A high-level feasibility study has concluded that the time is ripe to set up a free-trade zone between China, Japan and South Korea.

China proposed a free-trade zone with Japan and South Korea last November at a meeting of the Association of Southeast Asian Nations (ASEAN) in Cambodia.

Xu Changwen - a researcher with the Chinese Academy of International Trade and Economic Co-operation, who led the study - said the increased interflow of trade and investment among the three states made it necessary to set up a free-trade zone to streamline such trade and investment.

Japan has been China's largest trade partner for 10 consecutive years and the China has also been Japan's second-largest trading partner for eight years. The trade volume between South Korea and the China reached US$44 billion last year, eight times the figure for 1992.

A free-trade zone can give full play to trade and investment between the three economies and make the zone one of the most competitive regions in the world, said the expert from the Ministry of Commerce think-tank.

Japan's adjustment of its economy made the zone more possible, Xu added.

The main obstacle to such a free-trade zone used to be Japan's protection of its agricultural products.

The Japanese Government has been afraid that a further opening of the country's market will hurt its fragile, high-cost agricultural sector. Its 3 million farmers constitute a political base for its ruling Liberal Democratic Party.

As a result, Japan has made little progress in its free-trade negotiations with Thailand, Mexico and South Korea in recent years.

"But now, Japan is adjusting its industrial structure in a bid to revive its sluggish economy," Xu said.

Since its narrow domestic market leaves little room for adjustment, Japan must use the international market through economic co-operation with neighbouring countries, Xu added.

Currently, 20 per cent of Japan's foreign trade is with China and South Korea, and 10 per cent of its overseas investment goes to the two countries.

"The situation is driving Japan to push forward economic co-operation with China and South Korea," Xu said.

Unlike Japan, South Korea is willing to accept China into the planned Japan-South Korea free-trade zone, Xu said.

South Korea needs China's participation to remedy its disadvantages in Japanese-South Korean trade in machinery, electronic products and chemical industrial products, Xu said.

The think-tank's study also said there was no need to be apprehensive that industrial goods from Japan and South Korea will flood the Chinese market once the zone is set up and tariffs are lowered.

China's current tariff rate of 11 per cent compares to Japan's 2.9 per cent and South Korea's 7.9 per cent.

"But when China's tax waivers are taken into consideration, the actual rate is not much higher," Xu said.

So the Chinese economy will not be hurt if the free-trade zone cuts tariff rates to the same level, Xu said.

The study forecasts that the bilateral annual trade volume between China and Japan will reach US$130 billion by 2005, the volume between China and South Korea US$55.5 billion, and the volume between Japan and South Korea US$100 billion.

Zhao Jinping, a researcher with the State Council Development Research Centre, said a China-Japan-South Korea free-trade zone would facilitate the emergence of an East Asian trade bloc within 20 years.

China signed a free-trade agreement with ASEAN last November and the zone is scheduled to be set up by 2010.

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