Korea Finalizes RCEP Signing... Concerns Over Korea-Japan FTA Impact and US-China Risks

Product Liberalization Level 80%→90%
China, Persuasion Ultimately Fails... "Will Keep Trying"
Protecting Cars, Machinery, and Materials from Japan
Concerns Over Reduced Flexibility Due to China-Led RCEP Signing
Increased US-China Risks if US Rejoins CPTPP

[Image source=EPA Yonhap News]

[Asia Economy Reporter Moon Chaeseok] South Korea has signed the Regional Comprehensive Economic Partnership (RCEP), the world's largest free trade agreement (FTA) involving 15 countries including China, Japan, Australia, New Zealand, and ASEAN (Association of Southeast Asian Nations). This marks the first time South Korea has concluded an FTA with Japan.

While participation in this vast trade community can be seen as securing growth momentum for an economy weakened by the COVID-19 pandemic, limitations include India's absence and a lower level of market openness compared to bilateral FTAs.

Those who view RCEP as a China-led agreement warn that if U.S. President-elect Joe Biden pursues rejoining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), South Korea could find itself in a difficult position between the U.S. and China.

The government explains that "RCEP is an agreement led by ASEAN, not China," but many opinions hold that China has controlled and influenced the process.

Mitigating GVC Risks... India's Absence and Openness Levels Pose Limits

Indian Prime Minister Narendra Modi delivering a speech to military personnel in the Ladakh region on July 3rd. (Photo by AP Yonhap News)

On the 15th, the Ministry of Trade, Industry and Energy announced that the fourth summit had finalized the signing of RCEP. It emphasized the significance of launching the world's largest FTA amid the global economic and trade contraction caused by COVID-19.

The ministry explained that by participating in RCEP, which accounts for 30% of the world's FTAs, South Korea can reduce trade uncertainties, effectively respond to the trend of global value chain (GVC) fragmentation, and accelerate the New Southern Policy toward Southeast Asia.

The trade volume of RCEP is $5.4 trillion, larger than CPTPP's $2.9 trillion and the United States-Mexico-Canada Agreement (USMCA) at $2.5 trillion. The nominal GDP of participating countries is $26.3 trillion, exceeding CPTPP's $11.3 trillion and USMCA's $24.4 trillion.

As of last year, South Korea's exports to RCEP countries amounted to $269 billion, accounting for 50% of the country's total exports. This is larger than exports to CPTPP countries ($126 billion) and USMCA countries ($89.8 billion). The ministry stated, "This will greatly contribute to expanding our export markets and diversifying trade structures in the future."

Failure to persuade India to join is considered a limitation. India declared its non-participation at last year's summit and has not returned to negotiations. The ministry said, "As stated in the summit declaration, we will join efforts with participating countries to continue consultations so that India can join RCEP in the future."

India finds it difficult to readily join RCEP, which is led by China. India participates in the 'Quad' (an informal security dialogue among four countries) with Japan and Australia, which is part of the U.S. strategy to contain China. Although Japan and Australia joined RCEP, India's situation differs due to serious border conflicts with China.

There are also criticisms that the level of market openness should be gradually increased. Although tariff elimination rates were raised from 79.1?89.4% under the existing Korea-ASEAN FTA to 91.9?94.5%, this is still considered lower than bilateral FTAs and agreements like CPTPP. Generally, openness above 90% is regarded as high.

A government official said, "We judged that RCEP offers significant benefits at relatively low costs," but admitted, "Since least developed countries like Cambodia and Myanmar also participate, overall market openness and trade norms may be less advanced than CPTPP."

Major countries such as China, Australia, and New Zealand maintained openness levels above 90% as set in their FTAs. China opens 92% to South Korea and South Korea opens 91% to China; Australia opens 100% to South Korea and South Korea opens 98% to Australia; New Zealand opens 100% to South Korea and South Korea opens 98% to New Zealand.

Core sensitive items such as rice, garlic, onions, and chili peppers, as well as major sensitive items with large import volumes like shrimp, squid, sea bream, and yellowtail, were excluded from concessions to protect domestic industries.

Government: "Protected Sensitive Items Like Cars, Machinery, and Key Materials from Japan"

The government stated, "By concluding RCEP, we are establishing our first FTA with Japan."

With the conclusion of an FTA with Japan, South Korea will have FTAs with all of the world's top five economic powers: the U.S., China, Japan, Germany, and India. Except for Brazil, South Korea will have FTAs with all countries ranked 1 to 10. This secures South Korea's status as a truly 'open trade nation.'

The government explained, "Considering the sensitivity of our industries to Japan, we concluded negotiations in a way that aligns with national interests."

Regarding tariff elimination levels between the two countries, the number of items is the same at 83%. Japan will eliminate additional tariffs that are 2 percentage points higher on imports from South Korea. South Korea will eliminate tariffs on 76% of Japanese imports, and Japan will eliminate tariffs on 78% of South Korean imports. Particularly for manufactured goods, Japan will eliminate additional tariffs 2.4 percentage points more than South Korea. South Korea will eliminate tariffs on 91.7% of Japanese manufactured goods, and Japan will eliminate tariffs on 94.1% of South Korean manufactured goods.

Sensitive items such as automobiles and machinery were excluded from concessions. Many of the opened items will have long-term tariff elimination over 10 to 20 years and nonlinear elimination schedules.

Nonlinear elimination means, for example, in a 10-year tariff elimination agreement with an openness intensity of 0 to 10, maintaining an openness intensity of 10 throughout the agreement and then suddenly dropping to 0 at the end. In contrast, linear elimination gradually adjusts the elimination rate, such as 10 for years 1?2, 8 for years 3?4, 6 for years 5?6, 4 for years 7?8, and 2 for years 9?10.

The government said, "We excluded sensitive items like automobiles and machinery from concessions to Japan and protected them by using many long-term (10?20 years) and nonlinear tariff eliminations for opened items. Our share of long-term tariff elimination (over 10 years) is 41.6%, higher than Japan's 17.1%, and we also utilized many 20-year and nonlinear eliminations."

South Korea has 455 items with 20-year tariff elimination, compared to Japan's 2 items. South Korea secured 105 items with nonlinear elimination, while Japan secured none.

A government official explained, "Most of the most sensitive items, such as finished cars and machinery, which raise the most industry concerns, are excluded from concessions. Since sufficient safeguards have been established for finished cars, machinery, and key materials, parts, and equipment, we believe domestic industry damage will be minimal."

Risk of U.S.-China Conflict Increases if U.S. Rejoins CPTPP

[Image source=Yonhap News]

There are concerns that if U.S. President-elect Biden pursues rejoining the CPTPP, South Korea, having signed the China-led RCEP, might face difficulties.

The government repeatedly emphasized, "It is difficult to assert that China led RCEP; it is more accurate to view it as an ASEAN-led agreement," but concerns remain.

A government official said, "RCEP negotiations began in 2012 when U.S.-China conflicts were not as intense as now. The main goal of the agreement is to strengthen economic cooperation with ASEAN."

Regarding CPTPP, the government stated, "It is not appropriate at this time to comment on our participation in CPTPP, and we will keep all possibilities open and review them."

The official added, "Biden's core strategy is domestic economic recovery, and trade policy specifics have not yet emerged. Since there are many variables, including whether the U.S. will utilize the World Trade Organization (WTO), the G7, the G20, or rejoin CPTPP, the government is monitoring various possible scenarios."

This content was produced with the assistance of AI translation services.