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S. Korea aggressively seeks trade pacts to make up for late start

Yonhap News | 15 December 2004

S. Korea Aggressively Seeks Trade Pacts to Make Up for Late Start

By Lee Joon-seung

SEOUL, Dec. 15 (Yonhap) — South Korea will make a determined effort to pursue free trade agreements (FTAs) in an effort to further its interests, despite concerns that this could weaken domestic industries and pose further challenges for the agricultural sector.

The country will start talks with the Association of Southeast Asian Nations (ASEAN) next year so a trade agreement can be reached in 2006. Ongoing trade discussions with Japan will be carried out in an effort to find common ground, while a formal deal with Singapore is expected to be signed and ratified in the first half of the new year.

"South Korea will strive for several FTAs that will further the country’s economic interests," Foreign Minister Ban Ki-moon said earlier, adding that negotiations with Canada will be started as well, and the government will do all it can to address concerns by farmers and the domestic manufacturing sector.

Ban’s remarks, coupled with strong views by President Roh Moo-hyun that expanding free trade pacts reflects South Korean interests, is seen as a clear signal that the 12th-largest exporting economy is coming to grips with the fact that it can ill afford to fall behind a global trend.

South Korea had in the past shown a marked lack of interest in FTAs, which became a vogue in the 1990s. Its first such deal with Chile was signed in October 2002, with the treaty going into force in April, while a second FTA with Singapore is expected to be signed next year. This is in contrast with the more than 180 separate FTAs that are in effect, and the likelihood that 50 percent of all global trade in 2005 will occur between countries that have such agreements.

Europe leads the pack with more than 100, followed by around 25 in Asia and about 17 for the Americas.

Reflecting the sudden change of heart, Foreign Ministry officials said joint feasibility studies by public and private sectors were under way with the European Free Trade Association (EFTA) and Mexico.

It said that actual FTA talks with the EFTA’s members, Iceland, Liechtenstein, Norway and Switzerland, could begin next year.

India, a rapidly emerging market, and the South American common market Mercosur, made up of Brazil, Argentina, Uruguay and Paraguay, are looked at as potential FTA partners, with initial studies and formal negotiations to begin in two to three years.

South Korea is also exploring the possibility of establishing an open trade pact with China and the United States in the long term. Exploratory meetings on outstanding issues that might arise when official talks begin are to be discussed with Washington early in 2005.

"The reason South Korea is moving in the direction of FTAs is to cope with delays in multilateral trade talks under the World Trade Organization and to preempt any disadvantages in trade that could occur if an economic rival set up an FTA with a trading partner or bloc," said Lee Young-sun, an economics professor at Yonsei University.

South Korea’s plan to sign a FTA with ASEAN comes as both Japan and China have publicly said they wanted free trade pacts with the Southeast Asian economies.

Lee said that every country wants to fuel economic growth and is fighting to attract more investment. He said that an FTA will ASEAN will a viable tool to reach this end.

This view is supported by a 40 percent year-on-year increase in exports of South Korean products to Chile after the trade deal went into effect, while Chilean exports shot up by more than 80 percent, although this was mostly the result of an increase in raw materials bought by Seoul. Concerns of Chilean fruit flooding the market have yet to materialize.

Experts in Seoul have said that the effective conclusion of trade talks with Singapore was important since it provided a model for the future, especially in furthering South-North Korean economic cooperation.

Minister for Trade Kim Hyun-chong said on Nov. 30 that the Singapore FTA could be used as precedent to get other countries to give products made in Kaesong, North Korea, the same preferential tariff rates as those made in South Korea.

"This is significant because it can enhance cross-border ties, which can ease South-North Korean tensions and bring incalculable economic benefits for the country, boosting business confidence, investment and exports," the minister said.

A successful conclusion of an FTA with ASEAN promises a much larger windfall for the country. A report by the Korea Institute for International Economic Policy (KIEP) claimed South Korea’s gross domestic product would jump US$14.6 billion in the short term and grow by more than $18 billion in the long term as a result of freer movement of goods and services. ASEAN is South Korea’s fifth-largest trading bloc and ranks third in investments by local companies.

KIEP said that freer movement of goods and services could translate into a $370 rise in per capita income as well, although some concerns may arise in the agriculture sector.

Other trade institutes said that a future pact with Mercosur will give South Korean manufacturers access to 200 million consumers ready to buy such products as mobile phones, electronics and autos, which South Korea is good at making. This will be a further boost to the economy.

They argued that opening the market is fraught with risks, but can also strengthen competitiveness of South Korean products in the long run.

Government experts and some private scholars have claimed that once the rice liberalization issue is resolved, a major hurdle to expanding FTA deals will be removed. Many fruits and vegetables in Southeast Asia and elsewhere are not grown in South Korea, so the economic impact of market liberalization may not be so severe, nor the psychological impact as strong as when the market first opened to foreign produce, they said.

"When the Uruguay Round was taking place people were very nervous because they did not know what to expect, but after a decade of gradual liberalization, more South Koreans are less apprehensive," argued Chung Seung, a director general of information at the Agriculture Ministry.

Notwithstanding such rosy sentiments, many in South Korea, such as the Korean Confederation of Trade Unions and the Korean Peasants League, have been vociferous in objecting to further FTAs. They claim that the government is sacrificing the interests of workers and farmers at the expense of manufacturers and foreign interests.

Even some businesspeople have said that pushing FTA’s should be approached carefully and that government plans to conclude a pact with Japan by the end of 2005 should be measured to best reflect national interests.

"If the government wants an FTA with Japan it should take care to make provisions that will give extended waivers for some products, while making clear that Tokyo must reform its ’closed’ distribution system, which effectively acts as a trade barrier," a spokesperson for Federation of Korean Industries said.

The federation of leading companies also said that a clause should be included to make it easier for Japanese companies to invest in South Korea.

The Korea Federation of Small and Medium Business said that customs officials must make certain to check the place of origin for products that are shipped from FTA partners because they could act as conduits for products made in other counties that are not eligible for lower duties.

An influx of such materials could have a serious effect on smaller companies whose profit margins are razor-thin.

It said an FTA with Japan was a source of grave concern since the neighboring country’s dominant parts manufacturing companies could edge out many companies here with superior quality and cheaper prices as a result of preferential duties levied.

This will lead to a further worsening of the trade imbalance between the two countries and undermine efforts to widen the technological gap with China, since local parts suppliers would be edged out of the market before they have time to grow.

"There are countries that don’t pose a threat and there are those that do, so for the latter it would be prudent to be cautious with free trade pacts, since the wrong timing could have severe repercussions," said Lee Soo-dong, president of a systems integration software company that deals with Samsung Group affiliates. The businessman added that many parts he uses already come from Japan, and lowering duties further would compel people like him to turn from the few Korean suppliers.

He said that although FTAs were good and needed, it might be wise to canvas public opinion on certain pacts.

 source: Yonhap