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Deeper cooperation urged for key East Asian powers to sustain growth

South Korean journalists see Tokyo, Seoul working together as partners with Beijing in world's fastest-growing region

by Takashi Kitazume

Staff Writer

China, with its increasingly assertive diplomacy and rapid military buildup, is a common security threat for Japan and South Korea, but the two countries also need to work with China as a partner in East Asia’s economic growth, veteran journalists from South Korea said in a recent symposium in Tokyo.

The realization of the often-touted economic integration in East Asia is still far off, but countries in the region — especially the three Northeast Asian powers — should start from where they can cooperate and at least set a long-term vision for the region’s future, the journalists said.

Editorial writers from five major South Korean newspapers took part in the symposium organized Feb. 10 by the Keizai Koho Center to talk about how the two countries can work together amid the changing dynamics of the world’s fastest-growing region. Motohiro Ikeda, a senior editorial writer for the Nikkei business daily, served as moderator of discussions.

Diplomatic relations and public sentiments between Japan and South Korea have frequently been marred by memories of Japan’s 1910-1945 colonial rule of Korea and a lingering territorial dispute. However, Tokyo and Seoul have indeed worked closely together when they see a common security challenge — including when the United States reviewed its security policy in Asia and started withdrawing its troops deployed in South Korea in the 1970s, said Kim Chang Kyoon from The Chosun Ilbo.

“When the security risk rises in South Korea and its neighborhood, Japan will be exposed to the same risk. Similarly, South Korea will not rest assured if Japan’s security is under threat,” Kim said.

Today, the common challenge for the two countries is China, which increasingly flexes its diplomatic muscle in the region backed by sustained, rapid economic growth and military buildup, Kim said.

China replaced Japan as the world’s second-largest economy and its defense spending reached nearly double that of Japan in 2010, Kim said, noting that the gap between China and any other East Asian country in terms of “hard power” will continue to expand in the years ahead.

Still, Kim argued that Japan and South Korea are more experienced than China in terms of working under internationally accepted rules in the global community, adding that they can work together as “soft powers” to keep China’s assertive diplomacy in check.

Over the long term, however, the two countries need to support China as the leading economic power in East Asia, Kim said.

“Japan, China and South Korea are all in the same boat” as partners in a new era of East Asia as the driving engine of global growth, he said.

Economic relations among the three Northeast Asian powers “have advanced to a point of no return,” said Lee Chul Ho from the JoongAng Ilbo. Today, China and Japan account for more than a third of South Korea’s external trade, while exports and imports with Northeast Asian economies including Taiwan occupy over 30 percent of Japan’s global trade, Lee said.

Over the past five years, diplomatic exchanges among top government leaders of Japan, South Korea and China have also substantially increased, including annual bilateral summit meetings. But people in the three nations do not appear to think that trilateral cooperation has leapfrogged, and part of the reason can be found in the unstable political leadership in the three countries, Lee said.

Japan has had six prime ministers since 2006, South Korean President Lee Myung Bak has become a lame duck in his final year in office, with plunging popular support, and China faces its Communist Party leadership change in October, he said.

Today, Northeast Asian nations are increasingly urged to work together to play an international political role commensurate with their growing economic power, but diplomatic relations have not caught up with the fast-expanding economic ties in the region, Lee said.

Still, Lee said that despite the tough prospect for deepening political ties, private-sector economic ties among the three countries will continue to expand, unless political leaders try to fuel nationalistic public sentiments that discourage such exchanges.

Tourism and cultural exchanges are also set to increase, which in turn will further accelerate the business ties, he said. While Korean pop groups and TV dramas continue to be popular in Japan, some South Korean cable TV channels exclusively feature Japanese dramas and other entertainment, Lee said, noting that the bilateral cultural exchanges — which used to be tightly regulated in light of the history of colonial rule by Japan — “will no doubt continue to expand under market principles.”

An Asian economic community backed by an institutional framework is a concept that is frequently floated by political leaders but does not seem to go anywhere.

Nobody would object to the idea that Asian countries should work more closely together for the region’s prosperity and that all irrational hurdles need to be removed to achieve that goal, said Jang Gyeong Duk from the Maeil Business Newspaper. The question, he added, is how far, deep and fast the region should pursue economic integration.

For example, is currency integration that would be similar to that of the euro-zone countries going to be possible among Asian economies? An Asian Development Bank forecast shows Asia accounting for 52 percent of the world’s gross domestic product (GDP) by 2050, and a currency union among the region’s economies will likely produce huge opportunities, Jang said.

Still, a national currency is closely linked to each country’s sovereign rights and has its own history, and forcing integration despite problems could result in disasters, he said. The current debt crisis in the euro zone, where the currency union went ahead even though fiscal powers were mostly left in the hands of national governments, testifies to this risk, he said.

Economic integration in Europe has been driven by political motivations to ensure that the region would never again be divided by war, but there is no such pressing motivation in Asia, Jang said. Negative sentiments from the wartime experience linger among key economies of the region, he said, suggesting that it will be hard to imagine that China will cede its currency powers to a regional central bank led by Japan — or vice versa.

Asian countries remain widely different in their stages of economic development and systems of economic management, and free movement of labor throughout the region is unlikely in the foreseeable future, Jang noted.

An economic and currency integration like the European Union will be something of a distant future for Asia, but then the region must think what the realistic options it can take today will be, Jang said.

“Even if it’s a far distant future possibility, we need to take small steps toward that goal,” and only then conditions will become ripe for future integration, he said. Without even a long-term vision to achieve that, economic integration will be forever impossible in Asia, he added.

Among the interim steps countries such as Japan, China and South Korea can take now will be bilateral trade and investment liberalization talks — as well as regional cooperation for financial stability, efforts for which increased after the 2008 global financial crisis, Jang said.

Jang stressed the importance of financial system stability for the region. Elimination of import tariffs under a free trade accord may slash import and export prices by up to about 10 percent, but such benefits would easily be lost if currency values are to fluctuate 50 percent under an unstable financial system, he pointed out.

East Asian economies are already in discussion about regional financial stability, including beefing up the currency swap arrangements under the Chiang Mai Initiative, “but efforts need to speed up for a more efficient” regional cooperation in this area, Jang said.

After years of negotiations and controversies on both sides, South Korea concluded a free trade agreement last year with the United States, which is set to come into effect shortly. Also amid heated domestic controversy, Japan announced in November that it would join the talks for the U.S.-backed Trans-Pacific Partnership free trade pact.

These developments are taking place just as momentum for free trade talks among Japan, South Korea and China appear to be receding, said Park Soon Bin from The Hankyoreh newspaper.

Even though market-driven business ties continue to expand, government-level efforts for economic cooperation have not progressed much, Park said.

“The share of China and Japan in South Korea’s overseas trade has increased from 20 percent a decade ago to 30 percent. Without China, Japan can no longer keep the momentum for its own growth,” he said. The question, he added, is how the market-driven developments can be turned into positive cooperation among the three nations.

Park said the three countries should grope for ways to solve their common challenges, such as the energy problem. Another possibility might be for the three powers to create and jointly run a fund for regional currency stability, he added.

Japan, South Korea and China should start by creating a model of economic cooperation they can agree upon and gradually build it up into a broad framework for cooperation, Park said.

In the absence of any free trade framework among the three Northeast Asian powers, some critics charge that the South Korea-U.S. FTA and Japan’s participation in the TPP talks are creating a microcosm of the rivalry between what is often referred to as the G-2 powers — the U.S. and China, Park noted.

Park said he believes that the TPP talks will essentially turn into free trade negotiations between the U.S. and Japan, which, just like the South Korea-U.S. FTA, will cover not just tariffs on goods but a whole range of rules on services, investment, intellectual properties and so on that will have a huge impact on economic structures.

He said he shares the view with many experts in his country that the South Korea-U.S. FTA was an attempt by the United States to change South Korea’s very economic structures based on U.S. rules. And the conclusion of the accord — along with Japan’s participation in the TPP talks — has put China on guard, he added.

Oh Hyung Kyoo from The Korea Economic Daily spoke about South Korea’s retail industry and said the growing number of affluent Chinese tourists is one of the key factors that support the strong sales at department stores in the country.

South Korea’s retail industry grew by 8.7 percent in 2010 and 7.3 percent in 2011. While the growth is forecast to slow down to 6.3 percent this year, sales at department stores are estimated to rise 10 percent, Oh said.

While the prospect for the industry in the coming years is mixed, optimists point to the contribution of the sharp increase in shoppers from overseas, he said. Domestic demand in South Korea, with its population of nearly 50 million, is not enough to sustain the retail industry, but the number of tourists from China and Southeast Asian countries are on the rise, he added.

The number of foreign visitors to South Korea topped 10 million for the first time last year, including about 3 million from Japan and 2 million from China, according to the JoongAng Ilbo’s Lee.

A major difference between Chinese and Japanese tourists, Oh said, is their spending behavior. More than 30 percent of Chinese visitors to South Korea spend over $1,000 per head during their stay, while only 4 percent of Japanese tourists do, he said.

Meanwhile, some of the Japanese retail companies that have launched operations in South Korea are having a huge impact on local business practices, Oh said. One example is Fast Retailing Co., which opened its first Uniqlo discount clothing store in South Korea in 2005, he said.

Uniqlo has “changed the landscape of the fashion industry in South Korea,” Oh said. In 2011, Uniqlo sales in the country grew 44 percent to hit 360 billion won, and the company aims to increase the number of its stores from the current 63 to 150 and achieve 1 trillion won in sales by 2014 — the largest in the South Korean fashion business, he noted.

Another Japanese company is ABC Mart Inc., which has increased its footwear chain stores in South Korea to more than 100 and is “seen as one of the foreign firms that radically changed the shoe retail business” in the country, Oh said.