In May, a trilateral meeting among China, South Korea and Japan led to an agreement to elevate negotiations on a trilateral free trade agreement. In addition, a China-Korea bilateral meeting led to an agreement to "revitalize" trade and investment through multiple existing and new channels. What is behind these announcements, and where might they take us?

To answer these questions, China Trade Monitor talked to Yeo Han-koo, former trade minister of South Korea and now a senior fellow at the Peterson Institute for International Economics.

CTM: The trilateral trade negotiations started in 2012 and have had 16 rounds of trade talks so far. Can you tell us what has been accomplished at the talks and what are the main obstacles going forward?

Yeo: The trilateral trade negotiations have been slow in progress partly because RCEP, Korea-China FTA and TPP/CPTPP negotiations have progressed during the similar period and the three countries put the conclusion of these negotiations ahead of the trilateral FTA.

When it comes to the trilateral trade talks, it takes time for the three countries to find a common ground for the modality of negotiations because the industrial structure of the three countries is similar and became more competitive than complementary.

CTM: The last round of trade talks took place in 2019. What prompted the revitalization of the trade talks now? Considering the more competitive industrial structure and rising geopolitical tensions between China and the U.S.— a major ally of both South Korea and Japan— the timing is a bit surprising.  Which of the three countries is pushing the hardest for these talks?

Yeo: Since 2019 when they last met, there has been a sea change in terms of geopolitical shifts, supply chain disruptions, trade diversification and securitization of the economy, let alone the pandemic.

The new dynamics created by these changes brought together the three distinctive neighbors for the first time in five years. After years of turbulence, their interests are aligned once again. China cannot alienate itself from the two major economies in its backyard. South Korea and Japan cannot afford to destabilize their security and economic relations with their big neighbor when North Korea continues to nuclearize and provoke.

CTM: So there is interest from all three sides to revive the trade talks. Do you think it is likely that we will see any concrete outcomes from these trilateral talks soon, or is it more about a political show of unity just from having the talks?

Yeo: The trilateral FTA would be an ambitious undertaking if realized, but needs to be prudentially recalibrated to navigate a rough trade environment of the present. It would be wiser to have a longer-term perspective when it comes to market access negotiations. The market access among the three countries was first connected through the Regional Comprehensive Economic Partnership (RCEP) in 2022 with its entry into force, although at a modest level due to each other’s sensitivities. There is a consensus among the three countries that the trilateral FTA, if attempted, should aim for RCEP+, surpassing RCEP in terms of its level of ambition in market access, disciplines and standards.

It would be challenging, though, to find a landing zone among the three, as I mentioned previously, when their manufacturing-based, export-oriented industrial structures become more competitive than complementary, especially when overcapacity and cheap exports from China emerge as major risks to Japan and South Korea.

On the other hand, there could be areas of immediate cooperation among the three: decarbonization and supply chain stability.

On decarbonization, the three countries can join forces to accelerate decarbonization, for instance, by collaborating on renewable energy and low-carbon technologies, developing regional carbon markets and hydrogen supply chains in the region to benefit all. All in all, the three countries account for almost 40 percent of global manufacturing. Major disruptions in these supply chains could wreak havoc not only on the three countries, but also on the global economy, including the U.S.

CTM: As to China and South Korea, at the May 26 meeting between Premier Li Qiang and President Yoon, they emphasized using the existing communication mechanisms, including the bilateral Investment Cooperation Committee, the Export Control Dialogue Mechanism, the bilateral Supply Chain Hotline, and the Supply Chain Cooperation and Coordination Council. How do you see these mechanisms working? And what issues do you expect them to discuss through these mechanisms? 

Yeo:  It is important for Korea and China to maintain communication channels to discuss whatever issues arise from their decades-long economic interconnectedness, but it is generally understood that these mechanisms didn’t live up to expectations when they were needed the most.

The two countries face a complicated backdrop of economic security environment with export controls and investment screening restrictions while it is still necessary to maintain trade, investment and supply chain stability. At least the two countries can find a new equilibrium in a rapidly changing world by managing downside risks and maintaining supply chain stability, whether it be semiconductors, batteries or critical minerals.

CTM: At the same meeting, the Korean and Chinese leaders agreed to resume the second phase negotiations on the bilateral Free Trade Agreement, which aim at further opening market access, especially in services and investment. Do you think they will make progress on this front soon? 

Yeo: When Korea deployed THAAD missiles to defend itself from the threats from North Korea, China retaliated economically, focusing on services sectors such as tourism and a cultural export ban in 2017. In fact, the announced resumption of the Korea-China 2nd stage negotiations focuses on tourism, culture and other services market, the same target areas of the economic retaliation by China. The Korea-China FTA services negotiations will be a litmus test for China’s seriousness in rebuilding the trust and resilience for future trade and investment relations.

CTM: You talked about the issues on the China side. On the Korean side, how does South Korea perceive the national security implications of its economic ties with China? To what extent might this shape Seoul's approach to measures like export controls and investment screening, similar to actions taken by the U.S. and other countries for economic security reasons?

Yeo: Geopolitics is interlinked with trade, investment and supply chain resilience. We have to navigate this turbulent era of economic security.

For instance, the semiconductor supply chains are led by the US and the EVs, batteries and critical minerals supply chains by China. South Korea is a major player in these industries. The US has introduced sweeping export control measures for AI and semiconductors, and China responded with its own export controls on critical minerals and battery technologies. Japan and South Korea in the middle are major players in those supply chains, directly exposed and squeezed by the warring two superpowers.

Although each party may have different supply chain interests and priorities, whether it be semiconductors or critical minerals, they share common interests in managing downside risks, preventing a repeat of major breakdowns, restraining coercive actions against each other and maintaining stability and predictability in the supply chains. This is where the interests of the three countries as well as the US are aligned.

CTM: You mentioned supply chain, national security concerns have often led to trade and investment restrictions, which could potentially undermine progress in bilateral or multilateral trade negotiations. How is South Korea balancing these competing priorities of economic security and further trade openness with China?

Yeo: Striking the right balance between legitimate national security concerns and maintaining vibrant trade and commercial activities would be critical, especially to South Korea facing the nuclear threats from the North. Over-securitization of the economy could kill economic vitality and innovation. But ignoring legitimate security objectives could expose supply chains and sensitive technologies to serious risks. This is easier said than done, but necessary as well in a rapidly changing world.

Thus it would be mutually beneficial to have communication channels, consultation and resolution mechanisms put in place for whatever contingencies for the three countries as well as the US.