New Dynamics and Prospects of China-Japan-ROK Economic and Trade Cooperation

By Wang Ruibin

Strengthening free trade cooperation among China, Japan and the ROK is in the interests of the three countries and is an important step towards economic integration in the Asia-Pacific. The 8th China-Japan-ROK Summit at the end of 2019 published the China-Japan-ROK Cooperation Vision for the Next Decade, drawing up a strategic plan to deepen cooperation among the three countries and setting a positive tone for upgrading their economic and trade relations. However, in view of the global economic slowdown, intensifying geopolitical and economic frictions in the region, and the urgency of the COVID-19 epidemic, China, Japan and the ROK still face difficulties and challenges down the road in their economic and trade cooperation.

I. Seizing New Opportunities for Economic and Trade Cooperation between China, Japan and the ROK

The proposal on closer China-Japan-ROK economic and trade cooperation, especially the establishment of a China-Japan-ROK free trade area (FTA), was officially made at the leaders’ meeting held at the end of 2002. Over the years, the governments and academic communities of the three countries have studied its feasibility and evaluated its impact on their own industries. To enhance their capacity to counter risks from outside the region in the wake of the 2008 global financial crisis, the three countries committed to pursue closer economic and trade cooperation and prioritize the FTA negotiation process. Since 2013, China, Japan and the ROK have completed 16 rounds of free trade talks. Despite the consensus reached on many issues, they are yet to make substantial breakthroughs. At present, the positive dynamics in China-Japan-ROK relations have created new favorable conditions for closer economic ties among them.

1. China-Japan relations continue to warm up. The Abe administration has been active in improving relations with China for mainly two reasons. First, as Trump is fervently pursuing unilateralism, Japan would get limited benefits if it still focused its diplomacy on the US. Therefore, it has to be pragmatic. Second, the Abe administration hopes to boost Japan’s economy through China’s development. The stimulus policies guided by “Abenomics” have almost exhausted their effectiveness. Issues that have constrained the Japanese economy, such as long-term protracted deflation, falling productivity, and decreasing population, defy an easy fix. To sustain the momentum of economic expansion, Abe hopes to take advantage of China’s continued growth and the Belt and Road Initiative (BRI) to expand economic cooperation with China in industrial production capacity, public finances, financial services, and third-party markets.

First, China-Japan political relations have been improved. In 2018, Premier Li Keqiang attended the 7th China-Japan-ROK Summit and paid an official visit to Japan.This is the first official visit by a Chinese leader to Japan since Premier Wen Jiabao’s last trip in 2011, showing that bilateral relations returned to the normal track. Shortly afterwards, Japanese Prime Minister Shinzo Abe visited China, which was also the first visit by a Japanese leader to China in seven years. The Abe administration shifted to a positive attitude towards the Asian Infrastructure Investment Bank (AIIB) and the BRI and made clear its willingness to cooperate with China under the BRI. During the 2019 G20 summit in Osaka, President Xi and Prime Minister Abe reached 10 points of consensus. 

Second, two-way trade stopped falling and started to grow. China-Japan trade had been in the doldrums for several years. It dropped by as much as 15.3% in 2015 and didn’t reverse the decline until 2017. In 2018, their trade in goods totaled US$303 billion, in which Japan’s exports to China increased by 6.8%, standing at US$149.7 billion, and its imports from China were US$180.7 billion, up 4%. China remains Japan’s second largest export market, narrowing the gap with the US, Japan’s top export destination. China also continues to be Japan’s largest source of imports. In 2019, there was some fluctuation in China-Japan trade growth due to the intensifying China-US trade frictions. Statistics currently available show that two-way trade was RMB2.17 trillion, a modest increase of 0.4%.

Third, mutual understanding on security has been deepened. China and Japan has increased security and defense exchanges. In 2018, they reached the MOU on Maritime and Aerial Communication Mechanism and launched the maritime and aerial communication mechanism to avert accidental clashes at sea and in the air and prevent such incidents from escalating into serious military conflicts. This is an important progress made by China and Japan in recent years in managing their territorial disputes, forestalling the impact on bilateral relations, and getting over the security dilemma. In April 2019, the frigate of Japan’s Maritime Self-Defense Force made an appearance at the international ship-watching ceremony held in Qingdao. In August, the China-Japan Strategic Dialogue that covers defense, diplomacy and other topics resumed after a suspension of seven years. In October, the Chinese missile destroyer “Taiyuan” made a port call on Japan. In December, the Chinese and Japanese defense ministers met again. During the same period, the Abe administration rarely mentioned or toned down its rhetoric on the South China Sea and the Indo-Pacific strategy.

2.China-ROK relations have been repaired at a fast pace. When Park Geun-hye was in office, China-ROK relations once reached the highest point since the two countries had established diplomatic ties. The relations, however, took a nosedive after the US and the ROK officially announced the deployment of the THHAD missile defense system on the Korean peninsula. After Moon Jae-in came to power in 2017, he started to make mends to China and undertook notto deploy the THHAD system, not to join the American missile system, and not to develop the trilateral military alliance with the US and Japan. His administration also confirmed that it had no intention to harm China’s security interests. China-ROK relations thus made a turnaround, bringing about rapid growth in two-way trade. In 2018, their trade in goods was US$268.64 billion, up 11.9% year-on-year. The bilateral relations recovered at a fast pace mainly due to the following factors:

First, the Chinese and Korean economies are highly interdependent. China is the ROK’s largest trading partner, while the ROK is China’s third largest trading partner, fourth largest final export destination, and largest source of imports. The ROK’s economic growth has benefited from the huge Chinese market, which is the largest for Samsung, Hyundai and other Korean consortia. China has a demand for Korean technologies, products and market. The two sides have particularly close cooperation in the electronics industry.

Furthermore, the “New Northern Policy” and “New Southern Policy” promoted by the Moon Jae-in government resonate with China’s BRI. Both countries have an interest in exploring wider economic cooperation in third-party markets such as Southeast Asia and South Asia.

Finally, in the broader context of the Korean Peninsula, the Moon Jae-in administration has pursued a moderate policy towards the DPRK, and China commends the policies and actions of the two Koreas to seek reconciliation and cooperation. China and the ROK share the same position on denuclearizing the Korean Peninsula, defusing tensions in the region, and creating an external environment conducive to regional peace and prosperity.

3. The icy Japan-ROK relations began to thaw. This round of deterioration in Japan-ROK relations was triggered by the issue of compensation for “comfort women” and forced Korean laborers during the Second World War. In October 2017, the ROK’s supreme court ruled in favor of the right of forced laborers used by Japan during the Second World War to claim damages. Later, the ROK declared the Comfort Women Agreement unconstitutional and dissolved the Reconciliation and Healing Foundation the following year. In so doing, the ROK abolished the previous understandings and agreements reached with Japan on related issues. The disputes between the two sides on issues of historical legacy and in the political field once again escalated, and turned into economic and trade conflicts. In July 2019, Japan announced controls on the export to the ROK of fluorine-containing polyimide, semiconductor photoresist and hydrogen fluoride for high-purity semiconductors. It went further to strengthen export controls by removing the ROK from the “white list” of preferential trade treatment. These moves dealt a heavy blow to the electronics industry of the ROK, which was compelled to take countermeasures. Though the two countries have been locked in a confrontational mode, there have emerged signs of easing. They have maintained ministerial dialogues and other channels to prevent the relations from worsening. Japan has slightly relaxed its export control on the above-mentioned semiconductor materials to the ROK. And the ROK renewed the General Security of Military InformationAgreement (GSOMIA) with Japan and put on hold the lawsuit against Japan at the WTO.

The current state of relations between China and Japan, China and the ROK, and the ROK and Japan are not perfect. On the whole, however, they are in the best position since the start of free trade negotiations. The Trump administration’s “America First” policy of trade protectionism has exerted great pressure on China, Japan and the ROK and their collaboration on industrial chains, prompting the three countries to seek cooperation. At the Chengdu summit, the leaders of the three countries affirmed at the top political level their commitment and objectives to resolve differences, upgrade trade liberalization, and promote regional economic integration.

II. New Challenges for China-Japan-ROK Economic and Trade Cooperation

As mentioned earlier, the process of economic and trade cooperation between China, Japan and the ROK is characteristically driven by external crises. At present, the complex economic and political situation in the world and the Asia-Pacific once again brings the three countries closer together to seek new ways to deepen and upgrade economic and trade cooperation to cope with changes and crises. Compared with more than ten years ago, major shifts have taken place in the three countries’ respective strength and standing. They are confronted with new difficulties and greater challenges in economic and trade cooperation.

1. Changes in the economic and trade interdependence of the three countries. In general, the interdependence among the three countries is weakened and out of balance. The 2008 global financial crisis stimulated an interest in China, Japan and the ROK to join hands and explore the establishment of a free trade area to mitigate external shocks and improve their overall well-being. Since then, the trade between and among China, Japan and the ROK has continued to grow in absolute terms, but their respective shares in global trade has changed significantly. In 2007, the trade in goods between China and Japan and between China and the ROK accounted for 13.47% and 8.24% of China’s total trade respectively. In 2018, the figures dropped to 12% and 6.1%. China’s dependence on Japan and the ROK for trade has declined, while Japan and the ROK has relied more on the Chinese market. From 2007 to 2018, the share of trade with China in Japan’s total trade rose from 17.74% to 21.37%, while the share of trade with China in Korea’s total trade climbed from 19.9% to 23.56%. During the same time frame, Japan-ROK trade saw its share fell from 6.1% to 5.69% in Japan’s foreign trade, and from 11.2% to 7.42% in ROK’s foreign trade, slight decreases in their respective international trade. In addition, the intra-regional trade growth between China, Japan and the ROK has long been under 20%, far lower than 64% in the EU, 50% in NAFTA, and 24% in ASEAN.

2. The three countries are competing more intensely in the industrial sectors. China, Japan and the ROK are all global manufacturing powerhouses. In some industries, such as electronics, they are part of the industrial chain and highly complementary. Trade among them has therefore been dynamic. Japanese companies are in a monopolistic position on the upper stream of the semiconductor production chain, while Korea is strong in high-tech memories, panels and components. Chinese companies produce low-tech materials and components and take up the packaging and assembling jobs. Taking Huawei P30 Pro smart phone as an example. In the cost of one set, Japanese and Korean components take 23% and 7.7%, while the Chinese mainland accounts for 38.1%. However, as China improves its technologies and moves fast up the global value chain, China is catching up with Japan and Korea in automobiles and components and the petrochemical industry. Agriculture is the sector that all the three countries take great care to protect. Japanese and Korean interest groups in agriculture have long been staunch forces against any free trade agreement. At present, Japan’s weighted average tariff rate on imported goods is only 2.45%, but the tariffs on food and vegetables are 12.66% and 17.75% respectively. The ROK has gone even further. Its weighted average tariff rate on imported goods is only 4.83%, while that on food and vegetables is 14.40% and 112.36% respectively. It is therefore difficult for China, Japan and the ROK to open their markets to each other’s agricultural products. Japan and the ROK have become increasingly competitive in such industries as culture, entertainment and e-sports, where they have established strong footholds.

3. The geopolitical and economic environment is complicated. The US regards the Asia-Pacific, especially East Asia, as the frontier of its global strategy. Its relevant policy adjustments have a great impact on the political and economic environment in the region and the cooperation between China, Japan and the ROK. In response to a stronger China, the US formulated and implemented a “pivot to the Asia-Pacific” strategy towards the end of the Obama administration and pushed for the Trans-Pacific Partnership Agreement (TPP) to maintain its dominant position in the regional order. At the end of 2017, the Trump administration clearly defined China as a “competitor” in its National Security Strategy report. In its subsequent efforts, the US has scaled up involvement in Asia-Pacific affairs and pursued all-round policies and actions to contain China. At present, the US has adjusted its economic and trade relations with China, Japan and the ROK, and redistributed economic benefits in the region. While negotiating with China amid intensifying trade frictions, the US has modified the free trade agreement with the ROK and concluded the US-Japan trade agreement and US-Japan digital trade agreement, all to serve its own interests. After two years of negotiations, China and the US signed a trade deal, marking a new stage in the structural adjustment of their economic and trade relations. The most urgent issue in China-US economic and trade relations has shifted from the concerns over “decoupling” to “recoupling” under new conditions. On the other hand, the US is steadily taking forward the Indo-Pacific strategy and is closely cooperating with India, Japan and other major countries. While strengthening military and political deployment, the US intends to add economic dimensions to this strategy by mobilizing investment and formulating the “Blue Dot Network” plan. Moreover, issues such as the Korean Peninsula, the South China Sea and the Taiwan Strait also bear on the core interests of all parties concerned and become factors of instability that foreign forces can use at any time to hamper economic and trade cooperation between China, Japan and the ROK.

III. Practical Ways to Promote China-Japan-ROK Economic and Trade Cooperation 

At present, China has been proactive in coordinating the economic and trade cooperation among the three countries. First, the root cause of this economic and trade conflict between Japan and the ROK has not been resolved. It is put on hold for the time being, making it difficult for their relations to make any substantial improvement in the short term. By contrast, China’s relations with Japan and the ROK have been steadily improving. Second, Japan and the ROK rely heavily on the Chinese market and have a strong demand for industrial collaboration.The impact of the COVID-19 epidemic on electronics, automobiles and other industries once again highlights China’s pivotal role in the value chain of the region.Third, Japan and the ROK are keen to cushion off the impact of US trade protectionist policies and seek a bigger say in making new international trade rules.

1. Expanding new areas of trilateral cooperation in new areas such as digital trade. China-Japan-ROK free trade negotiations may accelerate, but it is difficult to reach a package free trade agreement in the near future. Apart from political and historical issues, the three countries still have divergent expectations for liberalization and facilitation in areas like trade in goods, trade in services and bilateral investment. Japan and the ROK held six rounds of free trade negotiations before 2005, but got nowhere. China and Japan have yet to start free trade talks. The China-ROK FTA is outdated and has yet to be upgraded. 

At present, the traditional economic and trade relations among the three countries are undergoing adjustment. But as the foundation of industrial cooperation is stable, it is difficult to bring about disruptive changes. In order to maintain the vitality of the trilateral economic and trade cooperation, it is imperative to start discussions on issues, especially digital trade, that represent the new direction of global economic and trade activities. As early as in 1998, the WTO began to make rules on IT-enabled cross-border transactions. In recent years, digital trade has grown rapidly worldwide, making a sweeping impact on the traditional ways of trade, models of value creation, trade in services, international trade patterns, and economic integration. According to the WTO, global e-commerce transactions were valued at a staggering US$ 27.7 trillion in 2016. In 2019, 76 WTO members announced the launch of e-commerce or digital trade negotiations.The formulation of global digital trade rules is being led by the US and EU in two models.The trade agreements reached or revised by Japan and the ROK with the US and EU all contain digital trade. 

Globally, China, Japan and the ROK are all front-runners in the digital economy, with robust IT infrastructure and a complete ecology of digital industries. Since the financial crisis, the three countries have made a series of plans to accelerate the digital economy. Japan released the White Paper on Manufacturing Industries and the Integrated Innovation Strategy. The ROK published the Five-year Plan for Innovative Growth Engines. At present, among the three countries, only China and the ROK include digital trade in their free trade agreement. Whether China, Japan and the ROK can reach consensus in this field at an early date will determine how their economic and trade cooperation will grow in breadth and depth. 

In future free trade negotiations, the three countries need to hold in-depth discussions on key issues in digital trade, such as intellectual property protection, tariffs, cross-border data flow and localization of data storage, personal information protection, and cyber-security. At present, China, Japan and the ROK are the Asian centers of the global industrial chain, accounting for about one fifth of global trade. It is estimated that the compound growth rate of e-commerce in China, Japan and the ROK will reach 12%, 7% and 6.2% respectively between 2018 and 2022. If the three countries can make a breakthrough in digital trade rules, it will help to build an Asian hub of the global digital economy and make them well-placed in the formulation of new international trade rules.

2. Promoting trilateral cooperation among China, Japan and the ROK through multilateral mechanisms such as the Regional Comprehensive Economic Partnership (RCEP). The level of economic and trade cooperation between the three countries is closely related to the process of economic integration in the Asia-Pacific. In November 2019, the third RCEP leaders’ meeting was held in Bangkok, Thailand. A joint statement was issued, announcing that RCEP member states had concluded negotiations on all 20 chapters of the text and virtually all market access issues and would sign the agreement in 2020.

The RCEP is highly tolerant towards the different expectations of China, Japan and the ROK on free trade. Japan is involved in several regional cooperation processes, including  Comprehensive Progressive Trans-Pacific Partnership(CPTPP), RCEP, China-Japan-ROK economic and trade cooperation. It is not only a major driver of the higher-level CPTPP and an important participant of RCEP, but also plays a key role that affects the effectiveness of China-Japan-ROK cooperation. Japan thinks the RCEP is on low standards, and places more premium on the CPTPP, which it sees as the cornerstone to strengthen its economic and diplomatic influence in the cooperation process of the Asia-Pacific and a trend-setter in global free trade rules making. However, the total GDP of the 11 member countries of CPTPP only accounts for 13% of the global GDP, with limited scale and influence. Japan looks forward to playing a leading role in its membership expansion, so as to enhance its say in regional affairs and rules making. At present, the ROK has concerns over the CPTPP led by Japan and Australia, believing that some of its clauses will hurt its agricultural and auto industries. That is why it has stayed aloof. As for the RCEP, the ROK does not expect it to generate much trade growth in view of its standards and level of free trade. In fact, the ROK has signed bilateral free trade agreements with all RCEP members except the Philippines and Thailand.

However, at a time when China, Japan and the ROK are yet to reach a high-standard free trade agreement, the RCEP can provide the three countries with trade and investment facilitation and liberalization equivalent to a free trade area, and help to mitigate or avert the impact of historical issues on bilateral economic and trade cooperation. Moreover, in the long run, the geopolitical and economic influence supported by the RCEP’s huge market, scale of trade and the potential of its major economies should not be underestimated.

3. Creating synergies between the BRI and the regional development plans of Japan and the ROK. In response to the BRI, Japan and the ROK have shifted from doubts and concerns to engagement and interaction. In 2017, the Secretary-General of the Liberal Democratic Party of Japan attended the BRI Forum for International Cooperation. After that, Prime Minister Abe made positive comments on the BRI and raised the possibility of linking it with the Indo-Pacific Strategy. In May 2018, the two sides signed an MOU on third-party market cooperation between Chinese and Japanese enterprises, which helps to mitigate the vicious competition between enterprises of the two countries on BRI-related markets. On the whole, Japan has mixed feelings towards BRI. On the one hand, it hopes to hedge against the BRI with the help of the US-led Indo-Pacific strategy. On the other hand, it hopes to seize the economic opportunities created by the Chinese initiative. At the same time, it wants be an independent power in making regional development plans. So it chooses to use the “Indo-Pacific concept” to be less confrontational. 

In order to seek economic and diplomatic breakthroughs, the Moon Jae-in administration hopes to expand its economic relations to Russia, Mongolia and China in the north and to Southeast Asia in the south, especially ASEAN and India. Accordingly, it has put forward the “New Northern Policy” and “New Southern Policy” and made a comprehensive and concrete plan for aligning the two policies with the BRI. However, the “New Northern Policy” is constrained by the situation on the Korean Peninsula, US-Russian relations and other factors, while the southern policy has been more dynamic. 

The regional development plans of China, Japan and the ROK thus converge in ASEAN. This is also consistent with the economic law of industrial relocation. The fast-growing ASEAN market has a strong demand for infrastructure such as transportation and electricity, which provides good conditions for trilateral cooperation. China, Japan and the ROK can bring into play their comparative advantages, seek common ground while reserving differences, and establish a model of benign competition and cooperation for win-win results. 

In this connection, the BRI can be improved in three respects. First, transparency. It should be open and transparent. Information such as bidding and financing should be open and accessible. The bidding procedures should be open and competitive. Second, market principles. Businesses should be at the driver’s seat. And the market should play an active role in resources allocation. Innovative models of competition and cooperation should be developed in third-party markets to avoid exclusive operations. Third, institution building. China may explore the possibility of building interaction and cooperation mechanisms with Japan and the ROK on project planning, operation and management.

Wang Ruibin is Associate Director and an Associate Researcher of Department for World Economy and Development of China Institute of International Studies.