POINT OF VIEW/ Hidehiko Mukoyama: South Korea's changing export destinations and expanding FTA network

In recent years, South Korea's exports have come to rely more and more on business with newly emerging economies. Along with the fast economic growth of these countries, another reason for this has been the energetic efforts by South Korean enterprises to develop new markets. The South Korean government is working to support the global spread of South Korean enterprises by expanding its free trade agreements (FTA) network.

An examination of South Korea's export structure by geographical distribution reveals that the portion accounted for by North America and Europe has been diminishing. Among the reasons for this have been South Korea's trade friction with the developed economies, the upward revaluation of the won in the 1980s, and the increasing regional economic integration in North America and Europe in the 1990s, such as the conclusion of the North American Free Trade Treaty and the establishment of the European Union.

The start of South Korean enterprises' production in North America and Europe and the shift of their production operations to other Asian countries are also contributing factors.

Meanwhile, Asia's share of South Korean exports--that of Japan, China and other Asian countries combined--is increasing. And within that trend, Japan's share is declining while China's is growing. In addition to production goods, in recent years there has been an increase in consumer goods destined for local markets.

Due to the impact of the Asian currency crisis, the share of North America and Europe in South Korean exports rose in 1997 and 1998, but it began to decline again from 1999. In particular, as a result of the severe economic deceleration brought about by the "Lehman Shock" of September 2008, the share plummeted to only 26.7 percent in 2009.

Of course, it needs to be borne in mind that exports from countries to which South Korean companies had switched their production bases have been on the increase, but the figures nevertheless are only about half of what they were in the early 1990s, around 50 percent.

While the Asian share of South Korean exports hardly changed from 51.2 percent in 2003 to 52.5 percent in 2009, the share of the newly emerging economies outside of Asia rose from 13.3 percent in 2003 to 20.8 percent in 2009.

In fact, the annual growth of South Korean exports to the Middle East, Latin America and Oceania frequently tops that of exports to Asia.

Until the early 2000s, South Korea's FTA activities lagged behind those of Japan, but in recent years have become more positive. This is because, for South Korea, whose domestic market is small and export dependence is high, beating other countries to the mark in developing a network of FTAs is expected to bring the benefits of:

(1) Securing a position of superiority in terms of trade and commerce;

(2) Boosting the global spread of South Korean enterprises; and thus

(3) Strengthening South Korea’s international distribution and financial functions.

By 2006, South Korea had concluded FTAs with Chile, Singapore and the European Free Trade Association (EFTA). Subsequently, a number of FTAs have been concluded at an increasing pace.

An agreement on trade in goods with ASEAN took effect on June 1, 2007, and an FTA was signed with the United States on June 30, 2007. An agreement on trade in services with ASEAN took effect in May 2009, negotiations were concluded on an FTA with the EU in July 2009, and an FTA with India was signed in August 2009 and took effect in January 2010.

One characteristic of recent activity has been the prioritizing of countries and regions with large markets. Japan is the priority market in Asia. The FTA with the EU is due to take effect in 2010, and it is possible that negotiations with China will get under way.

Another characteristic is that, in order to engender more successful results in automobiles and other industrial products, which are items of concern to South Korea, South Korea has responded with flexibility to the demands of export destination countries.

For example, South Korea has agreed with Chile to abolish tariffs on tomatoes, cucumbers and pork within 10 years, and with the United States to abolish tariffs on beef within 15 years.

South Korea has also agreed to reduce its screen quota, a system whereby domestic movie theaters are required to screen a minimum number of domestically produced films. The issue was a point of contention.

In South Korea's FTA with India, India has agreed to abolish customs duties on a range of items that account for 75 percent of its import worth from South Korea within eight years. The figure is 85 percent on the South Korean side.

The 12.5-percent customs duty on automobile parts and components will be reduced to between 1 and 5 percent within eight years. That will provide an immense cost superiority to the Hyundai Kia Automotive Group, which produces in India.

Further, the final draft agreement of the FTA between South Korea and the EU calls for customs tariffs on industrial products to be lifted by the EU within five years and by South Korea within seven years.

South Korea is looking forward to greater exports of automobiles, household electrical appliances and other goods, while the EU is looking to increase exports of cosmetics, chemical products, and wine and other agricultural products.

Just as under the FTA with Chile, it has been agreed that customs tariffs on pork, which has been a point of contention, will be lifted within 10 years. Once South Korea's FTA with the EU becomes effective, there is no doubt that Japanese corporations will find themselves at a competitive disadvantage.

The automobile industry is expected to be the most affected. The EU imposes a tariff of 10 percent on passenger vehicles and 22 percent on commercial vehicles. The tariffs on automobile parts and components will be lifted immediately after the FTA takes effect, those on midsized to large vehicles within three years, and those on smaller vehicles within five years.

Even in the South Korean market, Japanese cars will feel the impact. Japan's share of the recently expanding imported car market, made up mainly of luxury cars, has been growing in recent years. But if the prices of European cars come down after the FTA comes into effect, some loss of that market share will be inevitable.

Meanwhile, negotiations on an FTA with Japan remain stalled. The two sides began intergovernmental talks on an economic partnership agreement in December 2003. But those were broken off in November 2004 amid disagreement over the opening up of agricultural and fisheries markets as well as differences of opinion on trade imbalance, non-tariff barriers and industrial cooperation. Discussions aimed at restarting the talks have been going on since 2008.

Given that South Korea is gradually losing incentive to proceed with negotiations with Japan, the Japanese government will need to come up with more attractive concessions. If Japan plans to start negotiations with Australia and other agricultural exporting countries, it will be necessary to work out how best to manage the balance between agricultural policy and the promotion of FTAs.

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Hidehiko Mukoyama is a senior economist at the economics department of the Japan Research Institute. This report was published in the March 2010 edition of Asia Monthly, an English-language publication of the institute. It is available at (http:/www.jri.co.jp/english/periodical/asia/).