The benefits of an FTA for Asia

Next week will see Japan and the Republic of Korea, two of China's important neighbors, going to the polls, which could add to the uncertainty in the East Asia region. Japan's relations with China and the ROK are at the lowest in years because of the islands disputes it has with the two countries.

But frictions will do no country any good. This is something the new leaderships in the three countries, especially Japan, need to understand. They have to realize that seizing the opportunity to strengthen their economic cooperation is the most potent way of thawing relations.

The first round of China-Japan-ROK Free Trade Agreement negotiations, scheduled for early next year, will provide an excellent opportunity to the three countries to spur economic growth at a time when Japan and the ROK face economic downturn and China's economy is bottoming out.

The potential of economic cooperation among China, Japan and the ROK cannot be overstated. Japan and the ROK have great competitive advantage in capital and technology-intensive industries, while China enjoys a definite edge in resource and labor-intensive industries.

The three, needless to say, are important economic and trade cooperation partners. China has been the largest trading partner of Japan and the ROK for years. Japan is the fourth largest and the ROK the sixth largest trading partner of China, and the trilateral trade volume increased from $130 billion in 1999 to $690 billion in 2011.

Besides, Japan and the ROK have become major sources of China's foreign capital. By June, direct investments from Japan and the ROK in China had reached about $85 billion and $50 billion. And a joint research by the three countries shows a China-Japan-ROK FTA will increase China's GDP by 1.1-2.9 percent, Japan's GDP by 0.1-0.5 percent and the ROK's GDP by 2.5-3.1 percent.

The key to propelling the China-Japan-ROK FTA negotiations could be the establishment of separate FTAs between China and Japan, China and the ROK, and Japan and the ROK. Such a move, most of all, would eliminate mutual suspicions and worries.

China and the ROK started talks on setting up an FTA in May, which are likely to proceed further after the ROK's presidential election on Dec 19.

Satoru Okuda, an economist at the Institute of Developing Economies in Japan, estimates that the ROK will benefit greatly from a China-ROK FTA. For instance, its communication equipment and machinery exports to China could increase by $27.8 billion a year, which may propel its GDP by 2.5 percent.