How will Senkaku dispute affect 3-nation FTA?

Asahi Shimbun | October 22, 2012

How will Senkaku dispute affect 3-nation FTA?

By KEIKO YOSHIOKA/ Correspondent

Amid the dispute over the Senkaku Islands, Chinese officials refused to interact with their Japanese counterparts on many fronts but kept discussions going during working-level talks on formulating a free trade agreement (FTA) between Japan, China and South Korea in Seoul on Sept. 27.

However, the friction over the islands, which China calls the Diaoyu Islands, is starting to cast a dark shadow over the direction of the FTA negotiations, which could have serious implications for East Asia’s economic growth.

How will economic relationships between the three countries develop? The Asahi Shimbun asked two experts—one Chinese and one Japanese—for their opinions on the matter.

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LI XIANGYANG: China, South Korea to accelerate FTA negotiations without Japan

The Diaoyu Islands issue is the greatest shock to the economic ties China has been developing in Asia over the past dozen years or so.

Naturally, it is also exerting a negative effect on the China-Japan-South Korea FTA. For a major power, an FTA is more than just a pure economic goal; it also strengthens political and diplomatic ties.

The obstacles standing in the way of this FTA are not economic ones. They include historical issues, questions of who takes the lead in the region, relations with the United States, and so forth. Those obstacles have become ever larger because of the Diaoyu Islands issue.

In the future, I see Japan shifting from its "China-Japan-South Korea FTA plus Trans-Pacific Partnership (TPP)" strategy toward a preference for the U.S.-led TPP. In the meantime, China and South Korea will accelerate their FTA negotiations.

South Korea is the biggest beneficiary of worsening Sino-Japanese relations. I think they will try to wrest from Japanese companies the status that they have built up over their years in the Chinese market.

The industrial supply chain stretching across Asia begins in Japan and ends in China. Of course, worsening relations with Japan will also have a temporary detrimental effect on China’s economy. However, South Korean and Western companies will solve that problem in a few years.

Japan has more to lose from being deprived of China’s market. There is no other market like it in the world. I think that Japan is responsible for the outcome because it destroyed the tacit understanding of not saying whom the islands belong to. China will not yield, even if we have to pay some economic costs.

(Li Xiangyang is director of the National Institute of International Strategy, the Chinese Academy of Social Sciences.)

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YUKIKO FUKAGAWA: One country does not account for the entire supply chain

With political tensions between Japan and China becoming this strained, we cannot expect any developments to come out of the FTA negotiations for a while. But it is important that the working-level talks are proceeding, and I commend the three countries for sitting down for talks in Seoul.

China is changing from a manufacturing and processing hub into a consumer market. This means that the country has a lot of leverage in negotiations with Japan. We should understand that this is not the old China. And of course our rival, South Korea, is trying to "play one side off against the other."

However, Japanese exports are not dropping off, despite the growth of South Korean companies. This is because there are things at the top of the supply chain like parts and materials that only Japan can furnish. No single country can account for the entire production networks in Asia.

That is why the FTA negotiations began with the idea of arranging investment and trade conditions to further raise regional competitiveness. It is not so much a political, "territorial battle" as China thinks it is.

Companies from around the world, not just Japan, are expanding into China’s market. Because of factors such as rising wages for Chinese workers, multinational corporations have begun adopting a "China plus one" strategy in which they seek out countries other than China when making new investments.

I believe Japanese companies are quietly speeding up their adoption of this approach. Likewise for other countries’ firms, I am sure the violent demonstrations and boycotts will remain etched in their memory.

(Yukiko Fukagawa is a professor of East Asian economy at Waseda University.)

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source: Asahi Shimbun