Japan Economic Foundation

Chairman's Speech

3 . The Implications of Korea – US FTA to East Asia and Europe

International Symposium
"A New Age of Trade in Asia"
Beijing, China

November 1-2, 2007
Noboru Hatakeyama, Chairman and CEO

Dr. Simandjuntak, Dr. Chulsu Kim, distinguished panelists, ladies and gentleman, it is my great honor and privilege to give a few remarks to this distinguished gathering. Since Dr. Kim has just made an excellent presentation on the impact on Japanese companies, I would like to supplement a bit.



[Direct Impacts]

Abstractly thinking, US FTA(KORUS) must have a big impact on Japan in the US market. Japan's products must be competing with Korean products in the US market. If KORUS is implemented fully, Korean products can enter into US market free of tariffs, whereas Japan's products have to pay tariffs for industrial products.
In reality, however, these US tariffs are not so high (3.3% for industrial goods), except for special products like truck [25%]. In addition, most of Japanese companies have already invested in the US. They don't have to export. Most of Japanese cars and electronics are sold to the US market from Japanese affiliates in the US.
In this regard, KORUS per se does not motivate Japan to have an FTA with the US soon, although, generally speaking, it is desirable to have one for both countries.



Abstractly thinking, KORUS must have a big impact on Japan in the Korean market as well. Japan's products must be competing with American products in the Korean market. If KORUS is implemented fully, American products can enter into Korean market free of tariffs, whereas Japan's products have to pay tariffs of 8 % on average for industrial products in Korea.
In reality, however, American manufactured exports to Korea are not so big. In addition, many Japanese companies have kind of alliance relationship with many Korean companies, thereby leading to division of labors which can hardly be broken by reduced or eliminated tariffs for the US products.
In this regard, KORUS per se does not motivate Japan to have an FTA with Korea soon either, although, generally speaking, it is desirable to have one for both countries.



[Indirect Impacts through other Asian countries]

When the KORUS is implemented fully, the competitiveness of Korean exports in the US market, will be improved, whereas ASEAN or Chinese exports, including those of Japanese affiliates located in ASEAN countries or China will not. Since export dependency ratio of those Japanese manufacturers located there are assumed higher than those located in Japan, KORUS indirect impacts on Japanese manufacturers, located in ASEAN countries or China are thought to be bigger than those located in Japan.
However, as is the case with direct exports from Japan to the US, since US tariffs are not so high, the impacts of KORUS on ASEAN or Chinese exports, including those of Japanese manufacturers located in ASEAN countries or China will be rather marginal
In the case of service sector, although certain services will be liberalized between the US and Korea, including carrying forward WTO Doha Round commitments, there will not be big impacts on Japan partly because most Korean service industries will not be able to take advantage of those liberalizations due to their weak competitiveness in the US markets and partly because US service industries are already competitive even before those liberalizations take place in Korean markets.



[Impacts through the EU]

The final signature on KORUS on April 2nd provoked the EU. The EU became concerned about disadvantages KORUS would bring about on EU companies which were going to export their products to the US market. Therefore the EU started negotiations with Korea, India and ASEAN as a whole.
The EU-Korea FTA is expected to conclude even within this year. The EU's intention seems to conclude the negotiation before presidential election of Korea in coming December. Had it not been for the successful conclusion of KORUS negotiations, the EU-Korea FTA [EKA] negotiations would not have started. In this regard, the impact of EKA can be deemed as indirect impact of KORUS on Japan. The impact of EKA on Japan will be much bigger than that of KORUS. First of all, Japanese companies have not invested in the EU as much as they did in the US. Therefore, in the EU market, Japan's auto or electronics manufacturers depend more on exports. However the EU imposes rather high custom tariffs on automobiles by 10% and on flat TVs by 14%, for example. If EKA is completed, Korean manufacturers of such products enjoy zero tariffs. From the first place, they, including Hyundai and Samson, are already competitive. Therefore this much tariff difference is quite a big damage for Japan. Because of this, the Government of Japan seems to have sounded possibility of entering study on an FTA with the EU. However, the EU was not forthcoming. In stead, Japan-EU Business Dialogue Round Table, a private body, proposed to explore the feasibility of having the Economic Integration Agreement [EIA] between Japan and the EU. The EIA is an agreement that includes strengthened regulatory cooperation, intellectual property, trade enhancement and improving environment to integrate both economies as close as possible. However, strangely enough, reduction or elimination of tariffs is not included in the EIA, according to the EU people. An EU official told me the reason why they excluded tariff issue was just that, if two big elephants like Japan and the EU have an FTA including tariff reductions or eliminations, Doha Round WTO negotiations would become hollowed. In other words, if Doha Round WTO negotiations turn out to be unsuccessful, the possibility to commence a study on a Japan-EU FTA might become a little bit higher.
In that hypothetical case where a study on a Japan-EU FTA starts, it remains to be seen what attitude the US will take.
In terms of India, the EU has started FTA negotiations since June this year. This may solicit China to do the same with the EU although there has never been any movement on both sides even for a joint study at this moment.
In terms of negotiations on an FTA with ASEAN as a whole which the EU decided last May to start, the EU does not seem to have started yet probably because of current situation of Myanmar.



[Conclusion]

Thus, KORUS through EKA may have opened a door of the new age of Asia and Europe FTA relationship. It may also open a door of the new age of APEC. I sincerely appreciate Korean active attitude toward FTAs. It will stimulate FTA policies of other countries, including Japan