Korea-Australia FTA

By Chris Baumann

Australia and South Korea are entering into a free trade agreement (FTA) and that brings to the surface a historic mindset where an advanced Western country gains access to a large Asian market. Such a mindset dates back to the old world order where Western countries were indeed more economically advanced.

Where is the synergetic advantage with the Australia-Korea FTA?

Korea has surpassed Western economies on most key economic dimensions. In only 60 years after the Korean War, the southern part of the Korean Peninsula has become one of the most dynamic and sophisticated economies in the world whereas, in contrast, Australia’s competitiveness has dropped and falls short on key macroeconomic dimensions.

According to the World Economic Forum, Australia ranks 21st in terms of global competitiveness followed by Korea, ranked 25th. But in terms of innovation and sophistication, Korea is 20th and Australia 26th; in terms of infrastructure Korea ranks 11th and Australia 18th; for the macro-economic environment it’s 9th versus 25th; and for health and primary education, Korea ranks 18th, Australia 22nd.

No doubt some Australian industry sectors are strong and globally competitive. For example, agriculture will benefit from the FTA with growing beef, dairy, sugar, wheat and wine exports to Korea once tariffs fall.

But at the same time, Korea’s own food industry has fast reached global center stage with innovative noodle, sweets and healthy herbal (e.g. ginseng) products, whereas Australian processed food may find relatively little demand in Korea. Australia can position itself to deliver raw material for the Korean food industry, but Korea is also looking to China for produce more in line with its taste, such as rice and herbs.

Korea is a world leader in the manufacturing of high-tech products such as mobile and smartphones, tablets and smart TVs (Samsung, LG), whereas Australia is not involved in making such things.

At the same time, Korea hosts two of the most dynamic and profitable, fastest growing car manufacturers: Hyundai and Kia.

Korean manufacturers are smart in utilizing comparative advantages on a regional scale, i.e. the design (R&D) and marketing of such products is largely done in Korea, but the labor-intensive manufacturing has partially been outsourced to low-cost countries such as Indonesia and Malaysia (electronics), Vietnam (tires) and India (cars).

The Australian car industry has, in contrast, not only lost foreign brands such as Ford, Mitsubishi and Toyota, but even its own home-grown brand Holden defects Australia for more cost-effective manufacturing in — precisely — Korea.

Toyota made a point of mentioning tariff issues when it made its decision to pull out of Australia, but in fact such large-scale decisions are more of a competition issue than a tariff one, which is really about market access.

In sum, Australia may simply not have a comparative advantage when it comes to (car) manufacturing, and in the global car industry, manufacturing moves to locations with the greatest competitiveness.

Australia may gain a synchronous advantage, however, once tariffs on steel are reduced and more Australian gear boxes made of steel are shipped to Korea. The Korean car industry benefits from that revised trade too, and subsequently is able to sell more cars, which in turn means Australia can make more gear boxes for Korean cars. This will result in a symbiotic advantage because both countries win in international trade.

In addition to manufacturing, Korea has emerged as a strong service provider. Korean Air and Asiana, for example, have become strong brands, winning customer satisfaction awards. In contrast, Qantas struggles to maintain its former glory and lobbies the government for support.

Tourism into Korea has also experienced tremendous growth, fueled by the Korean wave or “hallyu” with K-pop, entertainment shows and dramas whereas, in contrast, Australia’s tourism is in the process of repositioning itself after losing the Japanese market.

The FTA will guarantee market access for education providers, but here too, Korea is fiercely competitive. Korea’s education system with a focus on academic performance, discipline and passing on Confucian values has resulted in strong PISA results.

Korean students outperform Australian 15-year-olds by 10 percent in math and 6 percent each for reading and science.

In conclusion, Korea is more competitive than Australia in many ways and it would be naive to assume that Australia can in fact compete with Korean brands such as Hyundai, Kia, Samsung and LG.

The benefit of the new FTA for Australia is not merely the opening of an already key export market, but in fact a chance to learn from Korea about an education system that contributes to a competitive workforce, an opportunity to better understand the utilization of comparative advantages, and all up, a chance to regain global competitiveness.

Dr. Chris Baumann is a senior lecturer at Macquarie University in Sydney, Australia. His research includes customer loyalty, competitiveness in education and society, ethnic marketing, and East Asia (China and Korea). He is a visiting professor at Seoul National University (SNU) in South Korea and at Aarhus University in Denmark.