[The Korea Herald] Should Korea sign an FTA with China?

By John Power

Free trade agreements have been a cornerstone of Korean economic policy in recent years. Since Korea reached its first FTA with Chile in 2004, the country has signed deals with the European Union, Singapore, the Association of Southeast Asian Nations and, most recently, the U.S. Now attention has turned to the possibility of an FTA with the nation’s biggest trading partner of all, China.

On a state trip to Beijing earlier this month, President Lee Myung-bak said that official negotiations on a pact, first broached by the two countries in 2004, should begin in the next month or two. Building the government’s case, the Ministry of Foreign Affairs and Trade last week released a report claiming an FTA would boost exports to China and lead to new manufacturing jobs here.

Kim Young-gui, of the Korea Institute for International Economic Policy, says KIEP research bears out the benefits of a deal between the two economies, which saw trade of $224.8 billion in the first 11 months of 2011.

“It is known that the Korean economy has experienced high economic growth by pursuing export-oriented policies. Moreover, many countries have pursued further trade liberalization by agreeing on FTAs with one another. Therefore, FTAs are an inevitable strategy to Korea in the sense that Korea would lose a large share of the world market otherwise. If we consider direct positive effects from FTAs, as well as these opportunity costs of losing markets, it is widely agreed that the FTA is a fairly important and urgent agenda for the Korean economy,” Kim told Voice.

Kim notes that an FTA with China would likely have a greater impact than the one with the U.S passed at the National Assembly in November.

“What is interesting is that China has higher tariff and non-tariff barriers compared to Korea’s other trading partners such as the U.S. and the EU. This implies that the economic effects of tariff and non-tariff reduction through the Korea-China FTA would be greater than the Korea-U.S. FTA or Korea-EU FTA,” he said.

Korea’s tariff burden is also considerably lower than China’s, amplifying the potential of an FTA to benefit Korean exporters, according to a 2006 report by KIEP, which said the average tariff on goods imposed by Korea was 11.2 percent to China’s 56.9 percent.

A Korea-China FTA would also benefit consumers here, according to Dilip K. Das, a professor of SolBridge International School of Business at Woosong University.

President Lee Myung-bak met with Chinese President Hu Jintao in January to discuss a possible Korea-China FTA among other issues.

“The prices of foods in Korea should come down after the agreement. In Canada, my weekly grocery bill is about $22-25. Here my weekly grocery bill is around $80. Korean food prices are way too high. Looking at the wealth of the nation, these prices just don’t gel,” he said.

Das also believes an FTA could improve relations between the countries, especially in light of contentious incidents such as the recent killing of a Korean coast guard officer by Chinese fishermen.

“As you noticed during President Lee’s state visit to China, while this issue was discussed it did not overshadow the negotiations of the two parties, and they know that the two neighbors, or I repeat the two dynamic economies, have a lot going for them and there are far more important issues than this one incident which sort of could mar the relationship.”

The region’s recent economic history, Das says, has convinced countries of the advantages of easier trade.

“The Asian crisis changed everything because all these countries together had to fight this crisis and it weighed heavily on many countries including Korea, not so much China. And so they thought, OK, if we have to come to help each other at a time of economic distress, well why not get into FTAs and BTAs. And economically, in the regional economy, that’s what they started doing.”

But even before a single round of FTA negotiations has taken place, opposition has been strong. The main opposition Democratic United Party recently called on the government to halt plans for talks with China, with Floor Leader Kim Jin-pyo claiming the deal would have a “nuclear” impact on Korean farmers and fishermen. KIEP estimates that an agreement that lowered tariffs on agricultural products by 50 percent would cause up to $2.8 billion worth of damage to the local industry.

“We have to look at this scenario in its totality,” said Das, “that whenever an FTA is negotiated, there are some sectors that lose and they are some sectors that gain. And here in Korea it is the farming sector that would lose.”

DUP lawmaker Park Joo-sun says not enough information has yet become available for him to take a stance on the FTA, but he is adamant that it should not follow the example of the U.S. pact.

“Firstly, amending the law and system of Korea through a single FTA treaty should not be repeated. Secondly, products produced in Gaeseong Industrial Complex should be recognized as products of South Korea. Thirdly, effects on agriculture, livestock and fishing industries should be minimized through policies such as specifying sensitive products,” Park said.

Park says that a pact with China has the potential to be even more damaging to local agriculture than the Korea-U.S. FTA his party opposed in its previous incarnation as the Democratic Party.

“Agriculture, livestock and fishing industries should be dealt with extreme caution. Unlike the U.S., China produces the same agricultural products as South Korea does. Also, its geographical proximity eliminates concerns regarding freshness of the products which is the most important aspect of trading agricultural products. Furthermore, regarding the price competitiveness, Chinese agricultural products are overwhelming priced at 1/3-1/4 of the price of Korean products,” Park said.

Nam Hee-sob, who was a chief member of the policy committee of the Korean Alliance against the Korea-U.S. FTA, shares many of Park’s concerns.

“In general, the FTA is to reduce the tariffs which may lead to a reduction of prices. But I think it is just one side of the thing. I think it is meaningless to get a cheaper product at the expense of our food system. We cannot entirely rely on the Chinese food,” Nam said.

KIEP’s Kim, too, acknowledges that farmers would need to be compensated for their losses.

“It is also very important for the Korean government to make appropriate policies to share fruits from free trade and to help the people who would be unfavorably affected by the FTAs,” he said.

But Nam says that rather than seeking cheaper imports to tackle high food prices, the focus should be on reform of the local industry.

“We need to reform our domestic industry first and then if we can make mutual benefits with our trading partner in some specific products, then we can open our markets,” he said.

And while he accepts an FTA would benefit big exporters such as Samsung and Hyundai, Nam sees little benefits trickling down to the average person.

“The benefits they can get from exporting are not shared by the general public. Last year, I heard that Samsung made extra record profit but I haven’t heard any news that the ordinary people can have benefits from Samsung’s profit.”

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