/ Towards more visibility in East Asia – Latvia’s need for an expanded outlook
Introduction
The main takeaway from the 2018 Annual Report of the Minister of Foreign Affairs is the wider emphasis that is being placed on East Asia as a whole – not just China. In the context of political and economic cooperation, China is mentioned 5 times, the Republic of Korea is mentioned 5 times, and Japan is mentioned 6 times.[1] In comparison, the 2017 report mentioned China 10 times, the Republic of Korea 3 times, and Japan just twice.[2]
On the one hand, over-focusing on China has not been as successful as many had thought in the early 2010s, as the economic expectations from investments and transport cooperation have not yet been fully fulfilled. On the other hand, out of all of Latvia’s partners in East Asia, China is and is likely to remain by far the biggest. This is not just due to the size of China’s import and export markets, it is also because for seven years China has been actively engaging Latvia through multilateral formats for cooperation and wide-ranging sectoral dialogues.
This article aims at exploring Latvia’s current involvement with East Asia, describing the trends of engagement, and assessing how Latvia should balance its East Asia strategy. The article will also argue that Latvia needs to expand its political and economic engagement with Japan and South Korea to strengthen its economic competitiveness and even out the burden of expectations that is currently largely placed on Sino-Latvian cooperation.
Japan and South Korea have been chosen for analysis because Latvia already has permanent diplomatic representation in those countries – therefore, an institutional platform for multisectoral cooperation has already been established. In the future, however, a similar analysis would be beneficial vis-à-vis other regional players, such as Vietnam, Thailand, etc. Engagement with other partners in East Asia is the logical next step following widening exchanges with China.
China: The most visible regional partner
It is clear that the People’s Republic of China is Latvia’s biggest partner in East Asia, and its role has been steadily increasing since 2012/2013, with trade amounting to 159 million euros in exports (totaling 1.2% of Latvia’s exports) and 490 million euros in imports (3.1% of Latvia’s imports, making it the 9thlargest import partner) in 2018. In comparison, trade in goods with Japan constituted 53.3 million euros in exports and 25.7 million euros in imports, and with South Korea trade reached 61.7 million euros and 20.3 million euros, respectively.[3]
China’s attempts to interact with the Baltic States via its new transregional initiatives – first the “Cooperation between China and Central and Eastern European Countries” initiative (“17+1”), and shortly after “the Belt and Road Initiative” – contributed to Latvia’s assessment of its East Asia standing in the first place, leading to a widening of its outlook from regional and transatlantic issues.
Also, China is the only East Asian actor to provide a somewhat structured vision of Baltic, including Latvian, engagement. Arguably, Japan has presented projects of regional integration that have been interpreted as a “balancing act” with regards to the Belt and Road,[4] including the “Asia-Africa Growth Corridor” (in cooperation with India) and the “Free and Open Indo-Pacific” vision.[5] Nonetheless, first of all, this offer does not involve Europe, and secondly, Japan has found a way of working with China through “business cooperation in third countries”[6] instead of duplicating its initiatives.
This leads to the conclusion that saying China is just another one of Latvia’s partners in the East Asian region would be an understatement. Both the institutional depth as well as the practical deliverables of the countries’ cooperation put the Latvia-China relationship on a different level, leading to the conclusion that China is, and most likely will remain, Latvia’s biggest economic partner in East Asia. Therefore, the goal of the expansion of Latvia’s East Asia strategy should not be to replace China, but to diversify its portfolio and look for niche development opportunities.
Latvia must rely on its expanding vision of East Asia to invest in partnerships with Japan and South Korea, both on an economic and a political level. There are several arguments in favor of Latvia expanding its partnerships in East Asia.
First of all, Latvia needs to establish links with countries that offer scale-appropriate, sophisticated internal markets – even if Latvia doesn’t end up producing and selling much, this would not hamper cooperation.[7]
Secondly, both Japan and South Korea are involved with China through trade and are deeply integrated into regional supply chains. East Asia is the most integrated Asian region after Southeast Asia, and it is the most balanced region considering all dimensions of integration, including trade and investment, money and finance, and regional value chains.[8] Therefore, more proactive Japan and South Korea strategies for Latvia would not put a strain on Sino-Latvian relations – on the contrary, new complementarities could be achieved.
Lastly, through engagement in China’s multilateral initiatives Latvia has obtained the experience of operating within regional groups while working with a single East Asian partner. This knowledge can be applied to Latvia’s emerging partnerships in East Asia, as both Japan and South Korea are interested in the Baltic region as a whole.
Japan: Existing exchanges, new impetus
Not least due to China’s engagement in Europe in general and the Baltic States in particular, Japan has also become more present in the region. Its presence is best exemplified by the visits made by Prime Minister Shinzo Abe to six European countries, three of them being the Baltic States, in January 2018.[9] During the visits, apart from calls to deepen cooperation in the economy and tourism, there was a prevailing message of Japanese-Latvian common understanding on freedom, democracy and civil rights,[10] making an implicit reference to the three traditional EU critiques of China.
Notably, Latvia already sees Japan as an important economic partner – the Latvian Investment Development Agency has had a representative office in Tokyo since 2008. With the Economic Partnership Agreement between the EU and Japan having entered into force on 1 February 2019, the elimination of customs duties on agricultural products (such as dairy and pork), processed agricultural products (such as candies, confectionery, and biscuits), industrial products (such as cosmetics), and forestry products (such as timber) will gradually take place.[11] Latvia stands to benefit from the agreement since these product groups make up an important share of Latvia’s exports to Japan. Also, the issue of non-tariff barriers on pharmaceuticals, cosmetics, and beer, among others, has been working since 2016. Pharmaceuticals and alcoholic beverages rank 4thand 6th, respectively, on Latvia’s export sheet,[12] pointing towards complementarity with the Japanese import market.
As a country interested in education exports, Latvia should continue to promote itself as a university destination in Japan. The results of this promotion in terms of quantity, however, is likely to remain modest, as UNESCO puts the Japanese student outbound mobility ratio at 0.8, significantly lower than that of other countries in the region, such as South Korea (at 3.4) and China (at 2.1).[13]
From the perspective of investment attraction, Latvia already has a positive example of cooperation with Japan – in 2013-2014, Mitsui& Co., Ltd., the second-largest general trading company in Japan, purchased “RUT”, a terminal in the Freeport of Riga,[14] making it more competitive in the handling of cargo such as wood products and frozen food.
South Korea: Low baseline, positive trends
South Korea became the first Asian country to ink a trade deal with the European Union by signing the EU-South Korea free trade agreement in 2015 (a provisional agreement had been in place since 2011) – a deal that “went further than any of the EU’s previous agreements in lifting trade barriers”,[15] becoming an important development for all EU members, including Latvia.
There are signals that demonstrate that Latvia has an increasing interest in South Korea. Since the Latvian embassy was established in Seoul in 2015, exchanges have intensified both on political and promotional levels. In 2018 there were two key events – the first Latvian presidential visit took place, and a business forum was organized in Latvia. In April 2019, at Latvia’s initiative, the first meeting of the Korean-Baltic States Economic Committee took place in Seoul. In May 2019, the speaker of the Korean National Assembly came to Latvia on an official visit. In October 2019, in an effort to add higher-value-added products to the export balance, Latvian startup companies took part in a trade mission. Currently, Latvia’s cooperation priorities with South Korea include “tourism, transport, especially the development of direct flights, start-ups, investments, food processing, [the] timber industry, and the ICT [industry]”.[16]
Regarding goods exports to Korea, Latvia should continue to strive for higher-value-added exports, as currently timber and timber products make up 81% of the export sheet, whereas food, optical devices and machinery/mechanisms make up only 1% each.[17] Export groups are less balanced than in the case of Japan, where timber makes up only 50% of total exports, food stands at 5%, optical devices at 15% and mechanisms and electric appliances at 3%.[18] According to the Korea Trade-Investment Promotion Agency, medicine is also a promising export item.
As education exports are one of Latvia’s service export goals, this aspect of cooperation should be further explored as well. Currently, there are 53 Korean students pursuing their degrees in Latvia, demonstrating a level of complementarity between Latvia’s supply and Korea’s demand for European higher education. Korean students are active on the global education market, with an outbound mobility ratio of 3.4 – in the region, that is surpassed by Vietnam (at 3.6).[19]
Complementarity can be achieved in other areas of cooperation as well. Latvia has been intensively developing its profile as a cinema filming location. In 2019, a high-profile project – a historical drama directed by Yoon Je-Kyun filmed in Riga and at the Cinevilla Filmtown backlot – launched, with Latvia being the only overseas site.[20] One commercially successful filming project is more than enough to make a location iconic in Asia and to draw more projects and spillover revenues.
Another case in point is South Korea’s high economy interdependence ranking – exports plus imports as a percentage of GDP make up 70.4% (2018)[21] (by way of comparison, Japan is steadily low at 35%, and the PRC has been dramatically decreasing in the last decade, currently at 38%). Getting into the supply chains of the country’s highly integrated enterprises can open doors for Latvian producers and service providers – both in the East Asian region and globally.
Conclusions
China is and most likely will remain Latvia’s biggest economic partner in East Asia. Latvia should expand its East Asia strategy – not to replace China, but rather to diversify its engagement, taking advantage of the high economic interdependence of the region by entering its supply chains, looking for new markets, and making use of the diplomatic representation Latvia has established in other countries of the region.
Latvia needs to take advantage of multilateral frameworks such as ASEAN, EU-Japan Cooperation, and EU-Korea Cooperation to further exchanges with Japan and South Korea – and it needs to be more involved and visible within these frameworks. The newly signed Japan-EU trade deal and the existing EU-South Korea trade deal are both beneficial to expanding Latvian relations with these countries. Contrary to existing concerns, the author believes that intensifying political, economic and people-to-people contacts with Japan and the Republic of Korea would not put strain on Sino-Latvian relations; this is due to interdependence, mutual complementarity and a high level of regional economic integration between China and these countries. There are lessons to be learnt from Latvia’s cooperation with China – namely, the experience of operating within regional groups while working with a single East Asian partner. This knowledge can be applied to Latvia’s emerging partnerships in East Asia, including the newly established Korean-Baltic States Economic Committee, the next meeting of which is scheduled to take place in Riga.[22]
In terms of goods exports to Korea, Latvia should continue to strive for higher-value-added exports, as currently raw materials are the predominant group. In terms of services exports to Korea, Japan, and China, wider complementarities need to be established, including the creation of cultural products, as positive examples already exist and the foundation for this has been laid. In terms of education exports, Korea provides a more welcoming market than Japan due to the high outbound student mobility of the country.
© Latvian Institute of International Affairs, Latvian Foreign and Security Policy Yearbook 2020
ENDNOTES:
[1]Ministry of Foreign Affairs of the Republic of Latvia., “Annual Report of the Minister of Foreign Affairs on the accomplishments and further work with respect to national foreign policy and the European Union, 2018”,27.12.2018, https://www.mfa.gov.lv/images/ministrija/Annual_Report_of_the_Minister_of_Foreign_Affairs_
2018_en.pdf
[2]Ministry of Foreign Affairs of the Republic of Latvia., “Annual Report of the Minister of Foreign Affairs on the accomplishments and further work with respect to national foreign policy and the European Union, 2017”, https://www.mfa.gov.lv/images/ministrija/Annual_Report_of_the_Minister_of_Foreign_Affairs_2017_en.pdf
[3]Database of the Central Statistical Bureau., “ATD200. Eksports un imports pa valstīm, valstu grupām un teritorijām,”http://data1.csb.gov.lv/pxweb/lv/atirdz/atirdz__detalizeta__2zim/ATD200.px/
[4]Brînză, A., “Japan’s Belt and Road Balancing Act,” 8.11.2018, https://thediplomat.com/2018/11/japans-belt-and-road-balancing-act/
[5]The Government of Japan., “Towards Free and Open Indo-Pacific,” 07.2019, https://www.mofa.go.jp/files/000407643.pdf
[6]Ministry of Economy, Trade and Industry., “Japan and China Conclude Memorandum on Business Cooperation in Third Countries,” 10.05.2018, https://www.meti.go.jp/english/press/2018/0510_003.html
[7]Interview with Thomas Fingar, 9.11.2019
[8]Asia Development Bank., “Asia-Pacific Regional Cooperation and Integration Index,” 2017,https://aric.adb.org/pdf/aeir/AEIR2017_7_asia-pacific-regional-cooperation-and-integration-index.pdf
[9]Ministry of Foreign Affairs of Japan., “Prime Minister Shinzo Abe Visits Europe,” 16.01.2018,https://www.mofa.go.jp/erp/we/page24e_000234.html
[10]Collier, M., “Japan’s Abe on Historic Visit to Latvia,” 13.01.2018, https://eng.lsm.lv/article/politics/diplomacy/japans-abe-in-historic-visit-to-latvia.a264150/
[11]European Commission., “Key elements of the EU-Japan Economic Partnership Agreement,” 12.12.2018,https://europa.eu/rapid/press-release_MEMO-18-6784_en.htm
[12]Database of the Central Statistical Bureau., “Svarīgākās preces Latvijas eksportā 2018. gada decembrī
(faktiskajās cenās)”,12.02.2019, https://www.csb.gov.lv/lv/statistika/statistikas-temas/areja-tirdznieciba/apkopojums/meklet-tema/2509-latvijas-areja-tirdznieciba-2018-gada
[13]“UNESCO Institute for Statistics., “Global Flow of Tertiary-Level Students,” 2017, http://uis.unesco.org/en/uis-student-flow
[14]Mitsui & Co., “Portek to acquire Latvian Port Terminal Company,” 30.04.2013, https://www.mitsui.com/jp/en/release/2013/1205009_6472.html
[15]European Commission., “South Korea,” https://ec.europa.eu/trade/policy/countries-and-regions/countries/south-korea/
[16]Ministry of Foreign Affairs of the Republic of Latvia., “A new step in economic cooperation between the Baltic States and South Korea,” 24.04.2019, https://www.mfa.gov.lv/en/news/latest-news/63243-a-new-step-in-economic-cooperation-between-the-baltic-states-and-south-korea
[17]Latvian Investment Development Agency., “Latvijas ekonomiskā sadarbība ar Dienvidkoreju,”2019, http://eksports.liaa.gov.lv/files/liaa_export/attachments/2019.09_LV_Dienvidkoreja_ekon_sad.pdf
[18]Latvian Investment Development Agency., “Latvijas ekonomiskā sadarbība ar Japānu,”2019, http://eksports.liaa.gov.lv/files/liaa_export/attachments/2019.09_LV_Japana_ekon_sad.pdf
[19]UNESCO Institute for Statistics., “Global Flow of Tertiary-Level Students”, 2017, http://uis.unesco.org/en/uis-student-flow
[20]LSM.lv., “Rīgā sāk filmēt vēsturisku dienvidkorejiešu mākslas filmu,”1.11. 2019, https://www.lsm.lv/raksts/kultura/kino-foto-un-tv/riga-sak-filmet-vesturisku-dienvidkorejiesu-makslas-filmu.a337019/?fbclid=IwAR2RLQgvp0WHWSqJKPmDgnQEgHFr0mJBDhmrrDUaQKdbfBLnTZTAtDXT2tE
[21]Calculations made by author, data from: World Bank, GDP (current US$) – Korea, Rep., https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=KR,and Import and Export Statistics, Korea, Rep., https://comtrade.un.org/data
[22]Ministry of Foreign Affairs of the Republic of Latvia., “A new step in economic cooperation between the Baltic States and South Korea,” 26.04.2019, https://www.mfa.gov.lv/en/news/latest-news/63243-a-new-step-in-economic-cooperation-between-the-baltic-states-and-south-korea
