Korea's FTA Policy and Negotiating Korea-EU FTA

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(1)Korea’s FTA policy and negotiating Korea-EU FTA May 1st 2010 National Chengchi University Center for Korean Studies. Yoo-Duk Yoo Duk Kang (Associate Research Fellow Fellow, KIEP) (email: [email protected]). T bl off content Table 1.. Korea’s ’ FTA A policy li. 2 2.. Economic relation between Korea and the EU. 3.. Background of Korea-EU FTA. 4.. Contents of Korea-EU FTA. 5.. Economic effect of Korea-EU FTA. 6.. Future prospect of Korea’s FTA policy. 2. 1.

(2) 1. Korea’s FTA policy. 2. Changes in Korea’s Korea s trade policy . Korea's K ' ttrade d policy li h has experienced i d major j change h since i llate t 90s ttoward d regionalism. Why did Korea turn to regionalism based on FTAs?. . Three external reasons and two internal reasons.. External reasons: –. Ongoing DDA (2001~ ?) began to lose its momentum for trade liberalization (Singapore issues,) especially since 5th Ministerial Conference in Cancun in 2003.. –. Many developing countries had turned to regionalism to use FTAs as their development strategy since late 90s. This led other countries to enter into FTA race. (Bandwagon effect, Me-too-regionalism, Domino effect). –. Rapid development of BRIC, especially China: the emerging China has been good opportunities for Korean economy in general, but it was considered as threat as well, as China has attracted the largest part of FDI flowed into East Asia. Much of its inward FDI is aimed at export-oriented production. 3.

(3) Evolution of Regional Trade Agreements (RTA) in the world. Source: WTO. 4. FDI inflows in East Asian Countries (in USD million). 1995 ASEAN-10 Cambodia Indonesia Lao PDR Malaysia Philippines Singapore Thailand Viet Nam Northeast Asia China Hong Kong, China Korea, Republic of Japan ASEAN+3 World. 1996. 1997. 1998. 1999. 2000. 2001. 2002. 19,437 146 3,888 88 7,724 1,541 2 015 2,015 1,595 1,539. 22,949 442 5,607 128 8,972 1,615 1 559 1,559 1,905 1,490. 27,700 61 4,489 85 8,688 1,260 5 605 5,605 3,753 2,179. 17,593 305 -193 45 6,322 2,204 971 5,073 1,610. 16,328 207 -2,679 51 7,111 1,291 4 365 4,365 3,548 1,384. 10,911 164 -4,378 34 7,503 1,417 1 478 1,478 2,862 1,076. 17,393 121 -3,359 24 8,958 964 4 901 4,901 3,942 1,125. 10,567 12 -1,279 25 6,821 916 868 1,048 992. 36,882. 39,183. 43,126. 43,233. 39,846. 40,187. 45,159. 50,309. 1,573 2,613 75,012 389 392 389,392. 14,950 4,144 3,030 68,000 615 814 615,814. 24,579 7,352 11,631 75,156 998 431 998,431. 61,740 5,637 10,293 67,028 1 323 290 1,323,290. 23,179 2,690 6,357 71,598 718 922 718,922. 10,168 1,845 9,380 72,102 471 951 471,951. 901 -64 57,157 254 195 254,195. 887 188 63,208 317 500 317,500. Source: Asian Development Bank, Asia Regional Development Centre Dataset. 5.

(4) Changes in Korea’s Korea s trade policy Internal reasons: –. Falling economic growth: Korea’s annual growth rate was 9% on average throughout 1980s 9 but it fell down to 5.7% 5 7 in 9 90s and since 2000, it has stagnated g around 3 3.5%. 5 → It is necessary to find new momentum for growth and FTA has been increasingly considered as a policy option to sustain economic growth.. –. Korea’s service sectors account for 67% of total employment (and 58% of GDP) in Korean but its productivity is low, compared to OECD countries. → Korea’s service sectors are characterized by small and family-type companies which are highly concentrated on hotel and catering sectors. In order to improve the productivity in Korean service sectors, policy makers recognized increasingly the role of competition resulting esu t g from o ope opening g Korean o ea se service v ce market a et (to US a and d EU). U).. 6. Comparison of labor productivity in service industries (2006) Korea Service industries  Retail, Hotel and Restaurant  Transport, distribution and communication  Finance, estate and business services  Other services (health and Manufacture. Eurozone. Germany. UK. France. Luxembourg Czech Rep.. Poland. 100. 178. 168. 146. 192. 289. 109. (100). (221). (226). (213). (251). (378). (61). 117 (75). 100. 271. 221. 227. 284. 320. 212. 265. (100). (335). (298). (331). (372). (419). (118). (170). 100. 152. 114. 138. 132. 262. 100. 86. (100). (194). (153). (201). (173). (343). (56). (55). 100. 161. 149. 128. 177. 233. 75. 104. (100). (197). (201). (186). (232). (305). (42). (67). 100. 147. 144. 124. 156. 201. 88. 92. (100). (182). (194). (182). (204). (263). (49). (59). 100. 93. 91. 98. 100. 105. 68. 53. (100). (116). (123). (143). (161). (167). (82). (89). Source: OECD. 7.

(5) Development of Korea’s Korea s FTA policy . In No November ember 1998 1998, the ministerial meeting on the foreign economic polic policy (chaired by the Prime Minister) declared that Korea would start negotiations to push for FTA. -. Chile was chosen as the first FTA partner in consideration consideration. Why did Korean Government choose Chile as the first FTA partner? 1) Chile is considerably open economy in terms of trade policy in South Amercia and it had been already negotiating FTAs with several trade partners including US. 2) Chile's trade structure is rather complementary to that of Korea. For agriculture which is the most sensitive sectors that Korea has kept defensive stance on on, market opening to Chilean products are regarded less problematic, because of seasonal difference. 3) Chile seeks for FTA with Korea.. -. But implementing a FTA is harder than negotiating it!. 8. Internal negotiation of FTA: harder than external negotiation. 9.

(6) FTA Roadmap (Sept. (S t 2003)) . Korea-Chile Korea Chile FTA was as singed Feb Feb. 15 15, 2003, 2003 b butt its ratification took 16 months in the wake of polemics, involving not only political parties, but also farmers' union and NGOs.. . This experience drove Korea Government to fix more justifiable objectives on FTA policy in order to obtain public support on its trade policy. → The Gov. set up “FTA Roadmap” in September 2003 in order to obtain public support on its trade policy.. . FTA Roadmap describe coherent and concrete principles on FTA policy and include the list of FTA partners according to priority and prospect.. 10. FTA Roadmap (Sept. (S t 2003)) . Principles of FTA policy polic. 1) Seek for multiple-track FTAs with major trade partners in strategic and active way in order that Korea catch up with countries who have been already on FTA race. race 2) Look for advanced and comprehensive FTAs which include investment, service intellectual property, service, property competition and government procurement in order to maximize effects of FTAs. 3) Bring forward concrete blueprints on every FTA on perspective and organize public hearings in order that the Government can get public support and confidence on its trade policy. 4) Take into consideration not only economic factors but also political and diplomatic factors.. 11.

(7) FTA partners in consideration according to FTA Roadmap. Perspective. Countries in consideration. Remarks Start negotiations as soon as possible ac cording to the joint feasibility studies bet. Japan, Singapore. ween conducted by Gov, academic instit. Short-term (in 2 years). utions and industries Prepare negotiations or joint studies wh. ASEAN, Mexico, EFTA. en appropriate conditions meets. USA, EU, China. Progressive approach. Medium and long term. Israel, Peru, Panama, New Zeal. Countries who have shown their intentio. (in more than 3 years). and, Australia. n to conclude FTAs with Korea. Canada, India. FTA partners on perspective. Note: Canada and India were reclassified as FTA partners of short-term when the Roadmap p was revised in Mayy 2004 4 Source: Ministry of Foreign Affairs and Trade, Korea (2003) 12. Korea’ss FTA (as of Ap Korea April il 2010). Implemented (date of entry into effect). Singed or finalized. Under negotiation. Under study or preparation. K Korea-Chile Chil (01/04/2004) ( / / ). K Korea-US US. K Korea-Canada C d. K Korea-Japan J. Korea-Singapore (02/03/2006). (Signed, 30/06/2007). Korea-Mexico. Korea-China. Korea-EFTA (01/09/2006). Korea-EU. Korea-GCC. Korea-China-Japan. Korea-ASEAN (good, 01/06/2007). (Initialed, 15/10/2009). Korea-Australia. Korea-MERCOSUR. Korea-ASEAN (Investment, 01/09/2009). Korea-New Zealand. Korea-Russia. Korea-ASEAN (Service, 01/05/2010). Korea-Peru. Korea-Israel. Korea-Colombia. Korea-SACU. Korea-Turkeyy Source: Ministry of Foreign Affairs and Trade, Korea (2010). 13.

(8) 2. Economic relation between the EU and Korea. 14. Korea’ss trade and inward FDI with the EU Korea ((trade balance: billion US $ $)). ((investment: 10 million US $ $)). Source: National Statistic Office,, Korea. 15.

(9) Korea’s exports to selected trade partners. Korea’s imports p from selected trade p partners.  . EU is Korea’s second largest g trade partner p after China. Korea record the largest trade surplus vis-à-vis the EU.. Source: KITA 16. Source: European Commission 17.

(10) Korea’s export to the EU. Korea’s merchandise exports to the EU by Member States in 2008. Source: European Commission 18. Korea’s import from the EU. Korea’s merchandise imports from the EU by Member States in 2008. Source: European Commission 19.

(11) 20. EU FDI in Korea by Member States’ Share of total FDI in the manufacturing sector 1962-2008. Source: Ministry of Knowledge Economy, Korea. EU FDI in Korea by Member States’ Share of total FDI in the services sector 1962-2008. Source: Ministry of Knowledge Economy, Korea. Korea’s FDI in the EU, Share of Cumulative Total 1962-2008. Source: Export-Import Bank of Korea. 21.

(12) 3. Background of Korea-EU FTA. 22. Background of Korea-EU Korea EU FTA ■ EU’s FTA policy polic . EU's FTA (RTA) are composed of several levels. 1) Association agreements, Economic Partnership Agreements (EPAs) and 3) FTA. FTA. 2). 1) Association agreements are part of EU's neighborhood policies and they aim at enhancing economic development and political stability in European continent. continent 2) EPAs have similar motives in that the EU try to maintain economic and political relationship with developing world which was once European colony. They are closely related to EU's overall diplomatic strategy. 3) As for bilateral FTAs,, EU's approach pp is characterized by y its focus on economic motives. Political factors are rather excluded in negotiating FTA with third countries. (Cf. Korea-EU FTA vs. Korea-US FTA). 23.

(13) What has driven the EU to negotiate a FTA with Korea?. . In fact fact, the EU had sho shown n its preference for the m multilateral ltilateral negotiations on trade issues for long time.. . Pascal Lamy (trade commissioner in early 2000s) insisted that the EU put priority on ongoing Millennium Round in the WTO rather than bilateral FTAs.. . The period of his mandate as commissioner is often described as "moratorium moratorium on FTA (1999-2004)". During this period, the EU did not commit itself in negotiating new FTAs. → Some exceptions were FTAs with Chile, Mexico and South Africa, for which the negotiations had been already started.. . EU's stance on FTA changed in 2003 especially after break-up of the Ministerial Meeting in Cancun. Why did the EU change its attitude on FTAs?. 24. What has driven the EU to negotiate a FTA with Korea?. . Three reasons. 1) Stagnating DDA: The Ministerial meeting in Cancun failed in producing agreement on major issues "Singpore Singpore issues issues". This brought the EU to exclude investment, investment competition and government procurement in DDA negotiations. → As a result, the EU expected less from DDA. 2) Change in US trade policy: In 1990s, US trade policy put clearly priority on the multilateral negotiation on trade issues in the framework of the WTO and US resorted to the regional g trade agreement g onlyy occasionallyy in view of breaking g the ice in WTO agenda. However, since 2000, US stance on FTA has changed and started to consider bilateral FTA as possible alternatives to multilateral liberalization, which is qualified as "competitive liberalization". 3) Economic growth of Asian countries: It is increasingly necessary for the European countries to consider FTA with Asian countries to take advantage of their growth and their increasing purchasing power. power 25.

(14) Global Europe Strategy (European Commission, Commission 2006). . European E ropean Commission set out o t a ne new trade polic policy agenda designed to reflect these strategic priorities.. . The Global Europe strategy reoriented European bilateral trade agreements through a new generation of FTA with Asian markets and stepped up European focus in key areas such as intellectual property and access to raw materials.. . In this new policy package, EU decided to consider FTAs as part of comprehensive trade policies to enhance trade and investment opportunities and to go ahead with negotiations of comprehensive and advanced FTAs with third countries.. . For the F h fi first FTA partners, the h E European C Commission i i singled i l d out Korea, K ASEAN and India.. 26. Negotiating Korea-EU Korea EU FTA. . . . . . . 15/05/2006 - Korea-EU K r EU Tr Trade d Ministerial Meeting agreed on organizing a preparatory meeting on Korea-EU FTA 19/07/2006 - 1st Preparatory meeting on Korea-EU FTA 26~27/09-2006 - 2nd Preparatory meeting on Korea-EU FTA 24/11/2006 - Public P bli h hearing i on Korea-EU FTA 06/12/2006 - Consultation meeting g of stakeholder on Korea-EU FTA 01/05/2007 - Approval of InterMinisterial Meeting on External Economic Relation. . 06/05/2007 - Declaration of opening the official negotiation. . 07~11/05/2007 -1st negotiation. . 16~20/07/2007 16 20/07/2007 - 2nd negotiation. . 17~21/09/2007 - 3rd negotiation. . 15~10/10/2007 - 4th negotiation. . 19~23/11-2007 - 5th negotiation. . 28/1~01/02/2008 - 6th negotiation. . 12~15/05/2008 - 7th negotiation. . 23~24/03/2009 - 8th negotiation. . 13/07/2009 - Finalization of the FTA. . 15/10/2009 - Initialing of the FTA. Preparation. Negotiation 27.

(15) 4. Contents of Korea-EU FTA. 28. Difficult issues in negotiation: 1) Duty Drawback System . Korea and EU showed a veryy clear divergence g on duty y drawback system y (DDS) from the beginning.. . Korea's point of view: The DDS is crucial support system, especially for small and medium enterprises (SME) that rely heavily on outsourcing to China and Southeast Asia for intermediate goods. Without DDS, any kind of FTA would not bring about tangible economic benefits to SME.. . EU's point of view: The EU realized that DDS is important for Korea but the EU did not have precedents to insert the DDS in the FTA with third countries (ex: Chile, Mexico and South Africa). Western European companies have taken advantage of the European enlargement toward Eastern Europe that is less developed the West. As a result they tend to rely less on outsourcing out of the EU and DDS is less important for them.. . Compromise: The EU allow Korea to maintain current DDS (on average 8%) on Korea’s export to the EU for next 5 years. When Korea's imports of intermediate goods d increase i rapidly idl after ft 5 years off grace period, i d EU can li limit it DDS tto 5%. % 29.

(16) Difficult issues in negotiation: 2) Rule of origin . EU used to set p percentage g of the local components p in complete p p product to 60% in the previous FTAs with Chile, Mexico and South Africa. In order to be qualified as "Made in Korea", Korean-produced component must exceed 60% of total value of the products concerned.. . Korea insist to reduce percentage of local components to 35%. → big difference.. . Compromise: EU agreed on reducing threshold of local component to 45%.. . European car makers opposed heavily to Korea-EU FTA, especially due to DDS and rule of origin. They lobbied Member States Gov. and EU institutions and they are represented by ACEA (European Car Makers’ Association).. 30. Brief comparison between Korea-EU FTA and KOREA-US FTA Korea-EU FTA. Korea-US FTA. Tariff removal on industrial products. - Removal of tariffs on industrial products within 7 years (3 years → 5 years → 7 years) ㅇ EU removes tariffs within 5 years and Korea within 7 years. years - Percentage of Korean products on which the EU will apply early removal of tariffs (within 3 years): ㅇ By number of items : 97.3% ㅇ By value of imported item : 96.9% - EU's tariff removal schedule on Korean products ㅇ immediatelyy : refrigerator, g , auto p parts,, flat displayer p y ㅇ within 3 years : tire, microwave oven, plastics, midium and heavy passenger car ㅇ within 5 years : TV, small passenger car ㅇ within 7 years : none. - Removal of tariffs on industrial products within 10 years - Percentage of Korean products on which the US will apply early removal of tariffs (within 3 years): ㅇ By number of items : 91.4% ㅇ By value of imported item : 92.4% - US's tariff removal schedule on Korean products ㅇ immediately : passenger car (less than 3000cc), TV, LCD g TV,, p passenger g car ((more than 3000cc), 3 ), ㅇ within 3 yyears : Digital golf items ㅇ within 5 years : tire, speaker ㅇ within 10 years : Washing machine, Polyester, Truck. Service. - Market M k t opening i sectors t ㅇ KORUS Parity + KORUS Plus ㅇ KORUS Plus (additional market opening) : Satellite broadcasting service, Sewage water treatment service (Grace periods of 2 and 5 years are allowed respectively.) ㅇ Liberalization based on Positive approach. - Market opening sectors ㅇ Financial and Legal service, Telecommunication, Broadcasting, Accounting, Consulting services ㅇ Education and medical services are excluded from the FTA ㅇ Liberalization based on Negative approach. - Market opening sectors ㅇ Main agricultural products except rice - Korea's tariff removal schedule on EU's products ㅇ Pork (frozen) : within 10 years ㅇ Pork (cold) : within 5 years. - Market opening sectors ㅇ Main agricultural products except rice - Korea's tariff removal schedule on US products ㅇ Various exceptions on sensitive items: Exception, quota, Seasonal duty and special safeguard ㅇ Beef and pork (cold) : more than 15 years of transition period. Agriculture. ISD (Investor State Dispute). None, Korea and each Member States of the EU conclude BIT(Bilateral investment treaty). Yes. MFN by future FTA. Yes. Yes. Ratchet mechanism. No. Yes. 31.

(17) 5. Economic effects off Korea-EU FTA. 32. Economic impact of implementing Korea-EU Korea EU FTA . According to Kim et al. (2005) based on CGE model (GTAP), Korea-EU FTA will bring about 0.64~3.08% 0 64~3 08% of increase of Korea Korea's s GDP. GDP . . In static model, the implementation of Korea-EU FTA will contribute to increasing Korea's GDP by 0.64~2.02% and Korea's exports by 2.11~2.62%. In capital accumulation model, Korea-EU FTA will generate an increase i off 2.62~4.57% 6 % iin K Korea's ' GDP and d 2.11~2.62% 6 % iin K Korea's ' exports. t. However, its impact on the EU's economy is rather small, because the EU's economy is larger (by 14 times) than Korea Korea'ss. . The implementation of Korea-EU FTA will contribute to increasing EU's GDP by 0.03~0.10% in static model and 0.05~0.16% in capital accumulation model. Macroeconomic impact of Korea-EU FTA on Korean economy (%). GDP. 0.64. 1.97. 2.02. 1.08. 3.04. 3.08. Source: Kim et al. (2005). Income. 0.67. 2.11. 2.16. 1.01. 2.92. 2.96. Welfare. 0.25. 1.30. 1.34. 0.72. 2.42. 2.45. Exports. 2 11 2.11. 2 70 2.70. 2 62 2.62. 2 90 2.90. 4 57 4.57. 2 62 2.62. Imports. 2.93. 3.95. 3.81. 3.40. 5.08. 3.81. Terms of trade. 0.36. 0.66. 0.67. 0.21. 0.30. 0.32. Static model Scenario. I. II. Capital accumulation model III. I. II. III. 33.

(18) Economic impact of implementing Korea-EU Korea EU FTA . In general, Korea's exports in car, electric/electronic products and textile to th EU will the ill substantially b t ti ll iincrease, while hil imports i t from f th the EU will ill iincrease in machinery, chemical and steel/metal. . The h iindustry d taking ki the h most advantage d iis automobile bil industry. i d Since i EU's ' tariff iff on car iis still high (10% for passenger cars and 22% for commercial vehicles) and Korea's exports to the EU are important, exports to the EU will substantially increase. However, imports from the EU will increase also, especially in large cars.. . Exports in electric/electronic products will increase especially for TV and VTR. Increase in export in semi-conductors and telecommunication equipments will be minor, because tarifs on these items are alreadyy veryy low.. . In machinery, imports from the EU will substantially increase, since Korea's tariffs on machinery (5.9%) is higher than EU's (1.8%). Imports from the EU will replace those from Japan. Japan. . Import from EU in chemical products will increase considerably, since Korea’s tariffs (7.2%) on chemical products are higher than those of the EU (4.2%). Increase will be important in cosmetic and medical products. 34. Economic impact of implementing Korea-EU Korea EU FTA . Service sectors are liberalized at equivalent level (or plus) to Korea-US FTA and dK Korea will ill suffer ff from f d deficit fi it iin service i ttrade d with ith EU EU. . Since 2004, Korea has recorded increasing trade deficits in service with the EU, while it has kept large trade surplus in goods. goods. . Korea’s service industries in legal, financial, communication and broadcasting services are less competitive than European service industries and trade deficits in these sectors will a lot increase.. . The EU is highly specialized in business, legal and financial services and European service suppliers will take more market share in Korea.. . However, EU’s investment in Korea will increase, because trade by commercial presence (mode 3 of service trade) account for half of tall service exchange. Korea’s trade balance with the EU (unit: ( million euro) Source: Eurostat 35.

(19) 6. Future prospect of Korea’s FTA policy. 36. FTA in East Asia (as of August 2009). More FTA?. Source: author’s elaboration based on www.bilateral.org. 37.

(20) Future prospect of Korea’s Korea s FTA policy . . Korea’s FTA with major trade partner are finalizing… except FTA with Japan and China . Trade policy based on FTA has been global trend in 2000s and Korea are completing FTA negotiation with its main trade partners.  leveling playing field. . However, depth of FTA is considerably different.. . FTAs with China and Japan will be hard to negotiate with several reasons but they are necessary.. FTA are not cure-all for economic development. . Success of FTA still depends on domestic factors such as quality of institutions, labor policy and so on.. Doing Business: measuring business regulation (2008) ( ). Country. Korea’s rank in 2007:. 19th in i 2008 outt off 183 countries. Dealing with Employing Registering Getting Starting a Construction Workers Property Credit Business Permits. Protecting Investors. Paying Taxes. Trading Across Borders. 73. 59. 25. Enforcing Contracts. Closing a Business. France. 31. 22. 17. 155. 159. 43. 6. 42. Germany. 25. 84. 18. 158. 57. 15. 93. 71. 14. 7. 35. 5. 16. 16. 35. 23. 2. 10. 16. 16. 23. 9. Spain. 62. 146. 53. 157. 48. 43. 93. 78. 59. 52. 19. Netherlands. 30. 70. 104. 123. 29. 43. 109. 33. 13. Slovak Republic. 42. 66. 56. 81. 11. 15. 109. 120. 113. 61. 39. Czech Republic. 74. 113. 76. 25. 62. 43. 93. 121. 53. 82. 116 15. United Kingdom. 23rd. Total. United States. 30. 10. 4. 8. 25. 1. 12. 4. 5. 61. 18. 8. Japan. 15. 91. 45. 40. 54. 15. 16. 123. 17. 20. 1. Korea, Rep.. 19. 53. 23. 150. 71. 15. 73. 49. 8. 5. 12. Source: World Bank. 38. Thank yyou veryy much.. 39.

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