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[Publications]  SFIA Viewpoint by BARK Taeho - "Korea-China FTA: Major Contents and Implications"2015.01.28

Korea-China FTA: Major Contents and Implications

 BARK Taeho (Seoul National University)

         

In November 2014, the Korean government announced that it substantially finalized the FTA negotiation with China. In fact, this agreement has not been established overnight. Since 2005, a number of feasibility studies on the Korea-China FTA by the academics as well as the business representatives of the two countries were conducted. The both governments also had close consultations for almost two years before the official negotiations started in May 2012. The agreement still needs a few additional procedures to be completed, such as the final signing and domestic ratification of both countries. In any case, the Korea-China FTA is expected to enter into force before the end of 2015.

Now, Korea has 15 FTAs in total, including recently concluded FTAs with Australia, Canada, China, New Zealand, and Vietnam. All added up, the GDP of the FTA partners of Korea is over 73% of the total world GDP. This makes Korea rank 3rd in securing the world market through FTAs, following Chile and Peru. The Korea-China FTA has drawn much attention among major trading nations since China is the second largest economy in the world as well as Korea’s number one trading partner. Some trade experts note that Korea has become one of the few countries which have FTAs simultaneously with the US, the EU and China. In addition, the announcement of substantial completion of the Korea-China FTA negotiations was a welcome news to both countries since it happened in the midst of uncertain global trading environment; the multilateral trading system of the WTO is not moving forward due to the long delay of the Doha Round and none of the recently launched Mega-RTAs has been concluded.

The Korea-China FTA is comprehensive in that it has 22 chapters embracing not only goods, services, investment, and intellectual property rights but also trade facilitation, trade remedy, e-commerce, labor mobility, competition policy, environment and dispute settlement. Moreover, the Korea-China FTA includes a separate chapter on economic cooperation which was not included in Korea’s previous FTAs with major partners such as the US and the EU. The aim of this chapter on economic cooperation is to promote bilateral cooperation beyond market liberalization. In this context, the Korea-China FTA can play a role in recognizing the importance of economic cooperation in the FTAs. This chapter covers numerous fields including small and medium sized enterprises (SMEs), information and communication, textiles, energy and resources, science and technology, maritime transportation, tourism, culture, pharmaceutical, fisheries, and government procurement. One additional important aspect of the Korea-China FTA is that it is most comprehensive in covering non-tariff barriers (NTBs) among the FTAs China has concluded so far. The agreement provides a fast-track procedure to deal with NTBs and designates the specific government agencies in each country to effectively resolve the NTBs issues between the two countries.

As to the range and the speed of market opening on goods, in terms of import values, Korea has committed to completely eliminate tariffs on 77% of its imports from China within 10 years while China has committed to completely eliminate tariffs on 66% of its imports from Korea within 10 years. These figures are relatively low compared to those of Korea-US and Korea-EU FTAs. However, this reflects both countries' interests to protect each of their sensitive sectors such as agricultural, livestock and fishery products as well as some labor intensive products in the case of Korea whereas steel, petrochemical, electronic and auto-related products in the case of China. In services area, both countries did not make many new concessions. They exchanged concessions similar to those submitted to the WTO Doha Round negotiations. The two countries have also taken the positive system in services and investment concessions and agreed to adopt the negative system in two years after the start of the official implementation of the agreement.

Nevertheless, the Korea-China FTA is expected to benefit Korean firms. With lower trade barriers to China, Korean goods would gain competitiveness compared to other countries' goods in the Chinese domestic market. Also, those Korean firms which have already entered China would gain higher profits by no longer having to pay high tariffs on imported Korean parts and components. Especially under the circumstance that the Chinese government is recently pursuing to expand its domestic market rather than processing trade, the importance of the Korea-China FTA will grow as time passes.

The Korea-China FTA is also expected to induce foreign direct investments (FDIs) into Korea. Trade experts forecast that a growing number of foreign firms would invest in Korea in an effort to capitalize on Korea’s FTA networks. They say that foreign firms, in particular, would like to set up manufacturing facilities or R&D centers in Korea because these will serve a springboard to enter into mainland China; for instance, transportation costs and customs duties will be substantially reduced when foreign business entities operating in Korea export their goods to the Chinese market through the Korea-China FTA. And also the Korea’s FTAs with the US and EU will help Chinese firms make smooth inroads into the advanced markets, which will eventually encourage Chinese firms’ investment in Korea.

Furthermore, it is expected that the Korea-China FTA will contribute to the trade integrations in East Asian and the Asia Pacific regions. The Korea-China FTA is likely to serve as a substantial breakthrough for moving both of China-Japan-Korea FTA and RCEP negotiations one steps forward. In this regard, the world economic community pays close attention to the Korea-China FTA. Furthermore, in the longer run, trade experts even look forward to the formation of a free trade area of the Asia Pacific (FTAAP) when the RCEP and the TPP are integrated.

At this critical juncture, the fundamental task that Korea faces is to faithfully implement these FTAs and to make them serve best to the national interest. Up to date, allegedly it is large conglomerates that utilize FTAs most when doing business with their foreign counterparts. However, it is imperative for a wide variety of SMEs to benefit from using FTAs in order to participate in international trade based on global value chains. The Korean government should also make best endeavors to induce more FDIs to use Korea’s major FTAs. We all hope Korea’s FTA network makes valuable contributions to stimulating the Korean economy through creating more jobs.

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