Policy simulating----Free Trade Area of China, Japan and South Korea

In the study of bilateral and multilateral free trade among China, Japan and South Korea, CJK-TAP pattern and CJK database² of seven sectors (corn, vegetables, fruits, nuts and other crops³, animal products, food processing and manufacturing and service) are adopted to simulate the relevant policy.

(I) Set-up of the conditions for the pattern simulating Three schemes for establishment of the free trade area (FTA):

1) To establish China-Japan-South Korea Free Trade Area (CJK-FTA). The import of products among the three countries is free of duty and that between any of them and other countries or regions remains unchanged.

2) To establish China –South Korea Free Trade Area (CK-FAT). The import of the products between the two countries is free of duty.

3) To establish Japan –South Korea Free Trade Area (JK-FAT). The import of the products between the two countries is free of duty.

Based on the simulating result, an analysis is made about the impact of different schemes for FTA on national welfare, industrial output, agricultural import and export, and the income of farmers concerned.

（II）Analysis of the simulating result 1) National welfare and GDP

After the establishment of CJK-FTA, either the welfare change or the GDP growth rate indicates that South Korea is the major beneficiary of CJK-FTA (Table 7). Among the three schemes for FTA, CJK-FTA is the best choice for China. However, since the manufacturing and service industries of China are weaker than those of Japan and South Korea, China will witness the least national welfare growth among the three countries and a less GDP growth resulting from the FTA than South Korea.

Table 7 Changes in National welfare and Real GDP (EV) National welfare (million USD) Real GDP (%) Region

CJK-FTA CK-FTA JK-FTA CJK-FTA CK-FTA JK-FTA

China 1584 90 -207 0.09 -0.01 -0.01

Japan 6586 -317 1197 0.00 -0.01 0.00

South Korea 8373 9254 395 1.63 1.53 0.08 Source: Simulation results.

2 Got from sector merging in CJK4×10 database

2) Output of sectors

After the establishment of the FTA, there will be an increased demand for products with relative advantages in the three countries, so the output of relevant sectors will witness a rapid growth.

Due to the cheap labor in China, we will have more competitive advantages than Japan or South Korea in vegetables and meat products, which are of labor-intensive type, and in corn, which is of land-intensive type.

The simulating result (Table 8) shows in the CJK-FTA scheme, the most rapid growth in China is in grain of land-intensive type including corn and other crops, with an increased yield growth rate of over 10%. There will be a considerable growth in the labor-intensive industries covering vegetables, fruits and food processing. There will be a decrease in industries without advantages like manufacturing and service. Among the three schemes, JK-FTA will produce a negative impact on the overall output of all sectors in China.

Table 8 Changes in Industrial Outputs of China (Percentage) Commodities CJK-FTA CK-FTA JK-FTA Total value

(million USD)

Corn 11.84 8.43 -0.08 3180

Vegetables 0.73 -0.22 -0.02 77163

Fruit & nut 0.77 -0.31 -0.02 47488

Other crops 11.35 10.72 0.03 55084

Animal products -0.85 -0.97 -0.01 102967

Food processing 1.90 -0.87 -0.05 173942

Manufacture & Services -0.57 -0.31 0.00 2646385 Source: Simulation results.

The output change in different sectors is closely related to the income of the laborers of the sector. The more the output is, the higher their income is. The simulating result also reflects this.

For details, please see the attached Table 2.

3) Change of import and export a) Total import & export

Generally speaking, the agricultural products of China enjoy advantages while manufacturing and service of Japan and South Korea enjoy advantages. The simulating result in Table 9 (a) and Table 9(b) shows that the establishment of CJK-FTA will enable China’s agricultural import and export to enjoy a growth of different degree. However, the growth in agricultural export will be higher than that in agricultural import and vice versa in manufacturing and service.

Table 9(a) Changes in Total Imports of China (Percentage)

Commodities CJK-FTA CK-FTA JK-FTA

Total value (million USD)

Corn 2.05 1.33 -0.02 233

Vegetables 12.22 7.14 -0.10 484

Fruit & nut 12.04 6.92 -0.10 297

Other crops 18.00 12.08 -0.08 9119

Animal products 12.06 7.53 -0.09 2507

Food processing 18.65 11.96 -0.09 6794 Manufacture & Services 9.99 3.35 -0.13 291278

Source: Simulation results.

In CJK-FTA and CK-FTA schemes, the fastest growth of total import is in food processing products and other crops. The growth rate of import of vegetables, fruits and animal products is over 10 %.

Table 9(b) Changes in Total Exports of China (Percentage)

Commodities CJK-FTA CK-FTA JK-FTA

Total value (million USD)

Corn 72.02 52.56 -0.58 356

Vegetables 29.89 16.53 -0.03 1182

Fruit & nut 26.07 8.65 -0.07 920

Other crops 279.26 266.73 0.74 2511

Animal products -14.49 -10.92 0.14 1783

Food processing 53.06 -0.21 -0.73 9057

Manufacture & Services 4.09 1.21 -0.03 370599 Source: Simulation results.

In CJK-FTA scheme, the fastest growth of total export is in other crops, corn and food processing products, with the rate over 50% while the growth rate of export of vegetables and fruits is over 20 %. This is because these products enjoy a large share in the agricultural export of China and a large margin of demand in the market, but were levied a high duty by Japan and South Korea in the past. Therefore, once the FTA is formed, the export of these products will witness a great increase. Among the 6 varieties of products, only the export of animal products will decrease.

b) China’s import and export with South Korea

China is mainly an exporter of agricultural products to South Korea, and its import from South Korea is relatively low. After the formation of the FTA and the cut-down of duty, China’s import from South Korea will enjoy a rapid growth. Since South Korea traditionally exports processed agricultural products, China’s import of these products will be the highest, amounting to US$1,320 million. Then comes the import of animal products and other crops (See Table10(a) and Table 10(b)).

Table 10(a) Value Changes in Chinese Imports from South Korea (Unit: million USD) Changes in imports

Commodities Total imports CJK-FTA CK-FTA JK-FTA

Corn 0.0 0.0 0.0 0.0

Vegetables 5.0 31.5 31.6 -0.2

Fruit & nut 3.1 17.1 17.1 -0.1

Other crops 13.9 280.7 284.4 -0.8

Animal products 19.4 104.9 106.0 -0.5 Food processing 134.0 1319.5 1343.3 -1.5 Manufacture & Services 27061.2 18594.7 23579.1 8.2 Source: Simulation results.

Table 10(b) Value Changes in Chinese Exports to South Korea (Unit: million USD) Changes in exports

Commodities Total exports CJK-FTA CK-FTA JK-FTA

Corn 60.2 253.7 238.8 -2.4

Vegetables 43.5 307.5 302.3 0.9

Fruit & nut 23.4 163.0 160.1 0.5 Other crops 492.6 7460.1 7183.7 14.5 Animal products 65.1 -11.0 -8.0 0.4 Food processing 762.6 592.2 664.9 -29.3 Manufacture & Services 11917.3 5768.1 6730.2 -545.5

Source: Simulation results.

There is no advantage in vegetables and fruits products of South Korea and there is a high duty to protect these products (Attached Table 1 (b)). After the formation of FTA, there will be a great increase in China’s export of grain, vegetables and fruits to South Korea. The most rapid increase of export will be in other crops (soybean, wheat, etc.), vegetables and corn.

c) China’s import and export with South Korea

China mainly imports processed food products and animal products from Japan and seldom imports primary agricultural products that are not processed. After the formation of CJK-FTA, China’s import of processed food products from Japan will increase dramatically, amounting to US$ 394 million. Certainly manufacturing and service in Japan are industries with advantages, so after the formation of CJK-FTA, Japan’s export in these two sectors to China increases by US$39. 06 billion (See Table 11(a) and Table 11(b)).

Table 11(a) Value Changes in Chinese Imports from Japan (Unit: million USD) Changes in imports

Commodities Total imports CJK-FTA CK-FTA JK-FTA

Corn 0.0 0.0 0.0 0.0

Vegetables 0.8 1.0 0.0 0.0

Fruit & nut 0.5 0.6 0.0 0.0

Other crops 14.2 6.0 1.5 -0.2

Animal products 62.3 35.2 2.7 -0.6 Food processing 237.1 394.4 -14.5 -2.4 Manufacture & Services 48258.2 39059.3 -2950.5 -731.2

Source: Simulation results.

China mainly exports vegetables, fruits and processed foodstuff to Japan. Since labor is cheap in China and the above-mentioned products are of labor-intensive type, these products enjoy advantages in export.

Table 11(b) Value Changes in Chinese Exports to Japan (Unit: million USD) Changes in exports

Commodities Total exports CJK-FTA CK-FTA JK-FTA

Corn 45.4 65.4 45.4 65.4

Vegetables 259.3 168.9 259.3 168.9

Fruit & nut 259.3 161.8 259.3 161.8 Other crops 552.7 -14.6 552.7 -14.6 Animal products 228.2 0.6 228.2 0.6 Food processing 3513.3 4736.2 3513.3 4736.2 Manufacture & Services 52650.0 14047.1 52650.0 14047.1

Source: Simulation results.

In comparison with China’s export to South Korea, there is less change in China’s export to Japan. Because original duty levied by Japan on the agricultural products imported from China is much lower than that by South Korea, the change in Japan’s import from China is not so obvious as that in South Korea when the duty is cut down after the formation of the CJK-FTA.

4) Summary

I. Analysis of national welfare and GDP variation shows that the establishment of CJK-FAT is the most favorable to China among the three schemes and South Korea benefits the most from CJK-FAT.

II. After the establishment of CJK-FAT, the growth in corn, other crops, vegetables and fruits will enjoy the highest growth among all the agricultural products of China and the total income of farmers in these areas will enjoy a considerable increase.

III. After the establishment of CJK-FAT, the increase of agricultural export from China will be higher than that of import and the most rapid increase in export will go to other crops, corn and processed food products. In manufacturing and service, the import will be higher than the export.

IV. After the establishment of CJK-FAT, China’s agricultural export to South Korea will witness a great increase, and the most rapid increase goes to other crops, vegetables and fruits. The increase of import goes to processed food products.

V. After the establishment of CJK-FAT, China’s export to Japan will witness less change in comparison with that to South Korea. The increase of China’s agricultural export to Japan is concentrated in vegetables, fruits and food processing. China’s import of processed food products from Japan will enjoy the greatest increase.