Is Free Trade Agreement Possible?

Is Free Trade Agreement Possible?

Is Free Trade Agreement in Northeast Asia Possible?

The following is an abridged text of a paper presented to an international seminar on setting up a network of free trade zones in the Yellow Sea sub- region by Dr. Kim Won-bae, senior fellow of the Korea Research Institute for Human Settlements. _ ED.


A recent study on a potential free trade agreement between Korea and Japan pointed out that if the agreement were realized, the trade imbalance between Korea and Japan would deteriorate in the short run at Korea's cost.

The Japanese report, however, emphasized that both Korea and Japan will benefit greatly if the dynamic effects are considered (Institute of Developing Economies 2000).

The dynamic effects are said to result from increased competition, for example, between Korean and Japanese firms. Increased competition then will induce strategic alliances between them (which will increase intra-regional investment) as well as foreign corporations' investment in the countries (more likely in Korea than in Japan because of production cost differentials between Japan and Korea).

In other words, dynamic effects arise from improved productivity and they are estimated to bring more benefits to Korea than Japan.

Obviously, each country can have different interpretations depending on its position regarding the static and dynamic effects of a free trade agreement.

As the joint communiqu?by the Institute of Developing Economies and the Korea Institute for External Economic Policy (2000) clearly spelled out, it is important to have a shared vision and a will to form a free trade agreement.

The fact that Korea and Japan jointly conducted a study about the possibility of a free trade agreement is an indication that both countries recognize the need for further economic cooperation in an increasingly globalized era.

As many of specialists in Northeast Asia agree, there exists a need for a more formalized economic cooperation entity in Northeast Asia. The issue is when and where to begin.

Given the differences in the political economic system, and the level of economic development and technology among China, Japan and Korea, it appears unrealistic to form a trading bloc covering China, Japan and Korea in the near future.

Moreover, non-economic concerns such as unresolved issues on recent history occasionally surface in Northeast Asia.

When domestic public opinion on a free trade agreement or any other formal agreements flares up as a result of emotions, those non-economic concerns can easily hinder forward thinking and cooperative efforts in economic matters.

In brief, the state-led economic cooperation, despite the necessity for it, faces and will face difficulties in Northeast Asia, at least in the near future.

Despite the necessity and the efforts for a more formal economic cooperation organization in Northeast Asia, a state-to-state level agreement on a trading bloc will be difficult in the near future.

Hence, cross-border inter-local economic cooperation including human exchange is more desired as an alternative or as a supplement to the national level arrangements even if they are possible in the future.

The advantages of localized networks of free zones include: 1) a cushion effect against adverse external changes; 2) the ease of making institutional arrangements compared to national-level free trade agreements; and 3) more harmonious industrial cooperation through direct investment from more developed portions to less developed portions within the network.

The Yellow Sea sub-region (YSSR) has a great potential for forming a localized network of free zones. As pointed out by several studies, the YSSR has a strong potential to become a leading manufacturing zone in the world.

There are also growing cross-border economic exchanges in the YSSR as revealed by growing trade, investment and numbers of visitors.

Transportation links between major cities in the YSSR are rapidly developing. Most of all, local leaders and entrepreneurs recognize the need for inter-local cooperation for their well-being.

The existence of free trade or customs zones in several cities of the YSSR not only satisfies the prerequisites for the localized network of free zones but also saves efforts to establish new free zones.

However, countries in the region must seek ways to modify the features of foreign access zones in Kyushu so as to be integrated with other free zones in the network.

Since the primary aim of the network of free zones lies in harmonious industrial development in the YSSR, we should examine carefully appropriate industries for the international division of labor.

The industries for immediate consideration are automobile and electronics, but information technology and environment industries are also recommended.

The best sites for setting up the network of free zones are port cities, which already have free trade or similar zones. As the first tier of the network, Dalian, Tianjin, Qingdao, Inchon, Kunsan, Pusan, Kitakyushu, and Nagasaki are proposed. They all serve hinterlands of various sizes and play a leading role in regional economic development.

Three sets of measures are suggested for the concerned local governments to consider. They are related to foreign direct investment, trade, and trade facilitation measures. In addition, joint development of infrastructure is suggested to improve the efficiency of the network as a whole.

Some of these measures, like tariff exemption, may not be easy to implement without the consent of the national government but other measures such as favorable transportation charges among the network ports, simplified customs procedures, and integrated logistics service can be taken by local governments in collaboration with the private sector.

Inter-local cooperation, however, does not replace the need for closer economic cooperation at the national level. Instead, it enhances the chance for national governments to sign free trade agreements or create other formal economic cooperation mechanisms at the national level. In this sense, it is supplementary to national-level efforts.

The real value of inter-local cooperation lies in not its supplementary role but its role in promoting the understanding between neighbors and building a community spirit across the border through spontaneous cooperation.


Note: The full text and papers by other experts who participated in the seminar at KRIHS in Anyang, Kyonggi-do is available at www.krihs.re.kr.