What benefits will FTAs bring to Korea?

By Lee Tae-hoon

With an economy that depends heavily on trade, Korea has been actively seeking free trade agreements (FTAs) over the past decade.

The government’s push to open up to foreign markets through FTAs has helped the resource-scarce country rise to rank as the world’s ninth largest trading nation. This year Korea’s trade volume is expected to surpass $1 trillion.

So far, Korea has FTAs in force with Chile, Singapore, the four-nation European Free Trade Association (EFTA), the 10-nation Association of Southeast Asian Nations (ASEAN), India and Peru.

More significantly the FTA with the European Union, the world’s largest economic bloc, also went into effect beginning this year in July.

Now the Korea-U.S. free trade agreement (KORUS FTA) awaits ratification in the National Assembly with the U.S. Congress having already approved the bilateral pact in October.

Despite strong resistance from opposition parties, the country’s chief FTA negotiator Choi Seok-young says the KORUS FTA is not an option, but a must for the survival of Korea whose imports and exports account for about 88 percent of its gross domestic product.

Park Chin-keun, chairman and CEO of the National Research Council for Economics, Humanities and Social Sciences (NRCS) recently hosted a meeting of Choi and three leading FTA experts at a hotel in Seoul to hear their views on the progress, concerns and prospect of FTAs.

Lee Kyung-tae, president of the Institute for International Trade, Chae Wook, head of the Korea Institute for International Economic

Policy, and Choi Byung-il, professor of international trade and negotiations at Ewha Womans University, attended the gathering.

The NRCS is a state-run research agency that acts as a control tower for 23 think tanks under the Prime Minister’s office.

Pursuit of multiple FTAs

■ Lee Kyung-tae: Korea is pursuing numerous FTAs. The KORUS FTA awaits ratification from the Assembly, whereas seven FTAs, including the ones with EU, ASEAN, Chile, and India, have already entered into force.

Only five countries — Mexico, Chile, Morocco, Jordan and Israel — have concluded FTAs with both the United States and the EU. Given that Korea is the world’s ninth largest economy in terms of trade, the conclusion of the FTAs with the two giant economies bears much greater significance.

Though the multiple FTAs provide many benefits, there remain concerns for vulnerable local industries.

Could you explain the purpose, significance and benefits of the FTAs to help the public better understand the trade pacts?

■ Choi Seok-young: Korea needs greater access to foreign markets due to its heavy dependence on trade. Korea has a good chance of enjoying a first-mover advantage in the United States and EU for a long period since it will not be easy for other countries to forge FTAs with both of the two world’s largest markets.

Some critics argue that the FTAs or a further liberalization of the market through them may hamper Korea to be able to use its own economic policies as leverage. But such concerns are utterly groundless.

The KORUS FTA and Korea-EU FTA are just a part of the country’s market opening policy.

It should be noted that liberalization induces competition and provides long-term benefits, such as improvements in productivity and the modernization of systems.

Though consumers will have much to gain from FTAs, there seems to be a lack of public understanding about the level and extent of the advantages.

■ Choi Byung-il: FTAs are basically an extension of the government liberalization policy. Korea opened its market to a substantial degree in the 1990s as a result of the Uruguay Round negotiations and Asian Financial Crisis.

Tariffs on agricultural goods remain quite high, but those on industrial products have fallen to below 10 percent.

Up until the late 1990s, Korea lagged far behind many countries in the FTA race as it was reluctant to make vulnerable its agriculture and services sectors.

Many claim that Korea managed to quickly overcome the 2008 financial crisis due to its robust manufacturing industry.

The country’s heavy and chemical industry requires access to the global market as its 50 million population and a gross domestic product of $20,000 cannot sustain it.

Korea has no choice but to pursue economic expansion through trade unless there is a shift in the paradigm from export-led growth to a domestic consumption-oriented one while protectionism is rising around the world and the liberalization momentum by the World Trade Organization (WTO) is losing strength.

■ Chae Wook: The biggest challenge that Korea faces is the lack of resources. For a resource-scare country, the only way to achieve growth is making quality products using imported raw materials.

For a country inherently dependent on trade, importing resources at cheaper prices can help local businesses to boost exports. Pressure to open service and manufacturing markets has allowed the country’s economy to become more efficient. FTAs are a great opportunity to raise the country’s productivity and of course, trade.

FTAs, better than forecast

■ Lee Kyung-tae: Few would deny that Korea has achieved impressive economic growth through trade. But ever since the WTO was launched in 1995, multilateral liberalization negotiations have made little or no progress.

If Korea wants to continue to seek growth through trade, it has no other way but to seek FTAs. Now let us talk about the outcomes of the FTAs that many people are curious about.

In the case of Chile, the market share of Korean products rose to 6.4 percent last year, up from 3 percent in 2003 when there was no FTA. Jobs related to trade with Chile also surged from 6,000 to 22,000.

■ Choi Seok-young: Trade between Korea and Chile was $1.8 billion in 2003, but the annual trade volume has quadrupled to $7.2 billion after seven years since the bilateral FTA.

The trade volume with Singapore has nearly doubled and with the EFTA has tripled. Though the free trade deal with India began to enter into effect only from 2010, bilateral trade has already doubled.

■ Chae Wook: It is hard to estimate the economic effects of the FTAs. There has been noticeable progress after the FTA with Chile as it has been seven and a half years.

As for FTAs with other countries, such as Singapore and EFTA, Korea is enjoying a mover advantage but we should not expect an immediate economic impact.

What should be noted is that Korea’s market share in Chile has rather decreased, largely because the latter concluded FTAs with other countries as well, such as Japan and China.

■ Choi Byung-il: In order to scientifically verify the effects of FTAs, it requires a considerable amount of time. Only the FTA with Chile can allow meaningful data.

Nevertheless, businesses should learn how to take advantage of opportunities that FTAs offer.For example, the FTA with ASEAN presents new export opportunities for small-and-mid-sized businesses, but this is not maximized. It is as important to assist businesses to better understand the existing FTAs so they make good use of them and encouraging a push for new FTAs.

Trade Adjustment Assistance

■ Lee Kyung-tae: There was a strong resistance to opening the agricultural market to Chile, but the actual fallout has been much less than feared.

Local farmers’ endeavors to overcome the external impact appear to have borne fruit. FTA opponents demand the government to come up with stronger countermeasures to protect local businesses, but others claim that such safeguard measures are costly, as well as unsatisfactory.

■ Choi Seok-young : Of course, liberalization can cause damages to certain industries. That’s why the government enacted a special law in March 2004 and announced that it would provide financial support of 1.4 trillion won ($1.27 billion) to farmers and fishermen from that year through 2010.

Following the signing of the KORUS FTA on June 30, 2007, the government also pledged to expand support for agricultural and fisheries industries to 21.1 trillion won for 10 years starting 2008 to help them enhance competitiveness.

In April this year, the government promised to inject additional 2 trillion won to help the livestock industry and later ruling and opposition parties agreed to offer another 1 trillion won in subsidies to farmers.

The government and farmers, however, have yet to narrow their differences over how the money should be spent. Farmers want the government to supplement their income, whereas the government wants to improve their competitiveness in the long run by investing in facilities and infrastructure.

■ Chae Wook: Washington paid enormous attention to the Trade Adjustment Assistance (TAA) as it pursued the FTA. In contrast, Seoul appears to have made little effort on its TAA program. Though the TAA was introduced here in April 2007, only six companies benefited from it with the total amount of the fund authorized standing at 1.8 billion won.

Some say this is because the damage to the market has been minor, but I believe this is more likely due to difficulties that local businesses face in accessing the program or meeting its requirements.

■ Choi Byung-il: There was speculation that all orange farmers on Jeju Island would go out of business if Chilean grapes entered the Korean market through the FTA.

But that didn’t happen. There wasn’t even a decline in local grape production. I believe that local businesses have not used the TAA program much as the outcome has been benign.

Subsequently some claim that Korea should make improvements on its current TAA as the FTA with the EU went into effect and the KORUS FTA will soon be ratified.

It is too bureaucratized and complicated to make applications and there are too many organizations handling the matter. But if it becomes too readily available, this may lead to a moral hazard.

■ Choi Seok-young: It is much more difficult to qualify the U.S. TAA program than ours as the former’s support requires not only a 5 percent decline in sales, but also proof that indicates a mass layoff might be unavoidable.

In Korea, a 25 percent decline in sales was a requirement for TAA assistance, but it has gone down to 20 percent and the government is considering further easing the condition.

Nevertheless, excessive protective measures lead to a moral hazard. It is important to have a policy that ensures a balance between protection and competition and gives incentives to vulnerable businesses so that they can sharpen a competitive edge.