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Korea’s FTA Policies
2
Introduction
• Korea has changed from reluctant to enthusiastic FTA player– Importance of trade in Korean economy
has grown continuously– Korea sees FTA as a tool to maintain and
expand foreign markets and modernize its economy
– “multiple negotiations” to achieve as many FTAs as possible with strategic partners
3
Korean Trade (1970-2011)USD billions
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
0
100
200
300
400
500
600
Total ExportsTotal Imports
4
Share of Trade in GDP
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
-20
0
20
40
60
80
100
120
Exports
Imports
Net Trade
Total Trade
5
Regional Exports(USD billions)
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
0
20
40
60
80
100
120
140
160
180
200
US
China (Hong Kong and Taiwan)
Japan
EU
ASEAN
Central and South America
OPEC
ROW
6
Regional Exports(% of total exports)
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 20
5
10
15
20
25
30
35
40
45
US
China (Hong Kong and Taiwan)
Japan
EU
ASEAN
Central and South America
OPEC
ROW
7
Regional Imports(USD billions)
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
0
20
40
60
80
100
120
140 US
China (Hong Kong and Taiwan)
Japan
EU
ASEAN
Central and South America
OPEC
ROW
8
Regional Imports(% of total imports)
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
0
5
10
15
20
25
30
35
40
45
US
China (Hong Kong and Taiwan)
Japan
EU
ASEAN
Central and South America
OPEC
ROW
9
What Does Korea Export(2007-2011)
Primary Products2%
Light Manufactures6%
IT Products26%
Other Heavy Manufactures
65%
10
What Does Korea Export(2007-2011)
Transport Equip22%
Electronic Com-ponents
17%
Industrial Electronic Articles11%
Petrochemicals8%
Mineral Fuels8%
Articles of Iron or Steel7%
Special Machine3%
General Machine3%
Household Electron-ics3%
Precision Chemistry2%
Nonferrous Metal products
2%
Fabrics2%
Others13%
11
What Does Korea Import? (2007-2011)
Primary Products (for export)
14%
Primary Products (for domestic use)
17%
Light Manufactures (for export)
1%Light Manufactures (for domestic use)
4%IT Products (for
exports)8%
IT Products (for domestic use)6%
Other Heavy Manu-factures (for ex-
ports)16%
Other Heavy Manufactures (for domestic
use)33%
12
What Does Korea Import? (2007-2011)
Mineral Fuels30%
Electronic Com-ponents
10%
Articles of Iron and Steel8%Industrial Electronic Articles
6%
Precision Chemicals4%
Transport Equip4%
Metal Ore4%
Nonferrous Metal Products
4%
Agricultural Prod-ucts Farm Produce
3%
Petrochemicals3%
General Machines3%
Precision Machines3%
Others19%
13
Korean Imports by Use(2007-2011)
Raw Material (Used for Exports)
27%
Capital Goods (Used for Exports)
12%Consumption Goods (Used for Exports)
1%Misc (Used for
Exports)0%
Raw Material (Domestic
Use)33%
Capital Goods (Domestic Use)
18%
Consumption Goods (Domestic Use)
9%
Misc (Domsetic Use)0%
14
Korean FTAs: Signed and Imple-mented
Country Study Begun
Negotia-tions Begun
Negotiations Completed
Imple-mented
Chile 1999.09 2003.02 2004.04
Singapore 2003.03 2003.10 2006.03 2006.03
EFTA 2004.08 2004.12 2006.09 2009.06
ASEAN (Goods) 2004.03 2004.11 2006.08 2007.06
ASEAN (Ser-vices) 2004.03 2004.11 2007.11 2009.05
ASEAN (Invest.) 2004.03 2004.11 2009.06 2009.09
India 2005.01 2006.01 2009.08 2010.01
US 2006.06 2007.04 2012.03
EU 2006.07 2009.10* 2011.07
Peru 2007.10 2009.01 2011.08 2011.08
15
Korean FTAs: Signed but Not Yet Implemented
Country Study Begun
Negotiations Begun
Negotiations Com-pleted
Turkey 2008.09 2010.03 2012.08 (Goods only)
Colombia 2009.03 2009.12 2012.06
16
Korean FTAs: Under Negotiation
Country Study Begun Negotiations Begun
Canada 2004.11
Mexico 2004.10 2005.09
GCC 2007.11
Australia 2007.05 2008.10
New Zealand 2007.02 2008.05
Indonesia
China *** 2005 2012.05
Indonesia 2011.05 2012.07
Vietnam 2010.06 2012.08
Japan *** 1998.12 2003.10 **
17
Korean FTAs: Under StudyCountry Study
Begun
MERCOSUR 2005.05
Israel 2009.08
Mongolia 2008.10
Central America (Panama, Costa Rica, Guatemala, Honduras, Dominican Republic and El Salvador)
2010.10
Malaysia 2011.05
18
Korean FTAs: Studies Quietly For-gotten
Country Study Begun
Russia2007.10
SACU (South African Customs Union)2008.12^
19
Korean FTAs: Global GDP (2009) basis, billion USD; Total 57,876 billion
34210.3081460461;
59%
850.718201534134; 1%
9169.47051750212; 16%
7710.33017853278; 13%
834.060441840978; 1%
5100.62547019535; 9%
Implemented
Signed but not implemented
Under nego-tiation
Under study
Korea
Rest
20
Korean FTAs: Trade (1999-2003) Ba-sis (five year export and import total) 1575 billion USD
690.356286999998
; 44%
6.81865599999999; 0%
377.595129999999; 24%
268.746039999999; 17%
231.447902; 15%
Implemented
Signed but not yet imple-mented
Under negotia-tion
Under study
Rest
21
Korean FTAs: Trade (2007-2011) Basis (five year export and import total) 4243 billion USD
1504.938443; 35%
28.95122; 1%
1507.477886; 36%
551.294921; 13%
650.795164; 15%
ImplementedSigned but not yet implementedUnder negotiationUnder studyRest
22
Need for FTA
• Korea is a trade dependent country– Resource-poor country• Oil and other raw material must be imported• Thus, exports to earn foreign currency is a
must
– History of “export-led” growth– Exports and Imports each are over 50%
of GDP in recent years
23
GDP Growth(2005 real won, billions)
0
2000
4000
6000
8000
10000
12000
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010
24
GDP Growth(Nominal US dollars, billions)
0200
400600800
10001200
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006
25
Need for FTA
• Low foreign direct investment– Portfolio investment is fickle, and dis-
rupts exchange rates– Conglomerates (“chaebols”) financed
new investment and expansion through debt• Implicit government guarantee caused
moral hazard (“too big to fail”), inefficient fi-nancial sector, and large short term debt (domestic and foreign)
26
Cumulative FD I for Selected Countries (1980-2005)
0
10
20
30
40
50
60
70
80
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
US
J apan
France
Germany
UK
Argentina
Brazil
Chile
China
Taiwan
North Korea
Korea
India
Thailand
ASEAN
APEC
Colombia
27
Short History of Korea’s FTAs
• Before the 1997 financial crisis– No FTAs signed–Worries over FTAs and RTAs as trade
barrier
• 1997-1998 Financial Crisis– Need to show commitment to free and
open markets– Searched potential FTA partners• APEC
28
Short History of Korea’s FTAs
– Why Chile?• Economy small enough so that no major effect on Korea
in case of adverse effects• But large enough with enough imports to show positive
effects of FTA• Beachhead into underrepresented South American mar-
kets• “It takes two sides to tango” – Not many believed in Ko-
rea’s commitment to sign FTAs• Note that negotiations took more than three years, and
passage another year– Among problems: Rice, Apples (no Chilean exports), Grapes
(growing season opposite of Korea)– Chile started and finished negotiations with US during negotia-
tions with Korea
29
Short History of Korea’s FTAs
• 2003 “FTA Roadmap”– Few more FTAs with “small economies”
• Singapore (No agriculture)• EFTA (Little agriculture)
– Then larger economies– Ultimately largest economies / trading partners
• EU, US, China, India
– Fast negotiations with multiple partners• Not one negotiation at a time
– Comprehensive FTAs with “WTO plus”• Must include services, investment (FDI)
30
Short History of Korea’s FTAs
• Korean strategy – why?– Korea as a “trade hub” to increase FDI
and jobs– Catch up with other countries with mul-
tiple FTAs– Increase productivity• Services
– Lessons from financial services during financial crisis
– Reduce trade diversion
31
Short History of Korea’s FTAs
• KORUS FTA– Politically sensitive– Passage and implementation delayed
even though content substantially same as KOR-EU FTA
32
Short History of Korea’s FTAs
• “Unusual” Issues– Kaesong Industrial Complex
• Located in North Korea, using NK labor with South Korean investors and firms
• Rules of origin for most FTAs allow “Kaesong” products to be classified as Korean
• But for KORUS FTA, to be further negotiated– KORUS FTA allows special “outward processing zones” but has
not agreed whether Kaesong will be OPZ
– Clothing• Under current US rules of origin, Korean clothing made
with Chinese textiles can be classified as non-Korean• FTA Provisions in place to classify most clothing made in
Korea with Chinese textiles as “Korean”
33
Short History of Korea’s FTAs
• Future– China– Korea-China-Japan FTA– Adjusting existing (early) FTAs– Regional Integration• ASEAN+3 or ASEAN+6 (Australia, New Zea-
land, India)• TPP• FTAAP: Asian-Pacific FTA (APEC)
34
Korea Trade Policy Considerations(FTA and WTO)
• Open foreign manufactured goods markets– Automobiles, IT and office equipment, steel, cloth-
ing
• Avoid opening sensitive sectors– Agriculture (rice, beef, dairy, fresh foods)– Education, medical services– Reluctant to further open financial markets and cap-
ital accounts
• Maintain subsidies for certain sectors– Agriculture, fishery and other “backward” industries
• Weaken foreign anti-dumping policies
35
Why Colombia?
• One of largest Latin American economy– Geographical hub – North and South America
and Asia– Already signed FTAs with 18 countries, but not
yet with any Asian countries
• Rich in energy and other natural resources– Relatively high tariffs on Korea’s strategic
goods (e.g. automobiles : 35%)– Does not export much agricultural goods (ex-
cept coffee)
36
Degree of Openness (Goods): Korean Side
Immediate
elimination of tariffs
Longest transi-tion period for eliminating tar-
iffs
Total tariff-free liberalization
after transition period
Excluded from tariff elimina-
tionNotes
Chile 87.20% 16 96.25% 0.20%
3.45% of tariff lines to be discussed after
DDA negotiation (all
agricultural goods); Chile liberalization
rate = 99%
Singa-pore
59.7 10 91.6 8.4Singapore eliminates
all tariffs at imple-mentation
EFTA 86.3 10 99.1 0.9 EFTA elimination rate = 100%
ASEANMore than
63.0%[2016] Note
40 items (HS 6 digit)
Indianot compati-
ble7 not compatible
not compati-ble
not compatible
EU 81.7 20 99.60% 0.4 91.8% after 10 years
Peru 84.5 17 99.1 0.9 97.4% after 10 years
US 80.8 20 99.9 0.1 98.3% after 10 years
37
Degree of OpennessKorea-Colombia FTA
Immediate elimination
of tariffs
Longest transi-tion period for eliminating tar-
iffs
Total tariff-free liberal-ization after transition
period
Excluded from tariff elimination
Notes
Korea (Goods)Tariff lines
82.38% 1998.69%
(90.27 after 5 years)(96.11% after 10 years)
1.29%
Korea (Goods)Import value
98.96%100%
(98.96% after 5 years)(99.98% after 10 years)
0.00%
Colombia (Goods)
Tariff lines60.64% 20
99.35%(82.46% after 5 years)(96.73% after 10 years)
0.65%
Colombia(Goods)
Import value34.08%
100% (55.45% after 5 years)(97.80% after 10 years)
0.00%
Korea(Ag) lines
16.21%89.97%
(47.84%: 5 , 70.96%: 10)
10.33%
Korea (Ag) value
89.42%99.99%
(99.63%: 5, 99.94%: 10)
0.01%
Colombia(Ag) lines
54.77%95.02%
(62.71%: 5, 76.06%: 10)
4.98%
Colombia (Ag) value
95.16%100%
(97.55%: 5, 100.00%: 10)
0.00%
38
Sensitive GoodsKorea-Colombia FTA
• Manufactured Goods– Tariff elimination: 12 years
• Korea: Nickel, Nickel plates, Wooden construction products• Colombia: Refrigerators, Air-conditions, Washers
• Agricultural Goods– Tariff elimination 19-20 years
• Korea and Colombia: Boneless Beef• Colombia: Uncut chicken and 1 more product
– Excluded from Tariff Elimination• Korea: beef, milk, cream, potatoes, garlic, onion, pepper, or-
ange, apple, pear, ginseng, rice• Colombia: rice, beef, milk, powdered milk, pepper, garlic,
onion, green soybeans, red beans. Orange, sugar cane and sugar beet, etc.
39
Degree of Openness(Services and Investment)
• Korea’s liberalization measures are mostly the same as GATS offer– Trade in financial services limited (mostly)
to mode 3 (direct investment)
• Most services (including financial ser-vices) are open to foreign investment– Notable Exceptions:
• A/V services – especially TV and radio• Accounting and Law – open in stages, up to
joint ventures only
40
Degree of Openness (Services & In-vestment) Korea-Colombia
• Usual liberalization measures– NT, MFN – forbid or restrict local presence require-
ments, investment requirements (e.g. export requirements)
– List all non-conforming measures– In principle, allow capital flows, repatriation– Investment protection measures– ISD in case NT and MFN not followed
• Public Debt excluded from “investment”
41
Other Notable Measures: Korea-Colombia FTA
• Government Procurement– Beyond current WTO GPA measures
• Kaesong Industrial Complex– Origin is Korean for 100 goods (HS 6
digit level)
42
Korean Trade with Colombia(USD millions, 1969-2011)
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
0
200
400
600
800
1000
1200
1400
1600
1800
Exports to Colombia Imports from Colombia
43
Korean Exports to Colombia(2008-2011), 4890 million USD
automobile; 1594.974; 33%
auto parts; 1121.091; 23%
synthetic resin; 316.206; 6%
prime mover, pump; 174.675; 4%
other petrochem; 132.237; 3%
steel, flat-rolled prod; 131.803; 3%
construction, mining equip; 118.865; 2%
others; 1293.777; 26%
44
Korean Imports from Colombia(2008-2011, 1081 million USD)
Misc Foods (include. Cof-fee); 285.211;
26%
Alloy Iron; 232.339; 22%
Coal; 204.13; 19%
Crude Petroleum; 113.356; 11%
Copper articles; 110.239; 10%
Agrochem, Pharma; 43.403; 4%
Aluminum; 40.055; 4% Leather; 13.684; 1% Others; 36.906; 3%
45
Conclusion
• Korea is a trade-dependent country– FTA is seen as measure to insure and guarantee
future trade
• Korea is pursuing “multiple negotiations” with major and significant trade partners– Laid out in 2003 “FTA Roadmap”– US and EU were “big hurdles”– China: the most sensitive– Japan: reluctant to negotiate– Possible stepping stone to regional FTAs
(ASEAN+10, FTAAP, TPP)
46
Conclusion
• Characteristics of Korean FTAs– Significant liberalization of goods trade
and direct investment