Special Report

Playing Geoeconomics in Asia

China and South Korea are discussing a free trade agreement -- one more reason why the U.S. and South Korea should conclude one first.

By 6.7.06

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The Pentagon has just issued its latest assessment of China's military strength, warning of Beijing's growing power. But China's primary challenge to the U.S. in East Asia today is economic. Thus, the best way to respond is through economic means.

South Korea wants a free trade agreement with Washington, over which negotiations began this week. Unfortunately, this year is not a politically propitious time for further opening international markets -- the Doha round of the World Trade Organization talks has been a bust and nearly a dozen proposed bilateral accords are fighting for attention. But if the U.S. fails to move forward on Korea Washington will find itself left further behind the People's Republic of China.

Beijing's future course may be the most important geopolitical question for the 21st century. Growing fast, but still poor. Allowing more personal autonomy, but still authoritarian. Expanding its military, but still far behind America's strength. Much depends on the trail taken by the PRC.

China already poses a significant diplomatic challenge to the U.S., much of that stemming from its growing economic influence. In 2004 the U.S.-China Economic and Security Review Commission observed: "In the past two years, China has become even more central to regional and global trade, investment, and production patterns." Worried the Commission:

China has linked its growing economic power with strong diplomatic initiatives throughout Asia. China's softer approach to the region has been dubbed a smile campaign or charm offensive, but it is more than just that -- China has injected new energy into bilateral partnerships and multilateral trade and security arrangements.

Although the U.S. will retain the largest and most productive economy for some time, and continues to benefit from long-standing cultural and security ties with countries throughout East Asia, the PRC's influence will inevitably grow. Beijing starts with important advantages: it makes no demands regarding environmental or labor standards and criticizes no one for human rights. China is replacing Japan as the region's economic engine. Indeed, three years ago China became the largest export market for Japan, the Republic of Korea, and Taiwan.

Ever-more profitable economic relationships with Beijing will make its neighbors less likely to side with America in the future. Close Chinese financial links with Taiwan already have made it harder for Taipei to resist the PRC's political embrace. Beijing's market entices Southeast Asia, including strong U.S. allies like Australia. Investment and trade helps moderate political antagonism between China and New Delhi.

South Korea now trades more with the PRC than with America. More than one-third of Korea's direct foreign investment goes to China. Observes a recent Rand Corporation study: "The effect of China's economic rise on the Korean economy has been significant. China is now Korea's largest trading partner and the largest destination for Korea's foreign direct investment."

Moreover, China is assiduously promoting its relationship with the ROK. At a summit meeting last year Presidents Roh Moo-hyun and Hu Jintao set a goal of doubling their trade to $200 billion annually by 2012. To do that, the two nations are discussing a free trade agreement.

The barriers are significant, including Seoul's fear that Chinese agricultural products would ruin domestic farmers. But Beijing's interest should act as a warning to Washington: the PRC is carefully extending its influence, in this case directly at America's expense.

U.S.-SOUTH KOREAN TIES HAVE BEEN fraying for years. The Republic of Korea, beneficiary of Washington's security umbrella for the last half century, is increasingly turning away from America. Younger generations now inexplicably say they fear Washington more than North Korea, and have a more positive vision of China than the U.S.

Economic ties remain significant, however, with two-way commerce running more than $71 billion in 2005. America continues to provide the most foreign direct investment in South Korea. The ROK has become a more important market with its stunning economic rise; today South Korea's economy is estimated to be the 10th largest on earth.

But China is not the only country seeking to improve its access to the South Korean market. Seoul is negotiating FTAs with several nations, including India, Japan, Russia, and the EU. Washington risks losing business to all of them.

Of course, that doesn't mean South Korea offers a particularly welcoming environment. The ROK is only America's seventh most important trading partner, perhaps a surprise given the South's economic size and the two nations' historic ties. The Korea Economic Institute observes: "Korea remains a very difficult place in which to do business. However, a series of bilateral trade consultations in 2004 and 2005 showed progress on a number of issues, and a general warming of the bilateral trade relationship has taken place over the past year."

An FTA would strengthen the position of American companies in a growing market. The two countries have concluded a bilateral review process and begun the first of two rounds of formal talks. (A related step suggested by Balbina Hwang of the Heritage Foundation would be to include the South in the U.S. Visa Waiver Program, making it easier for South Koreans to visit America. It's a politically important issue for Seoul.)

Some studies suggest that an FTA would bump up the ROK's GDP by two percent and create 100,000 jobs. Since Seoul's market traditionally has been more closed than America's, the potential economic benefits for the U.S. are relatively greater. The U.S. International Trade Commission once estimated that an FTA would result in a more than 50 percent increase in American exports to the ROK. (This is one reason opposition from South Korean farmers is likely to be particularly fierce.)

The political advantages of an FTA may be more significant, however. America's military preeminence no longer holds the allegiance even of long-time friends such as South Korea. But other ties, both cultural and economic, remain strong despite political differences. An FTA will provide a better environment for the flourishing of American "soft power."

But the administration needs to push forward. The President's authority for "fast track" negotiating authority expires next April. Winning reauthorization will be no mean feat, and creating an FTA without it will be even more difficult. The complex Korean negotiation should be completed this year.

America faces many challenges in today's world. It needs to deploy all of its means of influence, including access to the world's biggest and more efficient economies. With China on the move, no region is more important than Asia to the U.S.

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About the Author
Doug Bandow is a senior fellow at the Cato Institute. A former Special Assistant to President Ronald Reagan, he is the author and editor of several books, including The Politics of Plunder: Misgovernment in Washington (Transaction).