Benefits of Korea-China FTA

By Dr. Jeffrey I. Kim

Recently, President Park Keun-hye made a three day trip to China and brought back enormous economic and political benefits to Korea. Upon her arrival in Beijing, President Park and President Xi held a summit meeting and came to the following agreements:

(1) Oppose any action that causes tension on the Korean peninsula. The two leaders urged the resumption of six-party talks to curb North Korea’s nuclear ambition;

(2) Seek ways to promote the Eurasia Initiative, which aims to construct the world’s longest railway connecting Europe, China, Russia, Mongolia, North Korea, and South Korea. This project was first proposed by President Park in October 2013. AIIB (Asia Infra Investment Bank) is expected to play a pivotal role in this project. Korea is the AIIB’s 5th largest shareholder out of 57;

(3) Hold a tri-lateral summit meeting with Japan. President Park is expected to play a catalytic role in this meeting as mediator between China and Japan.

President Park also had separate talks with Chinese Prime Minister Li Keqiang. They agreed to work closely to have the Korea-China FTA go into effect as soon as possible. The mutual benefits from trade and investment are enormous. China can have the China-Korea FTA take effect at any time. For Korea, however, it may take a while for the National Assembly to ratify it. If the majority of the Assembly members are fully convinced of the net benefit of the China-Korea FTA, they may ratify it within this year.

China is the world’s second largest economy in GDP. In 2014, China recorded a GDP of $10.4 trillion and a trade surplus of $380 billion. China’s imports from Korea were $145 billion. China’s investment in Korea in 2013 was $0.5 billion and substantially increased to $1.2 billion last year. In contrast Korea’s investment in China last year was $3.1 billion. If the FTA takes effect, the economic relations between the two will deepen more in the future.

Korea has signed FTAs with 52 countries, including the EU, USA, and China. Korea’s free trade network is the third largest in the world, covering 73.5% of the global economy in terms of GDP. The establishment of a bilateral FTA between two countries may seem easy, but it is very difficult in reality. The most difficult part in establishing an FTA is to complete the ratification process. Even if the two governments have signed the free trade agreement, each government must get an approval from its parliament. When there is a significant discrepancy in the assessment of net benefit of the FTA between the government and its parliament, the ratification process can be rough and rattling.

For example, Korea had a bitter experience when getting the Korea-US FTA ratified. When the two governments signed the FTA in April 2007, the US Congress did not welcome it, but the Korean National Assembly did. Later on, the two parliaments reversed positions. The US Congress passed a final FTA version in October 2011, and the Korean National Assembly barely ratified the final FTA in the following month. It took more than four years before the FTA was able to go into effect.

The ISDS (Investor-State Dispute Settlement) issue caused the delay in ratification. ISDS is an instrument of public international law that grants an investor the right to use dispute settlement proceedings against a host state. If the host state violates the rights granted to the investor under public international law, then that investor may bring the matter before an international arbitral tribunal.

Opposition party members and civic groups repeatedly demanded that the Korean government renegotiate with the US to remove the ISDS from the FTA. To prevent similar political confrontation between the ruling party and opposition parties, Korea and China agreed to include an additional clause in the FTA that will reduce the chances of the ISDS clause being abused. Article 12.9 of the Korea-China FTA stipulates that each party designates contact points in each territory, such as the foreign investment ombudsman, to help resolve the grievances of foreign investors before things get out of hand and need to be brought before an international court. Enormous economic benefits lie ahead for us. Why not actively explore them together?

Jeffrey I. Kim is the foreign investment ombudsman, a presidentially appointed troubleshooter for investors and entrepreneurs from overseas.