China, Japan and South Korea have been discussing creating a free-trade zone for some years. Every time their leaders meet, in pairs or collectively, the language used to describe progress is increasingly purposeful. Prime Minister Wen Jiabao and his visiting Japanese counterpart, Yoshihiko Noda, now say the discussions have reached the point where formal negotiations could start next year.
The three countries are already closely tied by trade and investment as well as physical proximity. Japan and South Korea are China’s largest trade partners after the U.S. and the E.U. The agreement to settle yuan-yen trade currency conversions directly, also announced during Noda’s visit, will only help boost economic ties.
Similarly Beijing’s approval for the Japan Bank for International Cooperation (the old Ex-Im Bank) to issue yuan-denominated bonds in China–a first for a foreign government agency– and Tokyo’s plan to hold a small amount of Chinese government bonds in its official reserves support the internationalization of the yuan, and thus provide a growing alternative to the dollar as the working currency of any trilateral free-trade zone.
Those existing and coming economic links make it more likely that a free trade agreement can be stuck between the three before agreement is reached on setting up the much larger proposed Trans-Pacific Partnership (TPP) that the U.S. now wants to join and promote but from which China is being excluded. Indeed the TPP may have provided some impetus to China, Japan and South Korea’s discussions. Together the trio account for 16% of world GDP, so a free trade agreement between them would create a formidable bloc just by dint of their economic size alone.