[Korea’s Great Transformation, Korea-Japan Future Cooperation] The First Mission for a Korea-Japan Industrial Community Is a Free Trade Agreement (FTA)

60 Years of Korea-Japan Relations: Toward Future Cooperation Partners
Korea's GDP Could Rise Up to 0.37% in the Long Term
High Potential in Advanced, Strategic Materials and Healthcare Sectors

The necessity of a Korea-Japan Free Trade Agreement (FTA) is once again drawing attention. Analysts argue that, beyond simply expanding trade, an institutional foundation for cooperation is needed for both countries to jointly respond to structural changes such as aging populations, supply chain restructuring, and intensified technological competition. The business sector is increasingly hopeful that an FTA could serve as the first step toward a Korea-Japan industrial community. There is a prevailing view that only with institutional connectivity between the two countries can substantive cooperation be realized.

According to a report titled "A Study on the Potential for Synergy Creation through a Korea-Japan Economic Bloc" published last year by the Korea Institute for International Economic Policy (KIEP), if a Korea-Japan FTA is concluded, Korea's real gross domestic product (GDP) is projected to increase by approximately 0.37% in the long term, 10 to 15 years after the agreement takes effect. By industry, production expansion is expected to be centered on manufacturing sectors such as electrical and electronics (+1.29%), chemicals (+1.10%), and transportation equipment (+0.89%). However, the report also notes that in the first year after the agreement takes effect, the short-term growth effect is limited to 0.06%, indicating that substantial results will require both expanded mid- to long-term investment and institutional reforms.

The report further estimates that if Korea joins the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), annual trade volume between Korea and Japan could increase by about $2.29 billion over the next ten years.

Based on these analyses, experts advise that practical and phased approaches?such as joining the CPTPP or concluding FTAs by industry?should take precedence over comprehensive FTA negotiations. Kim Bongman, head of the International Division at the Federation of Korean Industries, stated, "There is consensus that companies need to partner with Japan, but interests differ by industry. In sectors where Japan is more competitive, there is inevitably a defensive stance, whereas in areas where we have needs, proactive cooperation is possible." He added, "Collaboration is already underway in supply chain areas, as components and materials such as Sobejang and wafers are essential for semiconductor production. In addition, Japanese companies are actively entering the domestic market and supplying products in sectors such as hydrogen and the silver industry."

Kim Gyupan, research fellow at KIEP, said, "Since Japan has strengths in materials, components, and equipment (Sobejang), and Korea is strong in semiconductors and digital technologies, we should address what we can in a step-by-step manner." He also emphasized, "Korea and Japan must jointly respond to the trend of advanced, developed-country standards in areas such as digital trade, bio, quantum technology, and the space industry."

In the past, Korea-Japan FTA negotiations broke down due to conflicts over sensitive industries such as agriculture and automobiles. However, as the trade environment rapidly changes with digital transformation, stronger environmental regulations, and supply chain restructuring, there is a growing need for agreements focused on specific areas such as standards, certification, and services, even if full market liberalization remains difficult.

Yang Jooyoung, director of the Economic Security and Trade Strategy Research Office at the Korea Institute for Industrial Economics and Trade, stated, "Given the limitations of supply chain self-sufficiency policies that lack economic viability, practical economic cooperation with Japan is essential." He added, "A realistic approach would be to start discussions in mutually beneficial fields rather than pursuing comprehensive market opening." He particularly emphasized that expanding cooperation in advanced and strategic materials, where dependence on Japan remains high, could enhance the competitiveness of Korea's national strategic industries.

Jang Sangshik, director of the International Trade and Commerce Research Center at the Korea International Trade Association, analyzed that the need for Korea-Japan economic cooperation has grown even greater in response to China's control of strategic resources and weaponization of supply chains. He said, "China's introduction of export licensing for key resources such as gallium and germanium is increasing burdens on Korean companies. To address such external risks, Korea and Japan need to jointly build complementary supply chains."

The CPTPP, which is attracting attention as a prelude to a comprehensive Korea-Japan FTA, is in effect a multilateral FTA that can be expected to ease non-tariff barriers, integrate standards and certifications, and enhance supply chain resilience. The CPTPP currently includes 12 member countries: Japan, Australia, Canada, Mexico, Singapore, New Zealand, Malaysia, Vietnam, Brunei, Chile, Peru, and the United Kingdom. The Korean government pursued CPTPP membership during the Moon Jae-in administration, but a combination of factors?including diplomatic friction with Japan, strong opposition from the agriculture and fisheries sectors, burdens related to intellectual property rights, and insufficient institutional reforms?prevented the start of full-scale negotiations. Given the CPTPP's structure, which requires the consent of existing member states, the possibility of political opposition from Japan was also a major obstacle.

Kim Bongman commented, "It is desirable to broaden the trade foundation with Japan through the CPTPP. If Korea and Japan divide labor and integrate demand in areas where each excels, rather than working separately, efficiency can be greatly enhanced, much like how European aircraft manufacturer Airbus sells to the European Union (EU)." Airbus collaborates by having France, Germany, Spain, and the United Kingdom each produce aircraft parts based on their strengths, then integrating them to manufacture finished aircraft. The implication is that Korea and Japan could target a joint market through a similar division of labor by sector. However, practical constraints remain. Yang pointed out, "There will still be strong domestic backlash regarding the trade deficit with Japan. It is important to persuasively explain that a Korea-Japan FTA offers significant practical benefits in terms of supply chain reinforcement, entry into the Japanese market, and cooperation in the United States."