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Korea-China FTA talks gather steam but a sticky path ahead

Korea-China FTA talks gather steam but a sticky path ahead

By Ko Kyoung-tae

23 August 2005

As economic interdependence between Korea and China grows significantly, government officials and economists find it more and more necessary to form a free trade agreement to strengthen bilateral economic relations.

According to Korea’s Ministry of Foreign Affairs and Trade, Chinese Premier Wen Jiabao expressed interest in a free trade agreement between the two countries when he met with Prime Minister Lee Hae-chan in June.

During the meeting in Beijing, Wen said, "Official intergovernmental talks on a Korea-China FTA should be initiated once research about its potential economic impact on the two countries reaches some progress."

The Korea Institute of International Economic Policy and China’s Development Research Center of the State Council have been conducting joint research on the feasibility of a bilateral free trade pact since March this year.

China overtook the United States as Korea’s largest trading partner in 2004, accounting for more than 20 percent of the country’s exports.

Additionally, more than one-third of foreign direct investment by Korean companies has been going across the Yellow Sea to China since 2003.

But, while recognizing the necessity of a bilateral free trade agreement amid rapidly increasing economic interdependence between the two countries, both governments are still reluctant to launch an official government-level talk on the issue.

Korea is concerned that a free trade agreement will cause massive inflows of cheap Chinese agricultural products, possibly hurting the nation’s fragile agricultural industry.

"A free trade agreement will open the nation’s market to the world’s largest producer of agricultural goods, which has the world’s biggest agricultural population of 800 million. This will have a huge negative impact on the nation’s farming industry," said an official at the Foreign Ministry’s FTA Coordination Division, asking not to be identified.

The nation’s agricultural output will decline about 12 percent if customs duties on Chinese goods are abolished as a result of a free trade pact, according to a working paper by the Korea Institute of International Economic Policy released at the end of 2004.

"Because of its proximity to the domestic market, a wide variety of Chinese farm products including rice, fruit and even vegetables will probably dominate the nation’s market thanks to a FTA," said Lee Hong-shik, a senior researcher of the Korea Institute of International Economic Policy.

The paper also said that a free trade agreement will reduce the output of other labor-intensive industries including clothing and leather by 6 to 7 percent. This means that thousands of jobs will be lost amid the influx of duty-free Chinese products in the domestic market.

China has its own concerns.

Several high-tech Chinese firms are expected to be threatened by Korean electronics products, which are already of better quality and will have greater price competitiveness once tariffs are removed.

China’s electronics industry, for example, is expected to shrink almost 3 percent due to more cost-efficient duty-free Korean electronics, experts say.

Despite such challenges being posed to both countries, a free trade agreement between the two countries has already become an unavoidable issue, they believe.

"Considering the complementary industry structures of the two countries, both Seoul and Beijing unofficially find it very crucial for the two countries to be tied up to each other by a FTA," said Lee.

In contrast with Chinese government officials who are subject to less political pressure from interest groups, Seoul officials will have to undergo harder times to get FTA talks on track due to likely severe opposition from farmers and civic groups.

"Despite anticipated conflicts of interests, both governments share the common objective of establishing a FTA in the future to augment bilateral economic relations."

Economists note that a Korea-China FTA will most likely be realized in 5 to 10 years.