Economic cooperation by Korea-Japan-China trilateral could ease tensions

Only nine months after President Joseph R. Biden, Jr. met with the leaders of Japan and South Korea at Camp David to forge a “new era of partnership,” Japan and South Korea have pivoted to resume a separate trilateral partnership with China, which China hailed as a “new beginning.” These two trilateral frameworks would seem contradictory, and no doubt some are wondering whether South Korea and Japan are playing a double game with Beijing and Washington.

But the trilateral cooperation between China, Japan, and South Korea could be a positive development in itself, even for the United States. Details are scant, and it is unlikely to lead to any significant trade deals any time soon. Moreover, Japan and South Korea continue to be alarmed by China’s military expansion in the region and its support of North Korea.

The combined GDP of China, Japan, and South Korea account for a quarter of global GDP, and their global share of combined manufacturing amounts to almost 40 percent, encompassing semiconductors, electric vehicles (EVs) and batteries, steel, aluminum, and shipbuilding, just to name a few.

Japan and South Korea also share an interest in reducing the risk of over-dependence on Chinese supply chains, a risk underscored by their previous exposure to Chinese economic coercion over political issues. All parties share common interests in managing downside risks, restraining coercive actions against each other, and preventing repetition of the breakdowns that occurred during the COVID-19 pandemic.

The three countries have vowed to “keep discussions for speeding up negotiations for a Trilateral Free Trade Agreement (FTA),” and South Korea and China separately agreed to resume the second stage negotiation on services for the Korea-China FTA. In fact, negotiations over a possible China-Japan-Korea Trilateral FTA have been moribund for years. To achieve progress, the parties ought to refocus their efforts on a limited set of mutual interests, namely supply chain stability and decarbonization rather than market access expansion.

China, Japan, and South Korea are all members of the Regional Comprehensive Economic Partnership (RCEP), which took effect in 2022.The three countries opened their markets to each other through RCEP, although at a modest level. For the Trilateral FTA, they want to aim for RCEP+, surpassing RCEP in terms of its level of ambition in market access, disciplines, and standards.

But finding common ground among the three will be difficult when their manufacturing-based, export-oriented industrial structures become more competitive than complementary, especially when overcapacity and cheap exports from China emerge as major risks to Japan and South Korea. Some areas of immediate cooperation could encompass cooperation on decarbonization such as renewable energy technologies, regional carbon markets, and hydrogen supply chains in the region. For instance, as the three biggest carbon emitters in the region, they could join forces to develop common high standards and guidelines on a carbon market mechanism, facilitating cross-border renewable and carbon mitigation investment projects between developed and developing countries.

Supply chain cooperation would be more challenging, but still valuable, given that economic security issues are involved. The United States is a leader in semiconductor supply chains; China is a leader in batteries and critical minerals. Washington has introduced sweeping export control measures on chips, and China has responded with its own export controls on critical minerals and battery technologies.

Japan and South Korea are caught in the middle of these battles. Japan is wary, having been hit by China’s ban on rare earth exports in 2011. Korea has also been hit by China’s economic retaliation, when Beijing enacted a tourism and cultural export ban after Korea’s Terminal High Altitude Area Defense (THAAD) missile deployment in 2017. It remains to be seen whether China would reopen these services markets shut down to Korea through the newly resumed Korea-China FTA services negotiations.

Major disruptions in these critical supply chains could wreak havoc not only on the three countries but also on the global economy, including the United States. For example, Korean semiconductor companies operate big manufacturing facilities in China, accounting for almost 20 to 40 percent of their global production of flash memory chips (NAND) and dynamic random access memory (DRAM) chips. China is the world’s largest producer of graphite, accounting for 70 percent; battery makers from Korea and Japan source graphite almost entirely from China. Striking the right balance between legitimate national security concerns and enduring economic needs through established communication channels, consultation, and resolution mechanisms put in place for contingencies could be mutually beneficial to the three countries as well as the United States. The three countries should explore turning these shared interests and concerns into new rules and guidelines through a free trade agreement, possibly adjusting and replicating relevant elements of the Indo-Pacific Economic Framework (IPEF), an economic cooperation pact promoted by the Biden administration in 2022, specifically its agreement on supply chains and clean energy.

Industrial policy and subsidies are of keen interest to the three countries. Multilateral discussions on these issues through the World Trade Organization would be a preferred vehicle for agreement. In fact, China’s success in EVs especially at the early stage can be partly attributed to discriminatory subsidies. China’s EV battery subsidies in 2016 favored local battery makers’ technologies vis-à-vis Korean invested companies and tipped the scale for the success of local Chinese battery makers.

For its part, however, South Korea has provided non-discriminatory subsidies to EVs, domestic and foreign, including Chinese producers. Now Chinese electric buses dominate the Korean market: Their market share has increased from 41.8 percent in 2022 to 54.1 percent in 2023. In 2021–23, 50.9 percent of electric bus subsidies from metropolitan area local governments was provided to Chinese firms.

All in all, despite the differences and complexities of the three countries, cooperation in the form of a China-Japan-Korea Trilateral FTA could be a meaningful initiative to restore trust and rebuild institutions for sustained regional stability.

Hosting Japanese and Korean counterparts at his home in Rappahannock County, Virginia, Kurt Campbell, US Deputy Secretary of State, welcomed the new China-Korea-Japan dialogue. The United States no doubt remains wary of China’s diplomatic inroads in the region, but Japan and South Korea, the two middle-power countries, should be encouraged to engage in constructive dialogues that could reduce tensions to everyone’s benefit.