REPUBLIC OF KOR EA€¦ · REPUBLIC OF KOREA TRADE S UMMARY In 2002, the U.S. trade defici t with Korea totaled $13.0 billion, a slight decrease of $22 million from 2001. In 2002

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FOREIGN TRADE BARRIERS 239

REPUBLIC OF KOREATRADE SUMMARY

In 2002, the U.S. trade deficit with Korea totaled$13.0 billion, a slight decrease of $22 millionfrom 2001. In 2002, Korea was the UnitedStates’ 6th largest export market. During 2002,two-way goods trade between the United Statesand Korea increased to $58.2 billion, a slightincrease over 2001. U.S. exports to Koreatotaled $22.6 billion, a 1.9 percent increase over2001. U.S . imports from Korea also increased in2002 to $35.6 billion, up 1.1 percent from 2001.

U.S. exports of private commercial services (i.e.,excluding military and government) to Koreawere $7.1 billion in 2001 (latest data available),and U.S. imports from Korea were $3.8 billion. Sales of services in Korea by majorityU.S.-owned affiliates were $1.7 billion in 2000(latest data available), while sales of services inthe United States by majority Korea-ownedfirms were $385 million.

The stock of U.S. foreign direct investment inKorea in 2001 was $9.9 billion, an increase of10.7 percent from 2000. U.S. foreign directinvestment is concentrated largely inmanufacturing, banking, and wholesale sectors.

IMPORT POLICIES

Tariffs and Taxes

Korea bound 91.7 percent of its tariff line itemsin the Uruguay Round negotiations, and in 2001,Korea’s average tariff rate was 8.9 percent. However, Korea’s 50 percent average out-of-quota tariff rate for agricultural products in 2002poses a significant barrier to trade and contrastssharply with the relatively low average tariff forindustrial products of 7.5 percent. Korea’stariffs on all agricultural products, except rice,are bound at an average of 62 percent. In thecase of rice, Korea committed under Annex 5 ofthe WTO Agriculture Agreement to provideincreasing market access for rice at a tariff rateof 5 percent. Tariffs on forestry and fisheryproducts remain unbound. Between 1995 and2004, Korea agreed to lower duties on more than30 agricultural products of primary interest toU.S. exporters. These products include bulk,intermediate- and high-value items, such asmixed feeds, feed corn, wheat, vegetable oilsand meals, fruits, nuts,

Under its Uruguay Round commitments, Koreaalso established tariff-rate quotas (TRQs)intended to either provide minimum access to apreviously closed market or maintain pre-Uruguay Round access. (See also “QuantitativeRestrictions, TRQs and Import Licensing.”) In-quota tariff rates are zero or very low, but over-quota tariff rates on some products areprohibitive. Specifically, natural and artificialhoney are assigned an over-quota tariff rate of251.1 percent; skim and whole milk powder,189.2 percent; barley, 334.8 percent; barleymalt, 278 percent; potatoes and potatopreparations, more than 314.2 percent; andpopcorn, 651 percent.

Duties are still very high on many high-valueagricultural and fishery products. Koreaimposes tariff rates above 40 percent on manyproducts of interest to U.S. suppliers, includingshelled walnuts, table grapes, beef, cannedpeaches and fruit cocktail, distilled spirits,apples, pears and a variety of citrus fruits. Products subject to 30 percent or higher tariffrates include certain meats, most fruits and nuts,many fresh vegetables, starches, peanuts andpeanut butter, soups, various vegetable oils,juices, jams, beer and some dairy products.

By 2004, Korea will reduce bound tariffs to zeroon most or all products in the following sectors:paper, toys, steel, furniture, semiconductors andfarm equipment. Korea is harmonizing itschemical tariffs to final rates of 0 percent, 5.5percent or 6.5 percent, depending on theproduct. In addition, tariffs on scientificequipment are being reduced 65 percent frompre-Uruguay Round levels. On textile andapparel products, Korea has harmonized andbound most of its tariffs to the following levels:13 to16 percent for man-made fibers and yarns,30 percent for fabrics and made-up goods and 35percent for apparel.

Korea uses “adjustment tariffs” andcompounding of taxes to boost the applied tariffrate in order to protect domestic producers,practices about which the U.S. Government hasexpressed concern to the Government of Korea. In 1997, Korea agreed as a condition of its IMFstabilization package to reduce the number ofproducts subject to tariff adjustments. In 2002,Korea renewed adjustment tariffs on 22 of 26items that received adjustment tariffs in 2001(reducing the tariff rates for 9 of these 22 items)and implemented a new adjustment tariff for one

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FOREIGN TRADE BARRIERS240

product, live croaker. Most of the 23 adjustmenttariffs are imposed on agricultural products andseafood, including frozen croaker and skate.

The combination of relatively high tariffs andvalue-added taxes continues to render a varietyof products uncompetitive in Korea. One suchproduct is motor vehicles, which are subject to atariff rate of 8 percent – more than three timesthe U.S. tariff – as well as multiple taxescompounded on the tariff. Three of these taxesare based on engine size and have adisproportionate impact on imported vehicles. Although Korea eliminated or reduced somemotor vehicle taxes based on commitments itmade under the 1998 Memorandum ofUnderstanding Regarding Foreign MotorVehicles in the Republic of Korea, thecombination of the tariff and remaining taxeslevied on imported cars continues to severelyimpede their price competitiveness. InNovember 2001, Korea temporarily reduced thespecial consumption tax on autos through June2002. The United States continues to urgeKorea to undertake reforms of its overall autotax system in an open and transparent mannerthat fully involves all stakeholders throughoutthe process.

Non-Tariff Measures

Internal Supports

Korea agreed as part of the Uruguay RoundAgreement on Agriculture to reduce its domesticsupport (Aggregate Measurement of Support, orAMS) for agricultural products by 13 percent by2004. The Government of Korea substantiallyincreased the level of domestic support itprovided to its cattle industry during 1997 and1998, thereby raising the overall level of supportfor agriculture as well. The issue of whetherKorea had adequately confined domestic supportwithin the constraints of its WTO reductioncommitments on domestic subsidies was raised,along with other related issues, by the UnitedStates and Australia in WTO dispute settlementproceedings in 1999. While the panel ruledagainst Korea on this issue, the outcome of thedispute was inconclusive as the WTO AppellateBody was unable to make a specific finding onthe consistency of Korea’s subsidy level with theapplicable obligations under the WTOAgreement on Agriculture. Nonetheless, theAppellate Body did conclude that Korea had notbeen computing the current level of domestic

support in a manner compatible with therequirements of the Agreement. The UnitedStates will continue to monitor Korea’snotification of its AMS to the Committee onAgriculture to ensure that the calculation is nowin conformity with Korea’s commitments.

Quantitative Restrictions, TRQs and ImportLicensing

Quantitative Restrictions

Pursuant to a 1993 U.S.-Korea agreement andKorea’s Uruguay Round commitments, effectiveJanuary 1, 2001, the Government of Korearemoved its eight remaining quantitativerestrictions on items subject to balance-of-payments protection. These items consistedmainly of live cattle (dairy and beef) and beefproducts (HS 0201 and 0202). However, as aresult of limits on the number and size of officialport quarantine inspection facilities, Koreaeffectively placed quantitative restrictions on alllive animals eligible to be imported underKorea’s commitment to the WTO.

The U.S. Government, joined by theGovernment of Australia, initiated W TO disputesettlement proceedings in 1999 (see abovesection) to ensure that Korea would fulfill itsobligation to remove these balance-of-paymentrestrictions and, more broadly, that Korea wouldadhere to WTO rules in the conduct of its beefimport and distribution system. The WTO Panelfound in favor of the United States and Australiaon this issue, and after considering an appeal byKorea, the Appellate Body report affirmed thekey findings of the W TO Panel. (See also“Beef” under the TRQ section.)

Tariff-Rate Quotas (TRQs)

Most imported non-food goods no longer requiregovernment approval, but some products, mostlyagricultural/fishery items, face importrestrictions such as quotas or TRQs withprohibitive over-quota tariffs. Koreaimplements quantitative restrictions through itsimport licensing system which domesticproducer groups or government buying agencies– the Agricultural Fishery MarketingCorporation (AFMC) and Public ProcurementServices (PPS) – administer. A governmentexport-import notice lists products that arerestricted.

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The U.S. Government has raised concerns aboutKorea’s administration of quotas, specificallyregarding rice, citrus, and unprocessed foodgrade and value-added soybean and cornproducts. In some cases, including for onions,potatoes, shelled nuts and garlic, the Ministry ofAgriculture and Forestry (MAF) authorizesAFMC to auction in-quota quantity allocations. Such an allocation system adds costs to thepermissible charges foreign firms face inentering the Korean market, raising questionsabout the WTO-consistency of the system. TheU.S. Government also has raised concerns aboutMAF’s delegation of authority to the ChejuCitrus Cooperative (CCC) to administer itscitrus quota. The CCC attempts both to auctionin-quota quantity allocations and to impose tradeterms on the award winner. It also retains therevenue generated by the auctions. Proceedsfrom quota auctions used to support producersdo not appear to have been notified as domesticsupport to the WTO. Moreover, the CCCrestricts market access by delaying tenderannouncements and limiting import dates. TheGovernment of Korea condones the CCC’s anti-import practices, which ultimately burdenKorean consumers by limiting productavailability and raising prices.

Korea also continues to restrict imports of value-added soybean and corn products. Byaggregating raw and value-added products underthe same quota, Korea restricts market access forvalue-added products, such as corn grits and soyflakes. Domestic producer groups, whichadminister the quotas, invariably allocate themore favorable in-quota rate to their majormembers, who use it to import raw ingredients.

Beef

On September 10, 2001, Korea brought its retailbeef distribution system into compliance with itsWTO obligations. The U.S. Government hassought changes to Korean regulationsprohibiting the freezing of meat sold as “fresh”or “chilled” and the re-freezing of meats sold as“frozen.” After much encouragement by theU.S. Government, the Government of Korearesponded by changing Korean regulations topermit greater flexibility to importers in thefreezing of chilled beef in early July 2002,creating more U.S. beef export opportunities.

According to Korean statistics released inNovember 2002, Korean imports of chilled U.S.

beef have risen to $30.7 million (Jan to Oct 2002basis), up 253 percent or $18.5 million above2001. Korean imports of chilled U.S. beef sincethe change in regulations in July increased by$8.9 million over the same July – Octoberperiod in 2001. Prorated on an annual fiscalyear basis, imports of chilled U.S. beef areprojected to increase $26.8 million over theprevious year. The United States will continuemonitoring the situation to ensure thesemeasures are fully implemented.

Rice

The Government of Korea continues to exercisefull control over the purchase, distribution andend-use of imported rice. Korean law allowsimported rice to be used only for industrial orprocessing purposes. The state tradingenterprises that administer the WTO-mandatedminimum access program typically purchaseonly low-quality rice on instruction from thebuying ministry – MAF. In 2001, Koreaimported for the first time high-quality U.S. riceunder its minimum market access (MM A) quota,after adjusting its tender specifications to targethigher quality rice. The United States sold30,000 MT out of the 142,520 MT tariff ratequota (TRQ) available in CY2001 and 40,000MT out of the 171,023 MT TRQ available in CY2002. (Korea’s quantitative restrictions on riceexpire in 2004.)

The U.S. Government welcomed thisdevelopment while raising concerns that theimported U.S. rice remains relegated to storagefacilities as does most other rice imported underthe MMA quota programs. Specifically, theaccess afforded to U.S. rice is not on par withdomestic rice due to marketing restrictionsplaced on rice imported under the TRQ. Korearepeatedly has stated that it will not allowimported table rice to be marketed directly toKorean consumers, raising questions about theconsistency of Korea’s actions with its WTOobligations.

The U.S. Government also remains concernedwith continued Korean statements that its ricepolicies are non-negotiable in the current WTOagriculture negotiations. Such statements serveto undermine Korea’s broader goals andinitiatives within the WTO’s Doha DevelopmentAgenda negotiations. The United States willcontinue to actively engage Korea to ensure itsfull compliance with its WTO obligations on

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rice and to press for further liberalization.

Oranges

Quotas on fresh oranges were liberalized in July1997 to permit out-of-quota imports. The in-quota tariff rate is currently 50 percent, and theout-of-quota rate is 59.8 percent and will belowered to 50 percent in 2004. The in-quotaquantity for 2002 was 45,052 metric tons andwill be expanded at an annual growth rate of12.5 percent through 2004.

The Ministry of Agriculture and Forestry (MAF)delegated administration of Korea’s citrus tariff-rate quota (TRQ) regime to the Cheju CitrusCooperative (CCC), a Korean producer group. Allowing the CCC to administer the TRQ raisesquestions about whether it is being administeredin a non-discriminatory manner. While the CCChas purchased the majority of its imports fromthe United States, it failed to exercise the fullamount of the TRQ in 1999, 2000, and 2001. Moreover, in 1999 and 2001, Korea auctioned aportion of the quota, despite U.S. protests thatsuch an allocation system adds costs to thepermissible border charges facing foreign firmsentering the Korean market. Korea likewiseignored U .S. Government and industry requestsfor the issuance of a viable, market-based tenderschedule for the unfilled quota amount. In 2002,the CCC auctioned the full quota allocationwhich quota buyers used to import the fullamount of the 2002 TRQ. The United Stateswill continue to actively engage Korea to ensureits full compliance with its WTO obligations.

Import Clearance Procedures

U.S. suppliers of food and agricultural products,including products for which market access wasliberalized under bilateral or multilateral tradeagreements, continue to encounter market accessbarriers in Korean ports despite the steps theGovernment of Korea has taken in this area overthe past few years. After WTO disputesettlement consultations with the United Statesbetween 1995 and 1999, the Government ofKorea revised its import clearance proceduresby: (1) expediting clearance for fresh fruits andvegetables; (2) instituting a new sampling,testing and inspection regime; (3) eliminatingsome non-science-based phytosanitaryrequirements; (4) revising the Korean Food andFood Additives Codes, for example, to bringKorean pesticide residue level standards for

citrus into conformity with CODEXAlimentarius standards; and (5) requiring foodingredient listings by percentage for major,rather than for all, ingredients.

Import clearance of agricultural products atKorean ports remains generally slow andprocedures continue to be somewhat arbitrary,despite the steps the Government of Korea hastaken in thisarea over the past couple of years. Surveys ofU.S. trading partners in Asia indicate that importclearance for most agricultural products requiresless than three to four days. In Korea, importclearance for new products still typically takes10 to 18 days, and four to six months if a foodadditive is not specifically recognized in Korea’sFood Additive Code for use in that product. (Any unauthorized additive must go through aformal approval process before it can beapproved for use in a particular food).

Ministry of Agriculture and Forestry (MAF) andits agencies responsible for administering plant,animal and animal product inspection, includingthe National Plant Quarantine Service andNational Veterinary Research and QuarantineService, account for the greatest delays in importclearance. MAF imposes numerousrequirements that restrict access or delay importclearance, such as incubation testing for non-quarantine pests and product detention based onadministrative errors on export certificates,which add costs for importers and, ultimately,for consumers. Improvements in expeditedclearance of fruits and vegetables are slowlybeing eroded through various new testing anddocumentation requirements, extension ofdetention periods for pest identification, andregistration of every conceivable insect as apotential pest subject to quarantine measures.

In 2001, the Korea Food and DrugAdministration (KFDA) revised the Food Codeand the Food Additives Codes, addressing manyof U.S. industry’s concerns, such as establishingallowances for subsidiary colors in select foodcoloring and the easing of overly-burdensomerestrictions on food. However, other changes in2001 raise concerns about whether KFDAprocedures are overly burdensome. KFDA’srequirements for extensive documentation formandatory pre-market approval of each new-to-market product, its determination that a productis new if formula ratios are changed or ifsubstitute ingredients are used, and its non-

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recognition of “good manufacturing practices”in the production process of imported foodproducts set its procedures apart from those ofother OECD food safety agencies. More work isneeded to bring Korea’s food code standards upto international standards, specifically thosestandards related to food additives (e.g., Koreahas not effectively adopted the “generallyrecognized as safe” standard).

Starlink: Beginning in the fall of 2000, the U.S.Government has worked closely with the KFDAand MAF to provide assurances that the U.S.Government is helping to minimize the risk ofimporting U.S.-origin food-grade corn and corn-based food products that tested positive for the“Starlink” protein. KFDA guidance to fieldinspectors in late December 2000 helped ease,although not eliminate, port clearance delayscaused by confusion over Korea’s importrequirements regarding Starlink. Since the firstquarter 2001, Starlink corn has not been detectedin any U.S. food-grade corn exported to Korea. Nonetheless, KFDA continues to require aseparate import certification with food-gradecorn, in addition to the U.S. grain exportcertificate, that the product does not includeStarlink corn.

Poultry: In late 2002, the MAF imposed atemporary ban on U.S. poultry products as aresult of an outbreak of low pathogenic AvianInfluenza (AI). However, according to WorldOrganization for Animal Health (OIE)guidelines, regulatory action is mandated onlyfor outbreaks of highly pathogenic avianinfluenza. MAF’s restrictive action on U.S.poultry in response to the outbreaks of lowpathogenic avian influenza deviated from theOIE standards. The World Organization forAnimal Health is the standard-settingorganization for international animal healthstandards. International standards should guidecountry standards to avoid unnecessaryconstraints on legitimate trade.

Chemical Tests: In early 2002, U.S. fruit andgrain exporters experienced delays in quarantineinspection with extra testing costs due to apolicy change in the “same company, sameproduct treatment.” Same company, sameproduct treatment allows exemptions fromcertain agricultural chemical tests if the samecompany had previously passed tests for thesame product in an earlier shipment. In January2002, the KFDA added 12 new chemicals to

their list of chemicals subject to simultaneousresidue testing and required all products to betested (including products with same company,same product status from earlier tests). Thosecompanies/products which passed the new testregained same company, same product status. However, re-testing would be required again ifKFDA adds additional chemicals to their list ofchemicals subject to simultaneous residuetesting.

The U.S. Government expressed concern aboutthe extended clearance time resulting from thenew chemical tests and the cost associated withthe tests (over 1,000 US dollars for eachsimultaneous multi-residue test). KFDAHeadquarters maintained that same company,same product status will have to be renewedwhenever there is a change in the chemical testrequirements or standards. Since KFDA makessuch changes at least once or twice each year,the new policy will burden traders withadditional testing costs and extended clearancetimes.

Clearance time could be shortened bysimultaneously conducting tests and documentverification procedures. In many instances,these products are not new to the Korean marketand pose no safety risk. In addition, excessivedocumentation and repeated inspections are stillrequired to clear goods, and variability ofenforcement makes adherence to regulationsdifficult. For example, customs clearanceprocedures and locations vary depending oncommodity. This prohibits efficient mixedcommodity shipments, and also results ininconsistent customs classification of processed(blended) products.

The United States will continue its dialogue withthe Government of Korea on import clearanceprocedures until clearance times in Korean portsare comparable to those in other Asian ports andKorean procedures are based on science andconsistent with international trade rules andnorms. (See also “Standards and ConformityAssessment Procedures.”)

Customs Procedures

The Korea Customs Service (KCS) frequentlyclassifies “blended products” under theHarmonized System (HS) heading for the majoringredient of that product rather than the HSheading for the blended product, which usually

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has a lower tariff rate. Changes in classificationoften are based on arbitrary standards (e.g., fordehydrated potato flakes to be classified asblended products, they must include at least 10percent non-potato ingredients) and are at oddswith practices observed by other OECDmembers. “Blended products” disadvantaged bythis practice include potato flakes, soybeanflakes, flavored popcorn and peanut butter chips.

KCS’s misclassification of potato preparationsunder the HS heading 1105 has restricted U.S.exports of these products to Korea. Koreashould import dehydrated potato products underthe unrestricted HS 2005 heading, with anapplied tariff rate of 20 percent and a bound rateof no more than 31.5 percent in 2004. Instead,KCS has classified preparations of potato flour,flakes, granules or pellets under HS 1105, whichis subject to a tariff-rate quota (TRQ) with an in-quota quantity of 60 metric tons and an over-quota tariff of 304 percent. Although thesituation has improved somewhat in the pastyear, the U.S. Government will continue to seekto address this issue.

U.S. exporters have faced classification issueson other products as well. Since 2000, KCS hasautomatically classified all imported skate andray as skate, unless the import is accompaniedby a government-issued inspection certificatethat identifies the ray by its scientific name. Skate is subject to a 50 percent adjustment tariff;ray is subject to a 10 percent general tariff. Purportedly, this action was taken to helpprevent fraudulent mislabeling of ray, butsimilar actions have not been pursued with otherfish or food products subject to fraudulentlabeling. U.S. exports of soda ash also havebeen misclassified, resulting in a higher tariff.

The Korean Customs Service (KCS) has issuedtariff code classifications of commodities thatdiverge from classifications observed by othercountries (e.g. United States and EU). Forexample, Citrus Pulp Pellets are classified inunder HS 2308 by the United States and the EU. However, Korea has classified them under HS2309, subject to a quota. U.S. representativeshave asked KCS to revisit its classification,given how other nations are classifying thisproduct.

In addition, KCS routinely rejects customsclearance applications on administrative grounds(wrong print, font size, erasure marks on

application, etc.), thereby delaying the officialstart of the customs clearance process. Finally,Korean regulations often require local tradeassociations to certify or approve importdocumentation. In addition to requiring theimporter to pay a processing fee, which is usedto help fund the association, this rule requiresimporters to submit proprietary businessinformation, to which their local competitorsoften appear to have access.

STANDARDS, TESTING, LABELING ANDCERTIFICATION

Standards and Conformity AssessmentProcedures (Sampling, Inspection, Testingand Certification)

Korea maintains standards and conformityassessment procedures, such as sampling,inspection, testing and certification, that appearto be overly burdensome and appear to have adisproportionate impact on imports.

Korea plans to require mandatory environmentalrisk assessments (ERA) of biotechnology crops. On M arch 28, 2001, the Ministry of Commerce,Industry, and Energy (MOCIE) issuedlegislation (the so-called "LMO Act") toimplement Korea’s interpretation of theCartagena Bio-safety protocol. On June 25,2002, MOCIE announced a proposedPresidential Decree and Ministerial Ordinance tothe LMO Act in the government gazette forpublic comments. To date, no notificationregarding mandatory ERA’s has been submittedto the WTO. The U.S. Government hasexpressed concern that Korea’s plans related toimplementation of the Biosafety Protocol coulddisrupt an estimated $520 million amount ofU.S. exports to Korea, and could also harmKorea's plans to develop its own biotechnologyindustry. U.S. representatives have encouragedKorea to make every effort to implement aregulatory approach to biotechnology that isrigorously based on science, transparent andpredictable. Moreover, as Korea develops andimplements new regulations, the United Stateshas urged Korea to fully involve allstakeholders, avoid duplication and respectinternational commitments.

Under the Food Safety Act, issued by Korea’sMinistry of Health and Welfare (MHW), KFDAwas given the authority to conduct mandatorysafety assessments to evaluate biotechnology

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applications for products intended for humanconsumption to ensure their safety. The Actpassed in August 2002 and provides for an 18month (grace) period during which technologyfirms must file and have completed applicationsfor safety assessment. The U.S. Governmenthas expressed concern that the draftimplementing regulations for mandatory foodsafety assessments have not been notified to theWTO for international comments. U.S. officialshave urged their Korean counterparts to consultwith both local and foreign industry (importers,traders, exporters, and processors) prior tofinalizing the implementing regulations toaddress concerns so as to avoid trade disruptionsonce the safety assessments become mandatory.

In May 2002, a shipment of U.S. organic foodwas detained by regional Korea Food & DrugAdministration (KFDA) inspectors. The reasonfor the detention was that the shipment wasaccompanied only by an organic certificateissued for the farm or plant and not for thespecific lot that was exported to Korea. Meansfor being approved as a government-recognizedcertification agency have also caused delays inimport clearance of U.S. organic exports. Toovercome these problems, KFDA headquartersagreed to accept the following documents: 1)Copy of the certificate issued by a U.S.government accredited lab for the plant or farm;2) Copy of the opening page of the AgriculturalMarketing Service website and subsequent pagesleading to (and including) the list of all privatecertifiers recognized by USDA; and 3) anoriginal transaction certificate issued by a U.S.government accredited lab that certifies that thespecific shipment lot is organic, withinformation on the lot number, volume, etc. Despite the verbal agreement from KFDA,additional shipments of U.S. organic exportshave faced detention for the same reasons. Toeliminate port detentions of U.S. organicproducts, U.S. officials have urged KFDA toprovide clear guidelines on how to recognizeshipments of imported organic products toinspectors in branch offices so that eachshipment does not have to be detained untilKFDA headquarters intervenes.

In 2000 and 2001, the KFDA revised the FoodCode, Food Additive Code, and LabelingStandards to make them more consistent withinternational standards. However, KFDArequires that products be classified according toa narrowly defined product category, which is

then further restricted by limits on ingredients oradditives not approved for that product category. Manufacturers using products with ingredientsor additives not already approved for thatproduct category must seek KFDA approval,which can take six months to one year. KFDAwill not initiate the review process until alldata/documentation is submitted, furtherextending the process and cost. In addition,KFDA approves each product on a companybasis, institutionalizing redundancy inexamination and increasing costs, whileproviding no additional benefit or level ofproduct safety to the consumer. The UnitedStates has continually expressed concerns aboutthese practices and prohibitions under the FoodCode and Food Additive Code, particularlythose relating to the many ingredients, classes ofingredients, food colors and dyes, and food andfood manufacturing processes that are generallyrecognized as safe by international standards(i.e., CODEX, JEFCA, etc.). (See also “ImportClearance Procedures”).

The U.S. Government has expressed concernover Korea’s phytosanitary and sanitarycertification requirements that continue to limitmarket access for a variety of products. InJanuary 2002, MAF issued a proposal thatshould address the key concerns of U.S. industryregarding the extensive pre-clearance inspectionrequirements for imported in-shell walnuts, andthe U.S. Government is hopeful that this issuewill be resolved shortly. However, delays inKorea’s review of documentation on pestmitigation provided by the United Statescontinue to effectively preclude market accessfor cherries and apples.

In an effort to prevent imports of productsincluding BSE-tainted ingredients, in spring2001 Korea enacted requirements that the U.S.Government certify ruminant and ruminantproduct exports as BSE-free. Theserequirements proved overly restrictive. However, the issue was resolved when theGovernment of Korea, after extensive legalreview, decided to accept BSE-free certificationsby governments, relevant legal entities(associations, etc.), or manufacturers (ifnotarized).

Korean government agencies also require pre-approval for pharmaceuticals, chemicals,computers, telecommunications equipment,other products and all food additives. W hile

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many other countries require pre-approval forsome products, the range of affected products isexceptionally broad in Korea, and companiesmust submit documentation that isextraordinarily detailed. In the past, informationprovided by importers as part of the pre-approval/certification process often was notadequately protected. Regardingpharmaceuticals, in June 2002, the KFDAimplemented Drug Master File (DMF)requirements that oblige manufacturers tosubmit significant quantities of proprietarymanufacturing data to the KFDA as part of thedrug approval process. The Government ofKorea says the requirements are designed toassure product quality. U.S. industry, however,has expressed concern that because therequirements apply only to new drugs they applyalmost exclusively to foreign manufacturers ofinnovative pharmaceuticals and not local genericcompanies. Industry has raised additionalconcerns that the requirements may delaymarket access and could jeopardize intellectualproperty protection. A KFDA task force isstudying the concerns expressed by industry andother stakeholders.

KFDA approval for local sale of drugsdeveloped outside Korea remains slow. Thefrequent need for companies to duplicate inKorea clinical trials already completedelsewhere is of particular concern because suchtrials are costly and delay market access for U.S.products. Duplicate trials were expected todecrease following Korea’s 1999 announcementthat it would implement InternationalConference on Harmonization (ICH) guidelines. While the KFDA has made progress in acceptingthe concepts in the ICH E5 guidelines, theKFDA typically fails to include Koreans asmembers of the general Asian population fordrug testing and presumes that drugs are morenarrowly sensitive unless proven otherwise. InNovember 2002, Korea published revisedguidelines that could improve market access forU.S. companies. The U.S. Government willmonitor the implementation of these guidelines. In addition, the KFDA needs to streamline itsclinical trial application process, which delaysmarket access for U.S. products.

Finally, Korea has impeded market access forforeign pharmaceuticals by requiring redundantlocal test data for three lots of importedpharmaceuticals, vaccines and biologics forpurposes of product registration. Moreover,

once registered, each shipment of a drugimported into Korea for commercial purposesmust be tested. This is expensive, inefficientand scientifically unsound. The United Stateswill continue to emphasize the need for theGovernment of Korea to implement appropriateinternational guidelines on the acceptance offoreign clinical test data, to make the drugapproval process for new drugs more science-based, and to shorten the overall drug approvalprocess in Korea (see also "Intellectual PropertyRights Protection" and "Pharmaceuticals").

The United States and Korea have workedtogether cooperatively over the past few years toresolve a range of motor vehicle standardsissues. Consistent with the 1998 U.S.-KoreaMemorandum of Understanding (MOU)Regarding Motor Vehicles, Korea has takensteps to simplify and streamline its safety andenvironmental standards and certificationprocedures. In October 2000, Korea joined theGlobal Agreement, an agreement intended toencourage the international harmonization ofmotor vehicle standards. In 2001, the UnitedStates and Korea established a new workinggroup to improve the dialogue between the twosides on complex standards and certificationissues. The meetings of this group to date haveproved highly productive, and the U.S.Government believes that this forum offers thepotential to build a stronger cooperativerelationship on standards and certification issuesas the work of this group continues. The U.S.Government has closely consulted with theGovernment of Korea on the development of aself-certification system, which Koreaimplemented in January 2003. Theestablishment of this system will be a keyagenda item of the working group over the nextyear. Finally, with member governmentsworking to develop a new global standard onside impact crash tests under the GlobalAgreement, the Government of Koreacommitted to the U.S. Government, in January2002, that it would continue to accept both theU.S. and European side impact standard. Nonetheless, the U.S. Government continues tobe concerned about a variety of other autostandards issues, which serve as serious marketaccess barriers to U .S. automakers, and willcontinue to work with Korea to expeditiouslyaddress these matters.

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Labeling Requirem ents

U.S. exporters cite Korea’s non-transparent andburdensome labeling requirements as barriers toentry, despite various recent changes by theKorea Government to these requirements. TheU.S. Government will continue to address theseissues with the Government of Korea.

In July 2000, KFDA revised its food labelingstandards to bring Korea’s labeling standardsmore in line with international standards. Forexample, mandatory Korean-language labelingof product type for most products waseliminated and foreign languages may be usedon the label. The new labeling standards wereimplemented in January 2002 after an 18-monthgrace period. On January 1, 2001, the Ministryof Environment’s (MOE) new packaging andlabeling standards for food went into effect. Aimed at protecting the environment byminimizing land-fill material, the standardsprohibited the use of PVC-shrink-wraps andpromotional packaging that included more than20 percent “dead space” in the container. MOEaddressed U.S. Government concerns about therestricted use of PVC-shrink-wrap on someproducts, including frozen products, on foodsafety grounds. However, the U.S. Governmentcontinues to question Korea’s rationale forrestricting package size based on gross deadspace to minimize landfill material. Net spacedisplaced by such containers, once collapsed andmeasured (MOE does not allow this), is minimaland well within the objective of the standard. The U.S. Government will monitorimplementation of these standards.

Korea implemented mandatory biotechnologylabeling requirements for corn and soybeancommodities in March 2001 and in July 2001 forprocessed foods containing biotech-enhancedcorn, soybeans or soybean sprouts. In March2002, MAF extended biotechnology labelingrequirements for fresh potatoes. The KoreaFood & Drug Administration (KFDA) initiallyintended to follow MAF’s lead by requiringbiotechnology labeling for processed potatobased-products in 2003 (consistent with Japan’splan to start biotechnology labeling forpotato-based products). MAF officials haveindicated that U.S. fresh potatoes will be exemptfrom biotechnology labeling requirements withno requirement for extra documentation as longas biotechnology potatoes are not produced inthe United States. The U.S. Government will

continue to work with Korean officials to clarifyand confirm Korean requirements for non-biotech fresh potatoes. In addition, the U.S.Government has urged Korea to consult with itsseed industry to avoid disruptive requirements.

Korea provided only vague and limitedinformation on the mandatory biotechnologylabeling requirements prior to September 2002,however, which hampered companies’ ability toproperly comply with the requirements. Moreover, the new requirements appear far moreburdensome than necessary to achieve theirstated goal of providing Korean consumers clearinformation and appear to raise nationaltreatment concerns as well. Korea’s labelingrequirements and, in particular, rules forexemption from the requirements generatedconfusion and delays in custom clearance. Ultimately, the rules led to a significantreduction in Korean imports of U .S. productshaving a soy or corn base. The U.S.Government expressed concern over Korealabeling requirements in late 2001 and suggestedKorea adopt more flexible requirements. InSeptember 2002, Korea permitted acceptance ofa notarized self-declaration in-lieu-of fullidentity preserved documentation as certificationthat product meets requirements to be exemptfrom biotechnology. The United States willcontinue to work with the Government of Koreato resolve this issue in a manner that ensuresconsumer information requirements are satisfiedand is no more burdensome than necessary toachieve these goals.

GOVERNMENT PROCUREMENT

Korea joined the WTO Agreement onGovernment Procurement (GPA) on January 1,1997, and agreed to cover procurement of goodsand services over specific thresholds bynumerous Korean central government agencies,provincial and municipal governments and sometwo dozen government-invested companies. Inaccordance with its commitments under theGPA, procurement of satellites is included inKorea’s coverage as of January 1, 2002.

EXPORT SUBSIDIES

Korea has aggressively promoted exportsthrough a variety of policy tools, includingexport subsidies. However, it committed severalyears ago to phase out export subsidy programsthat are not permitted under the WTO

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Agreement on Subsidies and CountervailingMeasures. Under its IMF economic stabilizationpackage, Korea eliminated four WTO-prohibitedexport subsidies earlier than originally planned. Korea is rationalizing its overall subsidy regime,including through the notification of 19programs to the WTO, as required by reportingobligations, and the elimination or reduction ofthe benefits available in 68 others. The U.S.Government has strongly urged Korea to ensurethat its government support programs complywith its WTO obligations.

In February 2002, the Government of Korearevised the “Act for the Export-Import Bank ofKorea” (KEXIM) to enable KEXIM to becomemore active in undertaking risks and extendingcredit lines to exporters. Under the newregulations, KEXIM is able to undertake risksthat commercial banks are reluctant to assume. In addition, KEXIM’s financing sources wereexpanded to include non-bank guarantee fees,thereby boosting exports from Koreancompanies. The U.S. Government will continueto monitor modifications made to the Act toensure that they are consistent with Korea’sWTO obligations, including that financingprovided under this Act does not take the formof a prohibited subsidy. In addition, the UnitedStates will also work to ensure that Korea isrespecting its obligations as a participant in theOECD Export Credit Arrangement.

Government Support for Certain IndustrialSectors

The U.S. Government continued to expressstrong concerns about instances of possibleKorean government subsidization ofsemiconductor production and export that couldadversely affect U.S. trade interests. Inparticular, the U.S. Government raised concernsabout continued support extended to HynixSemiconductor, Inc. (Hynix) by Koreangovernment-owned financial institutions. Hynixis Korea’s second largest and the world’s thirdlargest semiconductor manufacturer.

Aid to Hynix was provided and/or arranged byits state-owned or state-controlled creditors onseveral occasions throughout 2001 and 2002 incomplex refinancing agreements involving debtrollovers, partial debt forgiveness, interest ratereductions, new lending and other forms ofassistance. The interventions were ostensiblydesigned to provide Hynix an opportunity to

restructure and wait out the worldwidesemiconductor market downturn. However,repeated bailouts of highly indebted Hynixperpetuated the chronic problems of the globalsemiconductor market by helping to maintainuneconomic capacity and excess supply, therebykeeping prices depressed.

Following an unsuccessful attempt to buy Hynixin the spring of 2002, Micron Corporation of theUnited States filed a petition with theDepartment of Commerce on behalf of the U.S.Dynamic Random Access Memory (DRAM)chip industry for a countervailing duty (CVD)investigation of allegedly subsidized DRAMSfrom Korea, including those produced by Hynix. The International Trade Commission has issuedan affirmative preliminary injury determination,and the Commerce Department is expected toannounce its preliminary subsidy determinationin March 2003. The EU launched its own CVDcase against Korean semiconductormanufacturers last summer, and its preliminarydecision is due in April 2003.

The U.S. Government has repeatedly raisedconcerns with Korea in bilateral and multilateralfora regarding the Hynix bailouts, as these callinto question Korea’s commitment to genuinestructural market reform and to its obligationsunder the WTO. The U.S. Government,together with U.S. industry, continues tomonitor developments carefully and has relayedthe United States’ strong expectation that theGovernment of Korea will not provide anyinappropriate support for Hynix or exert undueinfluence on the credit restructuring process inthe future.

The U.S. Government also began looking intoconcerns raised by members of the U.S. paperindustry about alleged targeted Koreangovernment aid to its coated paper sector,including low-cost facility investment loans andloan guarantees, tax benefits for facilityexpansion, government-sponsored creation of apaper manufacturing complex and governmentsale of debt obligations. Since a significantpercentage of Korean coated paper output isexported to the United States and other markets,U.S. industry is concerned that this support maybe distorting international markets for papergoods. The U.S. Government raised the issueboth formally and informally several times withKorean government officials and will continue

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to closely monitor the situation to ensure thatKorea fully abides by its WTO obligations.

INTELLECTUAL PROPERTY RIGHTS(IPR) PROTECTION

Korea was downgraded from the Special 301"Priority Watch List" to the “Watch List” in2002 due to the Government of Korea’sagreement to take significant steps to strengthenits IPR legislation and enforcement. The twoGovernments held several consultations on IPRissues during 2002, as part of the bilateralquarterly trade consultations, and the UnitedStates continues to monitor the implementationof commitments Korea made in 2002. Theseinclude giving police authority to a new specialenforcement unit within the Ministry ofInformation and Communications (MOIC) toconduct raids for software piracy, providing theUnited States with detailed data on its softwarepiracy enforcement efforts and establishingexclusive transmission rights for soundrecordings and performances. The United Statesalso remains concerned with respect to thetransparency of Korea’s enforcement efforts, theprotection of temporary copies, technicalprotection measures, Internet service provider(ISP) liability and ex parte relief, the lack of fullretroactive protection for pre-existingcopyrighted works, continued counterfeiting ofconsumer products, pharmaceutical patents, andlack of coordination between Korean health andIPR authorities on drug product approvals formarketing. Finally, in 2002 a new loopholeemerged in the Korean film and video ratingsystem that allows foreign movies to befraudulently registered in Korea. An interimsolution has been agreed to in concert with acommitment by the Government of Korea tointroduce into the National Assembly in the firsthalf of 2003, legislation to permanently solvethis problem. The U.S. Government continuesto monitor both the interim measures andprogress on the legislation.

IPR Enforcement

Despite the actions taken by the Government ofKorea over the past year, IPR enforcementcontinues to be an issue of serious concern. TheUnited States welcomed the establishment inJanuary 2002 of a Special Investigation Team(SIT) in MOIC. The SIT is charged withconducting raids of commercial firms thought tobe utilizing pirated software. Korea pledged to

grant the SIT full police powers to allow theteam to conduct effective enforcement raids onits own. The legislation to grant the SIT thisauthority reached the committee of the NationalAssembly by November 2002, but unfortunatelydid not pass in 2002. The U.S. Governmentexpects that this will occur in early 2003. TheUnited States remains concerned about thetransparency of the SIT enforcement process,including whether the right holders will benotified about all raids initiated by SIT. TheUnited States requested that the Government ofKorea to provide detailed information on theresult of court decisions ( i.e., acquittals,convictions, punishments) to both the rightsholders and the U.S. Government. The Koreanside has responded that in some instances thisinformation is burdensome to collect, while inothers, divulging details of cases violates theprivacy of the individuals involved. While theGovernment of Korea passed amendments to thepatent, trademark and utility model laws inJanuary 2001 that increased fines and terms ofimprisonment for infringers, the U. S. has urgedKorea to further review the penalties for IPRviolations in order to increase their effectivenessas a deterrent to piracy.

Copyright Act (CA) and Computer ProgramProtection Act (CPPA)

In December 2002 the National Assembly tookan important step forward by passing revisionsto the Computer Programs Protection Act(CPPA) which added transmission rights, acritical element of an effective copyright regimein the digital age. The Government of Koreaalso accepted the U.S. suggestion that onlineservice providers should immediately stop theinfringing activity upon request of the copyrightowner. The United States believes that theCPPA needs to be strengthened further and hasurged Korea to make additional amendments tothis law, as well as to the Copyright Act, toclarify that the copyright owner has theexclusive right to make copies, temporary orpermanent, of a work or phonogram.

In July 2000 and again in December 2001, theGovernment of Korea drafted revisions to theCopyright Act, and this legislation went tocommittee of the National Assembly in April2002. It is expected to be passed in early 2003. Although the draft revisions addressed U.S.concerns about exceptions relating toreproduction in libraries, the United States

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remains concerned about several provisions. Forexample, the provisions on technical protectionmeasures (TPMs) in both the CA and the CPPAincludes exceptions that effectively underminetheir purpose. Specifically, the Government ofKorea needs to clarify that although the CAstates trafficking in circumvention devices andservices is “considered to be infringement,” thevarious exceptions and defenses to infringementdo not apply in this context. Furthermore, theU.S. Government has urged Korea to amend thelanguage to prohibit technologies, services,products, or devices that have a limitedcommercially significant purpose or use otherthan to circumvent TPMs. Korea has respondedthat it is studying the issue to identify logicalexceptions and limitations. Also, the articleproviding limitations on the copyright liabilityof On-line Service Providers is vague as to theunderlying liability of service providers. Without clarity, the need for limitations on suchliability is suspect, as is the ability of the law topromote cooperation between service providersand right holders.

The United States has also recommended thatthe Government of Korea clarify the availabilityof injunctive and ex parte relief in civilenforcement actions, as required under theTRIPS Agreement. In addition, the UnitedStates has urged Korea to delete the reciprocityprovision relating to database protection in theCopyright Act, as it discourages the introductionof databases from other countries without suchlegislation. Finally, the United States hasexpressed concerns about the failure of theGovernment of Korea to address other keyissues in its most recent amendments to theCopyright Act, including provision for exclusivetransmission rights for sounding recordings(which Korea has pledged to do by the end of2003) and a provision of the full 50-yearprotection for pre-existing sound recordings.

Patent and Trademark Acts

Over the past year, changes to the Patent Actboth strengthened and streamlined the patentapplication process. The revisions also gave theKorean Industrial Property Office (KIPO) morepower to protect technologies exchangedthrough the Internet. In 2002, the Governmentof Korea proposed legislation to streamline theprocedures for foreign PCT (Patent CooperationTreaty) members. Overall, while the patent lawis fairly comprehensive and offers protection to

most products and technologies, U.S. industrystill believes that deficiencies remain in theinterpretation of claims and in the treatment ofdominant and subservient patents.

Trademark Act changes were made by Korea tobring the country into compliance with theMadrid Protocol on International Registration ofMarks as it prepares for membership in 2002and to the Trademark Law Treaty. The revisionssimplified application procedures forinternational applications and introduced aretroactive damage compensation system forregistrants. However, the successful pursuit ofclaims under this system has continued to bedifficult, particularly in cases involvingagricultural entities.

The Trademark Act also contains provisionsprohibiting the registration of trademarks filedwithout the authorization of the foreigntrademark holder by allowing examiners torefuse registration of applications made in "badfaith." Despite this change, the legal proceduresthat U.S. companies must pursue in order to seekcancellation proceedings reportedly discourageU.S. companies from pursuing legal remedies toaddress infringement in Korea, thereby acting asa barrier to effective enforcement. As such,problems still arise with respect to "sleeper"trademark registrations (i.e., registrations thatinfringe the rights of legitimate mark owners butare not challenged and removed). In January2002, MOIC established a Domain NameDispute Resolution Committee to accelerate theresolution of disputes over this issue. The U.S.Government has recommended that Koreainclude foreign participants on this committee. Also in 2002, MOIC prepared draft legislationfor the Internet Address Space Management Actthat gives more legal ground to a domain namedispute resolution committee and prohibitscyber-squatting.

Korea has long been a source of exports ofinfringing goods. Textile designs were affordedcopyright protection (in addition to protectionunder Korean design law) through a July 1,2000, revision to the Copyright Act. However,protection remains problematic largely becauseof the lack of enforcement, and some Koreancompanies allegedly pirate U.S.-copyrightedtextile designs and export them to third countrieswhere they compete with genuine U.S.-producedgoods.

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Although Korean laws on unfair competitionand trade secrets provide some trade secretprotection, these statutes remain deficient. Forexample, U.S. firms, particularly somemanufacturers of chemicals, candy andchocolate, face continuing problems withgovernment regulations requiring submission ofvery detailed product information, specificallyformulae or blueprints, as part of registration orcertification procedures. U.S. firms report thatalthough Korean law forbids the release ofbusiness confidential information, they haveexperienced instances where informationsubmitted has not been given sufficientprotection by government officials and, in somecases, has been made available to Koreancompetitors or to their trade associations.

The Government of Korea has taken steps overthe years to remedy data or patent protectionproblems that affect pharmaceuticals, butproblems remain, including the lack ofcoordination between Korean health and safetyand intellectual property officials. This lack ofcoordination results in the granting of marketingapproval for products that may infringe existingpatents. However, in March 2002, the UnitedStates and Korea resolved questions related toKorea’s commitment to provide full protectionagainst unfair commercial use of test datasubmitted for marketing approval, as required byArticle 39.3 of the TRIPS Agreement.

SERVICES BARRIERS

Korea continues to maintain restrictions on someservice sectors through a “negative list.” Inthese sectors, foreign investment is prohibited orseverely circumscribed through equity or otherrestrictions. (See also “Investment Barriers”). Construction

The construction and engineering markets inKorea were first opened to foreign competitionin 1996. Foreign companies may bid on publicprojects, including the massive capital projectsdesigned to improve basic infrastructure inKorea. Foreign firms still report problems withattempts to renegotiate accepted bid prices, aswell as with registration and bondingprocedures, which are excessively burdensome.

Advertising

Korea is among the world's top twelve largest

advertising markets; however, it remains ahighly restricted market. Since broadcastadvertising time is still sold exclusively throughthe state-sponsored Korea Broadcast AdvertisingCorporation (KOBACO), advertisers and theiragencies must work through KOBACO toadvertise on broadcast television. Legislationwas passed in 1999 to end KOBACO’smonopoly, but implementation of these laws hasbeen delayed. As a result, advertisers and theiragencies must still work through KOBACO toadvertise on broadcast television.

Some progress has been shown by KOBACO inrecent years in offering more flexible packagesand a wider range of commercial time lengths tobetter meet advertisers’ needs. However thereare still further changes in airtime sales thatshould be urgently considered. Firstly, in-program advertising has been proposed severaltimes to KOBACO. The government isreconsidering the issue. Secondly, most TVairtime packages are still offered on a monthlybasis, limiting the opportunity for advertisers toengage in spot buying of advertising time. Thisimpedes advertisers’ ability to run short-termcampaigns and tailor their media delivery. Thirdly, the practice of conditional selling -packaging radio (primarily religious radio spots)with TV airtime - is still evident. Finally, thecurrent pricing structure for TV spot timelengths outside of the 15-second standard offersinsufficient incentive to advertisers.

Broadcast advertising censorship presents acontinuing source of difficulty for all advertisersand agencies doing business in Korea. KARB’scensorship committee is comprised ofrepresentatives of various organizations whochange regularly. This handicaps television andradio advertisers since their advertising has to besubmitted in its final, fully produced film formatfor approval by KARB. This approval processcontributes significantly to the risk and costsinvolved for developing new advertisingcampaigns and introducing new brands. Oftenthe committee requires that substantiating testingbe repeated in Korea, disregarding advertisingclaim substantiation accepted in other countries. In some product categories, such as cosmetics,the Ministry of Health and Welfare requires thatadvertising copy be additionally approved by thelocal manufacturers’ association in advance ofairing or publication. Efficacy claims forpharmaceuticals, over-the-counter medicines and cosmeceuticals are also not permitted. This

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makes advertising of technologically superiorproducts less effective and ultimately contributesto the discouragement of innovation.

Direct Selling

Until recently, the U.S. direct selling industryfaced a variety of barriers in Korea, one of itslargest markets in the world. However, someimprovements in this trade situation haveresulted following the Government of Korea’srecent passage of a new Door-to-Door Sales Act(DDSA), which governs direct selling. Ofparticular concern to industry were changesbeing considered that would have made directselling companies jointly and severally liable foractions taken by direct sellers’ independentcontractors that are outside the contractors’scope of duties and responsibilities and beyondthe control of the direct selling company. TheU.S. side repeatedly raised concerns over thisissue with the Government of Korea in 2001 and2002, and these concerns appear to have beenaddressed. The new DDSA cleared the KoreanNational Assembly on February 28, 2002 (andwas signed by Korean President Kim, Dae-Jungin the summer) and meets the key multi-levelmarketing (MLM) industry request that the"joint and several liability" (which had assignedliability to the MLM companies for the actionsof the independent distributors of their products)be stricken from the new legislation. Also,although the price limitation has been raised to1.3 million won ($1,093 at 1,200 won/dollar),the distributors' sales commission limit remainsunchanged at 35 percent.

Screen Quotas

Korea maintains screen quotas on importedmotion pictures, requiring that domestic films beshown in each cinema a minimum number ofdays per year (currently, 146 days withreductions to 106 days possible if certain criteriaare met). The quota discourages trade, cinemaconstruction, the expansion of theatricaldistribution in Korea, and the competitiveness ofthe Korean film industry. In January 1999, theNational Assembly passed a resolutionintroduced by the Culture and Tourism StandingCommittee that a relaxation of the screen quotashould only be considered if and when Koreanfilms achieve a 40 percent market share, whichwas exceeded beginning in 2001. In December2000, a similar resolution was introduced by theUnification and Foreign Affairs and Trade

Standing Committee and was passed by theentire National Assembly. Korea’s resistance toreducing its screen quotas has held upnegotiation of the U.S.-Korea BilateralInvestment Treaty.

Foreign Content Quota for Free TerrestrialTV

Korea restricts foreign activities in the free TVsector by limiting the percentage of monthlybroadcasting time (not to exceed 20 percent) thatmay be devoted to imported programs. Annualquotas also limit broadcasts of foreignprogramming to a maximum of 75 percent formotion pictures, 55 percent for animation, and40 percent for popular music. Foreigninvestment is not permitted for terrestrialtelevision operations.

Foreign Content Quota for Cable and TV

Korea restricts foreign participation in the cableTV sector by limiting per channel airtime formost foreign programming to 50 percent. Annual quotas for broadcast motion pictures areset at 70 percent and for animation at 60 percent. These restrictions limit foreign access and thedevelopment of Korea’s film and animationindustries. The Government of Korea alsorestricts foreign ownership of cable television-related system operators and program providersto 33 percent, although pending legislationwould raise the ceiling to 49 percent. Networkoperators are limited to 49 percent. For satellitebroadcasts, foreign participation is limited to 33percent.

Satellite Re-Transmission

The Integrated Broadcast Law mandates thatKorean firms that wish to re-broadcast satellitetransmissions of foreign programmers must havea contract with the foreign program provider inorder to obtain approval from the KoreanBroadcasting Commission (KBC). Foreign re-transmission channels are limited to10 percentof the total number of operating channels. Thisartificial restriction limits the amount ofinternational broadcasting which couldotherwise be made available to Koreanconsumers and limits foreign investment inKorea in the broadcasting sector.

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Restrictions on Voice-overs and LocalAdvertisem ents

Presently, there are restrictions on voice-overs(dubbing) and local advertising for foreign re-transmission channels. These restrictions arewritten into the Korean BroadcastingCommission’s guidelines for implementation ofthe Broadcasting Act, and as such, could easilybe revised. Allowing voice-overs in the Koreanlanguage would not only make the broadcaststruly accessible to Korean consumers, but alsowould benefit the Korean economy by creatingmore studio/production jobs and foreigninvestment. The prohibition on local advertisingfor foreign retransmission channels restricts thelong-term viability of foreign re-transmissionchannels in the Korean market. Foreign re-transmission channels should be allowed tobroadcast their content and add/insert localadvertising in order to ensure their financialstability as well as to show relevant advertisingto their Korean viewers.

Accounting

Korea restricts the establishment of foreignaccounting firms by requiring that companiesmust employee at least 10 Korean-certifiedaccountants/partners, including at least three ofwhom must be partners and seven of whom mustbe employed accountants. Foreign CertifiedPublic Accountants (CPAs) are required tofulfill the same requirements as Korean CPAs,including: (1) obtaining Korean certification; (2)completing a two-year internship; and (3)registering with the public accountantsassociation. Accounting firms in Korea areprohibited from making an investment in orproviding a debt guarantee to any other firm inexcess of 10 percent of the accounting firm’spaid-in-capital.

Engineering

Although there are no restrictions on foreignengineering services specified in Korean law orregulation, procuring agencies (national, localand private) can specify particular conditionsand/or requirements for engineers andengineering services depending on the nature ofthe project. Such specifications can be writtento favor domestic engineering services firms. The Ministry of Construction and Transportation(MOCT) imposes no requirements that

engineering services be provided on a jointventure basis.

Legal

At the time of Korea’s accession to the OECD in1996, the Government of Korea amended the“Lawyers Act” to permit non-Koreans to belicensed to practice law in Korea, provided thatthey meet the same criteria that are applied toKorean nationals. The Government of Koreaalso amended the “Regulation on ForeignInvestment” in 1997 to allow for foreigninvestment in the legal sector. Any individualnot qualified as a lawyer under Korean law isprohibited from providing legal services toKorean and foreign clients in Korea and fromestablishing a law firm or office in Korea. Thereis no provision for “foreign legal consultants” inKorean law, although in practice many foreignattorneys in Korea perform legal advisoryfunctions. The U.S. Government continues tohave concerns that no foreign law firms maypractice law in Korea and that delineation ofpermitted practices for foreign lawyers is non-transparent, creating serious difficulties forforeign lawyers employed by local firms.

Financial

As a condition of its IMF economic stabilizationpackage, Korea agreed to bind its OECDcommitments on financial services marketaccess in the WTO. Korea’s revised schedule ofWTO financial services commitments enteredinto force in September 1999. The U.S.Government will continue to work with Korea toensure that it meets its WTO and OECDfinancial services commitments and to bringabout more liberal treatment of foreign financialservices providers.

Foreign-based, non-financial businesses inKorea face burdensome and costly proceduralrequirements for financial transactions that areinappropriate to Korea’s level of developmentand financial sophistication. For instance,virtually all inter-company transfers are subjectto certification. This is a cumbersome, costly,and unnecessary requirement, particularly fortransactions between subsidiaries. Even aftermost foreign exchange transactions wereliberalized in 2001, foreign bank and financialsubsidiaries must receive Bank of Korea (BOK)permission on their capital account transactions.

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Insurance

Korea is the second largest insurance market inAsia after Japan, with $47 billion in premiumspaid in the fiscal year ending March 31, 2002. The environment for foreign insurancecompanies has improved considerably sinceKorea implemented a series of regulatorychanges following its 1996 OECD accession. Korea incorporated many of these changes,including expanded market access and nationaltreatment commitments, into the 1997 WTOFinancial Services Agreement.

The 1997-98 financial crisis led to an ambitiousrestructuring of the Korean insurance industry. In 1998, the newly established FinancialSupervisory Commission (FSC), theGovernment of Korea’s financial watchdog andcenter for financial reform, revoked the licensesof some insurance companies and forced themerger of others on the grounds of insolvency. In addition, 16 life and non-life insurancecompanies entered FSC-supervised workoutprograms. (A workout program is a voluntary,out-of-court debt-restructuring framework,which may or may not involve governmentoversight.)

After failing several times to sell Korea LifeInsurance (KLI) to foreign buyers since 1999,the Government of Korea sold the company tothe Hanhwa group in December 2002. KLI hasroughly a 16 percent share of the Koreaninsurance market. The Government of Korea isgradually liberalizing foreign entry into the lifeand non-life insurance markets and has liftedsome restrictions on partnering with Koreanfinancial companies and on hiring Koreaninsurance professionals. In April 1998, Korealiberalized insurance appraisals and activitiesancillary to the management of insurance andpension funds. Korea’s brokerage market wasopened to foreign firms in April 1998. Severalforeign reinsurance firms like Reliance andARIGA have since entered the market. In 2002,the government submitted to the NationalAssembly a new insurance act bill removingmost limitations on business area and workingcapital, and the Assembly is still considering thisbill.

Banking

The most significant banking events in Korea in2002 were two big merger deals, creating new

mega banks. With $105 billion in assets,Shinhan and Chohung Bank will be the secondlargest bank in Korea while Hana and SeoulBank will be the fourth largest with $67 billionin assets. Kookmin is the only Korean banklisted on the New York Stock Exchange.

In the aftermath of the economic crisis, theGovernment of Korea injected over KRW 34trillion in public funds into the commercialbanking system, effectively nationalizing it. Currently, four commercial banks aregovernment-owned and managed (Hanvit,Kyongnam, Kwangju, and Cheju). TheGovernment of Korea also retains majorityownership in Chohung Bank and significantminority stakes in Korea First, Korea Exchange,and Kookmin Banks. (In January 2000, theGovernment of Korea sold 51 percent of KoreaFirst Bank to a U.S. firm, Newbridge Capital.)

In September 2000, the Government of Koreacommenced a “second round” of bankrestructuring. The National Assemblyauthorized the formation of financial holdingcompanies and granted authority for thegovernment to spend a further 50 trillion won inpublic funds to recapitalize ailing financialinstitutions. In April 2001, the Government ofKorea combined four state-owned banks(Hanvit, Kyongnam, Kwangju, and Peace banks)into Woori Financial Holding Company, afterinjecting 6 trillion won as bank recapitalization. Unlimited deposit insurance, which had beenintroduced to shore up confidence in banksduring the 1997-98 financial crisis, was revokedon January 1, 2001, and replaced by a per-account limit of 50 million won.

The IMF and the U.S. Government haverepeatedly urged Korea to privatize state-ownedbanks to allow market forces to more efficientlyallocate financial resources and increase investorconfidence in the Korean economy. On January25, 2002, the Government of Korea announced acomprehensive plan to sell off its stake in W ooriFinancial Holding Company, Chohung Bank,Seoul Bank, and Cheju Bank and to liquidate itsminority stakes in Korea First Bank, KoreaExchange Bank, and Kookmin Bank. TheGovernment of Korea already has sold SeoulBank and is close to selling Chohung Bank. Ithas announced its intention to sell its 9 percentshare of Kookmin bank during the winter of2003. In June 2002, KDIC listed WooriFinancial Holding Company on the Korea Stock

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Exchange, selling an 11.8 percent stake of thecompany. One month later, the Government ofKorea sold off a 51 percent stake of Cheju Bankto the Shinhan Financial Group.

At the beginning of 2002, Korea modified itsregulations to allow foreign bank branches toborrow from their head offices and to includethe net borrowing as Class B capital. However,the Government of Korea did not allow theforeign branches to use head office capital tomeet regulatory lending limit requirements andcontinues to restrict the operations of foreignbank branches based on branch capitalrequirements. These restrictions limit: (1) loansto individual customers; (2) foreign exchangetrading; and (3) foreign-bank capital adequacyand liquidity requirements. Foreign banks aresubject to the same lending ratios as Koreanbanks, which require them to allocate a certainshare of their loan portfolios to Koreancompanies other than to the top four chaebolconglomerates and to small and mediumenterprises. Foreign banks can establishsubsidiaries or direct branches. Althoughforeign investors may legally become majorityowners of Korean banks, this has proven to bedifficult in practice. In 1998 and 1999, theGovernment of Korea opened the capitalmarkets to foreigners, permitting foreignfinancial institutions to engage in non-hostilemergers and acquisitions of domestic financialinstitutions.

All banks in Korea continue to suffer from anon-transparent regulatory system and must seekapproval before introducing new products andservices - an area where foreign banks are mostcompetitive.

The April 1999 Foreign Exchange lawintroduced the first phase of foreign exchangeand import-export transaction liberalization. The second phase of foreign exchangeliberalization on January 1, 2001, deregulated foreign exchange and capital accounttransactions for individuals, but the restrictionson corporations and financial institutionsregarding their foreign exchange transactionsstill remain.

Securities On June 24, 2000, the Government of Korearemoved limits on local currency issues ofstocks and bonds by foreign firms. The

Government of Korea places no limits onforeign ownership of listed bonds or commercialpaper, no longer restricts foreign ownership ofsecurities traded in local markets and hasremoved almost entirely foreign investmentceilings on Korean stocks. Despite thisliberalization, foreign securities firms in Koreacontinue to face some non-prudential barriers totheir operations.

INVESTMENT BARRIERS

The Kim Dae-jung Government made a strongcommitment to create a more favorableinvestment climate and to facilitate foreigninvestment, and the U.S. Government is hopefulthat his successor Roh Moo-hyun will do thesame. Progress has been made in recent years,but additional steps are needed to fully achievethis goal.

The 1998 Foreign Investment Promotion Act:(1) increased the number of business sectorsopen to foreign investment (currently, tworemain fully closed to foreign direct investment(FDI) including television and radio stations,and 27 remain partially closed); (2) providedmore tax incentives; (3) simplified investmentprocedures; and (4) established ForeignInvestment Zones. The Government of Koreamust automatically approve a foreign investor’snotification unless the activity appears on anexplicit “negative list” or is related to nationalsecurity, the maintenance of public order or theprotection of public health, morality or safety. Since May 1998, foreigners have been permittedto engage in hostile takeovers and may purchase100 percent of a target company’s outstandingstock without consent of its board of directors.

Capital market reforms have eliminated or raisedceilings on aggregate foreign equity ownership,on individual foreign ownership and on foreigninvestment in the government, corporate andspecial bond markets, and have liberalizedforeign purchases of short-term financialinstruments issued by corporate and financialinstitutions. However, the Government of Koreastill maintains foreign equity restrictions withrespect to investments in various state-ownedfirms and many types of media, including cableand satellite television services and channeloperators, as well as schools and beefwholesalers.

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The Government of Korea has taken severalimportant steps to privatize state-ownedcorporations. In 2002, foreign investment limitsfor Korea Telecom (KT) were increased from37.2 percent to 49 percent. The governmentabolished the foreign investment limits forKorea Tobacco & Ginseng in December 2002and plans to increase the foreign investmentlimit for Korea Gas Corporation up to 49 percentin 2003. The National Assembly passedlegislation in December 2000 that sets the stagefor the privatization of KEPCO, the state-ownedelectric power utility. KEPCO subsequentlydivided its power generation division into sixsubsidiaries to lay the foundation for a market-driven electric power industry. In June 2001,KT sold Depository Receipts amounting to$2.24 billion, while in October 2001, KoreaTobacco & Ginseng Corp. sold GlobalDepository Receipts and Exchangeable Bondstotaling $550 million.

The Government of Korea removed restrictionson the direct purchase of land by foreignersthrough the 1998 revision of the Alien LandRegistration Acquisition Act. Non-Koreans,however, still cannot produce certainagricultural products for commercial purposes,nor can agriculturally-zoned land be taken out ofagricultural production.

General Motors (GM) finally took over DaewooMotor, the ailing Korean automaker in April2002 and launched a new company, GM-Daewoo Motor in October. Throughout 2001and into 2002, the local creditor banks, incooperation with the Government of Korea, haveengaged in negotiations to sell key Korean firmssuch as Hyundai Investment and Trust Securitiesto U.S. companies. To date, none of the dealshave been concluded.

While the more liberalized Korean investmentregime has increased U.S. investor interest inKorea, additional changes, including a moretransparent and predictable regulatoryenvironment, more sustained intellectualproperty protection, significant progress onstructural reform and market opening, andenhanced labor-market flexibility would greatlyimprove Korea’s attractiveness as a destinationfor foreign investment, a stated goal of theGovernment of Korea. Conclusion of the U.S.-Korea Bilateral Investment Treaty also couldfurther this goal.

ANTICOMPETITIVE PRACTICES

Com petition Policy

The Government of Korea’s enforcement of itscompetition policy, although historically weak,has been improving. The Korea Fair TradeCommission (KFTC) has been playing anincreasingly active role both in enforcement ofKorea’s competition law and in advocating forregulatory reform and corporate restructuring. KFTC’s powers to conduct investigations and toimpose tougher penalties were enhanced inJanuary 1999 with the revision of the M onopolyRegulation and Fair Trade Act. The Act wassubsequently revised in December 2000 tobroaden KFTC’s authority in corporate andfinancial restructuring and to raise substantiallythe administrative fines for violations and/or forfailure to cooperate with KFTC investigations. In December 2001, the KFTC fined seven mid-ranking chaebol $5.5 million for illegallysubsidizing affiliates. The KFTC did not inspectthe “Big Four” chaebol (Samsung, LG, SK andHyundai Motor Company) in 2001, howeverKorean press reports in early 2003 indicate theKFTC plans to initiate such an investigation thisyear. Despite the KFTC’s increasedenforcement activity, it remains somewhat weakin comparison with the other economicministries.

ELECTRONIC COMMERCE

Korea continues to be a world leader in Internetpenetration and usage. In 2002, the total numberof Internet users in Korea was 26.7 million, overone-half of the country’s total population andover twice the 11 million Internet users countedin 1999. Households with high-speed Internetaccess numbered 10.4 million in 2002, anincrease of 2.6 million from the 7.8 million userscounted in 2001. Competition in DSL-basedservices appears robust, and may be furtherboosted by the Government of Korea’s decisionto require Korea Telecom to unbundle localloops. Korea Telecom, which provides half ofKorea’s high-speed Internet service, is theworld’s fastest-growing ADSL provider. Despite the rapid growth of the Internet inKorea, the global recession caused a downturnin electronic transactions in 2001. Moreover,Korean banking practices and requirements fordocumentation restrict the growth of electroniccommerce trade of intangibles, particularly forsoftware products.

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In December 2001, the National Assemblypassed a revision to the Basic ElectronicCommerce Act, which went into effect on July1, 2002. The revised act more clearly lays outthe rights and obligations of the sender andreceiver of a commerce-related electronicmessage, gives the government more authorityto settle electronic commerce disputes, andbrings security and consumer protection rulesmore in line with OECD standards. The originallaw, passed in July 1999, encourages privatesector development of electronic commerce andcodifies authorization of electronic signatures aslegally binding on consumers and businesses.

In December 2001, the National Assembly alsopassed the Digital Content Promotion Act,which has helped industry construct theinfrastructure it needs and, more importantly,imposes stiff penalties for the copying orretransmission of online content. However, theGovernment of Korea should eliminateinconsistencies between this law and theCopyright Act, which would take precedence inany areas where the laws diverge. In addition,the Digital Signature Act was amended in 2002. While Korea previously has used only digitalsignature keys, this new law brings Korea in linewith international signature recognition policiesby allowing the use of various types ofauthentication technologies. The impact of thesechanges remains to be seen, especially given thatthe Government of Korea will maintain finalapproval of the use of these technologies byrequiring their review by licensed authorities,and the Ministry of Information andCommunications will write the guidelines andstandards for authentication methods used inKorea.

OTHER BARRIERS

Lack of Transparency

The lack of transparency in rule making and inKorea’s regulatory system continues to be theprincipal problem cited by investors or exportersseeking to compete in the Korean market. Whilethe Government of Korea has made someprogress in certain areas, many Korean trade-related laws and regulations lack specificity andthe implementing regulations often diverge fromthe objectives of the laws. Korean officialsexercise a great deal of discretion in applyingbroadly drafted laws and regulations, resultingin inconsistency in their application and

uncertainty among businesses. Compoundingthis problem is the Government of Korea’sfrequent failure to provide specific and timelynotification of planned or actual changes to lawsand regulations to stakeholders. Moreover,vague laws or regulations may be reinterpretedand then applied retroactively, even in caseswhere companies have sought to fully followKorean government guidance on implementingdomestic regulations. These transparency-related problems continue to be seriousproblems for market entry in a wide variety ofsectors, including agriculture, pharmaceuticals,telecommunications, and automotives. Foodproducers are particularly negatively affected bythe ability of individual Korean governmentofficials to apply their own interpretations ofvague or ambiguously worded labeling andproduct categorization standards. The U.S.Government places a very high priority onaddressing these problems.

Frugality Campaigns and Anti-Import Bias

While the Government of Korea is no longerdirectly involved in frugality or anti-importcampaigns and has taken some steps todiscourage overt anti-import activity, concernsabout anti-import biases remain. The legacyfrom past anti-import campaigns has provendifficult to overcome, especially in the autosector. A February 2001 survey revealed thatthe main factor restraining imported car sales inKorea is social pressure and the negative publicimage of foreign cars in Korea. Another Koreanstudy completed in January 2002 confirmedthese findings and found that such attitudesweaken the competitiveness of the Korean autosector.

In 2002, the Government of Korea continued totake steps to improve attitudes toward foreigncars and there was gradual, but steadyimprovement in Koreans’ perception ofimported vehicles. Much of the improvementcan be attributed to President Kim’s occasionalpublic statements encouraging Koreans topurchase imported cars, along with taxauthorities’ public statements that audits will notbe conducted on the basis of foreign carownership. In an important symbolic step, theGovernment of Korea purchased 50 U.S.-madecars in 2002 and will purchase another 50imported cars in 2003 for use as highway patrolcars for Korea’s National Police Agency. Thisfigure will equal more than one-third of the

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Agency’s fleet. The Government of Korea alsolent its support to the establishment of an“imported car” taxi fleet with 100 importedmini-vans prior to the opening of the 2002World Cup games. Finally, the Government ofKorea has expressed a willingness todisseminate the results of twin studies by U.S.and Korean economic research institutes on thecontribution of foreign automakers and foreignautos to the development of the Korean autoindustry and the overall Korean economy. These are useful steps. However, it is essentialthat the Government of Korea continue to makesustained and vigorous efforts to help eliminatethe negative attitudes of Koreans toward foreigncars.

In April 2001, the National AgriculturalCooperative Federation (NACF), a quasi-government producer group that allocatesMinistry of Agriculture (MAF) policy-directedloans, showed solidarity with several Koreanlivestock-related farmer associations thatdemonstrated against Korea’s liberalization ofits live cattle market per its Uruguay Roundcommitment. The demonstrators killed andinjured imported cattle they offloaded fromdetained transport trucks while riot police, sentto protect such animals, stood by watching. TheU.S. Government expressed concern aboutNACF’s role in the boycott, especially given itslinks to the Government of Korea. Farmerassociations also approached the Cheju CitrusCooperative, the administrator of Korea’s citrusimport quota, regarding importing citrus that thefarmers claimed undermined prices of variousdomestic fruits and vegetables. The ChejuCitrus Cooperative subsequently chose not totender for the remaining quota, the third yearKorea failed to do so.

Effective July 1, 2002, the Korean Fair TradeCommission (KFTC) began requiring indicationof the presence of biotech-enhanced componentsin advertisements. KFTC defines the "presence"of a biotechnology component as principalinformation to be provided in an advertisementfor any food product required to be labeled byMAF or KFDA in the revision of the guidelineentitled, "Notification of Principle Informationon Labeling & Advertisement.” According toKFTC’s advertisement notification, therequirement applies to anyone whomanufactures or sells biotech-enhanced food andadvertises such products in printed materialssuch as newspaper or magazine or through

broadcast media such as television. U.S.officials have encouraged Korea to eliminatethis non-science-based requirement on thegrounds that it duplicates existing labelingrequirements and creates an unfounded negativeperception of biotechnology products amongconsumers.

Motor Vehicles

In 1998, the United States and Korea concludeda Memorandum of Understanding (MOU) toimprove market access for foreign motorvehicles. Although the Government of Koreahas implemented most of its commitments underthe 1998 MOU, the United States has seriousconcerns about the lack of progress toward thekey goals of the agreement, which include: (1)substantially increasing market access forforeign motor vehicles; and (2) establishingconditions so that the Korean motor vehiclesector operates according to market principles. While Korean auto exports to the U.S. marketagain hit record levels in 2002, sales of foreignautos in Korea totaled 16,119 vehicles,representing just over one percent of the market.

The United States has held frequentconsultations with Korea to address marketaccess concerns in the automotive sector (Seealso “Frugality Campaigns and Anti-ImportBias”) and to resolve numerous standards andcertification issues (See also Standards andConformity Assessment Procedures”). In 2002,the Gover temporarily reduced the SpecialConsumption Tax (SCT), a three-tiered taxsystem based on engine displacement size. Thereduction included cars with engines greaterthan 2,000 cc – which includes most imports. Market demand for imported vehicles and totalmarket demand increased in direct response tothis temporary reduction. In September 2002,the Government of Korea ended this temporaryreduction. However, it has announced plans tosimplify and reduce this tax. Preliminary reportsfrom Korea indicate that it plans to replace thethree-tiered tax with a two-tiered system, whichwill still be based on engine displacement size. The new tax will become effective in 2004. TheU.S. Government continues to urge theGovernment of Korea to undertake such changesin a transparent manner which fully involves allstakeholders, including foreign industry,throughout the process.

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The United States has welcomed these steps buthas strongly urged Korea to take additionalmeaningful actions to open this sector,including: (1) elimination or reduction ofKorea’s 8 percent tariff on autos, which wouldsignal to Korean consumers that the Governmentof Korea is serious about opening the automarket to foreign competition; (2) developmentand implementation of a plan to simplify theauto tax regime in a manner that enhancesmarket access for foreign motor vehicles, asKorea committed to do under the MOU; (3)positive resolution of remaining standards andcertification issues, including the successfulimplementation of Korea’s self-certificationsystem; and (4) continued active efforts toaddress anti-import sentiments and negativeperceptions that serve as significant barriers tothe purchase of a foreign automobile. Whilesteps in each of these areas is critical, reductionof the tariff – which a Korean study showedwould increase foreign auto imports to 12percent in 5 years with a tariff reduction to 2.5percent – and simplification of the auto taxsystem would have the most immediate andsignificant impact.

The United States and Korea also have reviewedcorporate restructuring in the Korean motorvehicle sector. The Daewoo Motor Companywent bankrupt in July 1999, and a U.S. companyconcluded a non-binding MOU for its sale inSeptember 2001. After several months of duediligence and negotiations, the sale wascompleted in October 2002 and GM Daewoobegan production of a new model the samemonth. The U.S. Government will continue tourge Korea to rely on market-based solutions tothe restructuring of this and other sectors andwill closely monitor Korean actions as they havea direct impact on the ability of U.S. firms tocompete in the Korean market.

Motorcycles

Although progress was made to resolve U.S.concerns over Korea’s pass-by noise standard in2002, several market access issues remainincluding a highway ban, tariff and tax levels,and standards and certification procedures. Korea’s highway ban is the most serious of thesebarriers because it prohibits the use ofmotorcycles on expressways and on designatedbridges and severely restricts the marketpenetration potential for heavyweightmotorcycles, safely designed for highway use.

Korea is the only major world market in whichheavy motorcycles are denied access to majorhighways and designated overpasses in cities. Traffic safety statistics from other developedcountries and research organizationsdemonstrate that highways are actually safer formotorcycles than are other types of roads withnumerous intersections and hazards. The U.S.and Korean Governments have consulted onlifting the ban, and these discussions areon-going.

Pharm aceuticals

Korea is seeking to cut health-care costs and hasadopted a variety of new measures to achievethis goal, many of which would adversely affectKorean patients and U.S. and other foreignpharmaceutical companies. The Government ofKorea often has developed such proposals in aseemingly piecemeal manner without adequateinput from domestic or foreign stakeholders. Moreover, the Government of Korea has largelyfailed to consult in advance with the U.S.Government on these proposed measures,despite the 1999 U.S.-Korea agreements onpharmaceutical pricing. To address U.S.concerns about transparency and pre-notification, the Government of Korea agreed inJanuary 2002 to establish a bilateral health-carereform working group. The group is intended toprovide a forum for foreign pharmaceuticalcompanies to discuss their view of changes theGovernment of Korea is contemplating and toestablish a dialogue on health-care reform. TheU.S. Government serves as an observer on theworking group. The United States welcomedthe formation of the working group, which ithopes will address transparency concerns andserve to improve Korea’s plans to developcomprehensive health-care reforms. The UnitedStates urges the Government of Korea to fullyuse the working group as a forum to shareinformation with industry and other keystakeholders in a timely manner, andrecommends that the working group continue toserve as a forum for discussing these issuesthrough 2003 and beyond.

In 2002, as part of efforts to cut health-carecosts, Korea adopted new Triennial Repricingand Lowest Transaction Pricing measures andissued new proposals on Reference Pricing. TheGovernment of Korea did not consult with theUnited States on these measures, which threaten

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to have a disproportionately negative impact onU.S. research-based pharmaceuticalmanufacturers. The U.S. Government hasexpressed concern to the Government of Koreaabout its lack of transparency of this process,including Korea’s failure to provide the UnitedStates with adequate time for meaningfulcomment prior to finalization of these measures. U.S. industry has discussed these concerns inthe working group without success.

Triennial Repricing: The Triennial Repricingsystem was adopted in August 2002 for alldrugs registered on the national reimbursementlist as of the end of 1999. All registered drugswill be subject to repricing every three yearsunder this system, which took effect on January1, 2003. The system is expected to reduceprices for 2,732 products by an average of 7.2percent in its first year. The U.S. Governmentand industry have expressed concern that therepricing system may unfairly discriminateagainst U.S. producers of innovative drugsbecause the repricing formuladisproportionately reduces the price ofinnovative drugs compared to the price ofgenerics. In addition, the repricing system wasimplemented without meaningful consultationwith industry.

Actual Transaction Price: The United Statesand Korea reached agreement to price new,innovative drugs at the average ex-factory priceof A-7 countries (United States, UnitedKingdom, Germany, France, Italy, Switzerland,and Japan). In addition, in 1999, the twocountries agreed to the Actual Transaction Price(ATP) system, which was intended to endtypical hospital practice of demanding adiscount from pharmaceutical manufacturerswhen purchasing drugs and then receiving a fullreimbursement from the government-operatednational health insurance system.

Lowest Transaction Pricing: However, due toinadequate enforcement, ATP failed to achievethe goal of aligning the prices hospitals pay fordrugs with the reimbursement they receive fromthe Government of Korea. In August 2002,Korea adopted a new Lowest TransactionPricing (LTP) system on a one-year trial basis. The change from ATP to LTP means Korea willreduce the reimbursement price of apharmaceutical from the weighted average priceof the previous quarter’s sales to the lowest

transaction price of the previous quarter’s sales. The U.S. Government and industry areconcerned that LTP will severely impede theability of U.S. products to receivereimbursement at levels reflecting the cost ofintensive research and development. LTP ismore likely than ATP to result in discriminationagainst the products of U.S.-basedpharmaceutical manufacturers. The UnitedStates has expressed opposition to theGovernment of Korea’s elimination of ATP, asystem that had been viewed as fair and as a wayto resolve previous bilateral trade disagreements. The U.S. Government has also expressedconcern about the lack of a clear process forhandling companies’ appeals of LTP decisions,and has urged Korea to seek meaningful inputon LTP from industry and other stakeholders.

Reference Pricing: The Government of Koreahas been considering implementation of areference pricing system since 2001. Facingconsiderable opposition from doctors, hospitals,patients associations and other domesticstakeholders, as well as foreign pharmaceuticalcompanies, the Government of Korea hastemporarily shelved the proposal whileattempting to reverse the broad nationalconsensus opposing reference pricing. The U.S.Government continues to have serious concernsabout the proposed reference pricing program,as it would introduce inequalities in access toinnovative medicines in Korea and discriminateagainst foreign manufacturers of these products.

Reimbursement Guidelines: As part of itsefforts to trim health-care costs, the HealthInsurance Reimbursement Agency (HIRA) hasimposed unduly restrictive reimbursementguidelines on the innovative drugs of severalforeign pharmaceutical companies. Under theseguidelines, a product can be reimbursed only forthe indications listed on the product label. These guidelines are initially set by the KoreaFood and Drug Administration, but can later bemodified by guidelines established by HIRA. The process for establishing these modifiedguidelines is non-transparent and there is noappeals process. The U.S. Government raisedits concerns over the guidelines with theMinistry of Health and Welfare (MHW) andHIRA throughout 2002, and continues to urgethe Government of Korea to develop atransparent process for revising reimbursementguidelines.

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Certain key regulatory issues under theoversight of MHW remain unresolved, and newissueshave arisen as a result of the Government ofKorea’s introduction of health-care reforms andcost-containment measures. These issuesinclude Drug Master File requirements,redundant local testing of biologics, vaccines,and drugs, and requirements that clinical trialscompleted elsewhere be unnecessarilyduplicated in Korea (on the ostensible groundsof ethnic sensitivity) (See also "Standards andConformity Assessment Procedures").

Medical Devices

The United States continues to have seriousconcerns in this area, including reductions inreimbursement pricing (particularly related toorthopedic devices), hospitals' buying practices,proposed provisions of the M edical Devices Act,and a proposal for third party review of productapprovals. There is a need for moretransparency in and streamlining of theregulatory approval process.

In 2002, the Government of Korea continued toface increasing pressure to reduce expendituresin its national health insurance system in orderto address a mounting deficit. One of the majorfactors leading to this financial crisis was theimplementation of a new policy in 2000 toseparate the prescribing and dispensing ofpharmaceuticals. Doctors, who have maintainedthe right to dispense pharmaceuticals withprofits for many decades, were against thepolicy and many participated in a five-monthstrike, which ended in December 2000 after theGovernment of Korea agreed to series ofincreases in service fees for doctors. However,the anticipated savings to the health-care systemdid not happen and, as a result, the HealthInsurance Reimbursement Agency (HIRA)spearheaded cost-savings initiatives to reducespending in all areas, including reimbursementfor medical devices. In late 2002, MHWapproved proposed HIRA price reductions onmedical products from 2 percent to 75 percent,depending on the product and category. Thesereductions, effective January 1, 2003, areespecially burdensome for all categories oforthopedic devices, for which reimbursementprices have been reduced between14 percent to60 percent.

These reductions place a tremendous burden onpatient co-payments, threaten to limit theavailability of products in the market, and havethe potential of leading to a two-tiered health-care system. By approving these cuts, Koreaappears to have disregarded the Medical DevicePricing Task Force's April 2001recommendations to MHW on price regulations. The Task Force, which was comprised of eightmembers of the HIRA Medical DeviceSpecialists Committee and three members fromthe Korean and U.S./EU industries, jointlydeveloped proposed guidelines that provide anincentive for U.S. medical device manufacturersto introduce advanced and competitive productsto the Korean market. In contrast to the presentreimbursement guidelines which limit pricingfor new products to 90 percent or less of pricingfor similar products on the market, the proposedguidelines allow for pricing up to 130 percentprovided the new product has improved featuresand benefits. The United States will continue tourge the Government of Korea to increasetransparency through close and timelyconsultation with the U.S. Government andindustry on all issues pertaining to market accessfor medical devices. One important measure inthis regard is the inclusion of U.S. industryrepresentatives on key committees thatformulate policy proposals and decisions.

It should be noted that in compliance with WTOobligations to eliminate tariffs on medicalproducts, in 2000 the Government of Koreaeliminated tariffs on orthopedic devices and, in2004 plans to eliminate tariffs on other medicalproducts.

Cosmetics and Cosmeceuticals

The United States welcomes the Government ofKorea’s stated goal of moving toward self-regulation in the cosmetics sector; however,there is a significant amount of work left to bedone for Korea to achieve this goal, andobstacles remain against the entry anddistribution of foreign cosmeceutical products inKorea. Korea has testing and importauthorization requirements for cosmeceuticalsthat appear excessive. Furthermore, Korea hasimplemented new packaging requirements thatappear to limit the use of outer containersconsidered vital to the protection andpresentation of cosmetics.

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When the Korean Cosmetic Products Act(KCPA) became effective July 1, 2000, a newproduct category “cosmeceuticals” was created. Accordingly, cosmeceuticals must be reviewedfor safety and efficacy by the Korean Food andDrug Administration (KFDA) and must not be"falsely advertised" to have functions beyondproven efficacy. The KCPA regulations relatingto cosmeceuticals go far beyond requirements inthis area set by Europe, the United States, orJapan, and the approval process is lengthy. Compliance with Korean regulations remainsdifficult, particularly for foreign manufacturerswho must incur additional expenses for onerousand duplicative testing and labelingrequirements. Because imported products areproduced overseas, foreign companies mustsubmit more data to prove their efficacy, whichoften is business proprietary.

Moreover, the process of introducing newproducts in Korea is difficult because of atendency on the part of the Korean bureaucracyto resist products and procedures that aredifferent from those used by domesticcompanies. Foreign cosmetics often containdifferent ingredients or different concentrationsof common ingredients and often use differingtesting procedures in their home country, and theKFDA has tended to be conservative whenforeign product applications come before it. This problem has been exacerbated since theproduct approval process has been taken over bythe KFDA, as that agency is still refining itsapproval procedures.

The United States continues to work with theGovernment of Korea to further simplify andincrease the transparency of the cosmeticstesting procedures and product approvalsprocess and to ensure that all cosmeticscompanies fully understand the scope andrequirements of the KFDA regulations.

Telecomm unications

As one of the world’s leading nations intelecommunications, Korea currently isdeveloping its projects for IMT-2000 wirelessservices and introducing satellite TVbroadcasting. As a result, rapid growth isforecast for this sector. Despite such growthopportunities, some leading U.S. suppliers havebeen hurt by excessive governmental influenceover private operators’ selection of technologiesand interference in issues involving, for

example, foreign licensing and technologytransfers. This governmental influence on thechoice of sources of equipment and technologiesis often implied in the licensing process foroperators and also is clearly evident inlocalization policies for procurement. The U.S.Government will continue to urge Korea toavoid mandating specific technologies andstandards or intervening in private sectornegotiations related to this sector.

The Government of Korea also appears to beleading efforts to discourage use of foreign-sourced software for certain telecommunicationsapplications, while simultaneously supportingdevelopment of a Korean national standard forcompeting products. For example, the M inistryof Information and Communications fundsdevelopment of competing telecommunicationsstandards through its research and developmentarm, the Electronics and TelecommunicationsResearch Institute (ETRI). The Government ofKorea’s control over tariff rate approvals,certification of equipment and other regulatoryauthority provides it the means to exert stronginfluence over industries’ selection of specificstandards or technologies. Such practices denyKorean consumers access to innovative productsand potentially discriminate against U.S.software suppliers. The U.S. Government willcontinue to urge Korea to live up to its bilateraland multilateral commitments not to hinder theimport of such products.

A key concern for U.S. industry and the U.S.Government that has been the focus of a numberof bilateral meetings in 2002 and early 2003relates to the “wireless Internet platform forinteroperability (“W IPI”) standard for mobilephone applications. The Government of Korea,in its notification to the WTO under theTechnical Barriers to Trade (TBT) Agreement,stated it intends to make WIPI mandatory. TheU.S. Government continues to have a number ofconcerns related to the Government of Korea’sstated plans related to WIPI, including:inappropriate government involvement in thecreation, standardization and deployment ofWIPI, recent actions taken by the Governmentof Korea to discourage Koreantelecommunications service providers fromsubscribing to competing foreign standards;overly-restrictive WIPI specifications whichappear to be designed to keep competing foreignsystems out of the market; and possibleinfringement on U.S. companies’ intellectual

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property in the creation/promulgation of theWIPI standard. The Government of Korea hasstated that it will not make any decisions onwhether to make WIPI mandatory until it hasfully consulted bilaterally and within the WTO. Consultations are ongoing.

The Government of Korea has also announcedplans to reallocate the 2.3 gigahertz spectrum toa new wireless Internet system and appears to beplanning to mandate a new standard in this areaas well. The U.S. Government has repeatedlyexpressed its expectation that Korea, inlaunching any new telecommunicationsstandards, will fulfill its bilateral and multilateralobligations and that all efforts will be made toavoid creating unnecessary obstacles tointernational trade in the telecommunicationssector.

In the services sector, foreign ownershiprestrictions, including a ceiling of 49 percentforeign ownership for facilities-based (Type 1)carriers also impede the access of foreign firmsin the Korean market. The Government ofKorea divested the government’s final holdingsin Korea Telecom in May 2002. The UnitedStates believes that full privatization shouldinject much-needed competition into the marketand allow more U.S. suppliers to qualify for KTprocurement through locally qualified agentsand distributors. However, the true measure ofeffectiveness of privatization will bedemonstrated through KT’s commitment tomake needed changes to ensure a fair andtransparent and non-discriminatory procurementprocess. In broadcasting, foreign re-transmission channels are restricted to 10percent of the total of all cable and satellitebroadcasting channels and foreign investment inlocal system operators and program providers islimited to 33 percent. These restrictions alsoseverely limit market access for U.S. broadcastchannels and considerably raise the cost ofmarket entry. The United States will continue torecommend that Korea fully liberalizeinvestment in the telecommunications sector assoon as possible in order to enhance thecompetitive environment in this key sector.

Documents

REPUBLIC OF KOR EA€¦ · REPUBLIC OF KOREA TRADE S UMMARY In 2002, the U.S. trade defici t with Korea totaled $13.0 billion, a slight decrease of $22 million from 2001. In 2002