The benefits of an FTA for Asia

But since a China-ROK FTA, according to Okuda, could make Japan lose exports of up to $7 billion because of severe competition with the ROK, Japan needs to set up a China-Japan FTA as soon as possible to offset the impact and, at the same time, increase its exports to China by $47.8 billion a year.

Though the process for a China-Japan FTA has not been initiated, their bilateral trade volume has increased from $1 billion in 1972, the year bilateral diplomatic relations were normalized, to an estimated $360 billion this year.

The normal flow of Sino-Japanese trade has, however, been affected by the "purchase" of the Diaoyu Islands by Japanese government in September. The sales of Japanese automobiles and other commodities in China have declined sharply, and the share of Japanese automobiles in the Chinese market has fallen from 30 percent to below 8 percent. So in all probability, the Sino-Japanese trade volume will not be $360 billion, as had been estimated by experts earlier.

Data from Japanese listed companies, however, show Japanese enterprises' investment in China has been stable after September, reflecting their confidence in the Chinese market. It seems they have learned an important lesson from their efforts to replace China with India in 2005, when former Japanese prime minister Junichiro Koizumi's visit to Yasukuni Shrine, which honors World War II criminals, strained Sino-Japanese ties.

Japanese enterprises had then found India's infrastructure to be inadequate and its industrial sector to be threatened by terrorist attacks and frequent strikes. No wonder, Japanese enterprises today know the difference between setting up shop in China and any Southeast or South Asian country. The advantages that foreign companies enjoy in China have also prompted a majority of the Japanese enterprises that had pulled out of China in the early 1990s to return.

All these show that the cooperation between Chinese and Japanese enterprises has reached a new stage and the future of bilateral economic and trade cooperation is bright.

Since June 1, the Chinese yuan and the Japanese yen have been used to trade directly in the foreign exchange markets of Shanghai and Tokyo, and their trade volume reached up to 800 million yuan ($129 million) in Tokyo and 3 billion yuan ($482 million) in Shanghai on that fateful first day. It is self evident that by trading in the two currencies, Chinese and Japanese enterprises will save costs and time to their immense mutual benefit.

Negotiations on a Japan-ROK FTA started in 2003 but were interrupted by Japan's ambition of opening up the ROK's agricultural products' market. The ROK was also worried that its trade deficit with Japan would increase further after a Japan-ROK FTA was set up. Since territorial disputes between Japan and the ROK are becoming more frequent, it will be even more difficult for the talks to continue. But the ROK still maintains a positive attitude toward a China-Japan-ROK FTA because it has the potential to increase economic and trade cooperation.

Despite the problems that seem to thwart a China-Japan-ROK FTA, its immanent advantages should prompt the new Japanese leadership to promote the negotiations with the other two countries to pull Japan's economy out of recession and toward a prosperous future.

The author is a research scholar with the Chinese Academy of International Trade and Economic Cooperation, affiliated to the Ministry of Commerce.