Proposal for Japan-Korea Economic Partnership Framework

Is this time really different?

We are undoubtedly living in a distinctive period. Kenneth Rogoff and Carmen Reinhart’s This Time Is Different (2009) argued that excess liquidity was central to the 2008 financial crisis. Yet, many businesspeople and some policymakers at that time believed that it would not cause financial crisis because this time was different. The notion that large amounts of money supply was not relevant to the crisis turned out to be wrong. But this time, truly, is different. Russia, China, and North Korea are causing different types of disruptions now than over the past 60 years. The war between Russia and Ukraine is truly unexpected. It is a lingering vestige of the Cold War with an unclear outlook ahead. Additionally, multifaceted rivalries between the U.S. and China have created disruptions for Korea, Japan, and other countries. The so-called “AI Revolution,” much like other types of industrial revolutions, has produced a number of uncertainties, both good and bad. It is uncertain where this revolution will lead us in terms of society, work, and personal life. Currently, we are living in a world where all three of these factors of uncertainty overlap: old Cold War politics, the U.S.-China rivalry, and the AI Revolution. It is necessary to acknowledge that this is quite different from the world we have been living in up until this point. New perspectives, thoughts, and directions are required. Otherwise, our fates as countries may not be so bright. Indeed, our futures will be determined by how we respond to these three factors; our navigation of this turbulence will determine our prosperity and perhaps existence. Even in the face of potential conflict, there may also be great opportunity.

Manufacturing as a basis for pooled resources

This begs the question of how to best navigate this distinctive landscape in the modern world. For starters, alignment is central to protection. If we try to approach everything by ourselves, we will simply be trampled by greater forces. Alignment with Japan is particularly important for South Korea because of shared geopolitical challenges. North Korea is a looming threat for both countries, and North Korea’s alliances with China and Russia are also noteworthy for both.

Comparable capabilities in manufacturing also make it logical for Japan and South Korea to combine resources and talents. Indeed, Japan, South　Korea, and Taiwan have a noteworthy “gene for manufacturing” not seen in many other places throughout the world. In Korea’s case, this has been key to its survival during these turbulent times. The same applies to Taiwan and the Taiwan Semiconductor Manufacturing Company (TSMC), and this had been a key pillar in terms of their sovereignty. Combining talents, resources, and technologies will foster more substantive protection for these countries. For example, concerning semiconductors, the U.S. has design capacity; Japan has materials, components, and equipment (MCE) capabilities; and South Koreans have manufacturing prowess. Such semiconductor supply chains are critical to mitigate external risks.

While Japan and South Korea possess strong manufacturing capabilities, this advantage cannot be taken for granted, as the advantage is not a permanent, natural feature. Both countries face structural challenges stemming from aging populations and declining interest in manufacturing careers. In South Korea, younger generations increasingly favor fields such as entertainment or medicine over industrial work, and similar trends may be true in Japan as well. At the same time, technological change, particularly advances in AI, creates new opportunities. By training AI on accumulated manufacturing expertise, both countries can mitigate labor shortages and sustain industrial productivity amid our declining birth rates.

Closer alignment between Japan and South Korea would also strengthen their capacity to manage broader geopolitical risks. The current global order is shaped by two major powers, the U.S. and China, both of which face institutional and economic instability. Neither Japan nor South Korea can exert meaningful influence alone as both lack individual leverage. Acting together, however, they can help stabilize relations with the United States while providing leverage with China. As democracies grounded in stable institutions and shared values, combining resources and talents is a shared duty.

This is also a duty for the international community more broadly. South Korea’s own development trajectory, from postwar devastation and extreme poverty to prosperity, was made possible in part through support from other countries. This history has fostered a belief in many South Koreans that the country now has an obligation to make the world better. Japan’s situation may be similar. This creates a shared moment in which both countries can jointly serve broader global interests. The emphasis is on leverage through unity rather than unilateral action, with the argument that “going it alone” is no longer viable.

Japan-Korea cooperation and irreversibility

The question then becomes how such cooperation can be realized in practice. Concrete proposals are outlined in existing policy review reports, but hesitation remains in both countries due to unresolved historical issues and mutual distrust. However, these perceptions may be increasingly outdated. Recent public opinion data from South Korea suggests a significant shift: surveys conducted in 2024 indicate that the U.S. is viewed most favorably, followed by Japan, with the vast majority of South Koreans identifying these two countries as their preferred partners. By contrast, North Korea, China, and Russia are overwhelmingly perceived as the most dangerous actors. Although Japan is not universally viewed as the most favored country, the data points to a clear improvement in perceptions. Indeed, public opinion in South Korea increasingly recognizes Japan as an important partner, which discourages politicians in both countries from emphasizing historical conflict. As mutual dependence and future upside potential grow, mismanaging bilateral relations carries far greater risks in the current global environment.

Against this backdrop, a passive “wait and see” approach toward government action is perhaps outdated and misguided. Instead, proactive engagement through strategic investment is the key; the aim is to make bilateral cooperation effectively irreversible. In the past, political actors may have emphasized historical tensions because both the perceived benefits of cooperation and the risks of division were relatively limited. That balance has now shifted: the potential gains from alignment are substantially larger, while the costs of conflict are more severe, leaving both countries vulnerable to external influence if divided.

Shared democratic values and institutional stability are the foundation for deeper cooperation. While global democratic backsliding is a growing concern, Japan is a long-standing and stable democracy, and South Korea as a resilient one, demonstrated by its swift resolution of recent political turmoil. Japan and South Korea stand out as two distinct democracies in East Asia. Their common values, institutions, and commitment to democratic governance form the core basis for sustained and meaningful partnership.

The AI revolution and notions of scale

AI development requires large amounts of capital and data. Individually, neither South Korea nor Japan can match the scale of the U.S. or China. If AI and quantum technologies are to shape the next generation, the challenge for both countries is figuring out how to make these revolutions work to their advantage despite their relative size. The answer is pooling resources, data, and human capital to achieve scale through cooperation.

One comparative advantage for Japan and South Korea lies in data quality rather than sheer quantity. Observations from Chinese scholars indicate that poorly collected data produces weak AI outcomes, whereas high-quality data enables more effective systems. Both countries have accumulated extensive, high-quality data in manufacturing, medicine, and other applied fields, along with deep tacit knowledge developed through “learning by doing,” but each of our individual country’s data is still not that large an amount in the global scope of big data. By combining these assets, they can train AI more efficiently and apply it more effectively to real-world settings. Physical AI thus becomes very important. To make physical AI more efficient, tacit knowledge needs to be combined with manufacturing to drive productivity.

Both Korea and Japan are experiencing declining economic dynamism, gradually stunting growth rates over time. AI is a potential catalyst to reverse these trends, but only if its benefits are captured jointly through shared data and tacit knowledge. In a global environment where scale increasingly determines success, Japan and South Korea can effectively become “big” by combining our high-quality data, industrial expertise, and technological resources.

One proposed avenue is gradual labor market integration, particularly for younger generations. While immediate replication of the European Union model is unrealistic, incremental steps could allow greater mobility. Japan maintains near-universal employment among university graduates, while South Korea faces persistent youth unemployment, with hundreds of thousands of graduates remaining jobless for extended periods. Facilitating employment opportunities for young South Koreans in Japan would not only alleviate a major social loss but also help develop human capital, expand individual opportunity, and strengthen the long-term foundations of bilateral cooperation. South Korea also offers complementary advantages, particularly in the availability of highly paid positions at global firms such as Samsung Electronics and SK Hynix. Starting salaries for university graduates in South Korea are often higher than those in Japan, creating opportunities for reciprocal labor mobility. If young Japanese professionals work in South Korea and acquire experience in these environments, they can later apply that knowledge to their own business endeavors, further deepening bilateral knowledge exchange. Allowing young people in both countries to choose freely where to work is an effective way to build skills, foster innovation, and cultivate future business leaders. To support this, gradual labor market integration can be a first concrete step, beginning with younger generations. Removing work permit requirements would lower barriers to mobility, while targeted financial support could ease initial settlement costs such as related to language acquisition, relocation and similar matters. Such measures can be considered social investments that strengthen long-term cooperation.

Supply chain resilience is a second priority area. Building on our earlier discussion of semiconductors, closer coordination among the U.S., Japan, and South Korea, from design to production, would strengthen resilience against external shocks. Particular emphasis should be placed on critical inputs such as rare earths and minerals. By acting as joint purchasers or co-investors in overseas mining projects, Japanese and Korean firms could gain leverage, reduce vulnerability to disruptions, and send signals to deter attempts to weaponize supply chains. Notably, this cooperation should be considered open rather than exclusive, with sufficient scope to include partners such as the EU, Australia, and Taiwan under a “Japan-Korea Plus” framework.

Financial and institutional coordination is also noteworthy. Greater consultation between development and finance institutions such as the Korea International Cooperation Agency (KOICA), Japan International Cooperation Agency (JICA), Export-Import Bank of Korea, and Japan Bank for International Cooperation (JBIC) would allow for greater alignment of overseas investment strategies. In parallel, the concept of “friend-shoring” should be refined through the frame of specialization rather than full reshoring of industries, which would be prohibitively costly. Specialization among trusted partners, combined with backup investments to ensure redundancy, can be seen as a balanced strategy for managing uncertainty.

A third proposal involves expanding currency swap arrangements. Increasing the size of the Korea–Japan swap line can become a means to bolster financial stability, particularly amid pressure on the Korean won driven by outward investment and dollar demand. Strengthened financial cooperation would reinforce mutual confidence during periods of volatility.

Additional ideas include elevating South Korea’s role in global governance, potentially through inclusion in an expanded G9, as well as cultural cooperation to deepen societal ties. Joint sports leagues, music competitions, and other cultural initiatives are especially effective in engaging younger generations and building familiarity and trust.

Taken together, these proposals outline meaningful action that can be taken. By investing jointly in labor mobility, supply chains, finance, culture, and global responsibility, Japan and South Korea are urged to advance their shared interests, reinforce democratic values and institutions, contribute to international stability, and play a more active role in serving the global community.

Comment

TAMURA Akihiko:
Indeed, the concept of irreversibility is particularly relevant at this time. It is worth taking advantage of historically positive mutual sentiment to further bolster bilateral relations and strengthen strategic investments to cement this irreversibility. Unquestionably, Japan and Korea have gone through difficult times historically, but this is an important moment to capitalize on if we want to continue fostering positive relations moving forward.

To this end, an external trusted third party may prove beneficial. The U.S. jumps in occasionally to help improve our relationship, but other candidates could include EU Member States such as Germany and France. These two countries went through similar historical tensions and exerted great effort to overcome them. Additionally, Germany is a dominant supply chain player and France is a massive player both territorially in the Indo-Pacific region and in the AI sector. Another advantage to involving European third parties is their shared challenges around dealing with the U.S. right now. They too stand to benefit from improved relations between Japan, Korea, and European players.

Q&A

Q:
Concerning the China-Japan-Korea Free Trade Agreement (CJKFTA), in light of recent geopolitical tensions and an economic decoupling trend, what condition would be necessary for such an agreement to become feasible?

Q:
Between the EU (particularly Germany and France) and Japan-Korea economic security cooperation, which industrial sectors can generate the most effective synergies? From semiconductors to batteries, or hydrogen, how should these be prioritized? Which industrial fields would be the most effective in taking advantage of strengths that will complement European players?

Q:
Academia and the business community in both Japan and Korea have been arguing for closer cooperation between both countries, but it has always proven to be difficult. The historic issue is certainly one of the challenges. But there are likely others as well. Could you elaborate further on why this time is different?

Q:
Although the potential power of cultural collaboration between Korea and Japan is very important, as evidenced in Japanese youth consumption of K-pop and Korean cosmetics, but in business, the dominant mindset is still inherently competitive. For example, Hyundai and Toyota compete in the U.S. market and other marketplaces for car sales. Private companies inherently compete; thus, how can we coordinate between collaboration and private-sector competition?

Q:
How can Japan and Korea jointly respond to present U.S. policies? Both countries have committed many resources to investing in re-industrializing the U.S., and Taiwan is also likely undergoing similar negotiations. How can we collaborate in responding in this field?

Q:
How could Japan and Korea jointly buy LNG from the U.S. or Qatar in order to decrease the price? It could potentially take a decade of stable relations to create that kind of cooperation. How could we create such a stable relationship?

Q:
In addition to European nations, are there any third-party Asian nations that could help facilitate bilateral cooperation?

KIM Byung-Yeon:
Firstly, EU integration should be the goal. Both countries have to work together in market integration, although currency integration may not be possible or feasible. France and Germany would indeed be good core partners, after which it would become possible to open up to other partners.

In terms of Asian countries that could help strengthen the partnership, Australia is a good candidate due to critical minerals and the mutual strengthening of supply chains.

Regarding academia and the business community in both countries, the difference now is a structural change in sentiment, not a temporary or accidental development. In the 1970s and 80s, historical tensions were less provocative and economic ties between Japan and South Korea were strong. Afterwards, as South Korea’s economy became more closely linked with China, the perceived economic costs of diplomatic missteps with Japan diminished. That dynamic has now reversed. There is growing recognition in South Korea that isolation poses serious risks in a world marked by democratic backsliding and geopolitical uncertainty. In this context, Japan stands out as the most trustworthy partner, given shared democratic values, market systems, and similar geopolitical challenges. This shift is reflected in public opinion data showing Japan as South Korea’s favored partner country.

When considering cooperation with European partners such as Germany and France, the question of which industries offer the greatest synergies—semiconductors, batteries, or hydrogen—depends heavily on country-specific priorities and sectoral expertise. For Japan and South Korea, semiconductors are likely the top priority, followed by batteries and hydrogen, given their systemic importance and vulnerability to disruption. Other countries may prioritize different sectors, which helps explain why broader multilateral negotiations are often difficult. Japan and South Korea can therefore function as a core group, selectively inviting EU partners depending on the industry, technology, and strategic context.

In terms of trade, a trilateral China-Japan-Korea FTA is less compelling than participation in broader frameworks such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Although bilateral FTAs with China exist, their level of integration remains relatively shallow. CPTPP offers deeper economic integration and more robust rule-setting. South Korea should seriously consider joining CPTPP, and China could be included if it satisfies the framework’s conditions. This approach offers a more effective alternative to a standalone trilateral FTA.

Concerning persistent tension between cooperation and competition among firms, the concept of “co-opetition,” or cooperative competition, provides a useful framework. Firms may need to collaborate when facing shared vulnerabilities, such as securing access to critical raw materials which are subject to geopolitical disruption, while continuing to compete in markets. Pure competition without coordination may generate short-term gains but undermine long-term viability of their industry. Determining where cooperation is necessary and where competition should prevail must remain context dependent.

Cooperation with the U.S. is essential, but there are serious doubts about the feasibility of the U.S. reestablishing itself as a comprehensive manufacturing hub. Labor shortages, high costs, and opportunity costs, and particularly the diversion of resources from highly productive technology sectors all limit the effectiveness of large-scale reshoring. While some domestic manufacturing capacity may be necessary as a strategic backup, attempting to recreate a full manufacturing ecosystem would likely be inefficient. More concerning is the risk that aggressive U.S. reshoring could hollow out manufacturing capacity in Japan and South Korea, weakening their industrial bases without meaningfully strengthening U.S. competitiveness.

Research on varieties of capitalism helps explain why East Asia excels in manufacturing. This strength is rooted not only in subsidies or industrial policy but also in education systems and cultural foundations that cannot be replicated quickly. Looking beyond the current U.S.-China rivalry, sustaining manufacturing capacity in Japan and South Korea is essential. Hollowing out these industries would ultimately strengthen China’s dominance, as U.S. manufacturing would struggle to compete on cost and labor availability, creating a loss for all parties.

Two policy responses follow from this analysis. First, a trilateral investment advisory committee should be established to examine existing bilateral tariff agreements collectively, with the goal of maximizing benefits while minimizing systemic risk. Second, deeper trilateral cooperation among the U.S., Japan, and South Korea is needed to strengthen supply chain resilience. By pooling complementary strengths and coordinating policy approaches, the three countries can better protect critical supply chains from external disruption. Japan and South Korea, in particular, should engage in closer consultation and communicate these shared concerns clearly to U.S. policymakers.