For better or ill, the three North Asian economies of China, South Korea and Japan are becoming more interdependent. But each nation has their own point of view in this increasingly complex triangular trade relationship. Late last year, Chinese Premier Li Keqiang, Japanese Prime Minister Shinzo Abe and South Korean President Park Geun-hye restarted long-stalled talks on a three-way, free trade agreement, one designed to strengthen the links between the largest economies in East Asia. This follows a bilateral free trade agreement that China and South Korea signed in June last year. The trilateral pact is anything but a sure bet. It would have to overcome long-held distrust, lingering animosities and ongoing security concerns. It could take years to fashion.  No matter. A renewed push for this trilateral zone underscores the need for strong measures that boost long-term trade between the three nations. “It’s not moving fast. It’s going to take a long time. But there’s going to be progress,” said Yves Tiberghien, director of the Institute of Asian Research and a political science professor at the University of British Columbia. Tiberghien pointed to another leaders’ summit scheduled for late spring as building momentum. “It’s in the interest of business and trade in all three countries,” he said. China, Japan and South Korea are more than just large, wealthy neighbors who do business with each other. As their own officials have emphasized, the three countries constitute one of the biggest economic zones in the world today, one that rivals the European Union or North America. It’s not a simple “one country makes this and the other country supplies that,” either. It’s one in which manufacturers have blended production across these borders in often complex fashion.  Most dramatically, Japanese and Korean manufacturers have tied their homegrown operations to factories in China. That fusion has become a major engine propelling trade flows, not just in terms of goods exported elsewhere, but in terms of those traded between the three.  “It’s an integrated production chain and there’s more and more integration and regionalization,” said Tiberghien.  So, China’s recent economic downturn has a profound impact on regional trade, investment and commerce. Longer term, there might be moves to diversify production, investments and markets elsewhere, but there’s nothing to indicate that will supplant this triangular trade. For the foreseeable future, the three countries, their manufacturers and their traders see little choice but trying to bolster regional ties. “China, Japan and Korea are locked into this highly integrated trade and investment relationship,” said Andrew Crosby, managing director of the International Centre for Trade and Sustainable Development, based in Geneva. “They are all facing different degrees of structural rigidity and perhaps not adapting to reduced demand and changes in global trade patterns as fast as they need, so they try to take the traditional step of reducing barriers amongst themselves,”  China is the largest trading partner by far for both South Korea and Japan. China accounts for more than one-quarter of South Korea’s total exports and almost one-fifth of Japan’s. China supplies 22% of Japan’s total imports and 17% of South Korea’s. This affects everything from merchants to marine ports, retail to rail.  The economies in Asia have become highly interdependent, for good or for bad. “China’s growing prominence as a market for exports from its Asia-Pacific neighbors,” writes Rajiv Biswas, the chief economist, Asia-Pacific, for IHS Economics, “has increased their vulnerability to a Chinese economic slowdown.” A Hard Landing: The “ill” Factor in Triangular Trade An IHS model forecasts that if China’s annual economic growth drops to 5.3% during the 2016-2018 period, a so-called “hard landing,” South Korea’s GDP could see a negative impact of more than 1.5%, while Japan’s GDP could be trimmed by about 0.5%, both punishing reductions. That could push both economies into recession. The trade links are, if anything, deeper than statistics suggest. Whole industries, markets and corporations have developed and prospered on the back of this trade. Now, they’re being hammered.   Some of these economic ties are obvious, some not so much. For example, although it has no petroleum of its own, South Korea is one of the world’s largest exporters of energy and constitutes the country’s fifth largest export category, with more than $33 billion shipped overseas in 2015. That’s because it built and now hosts some of the most advanced refineries anywhere. Its biggest market is China. But that export plummeted last year, down more than 37%. Obviously, part of this reflected the decline in oil prices, but more was a result of a drop in demand from China. True, the three countries many times compete for business, especially in certain manufacturing sectors. And that competition can be fierce. But the old aphorism is being turned on its head: A falling tide lowers all boats.  Alliances are being struck in attempts to cope with this. Take the shipbuilding industry. In the midst of overcapacity and decreased demand, Japanese and Chinese shipbuilders are teaming up to build higher value-added vessels, although admittedly to counter Korean competitors, which have been hammered as well by declining orders. (Hyundai Heavy Industries Co., Samsung Heavy Industries Co. and Daewoo Shipbuilding & Marine Engineering Co. together lost almost $7 billion last year, according to Yonhap news agency.) For example, Kawasaki Shipbuilding and COSCO in a joint venture are investing hundreds of millions of dollars in a shipyard in Jiangsu that can build new-generation LNG ships and car carriers. China’s economic doldrums have resulted in a softening in demand for products from its other trading partners, say, rubber from Indonesia, plastics from Thailand, or electronic equipment from Malaysia. That impacts not only Southeast Asian exports but also the ability for these countries to import finished goods from Japan and South Korea, as well as from China. An increasingly integrated supply chain throughout the region means, for example, that a softening in China’s domestic car production affects those who supply raw materials or car parts from Japan, South Korea and Southeast Asia.   “A lot of Southeast countries are dependent on that Japan-Korea-China triangle,” said Crosby.  Trade between Japan and South Korea has been declining since 2011. Factors include renewed political and territorial issues and a weakening Japanese yen, which has made South Korean exports to Japan more expensive. But China’s economic slowdown has exacerbated this decline, both directly and indirectly.  In December, Japanese exports to China fell by 8.6%, but Japanese exports to South Korea dropped even more, by 15.4%.  All three currencies have devalued over the past three years. In late January, Japan’s Central Bank has reintroduced negative interest rates that will further weaken its currency, which has already fallen more than 20% since 2013. While the Chinese yuan and Korean won haven’t weakened nearly as much, there are fears that regulators in China and Korea will be pressured to respond to the devalued yen, unleashing a kind of currency wars and exports arms race. One result would be a further hampering of China’s efforts to transform itself into more of a consumer-based economy. Points to the Triangle China-Japan For the first half of 2015, the latest period detailed figures are available, Japan’s exports to China declined by a little less than 11%, according to the Japan External Trade Organization, or JETRO. That downward trend is likely to continue. Preliminary data indicates Japan’s economy shrunk 0.4% during the last quarter of 2015, with China being blamed as a major reason for the economic decline. As China’s construction boom withered, Japanese industry has suffered. Demand for Japanese iron and steel fell almost 20% in the first half of last year. Even more dramatically, Hitachi Construction Machinery Co, for one, reported China-related business fell by more than 40% for the year ended March 2015, and two-thirds in the period from March 2011 to March 2015. Meanwhile, Japan exported almost 30% less cars to China. That’s a radical reversal, considering that during the first half of 2014, car exports soared by more than 50%.  Or, take machine tools. China has become the world’s largest consumer of machine tools, accounting for more than 40% of world demand. That has greatly helped Japan’s machine tool industry, which has been making a comeback. China is now Japan’s largest export market, according to data compiled by Japan Machine Tool Buildings Association. But in 2015, Japanese machine tool exports to China fell by nearly 20%; almost all of that decline took place in the second half of 2015. Individual companies tell the story as well. Japan’s Tsugami Corp. is an almost-80-year-old company that makes precision machinery, including lathes and grinders, which are used for both auto parts and smartphone manufacturing. It has grown into a $500 million company, with more than 80% of its business in Asia, most of that in China. It has factories in both Japan and China, selling in and between both countries, with substantial sales as well in South Korea, its third largest market. For the nine months ended Dec. 31, 2015, the last reported results, sales were down by more than 26% and profits were down by more than 80% over the similar period the year before. The company’s financial report is peppered with references to the slowdown in China, which the company blames for current woes and an uncertainty about the future.  Yaskawa Electric Corp., which makes industrial robotics and factory automation equipment, reported slightly higher revenue, despite China. In its nine-month financial report, it cited deterioration in the Chinese market for robotics and a sluggish Chinese infrastructure market, smartphone and automotive-related markets, all of which affects its motion control devices. In projecting full-year figures, Yaskawa warned that the Chinese economy would drag down both sales and profits. Japanese exports aren’t the only casualty. Imports from China to Japan declined at an even steeper rate, 13.1% during the first half of last year. JETRO blamed some of the decline on the depreciation of the Japanese Yen. That hurt everything from mobile phones to medical devices.  China-South Korea Last year, South Korean exports declined every single month, the worst performance since the global recession of 2009. Exports to China were a major factor. They fell 5.6%, while imports were pretty much flat, according to the Korea International Trade Association.  Industrial goods were especially hard hit. Korean exports of refrigerator compressors, for example, declined 32%, while washing machine parts were down 22.5%. Rubber and plastic injection molding dropped 30%, while some specialized machinery related to working plastic and rubber fell almost in half. Revenue at Hyundai Heavy Industries, for example, fell 12% according to preliminary figures, while the country’s largest shipbuilder, heavy equipment maker and engineering firm lost more than $1 billion last year. Certainly, its woes extend far beyond, but declining exports to China definitely hurt.  Sales of Hyundai excavators have fallen precipitously and Hyundai officials blame China. “There is no other market that can replace China,” said construction equipment executive Rhee Sang-gi in a Financial Times article last year.  “We thought this year would be better than last year, but it’s getting worse: the Chinese market is getting smaller and smaller.” Rival Doosan Infracore has reported that excavator sales in China for the first three quarters of 2015 declined by 41%, while hydraulic components fell by 36%. Then, there are cars. China is the world’s largest vehicle market, but sales are now soft. Japanese and South Korean automakers have poured billions of dollars into China-based production and there are no signs they are letting up. Hyundai Motors is more aggressive than any.  China is already Hyundai Motor’s single biggest market, although sales in China for the Korean automaker fell 5% last year. To bolster its position, Hyundai is building two more factories in China, which will expand production capacity by 50% when they are fully running in 2018. Hyundai is now in negotiations with its joint venture partner to build its most luxurious model, the Genesis, in China, as well as other models. Hyundai affiliate Kia is enlarging its factory in China as well, which will boost production by one-third this year. Competition with China is certainly an issue as well and Korean manufacturers are painfully aware of the various threats Chinese manufacturers can bring. Late last year, for example, Korean semiconductor giant SK Hynix denied market speculation that it would enter a joint venture and collaboration with Chinese company Tsinghua Unigroup in return for a 20% investment. In discussing the possibility, The Korea Times quoted a fund manager, who summed up the relationship, not just of the company, but of the country as a whole: “China is a real threat and it is a big market for SK.”