Why South Korea and Japan Need a Digital Trade Agreement

South Korea and Japan rank among Asia’s most advanced digital economies. Their firms are deeply linked across semiconductor supply chains, online shopping, cloud services, and AI infrastructure. Yet the two countries have established almost no binding rules governing digital trade. The few that exist rely on broad exceptions that each country may invoke at its own discretion and sit outside binding dispute settlement.

Weak rules do not stay neutral. When there is no framework to enforce them, the largest market in the region may set the terms by default—and in digital trade, that market is China. China’s state-centered model treats data as something governments can localize, inspect, and control. Letting it set the regional default would bind Korean and Japanese firms to rules written for state oversight rather than the open, trusted data flows both economies have committed to elsewhere.

What Korea and Japan lack is a legal framework that provides long-term predictability. With Washington no longer pushing a binding digital trade agenda in the Indo-Pacific, Seoul and Tokyo should negotiate one now, beginning with a stand-alone digital economy agreement. They could build an agreement, perhaps at this year’s Asia-Pacific Economic Cooperation (APEC) summit, on the piecemeal design of the Digital Economy Partnership Agreement (DEPA). Korea joined DEPA as its first new member in May 2024, while Japan has accepted similar rules through the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the U.S.-Japan Digital Trade Agreement.

The Institutional Anomaly

Korean and Japanese firms are deeply linked across semiconductor supply chains, digital content, gaming, e-commerce, cloud services, payments, and AI infrastructure. In practice, the two economies already share digital markets in gaming, media, and entertainment. The Korea Development Institute’s data suggests that about 70 percent of Korea’s content exports are concentrated in Asian markets, specifically China, Southeast Asia, and Japan.

Both countries already clear a high privacy bar. The European Union, among the world’s strictest public data regulators, has certified each as safe to receive Europeans’ personal data. Korea and Japan’s only shared digital rulebook, though, is the e-commerce chapter of RCEP. But those rules are weak and subjective. Furthermore, there is no free trade agreement (FTA) between Korea and Japan, and efforts to establish one have stalled since 2004. A trilateral FTA with China has likewise made little progress.

China makes the case more urgent. It applied to join DEPA in November 2021, though its state-centered approach to data governance fits awkwardly with DEPA’s high standards. At the same time, Korea and China have continued to deepen services and investment trade since signing their FTA in 2015. Both tracks point in the same direction and could pull digital rules toward a common denominator that would clash with Japan’s CPTPP commitments and its commitments to the United States.

A Korea-Japan agreement would lock in high standards between Seoul and Tokyo first, before those rules face pressure in wider trilateral or China-led talks.

The Bottlenecks Are Real

If the logic is clear, then why have negotiations not begun? First, Japan wants binding, CPTPP-level disciplines and regards soft cooperation frameworks as redundant. Japan’s absence from DEPA, in this light, is deliberate rather than accidental. Analysis by the Research Institute of Economy, Trade and Industry shows that before the DEPA 2023 Protocol, its data-flow and localization provisions merely affirmed CPTPP-level commitments, while Japan pursued regulatory interoperability through the data free flow with trust agenda and the OECD instead. DEPA omits binding disciplines that Japan considers essential, including rules on source code, and relied heavily on cooperation-based language. Moreover, with China’s accession application pending, joining DEPA risked signaling acceptance of weaker standards at the very moment Japan was holding the line on CPTPP accession criteria.

Second, the bilateral relationship has long been constrained by political and historical disputes. A Korea-Japan FTA does not exist in part because such disputes have pushed the economic agenda to the back burner. Third, digital-trust friction has become a concrete obstacle. In 2024, Japan’s Ministry of Internal Affairs and Communications issued administrative guidance urging Japanese firm LY Corporation to reduce its reliance on capital from the Korean tech company Naver following a data breach, drawing official protests from Seoul. The circumstances showed how quickly a shared digital market could become a diplomatic issue.

Nevertheless, a digital-only negotiation that excludes sensitive issues such as agriculture and market access could offer a feasible alternative and preserve the strategic and commercial payoff of a bilateral agreement. At the same time, binding digital trade commitments could provide both governments and companies with a more predictable framework. Indeed, the same RIETI report above urges Tokyo to engage with DEPA members to maintain digital commitments at the CPTPP level. A bilateral digital trade agreement with Korea would be the most direct way to do that.

Compatible Substance, Separate Architectures

Korea and Japan have arrived at high-standard digital rules from opposite directions. The former has worked through the Korea-Singapore Digital Partnership Agreement,DEPA, and the U.S.-Korea FTA. Japan has worked through CPTPP Chapter 14 and the U.S.-Japan Digital Trade Agreement. The U.S.-Japan agreement goes further than CPTPP in two ways. It limits when a country can require financial-services computing facilities to remain onshore under Article 13, which the CPTPP’s e-commerce chapter omits. It also protects algorithms expressed in source code under Article 17 and drops CPTPP’s limit to mass-market software. In other words, Japan has already signed on to rules that, in places, look more like an advanced U.S. model.

Regardless, CPTPP remains the first agreement to establish a comprehensive set of digital trade rules, and subsequent agreements have largely built on that framework. Table 1 compares how the four agreements treat the core disciplines. The critical distinction among them is not simply coverage, but enforceability. The CPTPP and the U.S.-Japan Digital Trade Agreement are subject to binding dispute settlement. DEPA strengthened its enforceability through the 2023 DEPA Protocol, which brought key obligations on digital products, such as non-discrimination, cross-border data flows, and data localization, within the scope of Module 14 dispute settlement. By contrast, RCEP preserves much of the modern digital trade structure but drains it of compulsory force, making it the weakest common baseline currently shared by Korea and Japan. A Korea-Japan bilateral digital trade agreement would therefore replace that weak common denominator with a more binding framework.

Table 1. Digital Trade Rules Across Korea- and Japan-Relevant Agreements

Note. The year for each agreement is its year of signing. Article and module numbers refer to the operative texts. “Overall model” summarizes each agreement’s overall design. “Best-efforts obligation” means a country must genuinely try to reach a goal but does not breach the agreement by failing to; “Cooperative” denotes a non-binding recognition of importance without a defined obligation.

From Familiar Rules to New Frontiers

A bilateral agreement should start with familiar rules on digital trade facilitation, such as customs duties on electronic transmissions, paperless trading, and online consumer protection. Korea and Japan have both accepted these rules through CPTPP, the U.S.-Japan Digital Trade Agreement, RCEP, and DEPA, so committing to them again would impose little additional burden. The next step would be to strengthen the core data rules from RCEP. There, cross-border data flows and the data-localization ban are subject to broad self-judging general and security exceptions, and RCEP does not impose binding non-discriminatory and source-code rules. Because Korea and Japan have already accepted CPTPP-level obligations in most of these areas—Korea through DEPA and the KSDPA, and Japan through CPTPP and the U.S.-Japan agreement—a bilateral agreement could simply reaffirm those stronger commitments between them.

More ambitiously, the two countries could negotiate rules on financial services and emerging technologies. They could, for example, permit the free flow of cross-border financial data while preserving safeguards for data privacy and regulatory supervision. Digital identity is a similar frontier. Existing agreements cover only electronic authentication, while DEPA’s Article 7.1 promotes cooperation on digital identities, giving Seoul and Tokyo a template for working toward interoperable digital ID systems.

A further area of cooperation is AI governance and infrastructure. Korea’s AI Basic Act and Japan’s AI Promotion Act suggest paths for adopting cooperative rules to build trusted and responsible AI along the lines of DEPA’s Article 8.2. Data can flow freely only when trusted infrastructure can carry, process, and secure it. Existing digital trade agreements do not yet provide a developed framework for AI infrastructure, including secure cloud services, data centers, computing capacity, energy supply, cooling systems, and energy-efficient computing. A Korea-Japan agreement could fill that gap by linking digital trade rules with cooperation on trusted, resilient, and sustainable AI infrastructure.

Why Washington Should Care

Even though it would not be a party, the United States has a stake in how a Korea-Japan digital agreement materializes. The central problem with digital rules today is that they are fragmented and divided. For a company, that patchwork is an additional cost and burden. Small and medium-sized companies are the ones most often shut out. The political cost runs alongside it. When rules are weak and fragmented, the country with the most leverage tends to set the terms in practice. RCEP serves as a prime example of these limitations, with modern-looking commitments that a country can largely ignore at will and no dispute settlement to push back.

A binding Korea-Japan agreement would set clear rules across both markets, which means lower compliance costs and greater predictability for companies. For American firms, which already operate extensively in both countries under the same basic rulebook through the CPTPP and the U.S.-Japan agreement, the deal would extend familiar terms across a larger, trusted zone that Washington would not have to negotiate. Because Korea and Japan are both U.S. treaty allies, the agreement would solidify a bloc that resists the drift toward weaker rules and would leave a template for future U.S. administrations.

From Diplomatic Repair to Economic Architecture

Korea and Japan have already done the hard part by rebuilding enough trust to make this cooperation possible. Digital trade is the most realistic place to turn that repair into something lasting. It matters strategically, it pays off commercially, and it carries less political baggage than a fight over market access. All that is left is the political decision to write the agreement down. The next step is not another general statement of intent, but a formal decision by Seoul and Tokyo to launch negotiations on a stand-alone digital agreement.

Hyerim Kim is Lecturer at Seoul National University’s Graduate School of International Studies and former Deputy Director at the South Korean Ministry of Trade, Industry and Energy. The views expressed here are the author’s alone.

This material is distributed by KEI on behalf of the Korea Institute for International Economic Policy. Additional information is available at the Department of Justice, Washington, DC.