Industrial Structure, Regional Trade Bias, and China's FTA with Korea and Japan

This paper investigates the potential for China's FTA with Korea and Japan. We examine the similarities of industrial structures and regional trade biases among the three countries as indictors for establishing a China-Korea-Japan FTA. Even though the three countries are at very different developmental stages, their industrial structures will converge over time and their regional trade bias is high. Regression results of the gravity equation show that the trade volume among the three countries will increase. Based on our analysis of industrial similarities, we suggest a step-by-step procedure for the economic integration of Northeast Asia. A successful China-Korea-Japan FTA can be realized through the initial establishment of Korea-Japan and China-Korea FTAs, followed by subsequent negotiations between these two FTAs.