Sumitomo Heavy Industry has officially begun construction of its biggest overseas production base, in Tangshan, China. E-Mart, a Korean-based supermarket chain, recently confirmed its expansion into China this year. By 2014, E-Mart plans to have over 100 stores in China.
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Despite increasing labor costs and sometimes tangled relations, Japanese and Korean companies have not lost interest in investing in China.Â
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These are only single examples of the close economic and trade relationship developing between China on the one hand and Japan, and South Korea on the other, the three major economies in East Asia. Between January and March, 2008, Japan invested $1.071 billion in China, and has thus become China’s fourth largest investor, with Korea and its $1.057 billion investment right behind.
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The Chinese President Hu Jintao is paying a visit to Japan, labeled by Beijing "a journey of warm spring." Premier Wen Jiaobao’s visit last year was called "ice-melting journey." With a warming China-Japan relationship and Korea’s active attitude, the establishment of free trade zone is again being raised as an issue among the three countries. 　
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Close relations in investment, economy and trade
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In recent years, China’s trade with Japan and South Korea has increased steadily. In the first half of last year, China overtook the US to become Japan’s biggest trading partner. China has also become South Korea’s biggest trade partner and export destination, as well as the most prolific origin of its imports.
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Regional trading among China, Japan and South Korea accounts for about 55% of total trade of these three countries. Multi-lateral and bi-lateral mechanisms for economic cooperation are also increasing. Whether the three will reach a free trade agreement between them is drawing rapt attention from both business and academic circles.
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Japan and South Korea’s direct investment in China keeps growing, which helps to accelerate the development of China-Japan and China-South Korea bi-lateral trade, especially trades inside industries and internal trades of multinational companies.
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South Korea is the most active advocate of the establishment of a Northeast Asia Free Trade Area. A Korea Trade-Investment Promotion Agency (KOTRA) survey says that more than 60% of South Koreans hold a very positive attitude towards establishment of a free trade zone, for not only would South Korea’s industries increase exports but South Korean consumers would also enjoy imported goods at cheaper prices.
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KOTRA’s survey shows China has become South Korea’s first choice for overseas investment. "In the past, 77.5% of investments were in manufacturing, but we clearly feel a change in the investment trend. Now most of the companies coming to consult us are from service industries."
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Kim Yum Hee, a researcher from KOTRA’s Shanghai Office, said that in the past, South Korean firms primarily valued China’s labor force, but China no longer serves merely as a "world factory," and is instead playing an increasingly important role in world markets. Recently South Korean investment in China has expanded from early stage manufacturing to service industries such as catering, logistics, financial services and telecoms, and from coastal areas to deep inside China.
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A research questionnaire from Mizuho Bank, a leading Japanese commercial bank, shows that Japanese companies in China are also moving out from primary manufacturing and processing to stages with high added value.
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China’s continuous economic growth in recent years has strengthened the economic relations between these east Asian countries, and has become a driving force for regional economic cooperation. Complementary foreign trade structures in the three countries have helped form a regional division of labor between them. The establishment of a free trade area would promote trade and investment growth in all three.
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South Korea is the most eager for economic cooperation. An emerging industrialized country with a small though growing domestic market and dependence on foreign trade, the country is anxious to attract foreign investment and expand export markets though regional cooperation.
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"Enterprises of the three countries have already begun cooperation, but we need to formulate related systems to guarantee cooperation in a bigger frame. Currently institutional cooperation among the three countries largely depends on the power and will of their political leaders," said Kim Yum Hee.
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South Korea President Lee Myung Bak said during a visit to Japan that he was in favor of the establishment of a China-Japan-Korea free trade zone, as it would help all three countries maintain competitiveness in the global market. Kim says that Lee, a former Hyundai president, is very sensitive to the market economy. Lee has always emphasized that economic development is most important to the country.
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But many experts believe that Japan holds the key for the launch of negotiations for the free trade zone.
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"In regard to promoting economic cooperation in the East Asia, Japan is always talking rather than doing, as it cares more for cooperation with countries in other areas in Asia, such as signing a free trade agreement with ASEAN," said Feng Zhaokui, a researcher from the Institute of Japanese Studies, Chinese Academy of Social Sciences.
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Japan’s Concerns
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Some Japanese regard China, with its rapid economic growth, as Japan’s most dangerous potential rival. There is worry that the establishment of free trade zone may lead to industry transfer or even hollowing-out, and they have become increasingly reluctant on this issue.
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"Many common Japanese see China as a threat, and this will certainly affect Japan’s foreign policies and its attitude towards a free trade zone," said Feng Zhaokui.
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The proposed free trade zone might also be seen as throwing Japan into competition against China for the dominant power in the region. But Feng thinks that Japan could certainly maintain both a cooperative and competitive relation with China, and nobody would necessarily dominate the free trade zone. "No successful regional economic integration is dominated by a single country. For example, the cooperation inside of the EU is led by both France and Germany," he says.
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Now instead of a tri-lateral negotiations, China, Japan and South Korea are likely to launch bi-lateral talks for free trade agreements or accelerate the "10+1" cooperation with ASEAN. But research shows that if China, Japan and South Korea each sign free trade agreement with ASEAN or some single ASEAN countries, gains would be limited, and any regional economic organization formed would not rival the EU or the North America Free Trade Region.
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Piao Changgen, professor of the Institute for South Korean Studies, Fudan University, is skeptical about whether the present Japanese administration will push for the establishment of a free trade zone and the economic integration in the East Asia. "Now support for the Fukuda government is declining. South Korea will certainly worry about it, and for China, also, it is not good news. If Japan’s right wing stirs up trouble again, there will be difficulties between the three countries," he says.Â
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Selected industries could advance free trade
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"Despite their different development levels, the three countries need to share a common goal. They can learn from the experience of the EU and seek a basis for the cooperation in selected areas," says Kim Yum Hee. "For example, China, Japan and South Korea’s automobile, semiconductor, steel, shipbuilding and petrochemical industries have all entered world’s top 10, so their cooperation might start from these areas."
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Kim believes this would not only promote the development of the industries, but also boost the adjustment in industry structure in these countries, and thus promote mutual research and development and increase international competitiveness.
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Piao Changgen, however, thinks that as the three countries are all energy challenged, that and environmental protection would be a good starting point for trilateral cooperation.
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