In this week's invited contribution, Laura Rizzotto and Marco Vadagnini, who are students at the London School of Economics, discuss the possibility of a single free trade bloc grouping China, Japan and South Korea, which is once again in the limelight following recent reports that Beijing aims to open negotiations on a trilateral free trade agreement (FTA) in 2012.  This article was originally published by our knowledge partner Equilibri -- www.equilibri.net .

With intra-regional trade and FDI having increased considerably over past decades, countries in East and South-East Asia have put in place gradually stronger forms of “soft cooperation”, including regional institutions such as ASEAN, ASEAN Plus Three (APT) and East-Asia Summit (EAS) as well as bilateral FTAs. This pattern largely reflects a global one, which has seen bilateral trade liberalisation and economic agreements gain momentum as the Doha Round has fallen into stalemate. However, it also reflects specific regional dynamics, which see smaller states trying to balance the growing influence of a potential regional hegemon. Even East Asia’s three main powers, China, Japan and South Korea, whose cooperation has historically been stunted, have been more active in the past few years. Yet, they have adopted a more ambiguous and cautious stance than their smaller neighbours. This article examines these trends, focusing on the recent developments related to the creation of a trilateral agreement between East Asia’s three main powers. Despite some positive signs, the timely realisation of the initiative remains doubtful, with geopolitical, historical and economic concerns marring the relationship between the three powers. In addition, the current slow-down of the global economy is likely to add to inherent protectionist tendencies rather than favouring deeper integration.

Soft Multilateral Cooperation: Economically and Strategically Sound For Smaller States

Widely differing stages of development, still significant barriers to trade and nationalist rivalries continue to represent obstacles to East-Asian and pan-Asian regional integration efforts. Nonetheless, gradually stronger form of “soft cooperation” have emerged in the region in the form of institutions such as APEC, ASEAN, APT and EAS, providing a stable institutional framework for dialogue and cooperation in the area, promoting “best-practices” and helping to improve transparency. Smaller states have played a cardinal role in developing these regional institutions; and looking at the economic, political and strategic motivations behind them, it comes as no surprise that they are underpinned by a “balancing” behaviour, aimed at engaging and containing regional powers, especially China.

As highlighted by Stephen Walt, with ASEAN member countries still strongly dependent on investment from outside the region, recent integration efforts such as the ASEAN Free Trade Area (AFTA), the ASEAN Charter and the creation of an ASEAN Economic Community (AEC) by 2015 seek to increase the attractiveness of these markets and to attract FDI, reducing China edge as an economic competitor and avoiding marginalisation in relation to regional powerhouses. Attempts  to include Australia, New Zealand, and India in the East Asia Community (EAC) also reflects efforts to engage China, while watering down its influence. This is especially true as a series of tough diplomatic gestures and standoffs appear to set Beijing apart from its previous strategy of “peaceful rise”.

It should not be forgotten that a number of territorial disputes remain open in the South China Sea, and that according to the Stockholm International Peace Research Institute (SIPRI), countries in Southeast Asia started to enhance their defence capabilities substantially between 2005 and 2009.

China, Japan and South Korea: Preferring Bi-lateral Over Multilateral

The strategies adopted so far by East-Asia’s three main powers appear more nuanced, owning both to their specific interests and relative political and economic clout. Contrary to South Asian countries, they have acted more ambiguously, often favouring bi-lateral agreements and official development assistance (ODA) as economic and political tools to increase their own influence regionally and globally. For instance, as observed by Dr. Razeen Sally, over the past decade China has been extremely active with preferential trade agreement (PTAs), “setting off a ‘domino effect’ in East Asia”.

These PTAs are generally ‘trade light’, driven mostly by foreign policy objectives such as improving the country’s position vis-à-vis Japan, establishing leadership credentials in the region, strengthening relationship-building and securing privileged influence in other regions, rather than by commercial considerations.

Similarly, Japan continues to rely on its substantial ODA programme to foster and retain its influence in the region. The country’s record as an aid donor dates back to the period of reparations in the 1950s, and since then Tokyo has used aid not only as a form of investment but also as a tool for confidence-building as well as a solution for bilateral problems and a tool for supporting its power and influence in various international organizations. From this perspective, it is interesting to note that, according to data from the OECD, in 2009 57% of Japanese ODA was directed to countries in Asia (including Southern and Central Asia, and Other Asia and Oceania), with Indonesia, India, China, Vietnam and Philippines figuring among the top 6 destinations.

It should however be noted that on a number of occasions, Tokyo has showed a pronounced interest in multilateral forms of cooperation, either to capitalise on its potential leadership role or to marginalise rival China. For instance, Japan was a strong proponent of the creation of an “Asian Currency Unit” (ACU), with a view to capitalise on its regional production networks and promote the use of the yen. Likewise, Tokyo has also been a strong supporter of the inclusion of Australia, New Zealand, and India in the East Asia Community (EAC) as a mean to contain China’s influence.

Square the Triangle?

In spite of this, the Korea-China-Japan trilateral relationship has expanded progressively over the past two decades, encouraged by growing economic interdependence and shared economic interests. The possibility of a trilateral FTA between China, Japan and South Korea has thus been on the cards since the three countries started to promoted trilateral cooperation in the context of ASEAN+3 in the 1990s and introduced a specific summit in 2008. Hype over the project has increased recently, as China showed renewed commitment to the trilateral FTA amid growing rivalry with the United States and trade developments that have seen South Korea ratifying its trade agreements with the EU and the US as well as Japan considering joining an eventual Trans-Pacific Partnership agreement (TPP). The realisation of this project is however likely to be influenced by several factors.

Geopolitical and historical rivalries have long stunted cooperation between the three countries and strategic issues continue to cast a shadow over more stringent forms of cooperation. This is especially true as China has become more assertive in foreign policy since the global financial crisis, progressively leaving behind its “peaceful rise” strategy and adopting a more rigid stance against the US and the EU and its immediate neighbours.

Mistrust of Beijing has intensified throughout the region as the country has adopted a harsher rhetoric, escalating tensions in the South China Sea, and giving new fuel to its dispute with Japan over the Senkaku islands. In addition, in 2010 Chinese officials twice warned the US and South Korea against conducting naval exercises in international waters near China, even after North Korea sank a South Korean naval vessel in March. Furthermore, it should not be forgotten than while Japan and South Korea are major trading partners, relations remain rocky due to several disputes, especially with regard to the Takeshima/Dokdo islands. Deeper and wider forms of cooperation between the three parties could therefore  easily fall prey to popular resentment and nationalistic opposition. China’s more assertive stance in foreign policy is also likely to incentivise either hard or soft balancing dynamics, strengthening Tokyo and Seul’s propensity to participate in multilateral fora rather than in trilateral ones.

An FTA with China would also have important strategic ramifications for South Korea and Japan relationship with the US, especially at a time when relations between Washington and Beijing are tense on a number of fronts (the currency dispute, influence in Asia, military build-up, maritime borders of the South China Sea). From this perspective, it is worth noticing that Japan has been exploring the possibility of joining negotiations on a prospective Trans-Pacific Partnership agreement (TPP) – a multi-country trade deal involving several Pacific Rim (countries?) sponsored by the US. This move comes despite Japan’s usual reluctance to accept substantial market-opening commitments and warnings from Beijing that Japanese participation in the TPP process may cause China to reconsider its pursuit of a trilateral FTA. Similarly, South Korea’s free trade pact with the US will take effect in January 2012, six years after the two countries signed it.

As noted by See-Won Byun in an interview with Equilibri, a tri-lateral FTA among the three regional powers also depends on progress in the bilateral FTAs between the three parties, “whose prospects remain uncertain, and are regarded more difficult the more China catches up economically”. With both Tokyo and Seoul perceiving China as the major economic competitor in the medium- to-long-run, the protectionist and balancing stance may prevail, reinforcing the dynamics highlighted above. From this perspective, the current slow-down of the global economy is likely to add to inherent protectionist tendencies rather than favouring deeper integration, with elevated level of internal discontent and potential regional partners more internally-focused.

Conclusion

Although the possibility of a single free trade bloc grouping China, Japan and South Korea should not be excluded in the longer run, prompt and effective negotiations do not appear to be on the cards at the moment. Historical and geopolitical questions, coupled with often divergent political and economic interests, remain pertinent, especially as China’s more assertive foreign policy is likely to create new tensions and give new fuel to old disputes. In addition, Korea and Japan’s willingness to retain their influence on the region and preserve their “special relationship” with the United States cannot be discounted. In this light, multilateral fora could become more appealing for Tokyo and Seoul, as they offer more options to contain China’s influence.