Government leaders of Japan, China and South Korea met on May 21-22 in Japan to accelerate discussions on a framework for a trade agreement among the three countries. While the talks are still in very early stages, the commitment to complete current joint studies and speedup other ones is an indication that the bogged down Doha Round of WTO trade policy talks are not a reflection of the lack of interest among key countries for further trade agreements.

 

The leaders’ summit was the fourth held since December 2008. The previous ones covered a broad range of issues, while this meeting was aimed at showing that Japan was returning to normal after the March 11 earthquake and tsunami. Prime Minister Kan, Premier Wen and President Lee ate farm produce at Fukushima City about 35 miles from the damaged nuclear reactor to show that Japanese food is safe. China and South Korea had banned some agricultural trade after nuclear reactor leaks in Japan. While the three leaders remained committed to using nuclear power, their governments will discuss how to quickly exchange information and analysis of air currents when nuclear accidents occur.

The three leaders acknowledged differences that have limited talks in the past. China temporarily curbed exports to Japan of rare-earths metals used in many high-tech products. The two have had territorial disputes over small islands. President Lee referred to “inconvenient situations” – like the shelling of Yeonpyeong Island by North Korea, which has close relations with China. Closer economic ties could result in economic relationships where the three would have too much at stake financially to not find a way to resolve disagreements on other issues.

The countries together account for over 20 percent of the world’s GDP, about the same as the U.S. and the collective 27 countries of the EU. China is currently the largest trading partner for both Japan and South Korea, but trade among the three accounts for only 11 percent of total trade. The goal is to further open markets to each other, reduce tariff and non-tariff barriers, expand cooperation in customs and quality inspection, and improve transportation and movement of people.

There is much speculation why the talks are moving forward now. Premier Wen proposed the acceleration in the context of helping Japan’s recovery. Some believe Mr. Wen was pressuring Prime Minister Kan to choose their trade agreement over joining the Trans-Pacific Partnership (TPP) agreement supported by the U.S. Mr. Kan has now put off a decision on the TPP until after November. Premier Wen’s term in office ends in 2012 and he may be trying to solidify China’s trade policy before he leaves. Mr. Wen said formal negotiations could begin in 2012.

A trade agreement among the three countries would likely not look like some other recent free trade agreements. While China had to reduce trade protectionism to join the WTO in 2001, it remains protective of markets, except where the government benefits from lower trade barriers, like soybeans and cotton. The political power of Japan's agriculture and fishing industries has thwarted other efforts by Japan to pursue freer trade. South Korea is more open to trade agreements, but still protects some industries and agriculture when possible.

The three economies have more similarities than differences. All three have export-oriented manufacturing economies and import substantial amounts of raw resources. All are major food importers; Japan and South Korea because they have limited amounts of arable land and China because it has 1.3 billion people. Mutual investment accounts for less than 10 percent of total investment. They have held 12 meetings since 2005 on a trilateral investment treaty, but more work needs to be done to conclude talks by the end of the year as suggested by Premier Wen. The biggest difference is that Japan is a developed country; South Korea is called an advanced developing country, but is much like Japan. China spans the development range from developed economies in coastal areas, advanced developing in interior cities and developing in rural areas with limited resources.

U.S. agriculture has a large stake in trade relationships with the three countries. USDA estimates of agricultural trade released last week for the current fiscal year show China as the largest U.S. export market at $21.0 billion, 15.3 percent of U.S. exports. Japan is the fourth largest market at $13.0 billion, 9.5 percent of trade, and S. Korea at $6.5 billion is the sixth largest with 4.7 percent of trade. The three country total of $40.5 billion, 29.6 percent of total U.S. agricultural trade, surpasses NAFTA agricultural exports of $35.5 billion, 25.9 percent of trade.

As major importers of agricultural products, all three countries are likely to want to keep those products of out a trade agreement. If that is true, they could operate as three separate countries much as they do today. If agricultural products are included there could be some common standards on sanitary and phyto-sanitary issues that could be of benefit to U.S. exporters. Given other issues to be negotiated, changes in agriculture are likely to be limited.

Whatever is achieved in integrating the three economies would spread to the rest of the world. An agreement on automobiles, steel, chemicals, computers and hundreds of other products widely traded would impact other trading relationships. All three countries have trade agreements with the ten countries of ASEAN. South Korea has a trade agreement with the EU and a pending agreement with the U.S. Just last week, Japan agreed to preliminary talks with the EU on an economic partnership agreement. Even without trade agreements, all three countries have supply chains and raw material flows that affect every significant trading country.

A serious trade agreement among the three countries and agreements like TPP now being negotiated have the potential to increase economic efficiencies in trade and alter economic and political landscapes. Despite their potential power, trade agreements are still political documents that only have value if government leaders remain committed to them. Without that, the benefits will erode over time and inefficient mercantilist ways will replace the modern cross border supply chains.