Asymmetric evolution of Korea and Japan’s FTAs, late 1990s–2020

The puzzle

This chapter identifies puzzling divergences in the patterns and nature of Korea and Japan’s FTA since the late 1990s. First, Korea and Japan’s choice of FTA partners and scope of tariff concessions diverged greatly; and two, the divergences did not occur in one direction but reversed direction in 2013. In the first period from the late 1990s to 2012, Korea pursued FTAs with major trade partners that were also major exporters of agricultural products. Korea’s FTAs during this time period was marked with significant liberalization of its highly protected and politically sensitive agricultural sector. In contrast japan pursued FTAs with small trade partners that were not major exporters of agricultural products. Japan’s FTAs were limited in scope, with a substantial portion of its agricultural products exempted from tariff concessions. In the second period that started in 2013, however, this pattern has reversed. Japan successfully concluded FTAs with major agricultural exporters such as Australia and the EU. Japan even successfully concluded the TPP, which was a mega-FTA that included a large number of major agricultural exporters. Korea, on the other hand, has been taking a more protective stance in its FTAs. Unlike Japan, Korea refused to partake in the TPP. Moreover, Korea’s recent FTAs with major trade partners such as China have been much more limited in terms of scope and depth of trade concessions.

The primary aim of the chapter is to examine these divergences and reversals through an in-depth examination of the content of Korea and Japan’s FTAs since the late 1990s. The chapter first overviews the contextual background of Korea and Japan’s FTAs from their very first FTAs. The chapter then compares Korea and Japan’s FTAs across two different time periods: From the late 1990s to 2012 and from 2013 to 2020. Finally, the chapter concludes by exploring possible economic factors that can explain the diverging patterns of FTAs in Korea and Japan from the late 1990s to the present.

Evolution of Korea and Japan’s FTAs in global context: the 1990s

Global context: FTA race in the 1990s

In the 1990s, the world was engaged in an FTA race. The North American Free Trade Agreement (NAFTA), connecting the markets of the U.S., Canada, and Mexico, went into effect. The 15 members of the EU created a single internal market, moving beyond the 12 member-based European Economic Community. In South America, Mercosur was formed among Argentina, Brazil, Paraguay, and Uruguay. In Southeast Asia, the Association of South East Asian Nations (ASEAN) FTA was signed among the six founding members of Brunei, Indonesia, Malaysia, Philippines, Singapore,Thailand, and the new members ofVietnam, Laos, Myanmar, and Cambodia.

Bold and ambitious new initiatives on trade liberalization were declared one after another. The 18 members of the Asia Pacific Economic Cooperation, which accounted for half of the world output and included the then three largest national economies China,Japan, and the U.S., agreed on the future time frame for trade and investment liberalization in the region. Developed economies would liberalize by 2010 and the rest would liberalize by 2O2O.The EU and the Mediterranean countries (EUROMED) committed themselves to free trade by 2010.The 34 democracies of the western hemisphere met in Miami on December 1994 to work out a Free Trade Area of the Americas by 2005. Russia proposed free trade among some of the former members of the Soviet Union. The most ambitious and significant proposal was a Trans-Atlantic Free Trade Area that aimed to join Europe and North America.

The end of the Cold War drove this global FTA race as countries sought ways to enhance their chances of economic success in a new global order that embraced neoliberal principles. Free trade, free flow of capital, and deregulation became the new mantra of the world economy. This was a period when the practice of development through import substitution gave way to export-oriented development policies. Countries were serious about enhancing their competitiveness in the global market place through lowering tariffs and removing investment barriers.

The initial form of FTAs prior to the 1990s focused on the reduction of import tariffs. These were FTAs that were negotiated outside of the multilateral trading system of the General Agreement on Tariffs and Trade (GATT). As a matter of principle, FTAs aimed to achieve tariff eliminations for most goods with few exceptions. Negotiators pressed hard to secure immediate tariff eliminations for a substantial number of products, while striving to obtain longer-time frame for tariff eliminations on their sensitive products. In contrast, the wave of FTAs that began in the 1990s began to pay attention to services and investments as well as tariffs. Leading countries in the FTA race such as the U.S. and the EU pursued FTAs with comprehensive scope, with trade concessions going beyond trade in goods to include service sectors and investments. The U.S. and the EU also tried to achieve deep market opening, which meant tariff eliminations for substantial number of products in a short period of time with few exceptions. An FTA which combined comprehensive scope and deep market opening was assessed as a high-level FTA. An FTA with limited scope and shallower market opening was assessed as a Icnv-level FTA.

Interestingly, Korea and Japan stood outside of this global race for FTAs for most of the 1990s. Neither country seriously considered FTAs as an integral part of its trade strategy. Yet, both countries were already under strong international pressure to open up their markets, especially their heavily protected agricultural market (Bartlett 2018; Davis 2003, 160-219). The U.S. was by far the strongest voice demanding access to Korea and Japan’s agricultural markets, but other large agricultural exporters such as the EU, Canada, and Australia also sought access.The problem was that domestic opposition to agricultural liberalization was strong in both countries. As a result, at the turn of the new millennium, neither Korea nor Japan had any bilateral FTAs.

During the Uruguay Round negotiations of GATT (1986-1993), both the Korean and Japanese governments had experienced firsthand, the negative political backlash of negotiating on agricultural liberalization. In 1991, the GATT Director-General Arthur Dunkel issued the Dunkel Draft, which set the “principle of comprehensive tariffication without exception as the baseline for negotiations” during the Uruguay Round (Davis 2003, 188). In other words, all member economies had to replace non-tariff barriers on all farm products with tariffs. Yet, tariffication of agricultural products was a highly sensitive topic in Korea and Japan. Farm interests, politicians representing rural interests, and even consumers opposed tariffication for agricultural products (Bartlett 2018; Francks et al. 2002,118; Karrbo 2012,142-151;Woltf and Howell 2018). In particular, tariffication of rice, the most sensitive agricultural item in both countries, was considered a taboo. Eventually, Korea succeeded in negotiating a 10-year delay in rice tariffication with another maximum 10-year grace period, while Japan negotiated a 6-year delay in rice tariffication (Choi et al. 2016,21-22; Mulgan 2006, 85). Rice liberalization proved to be politically costly, leading to the resignation of the Korean prime minister and the end of Prime Minister Morihiro Hosokawa’s government in Japan (Francks et al. 2002, 118; Karrbo 2012, 142-151).² In the light of this negotiating history, jumping into the FTA race that potentially entailed agricultural liberalization was not palatable to Korea and Japan.

The Asian Financial Crisis of 1997: Korea and Japan joins the FTA race

The 1997 Asian Financial Crisis served as a catalyst to join the FTA race for Korea and Japan. Both countries are classic examples of countries that pursued export-oriented development policies. Naturally, both countries saw increased exports as a way to overcome the economic slowdown caused by the Asian Financial Crisis. FTAs were an attractive solution to improve trade for a number of reasons. First, Korea and Japan could reduce their dependence on the U.S. and European markets, where competition was already quite high. Korea and Japan faced a shrinking export market and needed to find new markets. FTAs would address both needs

(Koo 2006; Pempel and Urata 2006). Second, FTAs could foster higher levels of foreign investments within Korea and Japan, while at the same time allowing both countries to increase their investments in other countries (ibid.). Third, the large number of FTAs that had formed among their trade partners had placed Korean and Japanese companies at a disadvantage vis-à-vis their competitors in other countries. Due to these reasons, the Korean and Japanese governments seriously began to consider FTAs as a core economic and trade strategy' in the aftermath of the Asian Financial Crisis.

This change in trade strategy, however, did not immediately accompany a strong drive to achieve high-level FTAs. The momentum created by the Asian Financial Crisis and the growing number of FTAs in the global arena was not strong enough to overcome domestic resistance to liberalization. In particular, agriculture was a major source of opposition. Other import-competing sectors voiced their concerns as well. Policy makers in Korea and Japan were keenly aware of resistance from protectionist-vested interests. The sensitivity of FTA is apparent in Japan’s usage of the term Economic Partnership Agreement (EPA) instead of FTA. While FTA implied negotiating tariff concessions on all goods, EPA signified exclusion of substantial portions of sensitive items in the agriculture sector from trade liberalization commitments. Nonetheless, both countries had joined the FTA race by the late 1990s. And since then, Korea and Japan’s FTAs have taken very different paths despite the similar starting point.