By Soojong, Kwak
SERI Quarterly , Vol. 1, No. 1
In the late 1990s, Korea had to not only recover from financial crisis, but also address threats to its trade. The price competitiveness of China was rising fast and the global trend toward bilateral trade pacts diminished the export potential of Korea, one of only two World Trade Organization (WTO) members that did not have a single free trade agreement (FTA) in effect. In response, Korea joined the trend. FTAs with Chile, Singapore, and the European Free Trade Area have been the first steps. However, their contribution to trade and foreign direct investment (FDI) pales compared to the next set of pending FTAs which promises a sea of changes.
The KORUS (Korea-US) FTA was signed and forwarded for approval by Korea's National Assembly and the US Congress on June 30, 2007. It was quickly followed by talks with the European Union (EU), Canada, and India to negotiate FTAs. In addition, Japan has expressed hopes of reviving talks with Seoul and Korean authorities have contemplated an FTA with China. These countries represent Korea's chief interests in FTAs: allies and major economic partners, comprehensive coverage, and political significance.
If ratified, the FTAs with the US and the EU would be seminal events in Korea's economic development. They would promise significant opportunities domestically and abroad. In short, they would be catalysts to pushing the Korean economy to the next level. However, there are no guarantees, even if the trade agreements are ratified. Korea will once again have to examine its economic structure to open its doors even wider.
OPPORTUNITIES AND BENEFITS
Korea, Asia's third-largest economy, has a comparative advantage in manufacturing industries, including not only semiconductors, ship building, and steel, but also information and communication industries. On the other hand, the US has a comparative advantage in both agricultural and service industries such as farm products, education, medical, legal services, and financial services. So does the EU, except in the agricultural sector.
In addition, Korea and the US maintain a common interest in strengthening their respective national security. Korea expects that an FTA would reduce its security concerns about foreign countries and that the US would strengthen restraints against the rise of China as a power in Northeast Asia. The EU, however, would pursue its FTA with Korea in order to fortify its competitiveness against the US as well as strengthen its presence in the region.
Most ripple effects calculated using econometric models predict "win-win" results for Korea's FTAs with the US and the EU. Voluminous references show that the effect of the KORUS FTA ranges from a 1% to 7% increase in each nation's GDR On the other hand, the expected economic effect of the Korea-EU FTA, while relatively small compared to that of the US agreement, nevertheless is predicted to yield 2.02% GDP growth for Korea, with an average of 0.09% growth for Germany, France, and other founding members of the EU, and 0.01% for new union members.
Expected Effects of the Korea -US FTA
The fundamental reason why the KORUS FTA occurred before any similar agreements with China, Japan or other nations is that the US, Korea's third largest trading partner, is in a position to present the largest mutual supplementary effect. Korea's economy is popularly being referred to in "sandwich" terms, caught between China's cost competitiveness and Japan's technological know-how. All three countries compete directly with each other for market share in the US. In addition, Korea faces trade threats from emerging economies in addition to China.
The FTA would strengthen the export competitiveness of Korea's technologyand capital-intensive industries such as IT, automobile, steel, and machinery. Meanwhile, lower tariffs would bolster industries that face price competitiveness such as apparel and footwear. The KORUS FTA also has the potential to jump start the inefficient, underdeveloped, and long-protected Korean service industries. …