most important FTA to Korea is, however, a trilateral one among Korea, China and Japan. This trilateral one will be much more important than the summation of two separate FTAs, one between Korea and Japan and the other between Korea and China.

Many believe that an FTA between China and Japan may be one of the hardest FTAs in the world to accomplish. The two countries have had long history of animosity. The agricultural and intellectual property sectors are just two examples that divide the two. Equally important is their hegemonic ambition in the region and in the world.

Historical animosity is not unique between China and Japan, however. Korea and Japan as well as Korea and China have not been particularly friendly throughout their history. France and Germany were archenemies, but now they are in the same European Union. Brazil and Argentina did not trust each other in their entire history, yet they belong to the same Mercosur group, an FTA, which also includes Chile, Uruguay and Paraguay.

FTAs are not just for the former friends. Former enemies are in fact better candidates for an FTA to increase mutual benefits from a greater trade. With or without an FTA, China and Japan will fight for regional and world hegemony.

Korea is extremely important in this trilateral FTA among Korea, China and Japan. Our study shows that a borderline country loses a lot in trade. If China and Japan belong to different FTAs, but with Korea in neither of them, Korea’s trade will suffer greatly.

Because of the geographical location and its position being in the middle of Japan and China in its industrialization, Korea will benefit most from a trilateral FTA. A trilateral FTA among Korea, China, and Japan is a must for Korea. Korea can ill-afford a separate FTA, only with Japan or only with China. Korea should put its priority in achieving this trilateral FTA. All other FTAs will be secondary or tertiary in their importance. Instead of 13 additional FTAs, Korea should try an all-in negotiation effort for a trilateral FTA.

The writer, a professor of business economics and public policy at Indiana University’s Kelley School of Business, is a member of The Korea Times Economic Editorial Board.