Long, bumpy road to FTA with China
The Hankyoreh, Seoul
Long, bumpy road to FTA with China
Free trade with huge Chinese market presents great risks, but benefits are uncertain
By Jung Eun-joo, staff writer
3 May 2012
Trade minister Park Tae-ho has declared the opening of free trade agreement negotiations with China, but a rough road lies ahead. In addition to concerns about the major blow an FTA would deal to the domestic agriculture and fishing sectors and small manufacturers, questions are also being raised about the economic effects of recent FTAs with the European Union and United States.
Negotiation method and potential problem areas
Seoul and Beijing plan to hold preliminary negotiations on how to deal with vulnerable sectors. South Korea includes its agriculture and fishing sectors in this category, as well as textile companies and other manufacturers. China sees its automobile, machinery, and petroleum manufacturing industries as sensitive sectors. Seoul is gearing up to do everything it can to guard its agriculture and fishing industries through methods such as long-term tariff abolition, tariff reductions, and exclusion from concessions.
This is motivated by concerns that an FTA would lead to an influx of inexpensive Chinese agricultural products that South Korea farmers couldn‘t compete with.
A government official said that while there was no way of knowing how long the first stage of negotiations would take, the two countries do not plan to proceed to the second stage if they cannot reach an amicable agreement in the first stage.
The second stage will consist of negotiations in the form of a package deal covering all areas of goods, services, investment, norms, and cooperation based on the outcome of the first stage of discussions. Currently, the South Korean government plans to request self-determined methods of place of origin certification for exporters to receive tariff benefits, along with simplified customs procedures. It also hopes to establish more liberal service and investment terms than in the current trilateral investment pact with China and Japan or the concession (openness) terms of the World Trade Organization.
In particular, Seoul said it plans to actively push for the adoption of an investor-state dispute system, a contentious issue with the KORUS FTA.
Impact on SMEs
An FTA with China would mean major restructuring for domestic small and medium enterprises. A Korea Small Business Institute report analyzing the potential impact of an FTA with China on SMEs and specifying necessary response measures predicted a possible rise in consumer good exports, especially industrial products, but also “greater competition for domestic labor-intensive, low value-added industries, including a sharp rise in Chinese imports.” In particular, increases were predicted for televisions, refrigerators, and air conditioners in the electronics sector, but only minimal effects for IT goods, which are already duty-free. In the automobile industry, a continued increase in finished car exports was predicted, but also a rise in parts imports. For general machinery, the report predicted a possible increase in parts exports but said a rise in finished product imports could not be ruled out. And in the textile and garment industries, there is likely to be a rise in raw material and intermediary material exports, along with an increase in finished product imports, the institute said.
A KSBI researcher said, “China is price-competitive with significantly more goods than the US or the European Union, which we already have FTAs with. We may end up seeing a negative impact on domestic SMEs if these goods come onto the South Korean market duty-free,” the researcher predicted.
Score card for existing FTAs
Experts are predicting that an FTA with China will have a greater impact on the South Korean economy than either of the existing FTAs with the EU and US. South Korea already has more trade with China than with the US and EU combined. As of 2011, South Korea-China trade was valued at US$220.6 billion, including US$134.2 billion in exports and US$86.4 billion in imports. This was US$16.6 billion won more than the combined total of US$204.0 billion in trade with the US (US$56.3 billion in exports, US$44.6 billion in imports) and EU (US$55.7 billion in exports, US$47.4 billion in imports).
Critics are contending that the government is rushing into an FTA with the vast Chinese market at a time when South Korea is drawing only meager benefits from its existing FTAs with the EU or US.
Park Joo-sun, an independent lawmaker and member of the National Assembly’s Foreign Affairs, Trade and Unification Committee issued a press release Wednesday stating that the balance of trade with the US fell by more than US$11.5 billion in the ten months after the KOREU FTA took effect compared to the same period the year before.
As of the period from Apr. 1 to 20, exports to the EU stood at US$2.77 billion, with US$2.79 billion in imports, reflecting drops of 16.7% for exports and 2.8% for imports compared to the same period in 2011.
The KORUS FTA went into effect on Mar. 15, but the increase in US exports for April stood at 5.6%, down sharply from the 23% recorded for the same period last year.
