Korea has taken the first step toward a free trade agreement with China, its largest trading partner and the world’s second biggest economy. Seoul and Beijing held the initial round of negotiations on Monday.
Trade experts said the beginning of negotiations on the bilateral pact was itself significant. A free trade agreement with China would be more significant for the South Korean economy than other similar deals.
China is the second largest economy in the world behind the United States. Politically, it is North Korea’s main ally. If South Korea and China conclude a free trade agreement, Seoul will be the only country with free trade deals with the world’s biggest economic powerhouses ― the European Union, the United States and China.
A free trade agreement with China would expand the economic territory of South Korea to about 70 percent of the worldwide gross domestic product.
The Ministry of Strategy and Finance forecasts the country’s real GDP to grow by a up to 1.25 percent within five years and 3.04 percent in ten years if an FTA with China goes into effect.
The deal would boost the price competitiveness of Korean products in China, and is projected to boost consumer welfare by $36.58 billion.
Light and dark side
Like any other free trade deal, an agreement with China would affect different sectors in the Korean economy in opposite ways. Again, the agricultural and fishery industries would be badly affected, while some manufacturers and service firms would enjoy a boost.
Considering that China is geographically closer to Korea than the U.S. and the EU and that many Chinese products including agricultural and fishery goods are already sold cheaply in Korea, an FTA with the country could have a tremendous effect.
Free trade negotiations with China is fanning a sense of crisis in Korea’s farming and fishery sectors, which already face worsening conditions due to existing free trade deals.
Though Seoul has sought a free trade deal with Beijing, the Korean government already faces strong opposition from the agricultural sector, and could find the going tough as a result.
On Feb. 24, members of farmers’ groups staged a sit-in protest after occupying the platform in the first public hearing on a free trade agreement with China. Police removed them to allow the hearing to proceed. Panelists from the farming sector sharply criticized the government plan to work out a free trade deal with China.
“The government is reportedly seeking to exclude major agricultural products from FTA negotiations with China in the first stage. It also says it would not proceed to the second stage unless its first-stage demands are not agreed upon. But agricultural products are a strategic item for China. It would be nonsense for them to exclude the items from negotiation,” said Gwak Gil-ja, policy director at the Korea Peasants League.
“The Korean market is already flooded with cheap Chinese produce, even though Seoul imposes tariffs. The staged negotiation structure is a mere ploy to ease opposition. We cannot accept the opening of the agricultural market.”
The league plans to hold a nationwide rally in June, calling for an immediate stop to the FTA negotiations.
An association of agricultural, fisheries and livestock trade groups also criticized the trade negotiations with Beijing and urged the government to abandon its efforts.
“If Korea lifts tariffs on agricultural goods except for rice, as it did in the U.S. FTA, the agricultural sector will likely suffer heavy damage from the deal with China,” Eor Myong-keun, research director at the Korea Rural Economic Institute, said.
“So Korea is to demand both sides designate rice and some other agricultural goods as sensitive items to be excluded from tariff reduction or abolition.”
“However, China will not easily accept the Korean demands, and Seoul may have to open up some of its markets in the manufacturing sector to work out a compromise on the sensitive items of both sides,” he said.
Especially in the field of fisheries, a free trade agreement with China is expected to strike a much stronger blow to local producers than the U.S. FTA. Chinese marine product output is about 17 times greater than Korea’s and its products are much cheaper. Furthermore, unlike the U.S. or Chile, Chinese aquatic products are available in the form of live or fresh fish thanks to geographic proximity.
Provincial governments are in a hurry to work out safeguards to protect local products. The Jeju Provincial Government last Friday requested the central government include farmed flatfish, hairtail and corbina in the sensitive items to be left out of negotiations. But it is unknown if its request will be met.
Negotiations will be inevitably tense because items sensitive to Korea are the target of market opening on the Chinese side.
Unlike the U.S. FTA, negotiations with China are expected to meet little or no opposition from politically anti-American groups, but how to compensate for the severe damage expected in the agricultural sector could be a thorny problem for the government. According to the Korea Rural Economic Institute, Korea-China free trade is estimated to boost Korean imports of Chinese agricultural products by $10.8 billion while reducing Korean agricultural output by 14.7 percent over 10 years.
Trade experts hold the view that the free trade deal between Seoul and Beijing would expand both exports and investment. Yet, they place more emphasis on investment expansion.
A trade researcher expects the deal to induce Chinese firms into investing in Korea, while attracting investment from foreign companies wanting to make inroads into China.
“If a Chinese company invests in Korea and exports its products made in Korea, it can avoid the so-called ‘China discount’ (caused by low perception of quality),” said Chung Hwan-woo of the Institute for International Trade, a think tank of the Korea International Trade Association. “What matters is job creation from increased investment in Korea.”
According to the Korea Institute for International Economic Policy, the free trade deal with China is expected to expand employment by 190,000 to 250,000 over five years after its conclusion and by 240,000 to 330,000 over 10 years.
The institute suggests in a report that Seoul should put top priority on investment liberalization. To do so, the government will have to upgrade the framework of bilateral economic cooperation to attract more Chinese investment, the report says.
According to the report, Korea and other foreign countries have often complained of investment barriers in China, including investment and equity ceilings, tangible and intangible conditions on investment permission such as export or technology transfer demands, and placement of Chinese figures on company boards.
The institute suggests that negotiators seek to scrap equity and investment restrictions, establish a cooperation committee to facilitate investment and liberalize investment for certain regions such as the midwestern and inland areas of China.
In contrast with the Korean farming sector, Korean manufactures operating in China welcome free trade negotiations. A recent survey by Korea Trade-Investment Promotion Agency found that 56.8 percent of Korean companies supported the idea of a deal, with 5.7 percent opposed.
The most common reason for supporting the deal was the reduction of import tariffs, with 47.5 percent of respondents citing it. That was followed by business cooperation with Chinese firms, with 31.3 percent, and expansion of investment in China, with 16.2 percent.
“Without doubt, the largest benefit to Korean companies will be tariff reduction or abolishment. Chinese tariffs are high for finished products and low or nonexistent for parts, so export of finished products is likely to become brisk,” said Eo Sung-il, director-general of China Business Division of the KOTRA.
“Korean companies in China will have more difficulties when they are involved in processing trade, which Beijing closely regulates. To cite a non-tariff barrier, they are required to make deposits when they switch their products to domestic sales. I expect the free trade agreement to remove such non-tariff as well as tariff barriers.”
The deal is expected to benefit the Korean automobile, petroleum, petrochemicals and steel industries, while the textiles and garments, electric products and light industries are forecast to suffer adverse effects.
“China takes up about 30 percent of the global automobile export market, with annual sales volume reaching 20 million units. If the car market removes the 25 percent tariff barrier, which is higher than the Korean tariff of 10 percent, Korean automakers will gain a big boost in price competitiveness,” said Kim Yong-tae, a spokesperson of the Korea Automobile Manufacturers Association.
Oil refiners also have a high expectations.
“China and Hong Kong account for more than 28 percent of exports by Korean oil refiners. If China lowers tariffs, Korean oil, a price sensitive item, will be more competitive,” an official of the Korea Petroleum Association said.
“Considering that as the Chinese demand for oil is growing, Beijing finds it hard to meet domestic demand with its own supply and also given that Korea is ahead of China in oil refining technology, the chance of China exporting oil products to Korea is very low, even if both sides conclude the free trade deal.”
But the local clothes industry, already overpowered by products made in China, is likely to take a hit.
“Chinese products already account for 50 percent of total clothes imports. And the figure tends to go up. We impose a 10 percent tariff, but if it is removed, the inflow of Chinese products will accelerate,” an official of the free trade agreement support center of the Korea Federation of Textile Industries said.
Negotiations for a free trade agreement with China are to be conducted in two stages. In the first stage, Korea and China will determine sensitive items to be protected from market opening.
So, for both sides, the most contentious part of the first stage lies in which items they will agree to designate as sensitive goods and services.
On the Korean side, the negotiations seem to be designed both to protect the local agricultural sector and to prevent the sector from derailing negotiations.
“We may not proceed to the second stage if we fail to work out differences (over sensitive items) as we intend,” Choi Seok-young, deputy minister for FTA of the Ministry of Foreign Affairs and Trade, told reporters early this month.
Experts view the staged format of negotiation as a way to block backlash from the local agricultural sector.
“It may be a negotiation for domestic purposes,” Chung of the Institute for International Trade said. First-stage negotiators are expected to leave the main talks to the new administration next year, he added.
In determining the scope of sensitive items, Seoul is to use free trade deals with the U.S. and EU as reference. Officials say they are considering demanding an immediate abolition of tariffs for Korea’s top 10 export items to China.
“Rice and staple grains are expected to be excluded as sensitive items, but what matters is that the government should work out safeguards for other produce,” Chung of the Institute for International Trade said. “However, negotiation takes two sides, who have to give and take.”
By Chun Sung-woo (email@example.com)