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Regional implications of Korea-China FTA

Korea Times, Seoul

Regional implications of Korea-China FTA

By Dilip K. Das

27 January 2012

The two dynamic economies of Asia, China and South Korea, have been enjoying close economic ties since 1992, when the two countries established diplomatic ties.

After the 1997-98 Asian financial crisis, their economic relations matured. They became more active in regional economic affairs, promoting economic and financial integration. During President Lee Myung-bak’s recent state visit to China, President Hu Jintao explored the issue of deeper trade ties between the two countries.

He broached the issue of launching negotiations on China-South Korea free-trade agreement (FTA) on the second day of the state visit. Interest from the Korean side was obvious because Korean Trade Minister Bark Tae-ho accompanied the president to participate in the president’s visit. The two presidents agreed to launch formal negotiations on a FTA promptly.

The size of its domestic economy is small. Therefore, Korea needs to have close trade ties with the large economies and markets. With two large FTAs, one with the EU and the other with the U.S., already in effect, South Korea can be justly regarded as a successful operator in crafting and implementing its trade policy.

China is naturally eager to negotiate the same trade terms as Korea negotiated in its two FTAs with the EU and U.S.

Having successfully entered into FTAs with the two largest markets of the world, Korea is initiating FTA negotiations with the second largest economy in the world.

The relationship between China and Korea is complex. While the two neighbors are interdependent and wish to have a cooperative relationship, they also have increasingly competitive rivalry in the global marketplace.

Several of China’s manufacturing industries and farm sectors have a comparative advantage over their Korean rivals. However, Korea took a long-term perspective and viewed China’s regional and global ascendance as a commercial opportunity rather than a strategic concern. In 2008, Korea and China even agreed to a strategic-cooperative partnership, with the aim of deepening diplomatic, economic and security cooperation.

The impending FTA is an old chestnut. The two countries broached the issue in September 2004, in Jakarta, during the ASEAN-plus-Three annual summit.

At that time, the two economies agreed to set up a research group to delve into the feasibility of an FTA. One of the results of this study was that while it will be a win-win game, Korea’s exports to China would likely increase as much as 30 percent. Since 2008, the two sides have held a series of joint feasibility studies on the possible design of an FTA.

As the two potential partners of the FTA are aware of the sensitivities of sectors like agriculture, fisheries, and textiles, they have agreed that talks would eliminate sensitive issues that could harm any one of the two economies.

Economic interdependence between the two countries has deepened. Their bilateral trade between over 1992-2010 recorded a 30-fold increase, from $6.37 billion to $207 billion. They realized the target of $200 billion two years ahead of time. Two-way trade between China and Korea during the first eleven months of the last year was $224.8 billion. The new target for 2015 is $300 billion.

China’s is South Korea’s largest trade partner for the last seven years. Korea-China trade exceeded the combined total of Korea’s trade with the U.S. and Japan. Also, Korea is the third trading partner of China, following the EU and the U.S. An FTA with China will have a greater impact on the Korean economy than the one with the EU and the U.S.

According to a report, Korean GDP will be growing following an FTA with China. It will expand by 2.72 percent. This increase in Korean GDP will essentially come largely from an increase in Korean exports of automobiles, textiles and petrochemicals. For Korea, these GDP gains are much large than those from its FTA with the EU (1.02 percent) and the U.S. (0.56 percent).

Korean agriculture and fisheries will be heavy losers. The Korean government dragged its feet because of expected backlash from the farming and fisheries sectors. According to a study by the Korea Institute for International Economic Policy (KIEP), production in these two sectors will drop by $14.26 percent, if Korea is to import inexpensive but competitive Chinese imports. Production cuts may be as high as 20 percent.

When it would come in effect, the two economies will grow together. Notwithstanding the presence of sensitive sectors, the overall impact of the FTA will be positive. It will also buttress the ongoing regional real sector integration efforts in Asia.

The writer is a professor of the SolBridge International School of Business at Woosong University in Korea.