Global Viewpoint

Business Professor Joseph L.C. Cheng discusses the proposed Asia free-trade agreement

7/10/2012  8:00 am

Joseph L.C. Cheng, is a professor of business at Illinois and an expert in international business. Cheng, who is also the director of the Committee of Institutional Cooperation’s Center for Advanced Study in International Competitiveness, spoke with News Bureau reporter Phil Ciciora about what the proposed China-Japan-South Korea free-trade agreement would mean for the U.S. and the global economy.

How would the proposed China-Japan-South Korea free-trade agreement (FTA) affect the U.S., especially in light of the recent lackluster domestic job creation numbers?

If realized, the proposed FTA would mean increased trade and investment among China, Japan and South Korea, resulting in new job re-creation and accelerated economic growth in the region. This positive effect, however, would not apply to the U.S. In fact, depending on the range of industries and product categories covered by the FTA and how rigorously it will be enforced, the FTA could result in decreased U.S. trade and investment with the three countries.

Last year, the U.S. sold $213.6 billion worth of merchandise to those three countries, accounting for more than 14 percent of its total world exports. Should there be a decline in U.S. exports to the region, small- and medium-size export firms, which account for about one-third of total U.S. exports and provide most of the domestic job growth, would be the most negatively affected. This is because more than 90 percent of those firms do not conduct manufacturing overseas, and thus cannot produce and sell in these three countries to benefit from the FTA. In other words, their market access is dependent on the U.S. government’s trade initiatives.

Because FTAs disadvantage trade from non-member countries, U.S. multinational corporations – but not small- and medium-size export firms – could be forced to produce and sell goods from their plants in the three member countries in order to stay competitive. This would mean moving jobs overseas. Also, because these member countries have bilateral FTAs with many other countries in Asia, U.S. multinational corporations might find it beneficial to increase production in China, Japan and South Korea for export to the region. Again, this would result in transfers of jobs overseas and also reduced investment by U.S. firms at home.

Finally, not only would the three member countries import less from the U.S., they would also invest less in the U.S. When announcing the FTA talks, China’s Premier Wen expressed hope that Japan and South Korea would be the primary destination for China’s outward investment. This decline in foreign investment from the three member countries in the United States could have a negative impact on domestic job growth and funding for business expansion and public revitalization projects (for example, infrastructure replacement and modernization).

Are there any potential positive outcomes for the U.S.?

One potential positive outcome for the U.S. would be fewer imports from the three member countries. This would provide an opportunity for U.S. manufacturers to increase their domestic production to fill the gap in demand and recapture the market-share that has been lost to imports. If U.S. manufacturers could produce unique, high-quality products at an affordable price, they would be able to not only attract new domestic customers and keep them but also open new export markets in other countries, including China, Japan and South Korea. This would also lead to new job creation in the U.S.

Could such a pact be a boon to the struggling economies of Europe?

In the short term, the proposed FTA would not be a boon to Europe. If anything, it would most likely result in decreased European trade and investment with the three member countries. Because of Europe’s worsening debt crisis, the negative impact there would likely be greater than it would be on the U.S.

What are the biggest obstacles to the three countries signing off on the agreement? Are they cultural, historical or economic?

Historical animosity and territorial disputes among the three member countries are the biggest obstacles to both the FTA negotiation and its final ratification. South Korea recently suspended the signing of agreements on military cooperation with Japan because of public opposition, particularly from the older generations who have bitter memories of Japan’s colonial rule. Japan and China have long been in dispute over territorial claims in the East China Sea. Both Japan and South Korea have also been calling for China to put more pressure on North Korea to stop further nuclear provocations.

In addition to historical and political obstacles, there will be opposition from interest groups within each country against the proposed FTA for fear of negative economic consequences. For example, Chinese manufacturers might not want increased imports from Japan and South Korea to reduce their market share. Japan currently has a big surplus from trade with South Korea; thus South Korea might not want to have more imports from Japan. Also, the three member countries are quite unbalanced in terms of the liberalization steps that they have already taken and they also have different visions for their economic future.

What should the U.S. do to better position itself for the new economic order?

Because of these obstacles, it is expected that the FTA talks will take many years to produce an agreement. In the meantime, the Obama administration should work to speed up the U.S.-led Trans-Pacific Partnership FTA negotiations (which involve eight other Asia-Pacific countries including Australia, Brunei Darussalam, Chile, Malaysia, New Zealand, Peru, Singapore and Vietnam) and put the agreement in place ahead of the proposed China-Japan-Korea FTA. Also, the administration should introduce new economic policies to revitalize the domestic manufacturing sector and help position it for enhanced international competitiveness. Finally, U.S. universities should invest more in training Asia-Pacific specialists to help U.S. companies and government trade offices to conduct and promote business in the region.