South Korean President Lee Myung-bak, left, greets India’s Minister of Commerce and Industry Anand Sharma at Cheong Wa Dae in Seoul, Aug. 7. The meeting came after Sharma and South Korean Trade Minister Kim Jong-hoon signed a Comprehensive Economic Partnership Agreement (CEPA). The accord calls for tariff cuts on goods and services to boost bilateral trade. / Korea Times

By Shyam Paliwal

Recently India and Korea took a step forward in the direction of free trade by signing a Comprehensive Economic Partnership Agreement (CEPA) early this month. This trade is mutually advantageous to both countries and will help with economic recovery.

There are several complementarities between Korea and India. Key strengths of Korea are its broadband infrastructure, technical innovations and mobile technology.

These are complemented by India's highly skilled human resources, IT service industry. However, while free trade has many benefits, it is also disadvantageous for some groups.

Suppose a Korean company develops a car that is twice as fuel efficient than any car developed by any Indian company. This is certainly bad news for the Indian carmakers.

But it is definitely not bad news for the Indian economy. The Indian manufacturers will now get access to better products and technology that will improve productivity in a range of industries. This will improve the Indian standard of living.

The Korean economy, too, will perform strongly with the profits, investment and employment this innovation generates. This should contribute to increasing the demand for Indian goods in Korea. However, this will lead to many Indian carmakers going bankrupt.

The Indian automakers will then lobby the government to impose trade restrictions on Korea. The carmakers are a small group as compared to the millions of diffused users who will benefit from the new technology.

But the auto unions are strong and concentrated. If new Korean cars are allowed to be imported without any restrictions, these people are going to lose the most. Obviously they are going to pressurize the government into imposing trade restrictions.

A similar situation can occur in Korea if highly skilled Indian IT professionals come to work in Korea. This influx will lead to reduction in costs for the IT industry and result in the consequential increase in profit.

A large number of Korean consumers are going to benefit as cheaper and efficient IT services become available. However, this influx of people might lead to a few Korean IT workers losing their jobs. This kind of job losses, even if few and far between, will make headlines.

This kind of propaganda is one of the dangers faced by free trade.

One specific technological area where there is significant potential for collaboration is space technology.

India has considerable know-how and expertise in this area and the scope for joint ventures exist. Such collaboration will help provide Korea with a reliable partner to pursue their space program and eliminate their dependence on Russia, as they are very reluctant to transfer their technology.

This kind of technology sharing will have technological benefits for both countries. But as a result of free trade there are always winners and losers.

The group that is going to lose is very often a readily identifiable industry concentrated in a particular region. Although the region may be small relative to the economy, each individual in this industry stands to lose a substantial amount.

On the other hand, those who gain may be a large but diverse group, each of whose members only benefit slightly from the free trade. Such diffused groups often find it difficult to coordinate their efforts to reduce trade protectionism.

Benefits of free trade can be seen from the import of American beef in Korea. Korea as a whole will benefit from such trade, but not everyone in Korea will share in this prosperity.

Some groups will benefit as a result of this trade, while the standard of living of others declines. The country as a whole benefits from trade, suggesting that the gains as a whole outweigh the losses.

Therefore the gainers could compensate the losers and still benefit from the trade. This kind of compensation can be in the form of retraining the labor employed in the domestic beef industry to help them find employment in other industries in which Korea has a comparative advantage.

Korea will always have comparative advantage in some industry. If the beef industry starts to decline, then other industries will be expanding. A set of industries in every country with comparative advantage have always evolved with time.

Often they seem to move from manufacturing to service industry. The industry where right now Korea has comparative advantage over America is the auto industry. If the American market is freed up for Korean cars by elimination of tariffs, the Korean auto industry will see a great expansion.

However, the free trade agreement signed between Korean and America is yet to be ratified by legislatures in both countries as the vested interests in both countries move to scuttle any agreement.

By signing the CEPA the Korean and Indian governments have sent a clear signal that they are for free trade and against protectionism.

However, a lot still needs to be done in terms of eliminating all barriers to free trade.

Shyam Paliwal is an international investor and an economic advisor. He now resides in Haeundae, Busan. He can be reached at shyampali@gmail.com.