Body
The Trilateral Leaders’ Summit among the United States, Japan, and Korea at Camp David in August ushered in a “new era of partnership” not only in security but also in economic and technology cooperation. The less noticed parts of the agreement covered a lot of ground in supply chains, technology, and economic security among the three nations, which account for 31.2 percent of global GDP and also play a critical role in the key supply chains of semiconductors, electric vehicles (EVs), and batteries.
The three pillars of the trilateral agreement include the Camp David Principles, the Spirit of Camp David statement, and the Commitment to Consult. Significantly, the aggregate GDP of the three countries is larger than that of rival economic agreements in the region: the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership (RCEP).
The formulation of the trilateral partnership comes at a critical juncture when both cyclical and structural forces are playing out to “derisk” regional economies from the previously dominant Chinese economy. Such trend is starkest in Korea, which has the biggest exposure of the three to the Chinese economy.
According to the Korea International Trade Association, Korea’s exports to China accounted for 26.8 percent of its total exports to the world in 2018. But that number dropped in the first half of 2023 to 19.6 percent, dipping below 20 percent for the first time in almost two decades.
In the same period, Korea’s exports to the United States increased from 12 to 18 percent, a trend resulting from several factors, such as China’s lagging economy and a surging US economy and the drop in Korea’s exports of semiconductors/IT and intermediate goods to China, precipitated by China’s trend on self-reliance.
The new group could evolve into a powerful platform advancing US engagement on economic security in the Indo-Pacific, while accelerating “derisking” and “rebalancing” for Korea and Japan. In essence, the stalled tripartite China-Japan-Korea Free Trade Agreement is being shelved in favor of an emerging trilateral US-Korea-Japan economic framework.
Follow-up agenda for the US-Japan-Korea pact
To strengthen their new partnership, the three countries should follow up with several steps. Supply chain resilience is a pressing common interest for the three partners. Launching a trilateral Supply Chain Early Warning System pilot as announced would be a good start. The recent move by China to restrict exports of two rare metals, gallium and germanium, makes the critical minerals and materials sector a promising candidate for the pilot.
When supply disruptions hit a country regarding a specific mineral, the three countries could join forces tapping into supplies of the other two or collaborate with third parties through contingency transactions, government procurements, or short-term drawdowns from stockpiles in the form of a “supply swap.” The trilateral cooperation could bolster the implementation of the supply chain pillar in the Indo-Pacific Economic Framework for Prosperity (IPEF), the 14-country grouping launched in 2022. The IPEF could also replicate best practices from the three partners with additional elements of capacity building.
For the common goal of supply chain resilience, the three countries should deepen industrial policy coordination. Korea and Japan have been the largest and third-largest foreign investors in the US clean-tech sector since the passage of the Inflation Reduction Act (IRA) a year ago, investing approximately $20 billion and $9 billion respectively, according to the Financial Times. It is clear that “friendshoring” from Korea and Japan is necessary to build state-of-the-art, sophisticated supply chains in high-tech industries. Uncoordinated and discriminatory industrial policy measures cause unnecessary trade frictions and waste precious political capital among allies and partners while trying to resolve cases in an ad hoc manner.
Technology protection with export controls and investment screening should be strengthened, while adhering to the “small yard, high fence” principle. Subjecting commoditized technologies such as memory chips to annual government reviews and approvals would not be appropriate for the “small yard,” because that step would put the relevant firms at a competitive disadvantage vis-à-vis Chinese competitors. The new US outbound investment restrictions on China could help Korea and Japan emerge as promising alternative investment partners to US venture capital and private equity firms. Venture capital and private equity outbound investment from Korea and Japan to China has been limited, so it would make more sense to focus on identifying new opportunities to fill the void in the innovative ecosystem left by China.
Energy security cooperation in liquefied natural gas (LNG) and civilian nuclear power generation would be promising as well. At Camp David, the trilateral partners committed themselves to accelerating the reduction of dependence on Russian energy. Korea and Japan are among the biggest importers of LNG from the United States. There is good potential to expand trilateral cooperation across the entire LNG value chain from exploration and LNG terminal infrastructure to LNG shipbuilding for trade.
Another key strategic area for cooperation would be civilian nuclear power generation. In the United Arab Emirates, a consortium led by Korea Electric Power Co., including Westinghouse, successfully built the first nuclear power plant in the Middle East, setting a precedent for successful Korea-US civil nuclear power cooperation. The ongoing legal dispute between the two companies should be resolved so they will not miss out on potential opportunities in the midst of intensifying competition from Chinese and Russian companies.
Finally, the importance and urgency to counter economic coercion cannot be overemphasized. The response from China to the Camp David Summit has been highly critical, causing concern that there might be economic retaliation from China. When China banned rare earth exports to Japan in 2010 following a territorial dispute in the East China Sea and China instituted economic retaliation against Korea after the THAAD missile deployment, the target countries had to cope with the crisis on their own.
The Camp David Summit formed a systematic anticoercion framework against any coercive measures undermining economic security and the rules-based international order. The “Commitment to Consult” could be interpreted as an unequivocal commitment to respond collectively not only to security events but also to economic coercion and other economic security-related threats. The proposed bipartisan and bicameral Countering Economic Coercion Act sponsored by Senators Chris Coons (D-DE) and Todd Young (R-IN) aims to institutionalize effective deterrence to counter economic coercion by autocratic states. Japan and Korea should consider similar new legislation to reinforce collective deterrence against any possible economic coercion.
On the downside, the absence of trade elements at the Camp David Summit was striking, although commerce/industry ministers’ and finance ministers’ meetings were institutionalized. Trade measures, such as raising/lowering tariffs temporarily, identifying informal, opaque coercive measures as noncompliant nontariff barriers, and dispute settlement through the World Trade Organization (WTO) or RCEP, should be part of an effective countercoercion package. It would be even more desirable if the three countries could launch Information Technology Agreement III negotiations to boost digital trade and at a later point if the United States and Korea join the CPTPP together with Japan’s support.
Data Disclosure
This publication does not include a replication package.
