Korea’s FTA Policies

2

Introduction

• Korea has changed from reluctant to enthusiastic FTA player– Importance of trade in Korean economy

has grown continuously– Korea sees FTA as a tool to maintain and

expand foreign markets and modernize its economy

– “multiple negotiations” to achieve as many FTAs as possible with strategic partners

3

Korean Trade (1970-2011)USD billions

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

0

100

200

300

400

500

600

Total ExportsTotal Imports

4

Share of Trade in GDP

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

-20

0

20

40

60

80

100

120

Exports

Imports

Net Trade

Total Trade

5

Regional Exports(USD billions)

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

0

20

40

60

80

100

120

140

160

180

200

US

China (Hong Kong and Taiwan)

Japan

EU

ASEAN

Central and South America

OPEC

ROW

6

Regional Exports(% of total exports)

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 20

5

10

15

20

25

30

35

40

45

US

China (Hong Kong and Taiwan)

Japan

EU

ASEAN

Central and South America

OPEC

ROW

7

Regional Imports(USD billions)

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

0

20

40

60

80

100

120

140 US

China (Hong Kong and Taiwan)

Japan

EU

ASEAN

Central and South America

OPEC

ROW

8

Regional Imports(% of total imports)

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

0

5

10

15

20

25

30

35

40

45

US

China (Hong Kong and Taiwan)

Japan

EU

ASEAN

Central and South America

OPEC

ROW

9

What Does Korea Export(2007-2011)

Primary Products2%

Light Manufactures6%

IT Products26%

Other Heavy Manufactures

65%

10

What Does Korea Export(2007-2011)

Transport Equip22%

Electronic Com-ponents

17%

Industrial Electronic Articles11%

Petrochemicals8%

Mineral Fuels8%

Articles of Iron or Steel7%

Special Machine3%

General Machine3%

Household Electron-ics3%

Precision Chemistry2%

Nonferrous Metal products

2%

Fabrics2%

Others13%

11

What Does Korea Import? (2007-2011)

Primary Products (for export)

14%

Primary Products (for domestic use)

17%

Light Manufactures (for export)

1%Light Manufactures (for domestic use)

4%IT Products (for

exports)8%

IT Products (for domestic use)6%

Other Heavy Manu-factures (for ex-

ports)16%

Other Heavy Manufactures (for domestic

use)33%

12

What Does Korea Import? (2007-2011)

Mineral Fuels30%

Electronic Com-ponents

10%

Articles of Iron and Steel8%Industrial Electronic Articles

6%

Precision Chemicals4%

Transport Equip4%

Metal Ore4%

Nonferrous Metal Products

4%

Agricultural Prod-ucts Farm Produce

3%

Petrochemicals3%

General Machines3%

Precision Machines3%

Others19%

13

Korean Imports by Use(2007-2011)

Raw Material (Used for Exports)

27%

Capital Goods (Used for Exports)

12%Consumption Goods (Used for Exports)

1%Misc (Used for

Exports)0%

Raw Material (Domestic

Use)33%

Capital Goods (Domestic Use)

18%

Consumption Goods (Domestic Use)

9%

Misc (Domsetic Use)0%

14

Korean FTAs: Signed and Imple-mented

Country Study Begun

Negotia-tions Begun

Negotiations Completed

Imple-mented

Chile 1999.09 2003.02 2004.04

Singapore 2003.03 2003.10 2006.03 2006.03

EFTA 2004.08 2004.12 2006.09 2009.06

ASEAN (Goods) 2004.03 2004.11 2006.08 2007.06

ASEAN (Ser-vices) 2004.03 2004.11 2007.11 2009.05

ASEAN (Invest.) 2004.03 2004.11 2009.06 2009.09

India 2005.01 2006.01 2009.08 2010.01

US 2006.06 2007.04 2012.03

EU 2006.07 2009.10* 2011.07

Peru 2007.10 2009.01 2011.08 2011.08

15

Korean FTAs: Signed but Not Yet Implemented

Country Study Begun

Negotiations Begun

Negotiations Com-pleted

Turkey 2008.09 2010.03 2012.08 (Goods only)

Colombia 2009.03 2009.12 2012.06

16

Korean FTAs: Under Negotiation

Country Study Begun Negotiations Begun

Canada 2004.11

Mexico 2004.10 2005.09

GCC 2007.11

Australia 2007.05 2008.10

New Zealand 2007.02 2008.05

Indonesia

China *** 2005 2012.05

Indonesia 2011.05 2012.07

Vietnam 2010.06 2012.08

Japan *** 1998.12 2003.10 **

17

Korean FTAs: Under StudyCountry Study

Begun

MERCOSUR 2005.05

Israel 2009.08

Mongolia 2008.10

Central America (Panama, Costa Rica, Guatemala, Honduras, Dominican Republic and El Salvador)

2010.10

Malaysia 2011.05

18

Korean FTAs: Studies Quietly For-gotten

Country Study Begun

Russia2007.10

SACU (South African Customs Union)2008.12^

19

Korean FTAs: Global GDP (2009) basis, billion USD; Total 57,876 billion

34210.3081460461;

59%

850.718201534134; 1%

9169.47051750212; 16%

7710.33017853278; 13%

834.060441840978; 1%

5100.62547019535; 9%

Implemented

Signed but not implemented

Under nego-tiation

Under study

Korea

Rest

20

Korean FTAs: Trade (1999-2003) Ba-sis (five year export and import total) 1575 billion USD

690.356286999998

; 44%

6.81865599999999; 0%

377.595129999999; 24%

268.746039999999; 17%

231.447902; 15%

Implemented

Signed but not yet imple-mented

Under negotia-tion

Under study

Rest

21

Korean FTAs: Trade (2007-2011) Basis (five year export and import total) 4243 billion USD

1504.938443; 35%

28.95122; 1%

1507.477886; 36%

551.294921; 13%

650.795164; 15%

ImplementedSigned but not yet implementedUnder negotiationUnder studyRest

22

Need for FTA

• Korea is a trade dependent country– Resource-poor country• Oil and other raw material must be imported• Thus, exports to earn foreign currency is a

must

– History of “export-led” growth– Exports and Imports each are over 50%

of GDP in recent years

23

GDP Growth(2005 real won, billions)

0

2000

4000

6000

8000

10000

12000

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010

24

GDP Growth(Nominal US dollars, billions)

0200

400600800

10001200

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006

25

Need for FTA

• Low foreign direct investment– Portfolio investment is fickle, and dis-

rupts exchange rates– Conglomerates (“chaebols”) financed

new investment and expansion through debt• Implicit government guarantee caused

moral hazard (“too big to fail”), inefficient fi-nancial sector, and large short term debt (domestic and foreign)

26

Cumulative FD I for Selected Countries (1980-2005)

0

10

20

30

40

50

60

70

80

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

US

J apan

France

Germany

UK

Argentina

Brazil

Chile

China

Taiwan

North Korea

Korea

India

Thailand

ASEAN

APEC

Colombia

27

Short History of Korea’s FTAs

• Before the 1997 financial crisis– No FTAs signed–Worries over FTAs and RTAs as trade

barrier

• 1997-1998 Financial Crisis– Need to show commitment to free and

open markets– Searched potential FTA partners• APEC

28

Short History of Korea’s FTAs

– Why Chile?• Economy small enough so that no major effect on Korea

in case of adverse effects• But large enough with enough imports to show positive

effects of FTA• Beachhead into underrepresented South American mar-

kets• “It takes two sides to tango” – Not many believed in Ko-

rea’s commitment to sign FTAs• Note that negotiations took more than three years, and

passage another year– Among problems: Rice, Apples (no Chilean exports), Grapes

(growing season opposite of Korea)– Chile started and finished negotiations with US during negotia-

tions with Korea

29

Short History of Korea’s FTAs

• 2003 “FTA Roadmap”– Few more FTAs with “small economies”

• Singapore (No agriculture)• EFTA (Little agriculture)

– Then larger economies– Ultimately largest economies / trading partners

• EU, US, China, India

– Fast negotiations with multiple partners• Not one negotiation at a time

– Comprehensive FTAs with “WTO plus”• Must include services, investment (FDI)

30

Short History of Korea’s FTAs

• Korean strategy – why?– Korea as a “trade hub” to increase FDI

and jobs– Catch up with other countries with mul-

tiple FTAs– Increase productivity• Services

– Lessons from financial services during financial crisis

– Reduce trade diversion

31

Short History of Korea’s FTAs

• KORUS FTA– Politically sensitive– Passage and implementation delayed

even though content substantially same as KOR-EU FTA

32

Short History of Korea’s FTAs

• “Unusual” Issues– Kaesong Industrial Complex

• Located in North Korea, using NK labor with South Korean investors and firms

• Rules of origin for most FTAs allow “Kaesong” products to be classified as Korean

• But for KORUS FTA, to be further negotiated– KORUS FTA allows special “outward processing zones” but has

not agreed whether Kaesong will be OPZ

– Clothing• Under current US rules of origin, Korean clothing made

with Chinese textiles can be classified as non-Korean• FTA Provisions in place to classify most clothing made in

Korea with Chinese textiles as “Korean”

33

Short History of Korea’s FTAs

• Future– China– Korea-China-Japan FTA– Adjusting existing (early) FTAs– Regional Integration• ASEAN+3 or ASEAN+6 (Australia, New Zea-

land, India)• TPP• FTAAP: Asian-Pacific FTA (APEC)

34

Korea Trade Policy Considerations(FTA and WTO)

• Open foreign manufactured goods markets– Automobiles, IT and office equipment, steel, cloth-

ing

• Avoid opening sensitive sectors– Agriculture (rice, beef, dairy, fresh foods)– Education, medical services– Reluctant to further open financial markets and cap-

ital accounts

• Maintain subsidies for certain sectors– Agriculture, fishery and other “backward” industries

• Weaken foreign anti-dumping policies

35

Why Colombia?

• One of largest Latin American economy– Geographical hub – North and South America

and Asia– Already signed FTAs with 18 countries, but not

yet with any Asian countries

• Rich in energy and other natural resources– Relatively high tariffs on Korea’s strategic

goods (e.g. automobiles : 35%)– Does not export much agricultural goods (ex-

cept coffee)

36

Degree of Openness (Goods): Korean Side

　Immediate

elimination of tariffs

Longest transi-tion period for eliminating tar-

iffs

Total tariff-free liberalization

after transition period

Excluded from tariff elimina-

tionNotes

Chile 87.20% 16 96.25% 0.20%

3.45% of tariff lines to be discussed after

DDA negotiation (all

agricultural goods); Chile liberalization

rate = 99%

Singa-pore

59.7 10 91.6 8.4Singapore eliminates

all tariffs at imple-mentation

EFTA 86.3 10 99.1 0.9 EFTA elimination rate = 100%

ASEANMore than

63.0%[2016] Note

40 items (HS 6 digit) 　

Indianot compati-

ble7 not compatible

not compati-ble

not compatible

EU 81.7 20 99.60% 0.4 91.8% after 10 years

Peru 84.5 17 99.1 0.9 97.4% after 10 years

US 80.8 20 99.9 0.1 98.3% after 10 years

37

Degree of OpennessKorea-Colombia FTA

　Immediate elimination

of tariffs

Longest transi-tion period for eliminating tar-

iffs

Total tariff-free liberal-ization after transition

period

Excluded from tariff elimination

Notes

Korea (Goods)Tariff lines

82.38% 1998.69%

(90.27 after 5 years)(96.11% after 10 years)

1.29%

Korea (Goods)Import value

98.96%100%

(98.96% after 5 years)(99.98% after 10 years)

0.00%

Colombia (Goods)

Tariff lines60.64% 20

99.35%(82.46% after 5 years)(96.73% after 10 years)

0.65%

Colombia(Goods)

Import value34.08%

100% (55.45% after 5 years)(97.80% after 10 years)

0.00%

Korea(Ag) lines

16.21%89.97%

(47.84%: 5 , 70.96%: 10)

10.33%

Korea (Ag) value

89.42%99.99%

(99.63%: 5, 99.94%: 10)

0.01%

Colombia(Ag) lines

54.77%95.02%

(62.71%: 5, 76.06%: 10)

4.98%

Colombia (Ag) value

95.16%100%

(97.55%: 5, 100.00%: 10)

0.00%

38

Sensitive GoodsKorea-Colombia FTA

• Manufactured Goods– Tariff elimination: 12 years

• Korea: Nickel, Nickel plates, Wooden construction products• Colombia: Refrigerators, Air-conditions, Washers

• Agricultural Goods– Tariff elimination 19-20 years

• Korea and Colombia: Boneless Beef• Colombia: Uncut chicken and 1 more product

– Excluded from Tariff Elimination• Korea: beef, milk, cream, potatoes, garlic, onion, pepper, or-

ange, apple, pear, ginseng, rice• Colombia: rice, beef, milk, powdered milk, pepper, garlic,

onion, green soybeans, red beans. Orange, sugar cane and sugar beet, etc.

39

Degree of Openness(Services and Investment)

• Korea’s liberalization measures are mostly the same as GATS offer– Trade in financial services limited (mostly)

to mode 3 (direct investment)

• Most services (including financial ser-vices) are open to foreign investment– Notable Exceptions:

• A/V services – especially TV and radio• Accounting and Law – open in stages, up to

joint ventures only

40

Degree of Openness (Services & In-vestment) Korea-Colombia

• Usual liberalization measures– NT, MFN – forbid or restrict local presence require-

ments, investment requirements (e.g. export requirements)

– List all non-conforming measures– In principle, allow capital flows, repatriation– Investment protection measures– ISD in case NT and MFN not followed

• Public Debt excluded from “investment”

41

Other Notable Measures: Korea-Colombia FTA

• Government Procurement– Beyond current WTO GPA measures

• Kaesong Industrial Complex– Origin is Korean for 100 goods (HS 6

digit level)

42

Korean Trade with Colombia(USD millions, 1969-2011)

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

0

200

400

600

800

1000

1200

1400

1600

1800

Exports to Colombia Imports from Colombia

43

Korean Exports to Colombia(2008-2011), 4890 million USD

automobile; 1594.974; 33%

auto parts; 1121.091; 23%

synthetic resin; 316.206; 6%

prime mover, pump; 174.675; 4%

other petrochem; 132.237; 3%

steel, flat-rolled prod; 131.803; 3%

construction, mining equip; 118.865; 2%

others; 1293.777; 26%

44

Korean Imports from Colombia(2008-2011, 1081 million USD)

Misc Foods (include. Cof-fee); 285.211;

26%

Alloy Iron; 232.339; 22%

Coal; 204.13; 19%

Crude Petroleum; 113.356; 11%

Copper articles; 110.239; 10%

Agrochem, Pharma; 43.403; 4%

Aluminum; 40.055; 4% Leather; 13.684; 1% Others; 36.906; 3%

45

Conclusion

• Korea is a trade-dependent country– FTA is seen as measure to insure and guarantee

future trade

• Korea is pursuing “multiple negotiations” with major and significant trade partners– Laid out in 2003 “FTA Roadmap”– US and EU were “big hurdles”– China: the most sensitive– Japan: reluctant to negotiate– Possible stepping stone to regional FTAs

(ASEAN+10, FTAAP, TPP)

46

Conclusion

• Characteristics of Korean FTAs– Significant liberalization of goods trade

and direct investment