Korea, China to expand FTA to service and investment

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The Korea Times | 18 March 2018

Korea, China to expand FTA to service and investment

by Yoon Ja-young

With Korea and China set to start negotiations to expand the scope of their bilateral trade agreement to services and investment this week, experts say it could be a meaningful opening of the door to China’s $1 trillion services market.

The Ministry of Trade, Industry and Energy announced that negotiations to expand the Korea-China free trade agreement (FTA) will be held in Seoul, March 22 and 23.

The Korea-China FTA took effect in December 2015, following the conclusion of negotiations on trade of goods in November 2014. The two countries had agreed back then to start the second-phase of negotiations - on services and investment - by December 2017. They passed the deadline, but agreed to start negotiations during President Moon Jae-in’s visit to China last December. Korea completed the domestic procedures for opening the negotiations, which includes a public hearing and report to the National Assembly.

"We will discuss basic principles and the direction for upcoming negotiations this time, exchanging areas of interest," the ministry noted.

The ministry also reported to the National Assembly last month that by additionally opening China’s rapidly growing services market, it will "bolster the foundation for Korean businesses’ advancement into the market and strengthen protection of Korean firms investing in China."

From manufacturing to services

While the two countries have become indispensable trade partners for each other, Korea’s investments in China have been mostly focused on manufacturing, while services investments have been notably small compared with other developed countries’ investments in China. Among global direct investment into China, manufacturing took only 26.5 percent while investments in services such as real estate, wholesale and retail took 70.2 percent. For Korea, meanwhile, manufacturing made up 72.6 percent of its direct investment to China.

China is a relatively closed market in services. According to the World Bank’s Services Trade Restriction index, China scored 36.6, which is higher than those of Korea, Japan or EU countries. This is why Korea seeks to open the market through the new negotiations.

"In the Korea-China FTA, services are treated under settlement dispute clauses instead of most favored nation treatment. It thus enabled China to take economic retaliation in tourism and other sectors following Korea’s decision to deploy a Terminal High Altitude Area Defense (THAAD) system." said Han Jae-jin, a research fellow at Hyundai Research Institute.

During the former Park Geun-hye administration, Korea decided to deploy THAAD to protect itself from North Korea’s increasing military threats. China, however, strongly protested the decision, claiming that the U.S. military hardware in Korea would harm its defense interests.

China took economic retaliation against Korean businesses, inflicting huge losses on them. Beijing banned sales of group package tours to Korea last year in March, and tourism was seriously damaged. The number of Chinese tourists who visited Korea from March to October last year stood at 2.38 million, down 60 percent from the same period the previous year. China also restricted hallyu content, and the balance in the services trade related with this between January and September last year dipped 40 percent compared with the previous year. Lotte Group, which became Beijing’s retaliation target for swapping its golf course with the Seoul government as the host site of the THAAD, decided to sell Lotte Mart stores in China after suffering 1.2 trillion won losses.

China also has not opened 65 services sectors to Korea which it opened to countries such as Switzerland and Australia. These include R&D, and automobile repair and maintenance. It fully opened only six sectors, or 3.9 percent of 155 services sectors, including data-processing and financial information provision services. Eighty-four sectors including entertainment, sports and financial services are partially open.

China’s huge services market

Outlook for the negotiations is positive as China is also trying to attract foreign investment into high value added sectors that can benefit its industries, including services.

"Recently, China is actively promoting foreign investment and easing regulations in not only manufacturing but also the services sector," Han said.

The market is huge. China’s trade in services totaled $752.9 billion in 2015, which was the world’s second largest. It is expected to surpass $1 trillion in 2020, taking one tenth of the global total services trade. Korean firms are especially interested in tourism, culture, healthcare, finance and legal services.

Experts say that Korea needs provisions in the FTA that will legally protect Korean firms that invested in China.

"Through negotiations on investments of the Korea-China FTA, Korea should cope with China’s high non-tariff barriers. Korean firms will increasingly advance into the Chinese market by securing protection on intellectual properties," Han said.

Investor-state dispute settlement (ISDS) is also crucial to protect Korean businesses in China.