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CAFTA and Korea: Swift countermeasures needed to cushion impacts

Korea Times, 30 June 2005

CAFTA and Korea
Swift Countermeasures Needed to Cushion Impacts

The free trade agreement between China and 10 Southeast Asian Nations taking effect this month poses considerable challenges to Korea. The China-ASEAN FTA, or CAFTA (pronounced as ``chafta’’ unlike ``kafta’’ for the Central American FTA), will form the world’s third-largest trading bloc, following NAFTA and the EU. But local exporters will have to fight uphill battles with Chinese and Southeast Asian competitors armed with no- or low- tariff products. The best way for Seoul is to join them if it can’t beat them.

Clearly, CAFTA is a win-win formula for China and the Association of Southeast Asian Nations, but puts a damper on struggling Korean exports. China will be able to sell its surplus industrial production to ASEAN markets, bringing about improved living standards on Southeast Asians. The influx of cheap Chinese labor is another advantage for the latter. But Korean products will suffer sharp price disadvantages in both China and ASEAN, currently the nation’s largest and fifth-largest export markets, respectively.

China and ASEAN boast a combined population of 1.8 billion, gross regional product of $2.1 trillion and trade of $1.6 trillion. CAFTA shows Beijing has taken the lead over Japan and Korea in the competition to team-up with Southeast Asia. This should surprise few, however, considering the traditional economic and cultural ties between China and the region. Korea will hold the fourth round of free trade talks with ASEAN this month, but needs to speed up the process to not lag behind any further.

Beginning July 20, China and ASEAN will apply tariffs of 0-5 percent on 40 percent of 7,000 trade commodities. The percentage of goods subject for preferential duties will rise to 60 percent in 2007 and 100 percent in 2010 with six ASEAN members. By 2015, there will be no tariffs between China and all 10 members. This is in stark contrast to the sluggish free trade talks among three Northeast Asian countries, due to political and historical hurdles.

Korea is simultaneously conducting free trade negotiations with several partners, but needs to have a priority list based on strategic importance because once the nation loses initiatives in some markets, it is hard to retake them. China alone has been and will pose as formidable competition for Korea, as shown by the communist country’s brisk advances to global markets through mergers and acquisitions, FTAs and commodity exports. Korea’s economic future will depend on how it competes and cooperates with China.

Particularly hit will be industries such as textile, machinery and petrochemicals. Related companies ought to sharpen up their strategies in advancing to these markets, and government and business officials should maintain close cooperation to cope with the changes.

 source: Korea Times