Trade cooperation to boost East Asian economy

The geopolitical and geo-economic landscapes will likely undergo profound changes after Donald Trump is sworn in as the United States president in January. Despite that, East Asia (China, Japan and the Republic of Korea) will consolidate its position as the center of the Asian production network, promote globalization and integrate the region's economies. In such circumstances, if China, Japan and the Republic of Korea were to seize the new opportunities to achieve breakthroughs in economic and trade cooperation, they will not only drive their own development but also help shape a new global economic order.

Need to make new breakthroughs

Trade and economic cooperation among China, Japan and the ROK has reached a critical juncture, from where they can "fall behind if not advancing". Since the China-Japan-ROK cooperation mechanism was launched in 1999, economic and trade cooperation between the three countries has yielded good results — with value of China-Japan-ROK trade increasing from $130 billion in 1999 to more than $700 billion in 2023.

But due to the lack of institutional arrangement and various other factors, China-Japan-ROK economic and trade cooperation remains unstable. As of 2023, the trilateral trade dependency ratio in intra-regional trade was less than 20 percent, far lower than that of the European Union (65.7 percent) and the United States-Mexico-Canada Agreement (40.2 percent).

Therefore, China, Japan and the ROK need to deepen their economic and trade cooperation to jointly respond to the external challenges. In particular, the three countries should expedite their negotiations for a trilateral free trade agreement (FTA). Studies show that the establishment of a China-Japan-ROK FTA could potentially increase the GDP of the three countries by 0.5-3 percent.

The idea of establishing a China-Japan-ROK free trade area was first proposed at the trilateral leaders' meeting in 2002, with formal negotiations on the issue starting in November 2012. But a China-Japan-ROK FTA is yet to be finalized even after 16 rounds of negotiations. Since the new US administration is expected to push forward Trump's "America first" strategy, the three countries should finalize and ink a trilateral FTA for their mutual benefit. And they could start the process by "speeding up negotiations for a trilateral FTA" as mentioned in the Joint Declaration of the 9th ROK-Japan-China Trilateral Summit on May 27, 2024.

Leverage RCEP to finalize FTA

The three countries could use the Regional Comprehensive Economic Partnership as a foundation to finalize and sign a high-level trilateral FTA. By doing so, they can gain from the "early harvests" in various fields.

A trilateral FTA will further liberalize goods trade, and help the three sides to make significant gains from "zero-tariff" coverage for up to 95 percent of the traded goods, with transitional periods, exceptions or phased tariff reduction arrangements for each country's sensitive products. A trilateral FTA will bring added gains for the three sides, as they can issue priority lists for key sectors such as healthcare, eldercare, environmental protection, and automobile and electronics manufacturing.

The three sides can also gain by aligning their rules, and using the Comprehensive and Progressive Agreement for Trans-Pacific Partnership as reference to set economic and trade rules to better protect intellectual property rights, increase government procurement and safeguard the environment. And they can achieve win-win results by seizing the extensive opportunities for cooperation in fields such as information and communications technology and the digital economy, as well as building on the RCEP's e-commerce rules to boost cross-border data flows, ensure non-discriminatory treatment for digital products, and establish high-standard digital trade rules.

To be sure, deeper China-Japan-ROK cooperation on trade will have a positive impact on the RCEP. In 2023, the GDP and manufacturing value-added of China, Japan and the ROK accounted for more than 80 percent of the RCEP region, while the value of their exports and imports accounted for over 70 percent of the region's total.

Also, the three countries together contributed to about 70 percent of Asia's growth and 36 percent to global growth. Since the next three to five years will be crucial for the full implementation of RCEP rules, China, Japan and the ROK must take the lead in using the RCEP framework to achieve breakthroughs on key issues such as free trade, market access and the free flow of factors of production. This will unlock the dividends for the three countries, while strengthening the region's industry chains.

Widen opening-up for ASEAN members

China, Japan and the Republic of Korea should also take measures to further open up their economies to the members of the Association of Southeast Asian Nations. For example, the three countries should expand the coverage of "zero-tariff" goods, shorten the transition period for tariff reductions, help their enterprises import more high-quality goods and services from ASEAN, encourage businesses to strengthen the industry and supply chains within the RCEP region, fully implement the RCEP's rules of origin, and lower the threshold for ASEAN enterprises exporting products to China, Japan and the ROK.

There is huge potential for the development of China-Japan-ROK trade in services. China is the largest service trade market for Japan and the ROK, and given the complementarity of the three economies, Japan and the ROK can benefit from increased trade with China. In the next five to 10 years, China's industrial, consumption and urban-rural structural transformations will not only generate substantial demand for services from Japan and the ROK but also make service trade a new driver for growth in the region.

From 2013 to 2023, the value of service trade among China, Japan and the ROK grew at an average rate of 4.5 percent a year, 2 percent higher than the growth rate of goods trade. In 2021, the share of trade in services was 7.8 percent in China-Japan trade, 8.22 percent in China-ROK trade and 11.06 percent in Japan-ROK trade, all below the global average of 21.4 percent, highlighting the huge room for further growth. If the share of services trade between the three countries reaches the global average, it is estimated to create an additional market worth $1.4 trillion.

Given their rapidly rising aging populations, China, Japan and the ROK should consider creating a common healthcare market for mutual benefit, because China's market for healthcare in 2030 is expected to be worth 16 trillion yuan ($2.20 trillion). With the lifting of restrictions on wholly foreign-owned hospitals in seven provinces and cities in the first half of this year, China is expected to introduce more supportive policies, creating new opportunities for Japanese and ROK enterprises in the healthcare sector.

The key lies in further opening up markets

Promoting higher-standard opening-up for services trade and investment is a shared task for China, Japan and the ROK. According to estimates by the Organization for Economic Co-operation and Development, the ROK's service trade restrictiveness index exceeds the OECD average by 80 percent, with Japan's being roughly on par with the OECD average but double that of major developed countries such as the United States, the United Kingdom, Germany and France. And although China has fully opened up its manufacturing sector, it still has room for further opening up its services sector.

This calls for deeper cooperation among the three countries to formulate a transparent negative list for cross-border services trade and substantially reduce barriers in the sector. The three countries should also take measures to align their rules, regulations and standards for their services markets, and thus attract more investments.

China, Japan and the ROK can also leverage their comparative advantages in R&D, design and manufacturing to establish a trilateral manufacturing industry association, in order to accelerate the implementation of trade policies in areas such as production equipment, technical services, joint R&D, and the free movement of high-tech professionals within the manufacturing sector.

Unilateral restrictions that violate market principles are not only ineffective but also harmful for the regional industry and supply chains. Plus, they will increase the cooperation costs. That huge potential is left untapped in trilateral high-tech trade can be gauged from the fact that Japan's exports of semiconductor manufacturing equipment to China in the January-April period jumped by 95.4 percent year-on-year, accounting for 50 percent of its total exports in this sector.

As for the ROK, its memory semiconductor exports to China from January to September grew by 40 percent year-on-year, representing 37 percent of its total memory semiconductor exports. Whether from the perspective of their own interests or broader market development, China, Japan and the ROK should enhance their strategic autonomy, refrain from "decoupling" or breaking down the supply chains, and advocate for greater market openness to increase mutual benefit.