The China-Japan-Republic of Korea Agreement for Promotion, Facilitation and Protection of Investment came into effect on Saturday, May 17, two years after the deal was reached by the three countries. The milestone trilateral agreement is widely believed to prelude the establishment of a China-Japan-Republic of Korea free trade agreement (FTA).
The trilateral agreement is the first “legal agreement and mechanism to enhance and protect investment between the three nations.” The 27 articles making up the agreement cover issues including most-favored-nation treatment, taxation, general exceptions, protection of intellectual property and the resolution of any disputes that may arise between host countries and investing companies. It also prohibits host countries from stipulating that any investing companies involved in production must acquire materials and parts from the host country.
According to Xinhua, the agreement will “create stable, favorable and transparent conditions for investment.” The three nations also hope that enhanced comprehensive cooperation between the three countries will energize economic growth and accelerate economic integration.
“It will certainly give a major boost to the economic development of all three countries,” said Li Tie, vice president of the China International Trade Association. In China, it is expected that that the impact will be particularly strong in the northeastern region, which was previously China’s base for heavy industry. These provinces will be able to take advantage of their location in order to create new links with South Korean and Japanese businesses, as well as strengthening existing connections. There are currently more than 200 Japanese-funded businesses and 900 South Korean-invested companies in Jilin province alone.
The agreement has been implemented against a turbulent political background between the three countries. China-Japan relations have long been fragile, and relations have become more strained in recent years due to the ongoing territorial dispute over a group of uninhabited islands in the East China Sea, known as the Diaoyu in China and Senkaku in Japan. Japan also has an ongoing territorial dispute with South Korea regarding the sovereignty of a group of small islets between the two nations.
The willingness of the three countries to push forward towards deepened economic cooperation and integration in spite of their political distrust highlights the importance of their economic relationship. The China-Japan, China-South Korea and Japan-South Korea trade relationships were valued at over US$332 billion, US$257 billion and US$103 billion respectively in 2012. China and South Korea are Japan’s largest and fourth largest trading partners and Japan and South Korea are China’s third and fourth largest trading partners. Additionally, China and Japan are South Korea’s largest and second largest trading partners.
RELATED: China, Japan and South Korea Enter Fourth Round of FTA Talks
The investment agreement, which has been described as the “first legal document on trilateral cooperation in the economic field,” is widely seen to represent a stepping stone towards even deeper economic integration. An announcement that the three countries would commence negotiations on a trilateral free trade agreement (FTA) accompanied the signing of the investment agreement in May 2012.
Although a breakthrough could still be a long way off, discussions continue to make progress, with the fourth round of talks occurring in Seoul in March 2014. The latest discussions covered issues such as rules of origin, modalities of tariff reduction, technical barriers to trade, and whether to include the food and environment sectors, government procurement and e-commerce in the FTA. However, there are still several pending issues, including environmental protection, technical standards and intellectual property rights, and the fifth round of talks will take place this summer in China.
“The three countries are well aware of the fact that the Korea-China-Japan FTA will stimulate the countries’ economic growth while also contributing to regional integration,” said Woo Tae-hee, South Korea’s Assistant Trade Minister and chief negotiator. The proposed FTA has also been called “a blessing for Korean businesses, with more opportunities, higher profits and lower tariffs.” Hiromasa Yonekura, chairman of the Japan Business Federation, has also called the FTA “key to Japan’s economic growth.”
The development of a China-Japan-South Korea FTA is part of a wider boom of free trade agreements in the past two decades. If negotiations are successful, the FTA’s impact will undoubtedly be felt further afield than China, Japan and South Korea. The FTA could even act as a building block for two of the more ambitious projects currently being negotiated in the region – the Trans-Pacific Partnership and the Regional Comprehensive Economic Partnership.
As well as the larger trade agreements, there are also several bilateral FTAs currently being negotiated. South Korea is particularly active, with negotiations underway to develop FTAs with China, Japan, Indonesia, Vietnam, Australia and New Zealand. Last week, South Korea’s Deputy Prime Minister and Minister of Strategy and Finance Hyun Oh-seok discussed the progress currently being made in the country’s negotiations with China and Vietnam.
Referring to the China-South Korea FTA, Hyun stated that both countries are now “identifying areas they are willing to open up to free trade and areas they want to remain protected”. An 11th round of negotiations is due to begin soon, which will deal with sensitive issues including the impacts of Chinese imports on South Korea’s agricultural sector and South Korean exports on Chinese manufacturers. In an effort to alleviate concerns, Hyun has assured that the government will include measures to protect agriculture and fisheries, which are South Korea’s two highly-sensitive sectors. South Korea intends to ratify their FTA with China as soon as possible in order to take a leading role in important discussions within the proposed Regional Comprehensive Economic Partnership, which would include South Korea, China, Japan, the 10 member countries of the Association of Southeast Asian Nations (ASEAN), India, Australia and New Zealand.
South Korea also intends to conclude negotiations with Vietnam soon, hopefully by the end of 2014. The fifth round of negotiations, which began in Seoul this week, will involve discussions about products, services, investment, country of origin, customs and cooperation. As an ASEAN member country, Vietnam is currently within the existing South Korea-ASEAN FTA, which came into effect on 1 January 2010. However, the higher-level liberalization of the two countries’ markets afforded by a bilateral FTA will improve South Korean companies’ position to compete in Vietnam, which is currently the sixth largest receiver of South Korean exports and the fourth largest destination for South Korean investment.
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email asia@dezshira.com or visit www.dezshira.com.
Stay up to date with the latest business and investment trends in Asia by subscribing to our complimentary update service featuring news, commentary and regulatory insight.
Related Reading
An Introduction to Tax Treaties Throughout Asia
In this issue of Asia Briefing Magazine, we take a look at the various types of trade and tax treaties that exist between Asian nations. These include bilateral investment treaties, double tax treaties and free trade agreements – all of which directly affect businesses operating in Asia.
APEC Discusses Asia-Pacific Free Trade Area as TPP and RCEP Alternative
Vietnam and the TPP Traverse Rough Seas Towards Promised Land
