Beijing, Tokyo should upgrade investment pact

Against the backdrop of stagnation in the World Trade Organization, friction between China and the United States, and growing anti-globalization, momentum has shifted toward regional and bilateral free trade agreements. A free trade bloc of developed economies, led by the US, is gradually being forged.

The US and Japan reached a trade agreement on tariff concessions in October last year. Some of the members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, such as Canada, Australia and New Zealand, have expressed interest in joining the pact, raising the prospect of a giant transpacific and transatlantic FTA involving more than 40 countries in Asia, Europe and North America.

To avoid being isolated by the US in international trade, China must promote trade liberalization and globalization, integrate more deeply into international markets, and forge closer economic ties with more countries.

In the context of warming ties between China and Japan, the two countries should launch negotiations on an upgraded bilateral investment agreement as soon as possible, as well as start negotiations for a China-Japan free trade agreement.

This would not only help promote China-Japan economic relations, but also boost progress toward a China-Japan-Korea trilateral FTA, accelerate regional economic development, and open doors to China possibly joining the CPTPP.

In 2007, China, Japan and South Korea initiated negotiations on a trilateral investment agreement, which was signed in May 2012. Also in 2012, the three countries launched negotiations on a China-Japan-South Korea FTA.

Currently, China is the largest trading partner of Japan and South Korea, and Japan and South Korea are China's second-and third-largest trading partners, respectively.

At the eighth annual meeting of leaders of China, Japan and South Korea held last year, the leaders said they would work hard to achieve a free, fair, nondiscriminatory, transparent, predictable and stable trade and investment environment and keep markets open.

If China, Japan and South Korea reach an FTA, it would become the world's third-largest free trade area after the US-Mexico-Canada bloc and the European Union.

The current bilateral investment agreement between China and Japan went into effect in 1989.Although China and Japan have signed FTAs with many countries, due to external factors, including the rigidity of the US-Japan alliance, strategic suspicions of the US and volatile relations between South Korea and Japan, China and Japan have not established a free trade mechanism.

China and South Korea have already forged an FTA and will start the second phase of negotiations to establish a new mechanism for China-South Korea economic cooperation.

South Korea and Japan have held similar negotiations since the end of 2004, but the talks stalled because Japan was unwilling to reduce tariffs on agricultural products.

The economic relationship between Japan and South Korea is relatively competitive, and the two countries have often been at odds due to historical issues. Their bilateral relationship has been icy for more than a year, which is an obstacle to the advancement of a China-Japan-South Korea trilateral FTA.

As countries separated by only a strip of water, China and Japan have close economic ties. Japan is China's third-largest source of foreign investment, and China is Japan's second-largest destination for foreign investment.

Despite the impact of the COVID-19 pandemic, trade between China and Japan in the first half of 2020 was close to $150 billion. Japan's investment in China was about $2 billion, basically reaching the level of the same period last year.

At present, the stability and improvement of China-Japan relations have also created the right conditions for the upgrading of economic ties on both sides.

During the fight against COVID-19, China and Japan have supported each other.

Despite some claims that Japanese companies will withdraw from China, according to Japan's annual survey on Japanese investment in Asia (including the Chinese mainland) and joint ventures in April 2020, about 90 percent of Japanese companies in China said they have no plans to change their supply chains or would only make adjustments inside China if any changes were made.

Although President Xi Jinping's visit to Japan was postponed due to the pandemic, warming relations between China and Japan have created good conditions for the upgrading of bilateral ties.

In establishing an ongoing high-level dialogue with Japan to upgrade the investment agreement and forge an FTA, China can also play a mediating role in trade negotiations with Japan and South Korea.

Mutual assistance amid the pandemic has shown that China-Japan relations can withstand hardships. By working together, the two sides can move on from the past, and bring peace and prosperity to both nations.

The author is president of the Center for China and Globalization, a think tank.