Korea’s FTA Policies

1. 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

4. Share of Trade in GDP

5. Regional Exports(USD billions)

6. Regional Exports(% of total exports)

7. Regional Imports(USD billions)

8. Regional Imports(% of total imports)

9. What Does Korea Export(2007-2011)

10. What Does Korea Export(2007-2011)

11. What Does Korea Import? (2007-2011)

12. What Does Korea Import? (2007-2011)

13. Korean Imports by Use(2007-2011)

14. Korean FTAs: Signed and Implemented

15. Korean FTAs: Signed but Not Yet Implemented

16. Korean FTAs: Under Negotiation

17. Korean FTAs: Under Study

18. Korean FTAs: Studies Quietly Forgotten

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

20. Korean FTAs: Trade (1999-2003) Basis (five year export and import total) 1575 billion USD

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

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)

24. GDP Growth(Nominal US dollars, billions)

25. Need for FTA • Low foreign direct investment • Portfolio investment is fickle, and disrupts exchange rates • Conglomerates (“chaebols”) financed new investment and expansion through debt • Implicit government guarantee caused moral hazard (“too big to fail”), inefficient financial sector, and large short term debt (domestic and foreign)

26. Cumulative FD I for Selected Countries (1980-2005)

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 markets • “It takes two sides to tango” – Not many believed in Korea’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 negotiations 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 multiple 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 Zealand, 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, clothing • Avoid opening sensitive sectors • Agriculture (rice, beef, dairy, fresh foods) • Education, medical services • Reluctant to further open financial markets and capital 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 (except coffee)

36. Degree of Openness (Goods): Korean Side

37. Degree of OpennessKorea-Colombia FTA

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, orange, 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 services) 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 & Investment) Korea-Colombia • Usual liberalization measures • NT, MFN • forbid or restrict local presence requirements, 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)

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

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

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