The need for economic cooperation in Northeast Asian region is increasing due to several factors. These are the deepening of the economic interdependence among the three countries; the need for the prevention of overlapping investment in major regional industries; as a response to the formation of economic blocs in the world economy and the growing number of fields requiring the coordination of common interests such as fishing activity rights and the problem of trans-boundary pollution. None of the Northeast Asian countries has joined any regional trade agreement so far but Japan and Korea have recently renewed their interest in concluding some kind of regional trade agreement. Also, China has intensified its trade liberalization process and tried to modernize its institutions in order to become a member of the WTO. Thus, the possibility of establishing Northeast Asian economic cooperation is higher than ever before.

Economic cooperation should be pursued through a preferential trading bloc that is compatible with WTO rules and that can gain momentum in the process of implementation. One possibility is to conclude a close economic cooperation organization in the region. An alternative can be an FTA among the three. However, this option has so far not been under serious consideration, due to the socialist regime of China, the attitude of Northeast Asian countries suspicious toward Japan because of the history of the past, and the fear of the aggravation of existing economic gaps. But the need for economic cooperation among East Asian countries has been reemphasized after recent changes in the international economic environment, especially after the East Asian financial crisis.

To examine the economic feasibility of Northeast Asian regional economic integration through the expansion of market approach, let us analyze the economic effects of trade liberalization between Korea and Japan, prior to exploring a simulation of economic integration of the three countries. If Korea and Japan eliminate tariff barriers on a preferential basis, Korea is projected to lose by USD 2.0 billion annually, and its trade balance with Japan will worsen by USD 7.1 billion. On the contrary, it appears that Japan will realize substantial gains. This result can be explained by the special conditions of both countries' economies. Korea's major industries overlap with Japan and thus are trade competitors, while Korea has weaker international competitiveness. Moreover, Korea's general tariff rates are higher than Japan's. Therefore, trade liberalization between the two countries will enhance Japanese price competitiveness over Korea's. Korea's dependence on high-tech industrial products from Japan will be higher, while Korea's industry structure will tend towards the development of low value-added industries such as textiles, clothing, shoes, etc, which will deteriorate the overall efficiency of resource allocation in Korea.

Next, a simulation was performed by adding China to the Japan-Korea FTA. Results similar to those in Korea-Japan FTA were obtained. The trade liberalization of the whole Northeast Asian region, however, would increase intraregional trade in a considerable way but at the same time, there is also a possibility that it would deteriorate the regional trade imbalance. This shows the importance of having a well-thought out strategy in achieving regional economic integration.
According to simulation results, the formation of an FTA would substantially improve Korea's and Japan's trade balances, while China would experience a sizeable increase in its trade deficit. This indicates that simple enhancement of market access by removing tariffs and non-tariff barriers (NTBs) within a short period of time is not a feasible approach for economic integration in Northeast Asia. Therefore, in creating an FTA, measures to mitigate anticipated problems should be devised. In creating the Northeast Asian Free Trade Area, we need to implement a strategy that will gradually lead to regional economic integration while overcoming the aforementioned obstacles.

Executive Summary

I. Introduction

II. The Evaluation of the Possibility of Economic Integration through the
Expansion of Market Access
1. Discussion on Northeast Asia Economic Integration
2. Northeast Asia Economic Integration: Empirical Results

III. Searching for Feasible Approaches

IV. Conclusion

References

국문요약