FTA lays foundation for more open economy
Korea Times
FTA Lays Foundation for More Open Economy
By Seo Jee-yeon
Staff Reporter
31 March 2005
The first free trade agreement with Chile has brought an array of benefits to Korea in the past year, not least contributing to the speeding up of the nation’s FTA talks with other trade partners.
While the FTA wave has swept the world, Korea had been left out of the race. Before the launch of the FTA with Chile on April 1 last year, South Korea, the world’s 12th largest economy, and Mongolia were the only two members of the World Trade Organization (WTO) that had no bilateral trade pacts.
With the world seeking bilateral trade pacts amid a standstill in multi-lateral talks, Korea, which depends heavily on exports, also felt the need to create FTAs. This is why economists predict that Korea will be a primary beneficiary of economic growth derived from market liberalization.
Despite the warning that the Korean economy will face serious consequences if it fails to attract FTAs, strong resistance from the farm industry hindered the National Assembly’s ratification of the FTA with Chile several times after Korea signed its first free trade pact with Chile last February.
The government sought the first FTA with Chile ahead of other bigger trade partners partly because Chile was a relatively small agricultural goods exporter to Korea.
In addition, Chile agreed with Korea to exclude sensitive agricultural products, including rice, peaches and apples from the tariff list.
Korea also allowed Chile to continue to slap tariffs on Korean washing machines and refrigerators.
Except those products under the free trade accord, from April 1, 2004, Chile started gradually lifting tariffs on more than 2,000 products ranging from automobiles, mobile phones, computers and machinery _ all of which account for more than two-thirds of South Korean exports to Chile.
In return, Korea began scraping tariffs on Chilean copper products, animal feed, wheat, wool, tomatoes and 277 types of fish.
Impact on Trade
After one year of the Korea-Chile FTA, there is little doubt the trade pact is a win-win economic partnership as both countries saw a surge in exports.
Importantly, to the relief of farmers, the import growth of Chilean agricultural goods stayed below 2 percent, except for Chilean wine.
According to a report by KOTRA, Korean exports to Chile rose 38 percent to $690 million last year, making up 3.12 percent in the Chilean import market, up from 2.98 percent in 2003.
The export growth rate was the highest among exporting countries with an FTA with Chile.
For instance, U.S., Canadian and Mexican exports to Chile increased 26.6 percent, 3,3 percent and 37 percent, respectively.
As to export growth by item, shipments of cell phones to Chile topped with a 175 percent rise, followed by cars (63 percent) and color television sets (70 percent).
Made-in-Korea products have become sought after brands in Chilean households, the report said.
Chilean exports to Korea also rose 78 percent to $1.84 billion last year over 2003.
Wine exports soared 153 percent, followed by copper (91 percent) and pork (56 percent).
In terms of exports, Korea seems to get more benefit from the Korea-Chile FTA as the rising Korean exports to Chile is largely attributed to tariff cuts, while the Chilean export growth was due in part to the price of copper rising, its biggest export item to Korea,'' the report said.
When it comes to agricultural imports from Chile last year, Chilean wine is one of the key beneficiaries of the FTA. Riding on awell being’’ trend, Korean demand for Chilean wine, recognized as quality wine at an affordable price, exploded last year.
Industry watchers predict Chilean wine will be the second most sought after wine this year after French, pushing U.S. wine to third place this year.
Chilean pork imports have also soared since the outbreak of mad cow disease in U.S. in 2003 reduced demand for beef.
Interestingly, imports of fresh grape, which the Korean farm industry expected to flood the market, fell 15 percent last year. Fresh grapes are the nation’s largest agricultural import from Chile.
In short, the trade pact with Chile expanded Korean exports in Chile with a less-than-expected rise in agricultural goods imports.
It is too early to say the FTA with Chile will bring long-term benefits for Korea, but it's clearly off to a good start,” Kim Han-soo, deputy director general for FTA affairs at the Ministry of Foreign Affairs and Trade (MOFAT), said.The nation witnessed a win-win partnership through the first FTA, which will ease negative public sentiment toward the market opening and give an impetus to proceed with other FTA talks.’’
Boost to market liberalization
The positive evaluation of the first FTA with Chile is likely to encourage Korea to pursue more FTAs in the near future, transforming the nation into an open trade economy.
The government announced it has adopted market liberalization as a key growth strategy in the era of globalization.
In his anniversary of his second year in office in February, President Roh Moo-hyun stressed that the government will pursue FTAs to move toward an open trade economy and achieve sustainable growth.
He went on to say that to embrace the free trade era means certain industries must undergo some difficulties in the process of market liberalization.
As a host of the Asia-Pacific Economic Cooperation in November, the FTA drive will be used to position Korea as an economy open to trade.
In compliance with the president’s commitment to push for FTAs, the MOFAT plans to simultaneously proceed with FTA talks with more than 20 countries this year.
Korea is currently waiting for the National Assembly’s approval of the second FTA with Singapore. It is proceeding with FTA talks with the European Free Trade Association (EFTA), Canada, Japan, and the Association of South East Asian Nations (ASEAN). Excluding Japan, Korea is expected to form an FTA with Canada, ASEAN and EFTA within the year.
Korea has conducted a feasibility study with India, Mexico and the U.S., and agreed to launch a similar study with China, the nation’s largest trade partner.
Analysts have pointed out that Korea is no longer a late-comer to the FTA race, with the situation totally different now to a year ago before the FTA with Chile was signed.
