May 1, 2005｜Korean Peninsula
Professor, Department of Economics, Inha University
Since bringing the ROK – Chile FTA into effect in April 2004, the government of the ROK has been working on the promotion of FTAs on a multi-track basis. Currently, the government is promoting FTAs on a multi-track basis with 20 major countries, including Japan, ASEAN and the European Free Trade Association (EFTA).
There are a number of advantages in promoting FTAs on a multi-track basis. Firstly, the strategy of promoting FTAs on a multi-track basis will accelerate previously sluggish moves towards the conclusion of FTAs and save on opportunity costs for ROK companies arising from the global proliferation of FTAs. In addition, even in the case of FTAs that are expected to lead to a trade deficit, the promotion of FTAs on a multi-track basis will have the advantage that the simultaneous implementation of FTAs that are expected to lead to a trade surplus will alleviate these trade deficits and elicit a positive attitude from the partner country with which the FTA has been concluded. Moreover, it has the advantage that it will maintain the momentum for the conclusion of FTAs and increase the expertise of staff involved in work relating to these agreements. Furthermore, these multi-track agreements can balance out the negative effects of FTAs. This means that by promoting and bringing into effect a number of FTAs on a multi-track basis, the differing effects of the various FTAs can be balanced out. For example, if the FTA with Japan, which looks likely to result in a trade deficit for the ROK, were to be pursued simultaneously with the FTA with ASEAN, which is tending towards a trade surplus, it would balance out concerns about the short-term trade deficit in the ROK-Japan FTA, which could be seen as a problem.
In order to maximize the effects of concluding FTAs, rather than focusing only on the field of products, the government of the ROK is oriented towards FTAs that cover a comprehensive range of areas, including services, investment, government procurement, intellectual property rights, technical standards, mutual accreditation, competition and cooperation. Through this orientation towards the promotion of high-level FTAs, the government is trying to improve domestic institutions and make them more advanced through FTAs, while also complementing them through multilateralism. The ROK – Chile FTA also covers products, services, investment, competition, government procurement and intellectual property rights; the package of concessions regarding market access targets the liberalization of all industries, including agriculture, with the ROK and Chile both abolishing import duties on 96% of relevant items (taking the number of items as the criterion) within ten years.
The ROK – Chile FTA concluded in April 2004 seems to be becoming established without any problems. Before the agreement entered into force, there was strong opposition from the agricultural sector in the ROK, but looking back over the last year since the agreement came into force, the initial expectation that not so much damage would result seems to have been correct. Commerce between the ROK and Chile has increased 55% over the last year, which was more than twice as high as the 25% increase in the ROK’s commerce with the rest of the world.
In order for the government’s multi-track promotion of FTAs to succeed, they must secure the support of the populace. In the process of promoting FTAs in the ROK, vulnerable industries such as agriculture were strongly opposed and there were not so many tiers in society that supported the promotion of FTAs. Some manufacturing industry groups, such as the Federation of Korean Industries and the Korea International Trade Association, supported the promotion of FTAs, but compared with the opposition of the agricultural sector, their arguments in favor were relatively weak. In particular, labor organizations such as the Korean Confederation of Trade Unions, are opposed to an FTA with Japan. Along with efforts by the government to ensure that the position of labor circles is reflected in any agreements, ensuring a support base for FTAs is likely to be vital to the success of the policy of promoting FTAs.
On the other hand, in East Asia, including the ROK, there is not much support for trade liberalization among consumer organizations.
In fact, consumers will be the biggest beneficiaries of FTAs and trade liberalization. Public awareness of the necessity of promoting the FTA policy is gradually improving, but support among the group that will reap the benefits of FTAs is weak and the government lacks cohesive power with regard to its promotion of this policy. In other words, as it will be in the interests of the majority of the public, none of them are saying anything, while the minority that will incur losses is becoming more vocal in its opposition. It is an expression of the so-called “silent majority, vociferous minority” phenomenon. However, as a result of the various trade liberalization measures that the ROK has promoted so far, it has become possible for consumers to buy cheap, good quality products. Moreover, amidst a situation in which they are forced to compete with imports, companies have redoubled their efforts to increase quality and cut costs, and the international competitiveness of Korean industry has improved as a result. One example of this came about after the confectionery sector was opened up to foreign companies in the 1980s; the business community in the ROK was concerned that it would succumb to competition from foreign firms and that a succession of companies would go bankrupt, but as a result of efforts by an industry that was fighting to survive amidst competition, the confectionery industry has developed into a highly competitive export industry. The electrical and electronic industry, which was liberalized at the same time, has experienced growth through globally renowned multinational companies and consumers no longer seek out foreign-made electronic goods.
In addition, it is necessary for companies that will make a profit from FTAs to strive to spread support for the FTA policy. For example, they must use industry-focused associations and groups to systematically inform the public of the necessity of promoting FTAs. Moreover, while informing the public of the direction of policies aimed at promoting FTAs, the government should establish measures focused on assisting industries adversely affected by FTAs. However, as in the case of the FTA with Chile, rather than unconditionally compensating farmers who suffer losses, the government should increase the proportion of the budget allocated for the structural adjustment of industry and providing a social security net.
At this point in time, with the ongoing integration of the global economy, the public should be made aware that external liberalization is not a matter of “choice”, but rather a question of “survival”. In the ROK, where the external economy accounts for 70% of gross domestic product, the use of external liberalization and reforms to develop an advanced commercial state – both in name and in substance – will act as a motive force for economic growth. Accordingly, FTAs are necessary for two purposes: achieving the goal of a national income of $20,000 and constructing a business hub for Northeast Asia. It is possible to achieve external liberalization through multilateral agreements such as the WTO, but as more than 150 countries participate in such agreements, it takes a long time to conclude them. FTAs should be promoted with countries whose interests accord with those of the ROK, while also supplementing them with multilateral agreements. FTAs have aspects that are more advantageous than multilateral agreements, such as the fact that they enable partner countries to be chosen according to the domestic situation and needs, and the fact that they make it possible to adjust the speed of external liberalization. If the ROK does not adopt such approaches as increasing the promotion of competition and expanding strategic collaboration through FTAs in order to improve the state of the economy and increase competitiveness as quickly as possible, it will find itself left behind in an age of intensifying technological competition.