Trade Compliance Center

KOREA TRADE POLICY REVIEW SUMMARY - 2000

PRESS RELEASE

PRESS/TPRB/138

18 September 2000

Market-based reforms help Korea recover from Asian crisis.

The report notes that market-based reforms, including steps to liberalize

further the foreign investment regime, have not only fostered a remarkable

recovery of the Korean economy, but reduced its vulnerability to external

shocks and established a solid basis for sustainable growth in the future. Real

GDP, which shrank by 6.7% in 1998, rebounded to grow by 10.7% in 1999.

Recovery was also supported by the multilateral trading system that

maintained foreign markets largely open to Korea's exports. The report states

that the United States, the EU and Japan have maintained their positions as

Korea's main trading partners, although the crisis seems to have diverted

certain exports to European markets. Similarly, the importance of trade with

countries from the crisis-affected Asia-Pacific regional only slightly declined,

still representing roughly one third of total trade.

However, the report notes that in the face of the crisis and the definitive loss

of preferential access in important markets (notably the EU, Japan and

Switzerland), the Korean authorities now appear to inter alia view regional and

bilateral trade agreements as an appropriate response to the world-wide

expansion of regional arrangements as well as instruments enabling a selective

and prompt opening of markets. In this context, it has initiated negotiations

on a bilateral free-trade agreement with Chile and is exploring similar initiatives

with other countries in the region. Furthermore, Korea now grants duty-free

access to imports of 80 commodities from 48 least developed countries.

Korea has carried out reforms in trade and related policies through the

implementation of commitments undertaken in the context of the WTO as well

as bilaterally agreed arrangements with multilateral institutions or other

trading partners. Efforts to improve transparency in trade and investment

policies were made by meeting regular GATT/WTO notification requirements as

well as by simplifying, translating in English and making part of the regulatory

framework available through a web-based computer network.

The report notes that Korea's main trade policy instrument is the customs

tariff, which is also an important source of tax revenue. Korea's average

applied MFN tariff is currently 13.8% (down slightly from 14.4% in 1996) with

7.5% for industrial products and in the order of 50% for agricultural products,

some of which are subject to considerable tariff "peaks".

The report states that Korea considerably improved its tariff bindings on

automobiles and items covered by the Information Technology Agreement

(ITA). The report also says that further improvements may result from the

implementation of remaining ITA undertakings, of ITA-2 negotiations and of

APEC's Early Voluntary Sectoral Liberalization initiative.

The report notes, however, that because Korea's customs tariff involves 125

different types and levels of duty, it is a highly complex instrument. The

report also notes that the gap between bound and applied rates imports a

degree of uncertainty to the effectively applied tariff.

At present, only beef and rice are subject to quantitative restrictions while

import prohibitions on items from Japan were definitively eliminated ahead of

schedule, the report notes. Overall, Korea has reduced its recourse to

anti-dumping actions and provisional measures. Nevertheless, it has taken

safeguard actions against imports of certain agricultural and livestock items.

The report notes that export restrictions now affect only a few items (fish,

seafood, sand and gravel) and all voluntary restraints - except those relating

to exports of textiles and clothing, automotive parts (to Chinese Taipei) and

silk waste (to Japan) - were eliminated as scheduled.

The report states that Korea has implemented the WTO Agreement on

Government Procurement beginning of 1997. Nonetheless, foreign suppliers

have apparently captured only a small share of the government procurement

market. In addition to advance implementation of the WTO Agreement of

Trade-Related Aspects of Intellectual Property Rights (TRIPS), Korea has

strengthened the protection of such rights by signing new treaties, increasing

its international cooperation and improving its enforcement.

In the agricultural sector, the report states that given the relatively low level

of agricultural productivity and numerous distortions to competition, there

appears to be a great deal of scope for efficiency gains. While quantitative

restrictions have been largely eliminated, several producers' cooperative and

state-trading entities continue to implement trade-distorting measures. These

include the administration of quantitative restrictions (making it difficult for

the annual quota for beef to be met) and tariff quotas, exclusive importation

rights, mark-ups, price support, provision of inputs at below-market prices,

provision of soft loans, and marketing services.

The report states that in the energy sector market-oriented reforms in

electricity and gas supply, and greater private sector participation have

increased competition, although state monopolies and concessional tariffs

have been maintained. Privatization is envisaged in the electricity industry as

from 2002 and gas by 2001.

The report notes that progress in the manufacturing sector has been largely

based in consumer electronics and communications equipment, automotive

products, chemicals, machinery and equipment, and basic metals. However,

despite ongoing corporate reforms the sector remains dominated by the large

conglomerates (chaebols). The report also states that while access to the

domestic automobile market is being improved by reducing tax and

standards-related impediments, the share of imported motor vehicles to the

domestic market remains low.

The report notes that in recent years, Korea has undertaken a remarkable

opening of the services sector to foreign investment - notably financial,

telecommunications, broadcasting, maritime and air transportation.

Nonetheless, both the State and the large conglomerates continue to be

involved in several activities. In the aftermath of the crisis, financial services

have undergone far-reaching reforms aimed at increasing competition and

rehabilitating the financial system. Rescue operations have reduced the

number of banks but temporarily increased state involvement in these

institutions. Efforts have been made to allow more competition and foreign

presence in maritime services, and to negotiate open skies agreements.

Notes to Editors

Trade Policy Reviews are an exercise, mandated in the WTO agreements, in

which member countries' trade and related policies are examined and

evaluated at regular intervals. Significant developments which may have an

impact on the global trading system are also monitored. For each review, two

documents are prepared: a policy statement by the government of the

member under review, and a detailed report written independently by the WTO

Secretariat. These two documents are then discussed by the WTO's full

membership in the Trade Policy Review Body (TPRB). These documents and

the proceedings of the TPRB's meetings are published shortly afterwards.

Since 1995, when the WTO came into force, services and trade-related

aspects of intellectual property rights have also been covered.

For this review, the WTO's Secretariat report, together with the policy

statement prepared by the Korean Government, will be discussed by the Trade

Policy Review Body on 26 and 28 September 2000. The Secretariat report

covers the development of all aspects of Korea's trade policies, including

domestic laws and regulations, the institutional framework, trade policies by

measure and by sector.

Attached to this press release is a summary of the observations in the

Secretariat report and parts of the government's policy statement. The

Secretariat report and the government's policy statement are available for the

press in the newsroom of the WTO internet site (www.wto.org). These two

documents and the minutes of the TPRB's discussion and the Chairman's

summing up, will be published in hardback in due course and will be available

from the Secretariat, Centre William Rappard, 154 rue de Lausanne, 1211

Geneva 21.

Since December 1989, the following reports have been completed: Argentina (1992 and 1999), Australia (1989, 1994 and 1998), Austria (1992), Bangladesh (1992 and 2000), Benin (1997), Bolivia (1993 and 1999), Botswana (1998), Brazil (1992 and 1996), Burkina Faso (1998), Cameroon (1995), Canada (1990, 1992, 1994, 1996 and 1998), Chile (1991 and 1997), Colombia (1990 and 1996), Costa Rica (1995), C?te d'Ivoire (1995), Cyprus (1997), the Czech Republic (1996), the Dominican Republic (1996), Egypt (1992 and 1999), El Salvador (1996), the European Communities (1991, 1993, 1995, 1997 and 2000), Fiji (1997), Finland (1992), Ghana (1992), Guinea (1999), Hong Kong (1990, 1994 and 1998), Hungary (1991 and 1998), Iceland (1994 and 2000), India (1993 and 1998), Indonesia (1991, 1994 and 1998), Israel (1994 and 1999), Jamaica (1998), Japan (1990, 1992, 1995 and 1998), Kenya (1993 and 2000), Korea, Rep. of (1992 and 1996), Lesotho (1998), Macau (1994), Malaysia (1993 and 1997), Mali (1998), Mauritius (1995), Mexico (1993 and 1997), Morocco (1989 and 1996), New Zealand (1990 and 1996), Namibia (1998), Nicaragua (1999), Nigeria (1991 and 1998), Norway (1991, 1996 and 2000), Pakistan (1995), Papua New Guinea (1999), Paraguay (1997), Peru (1994 and 2000), the Philippines (1993), Poland (1993), Romania (1992 and 1999), Senegal (1994), Singapore (1992, 1996 and 2000), Slovak Republic (1995), the Solomon Islands (1998), South Africa (1993 and 1998), Sri Lanka(1995), Swaziland (1998), Sweden (1990 and 1994), Switzerland (1991 and 1996), Tanzania (2000), Thailand (1991, 1995 and 1999), Togo (1999), Trinidad and Tobago (1998), Tunisia (1994), Turkey (1994 and 1998), the United States (1989, 1992, 1994, 1996 and 1999), Uganda (1995), Uruguay (1992 and 1998), Venezuela (1996), Zambia (1996) and Zimbabwe (1994).

TRADE POLICY REVIEW BODY: KOREA

Report by the Secretariat Summary Observations

The Economic Environment

The principal economic development since Korea's previous Trade Policy

Review in 1996 has undoubtedly been the financial crisis that erupted in 1997.

This crisis, triggered in part by the poor performance and high debt ratios of

certain large conglomerates (chaebols), led initially to a marked depreciation in

Korea's currency (the won), a sharp fall in real GDP, and a tripling of

unemployment. The crisis also exposed long-standing structural weaknesses in

the economy. In order to address these weaknesses, the Government has

been undertaking wide-ranging market-based reforms. These reforms have

been aimed primarily at the financial, corporate, and public sectors. Ongoing

efforts are also being made to increase labour market flexibility and expand

the social safety net. At the same time, Korea has, by and large, resisted

protectionist pressures, maintaining instead an outward-oriented trade and

investment strategy.

Market-based reforms, including steps to liberalize further the foreign

investment regime, have not only fostered a remarkable recovery of the

Korean economy, but reduced its vulnerability to external shocks and

established a solid basis for sustainable growth in the future. Real GDP, which

shrank by 6.7% in 1998, rebounded to grow by 10.7% in 1999. Inflation, after

jumping from 4.5% in 1997 to 7.5% in 1998, dropped to 0.8% in 1999. The

unemployment rate peaked at 8.6% in February 1999, more than three times

its pre-crisis level, but as a result of the recovery of production activities it

dropped to 4.8% at the end of 1999. However, real GDP per capita and the

unemployment rate have yet to return to their pre-crisis levels.

Korea's successful management of the crisis has combined structural reform

and careful macroeconomic management. In December 1997, Korea shifted

from a managed to a free floating exchange rate system and since then has

pursued exchange rate stabilization. After the sharp initial depreciation of the

won, which helped bolster export volumes by 19% in 1998, the Central Bank

intervened to smoothen the subsequent appreciation of the currency. Thus,

the won has remained substantially below its pre-crisis level, which has

enhanced the price-competitiveness of Korea's exports. As a consequence of

the crisis, the current account balance shifted from a deficit to surplus, albeit

declining, largely due to temporary import contraction and de-stocking.

Disbursements from multilateral institutions and foreign investment inflows

enabled Korea to rebuild quickly its international reserves, which had been

depleted by the crisis, thus helping to restore confidence in the economy.

External liabilities have fallen gradually, while their structure has changed

markedly as a result of a considerable rise in public long-term lending

associated with restructuring.

Whereas an expansionary fiscal policy was necessary to mitigate the adverse

effects of the crisis, public finances are now gradually being brought into

balance by restraining expenditure and raising taxes. In the face of an aging

population, and with the prospects of national unification seemingly improving,

stabilization of public debt constitutes an important fiscal objective.

Liberalization of the investment regime together with regulatory and other

market-based reforms have contributed to a considerable expansion in foreign

investment; the European Union (EU), the United States, Japan, and Malaysia

(in that order) were the largest investors in 1999. Although Korean overseas

investment by large conglomerates (the chaebols) and state-owned firms has

temporarily declined in the wake of the crisis, it is expected to resume its

expansion in the coming years.

The composition of merchandise trade, which is dominated by industrial

products, has changed slightly in response to the crisis and the subsequent

recession. The United States, the EU, and Japan have maintained their

positions as Korea's main trading partners, although the crisis seems to have

diverted certain exports to European markets; similarly, while the importance

of trade with countries from the crisis-affected Asia-Pacific region has slightly

declined, it still represents roughly one third of total trade.

Trade Policy Framework

Since its last Review in 1996, Korea has undertaken reforms in trade and

related policies through the implementation of commitments undertaken in the

context of the WTO, IMF and OECD as well as bilaterally agreed

arrangements. In addition to its Uruguay Round undertakings, multilateral

commitments on automobiles, information technology items, financial services,

and basic telecommunications have been expanded and/or strengthened. As a

result, Korea has become a more open and secure market for its trading

partners, despite the crisis.

In the face of the crisis and the definitive loss of GSP preferential access in

important export markets (notably the EU, Japan, and Switzerland), the

authorities now appear to view regional and bilateral trade agreements not

just as complementary to Korea's participation in the multilateral trading

system, enabling a selective and prompt opening of markets, but also as an

appropriate response to the world-wide expansion of regional arrangements.

Korea has initiated negotiations on a bilateral free-trade agreement with Chile,

with a view to securing greater trade and investment access; similar

initiatives are being explored with Japan and Thailand. As of January 2000,

Korea grants duty-free access to imports of 80 commodities from 48 least

developed countries.

In line with its multilateral trade and other commitments, including those with

international financial institutions, and with domestic political developments,

Korea has undertaken changes in its legislative and institutional framework. In

particular, while the number of ministerial positions has been reduced, as of

1998 the role of the Ministry of Foreign Affairs has been expanded to cover

the development and coordination of international trade policies as well as

representation in negotiations in this area; it is now the Ministry of Foreign

Affairs and Trade. Korea has participated actively in virtually all aspects of

WTO work (including the accession of China). Moreover, in preparation for the

next Round of negotiations, it has held public hearings in order to ensure that

the negotiation process adequately reflects a broad range of national views.

Korea's legislation in trade and related areas includes that on tariffs,

concessional entry, import approval, standards, export restrictions, export

assistance, intellectual property rights, competition, and consumer protection.

Provisions of the WTO Agreements cannot be superseded by those of

domestic legislation and may be invoked before the courts. Korea has also

participated in APEC work in the fields of tariffs, customs procedures,

electricity/food standards, government procurement, competition policy, and

intellectual property rights; at the OECD it has undertaken commitments or

participated in activities related to export credits, taxation, investment,

competition policy, and biotechnology.

Korea has met regular GATT/WTO notification requirements relating to its

legislation and responded to numerous questions raised by WTO Members in a

number of areas (e.g. agriculture, subsidies, state-trading, government

procurement); tariff information has been submitted to the Integrated Data

Base. In addition to regulatory reforms aimed at removing redundant legislation

and simplifying other laws and regulations, Korea has made every effort to

publish all types of legislation pertaining to trade and investment in English,

and to ensure that it is publicly available through a web-based computer

network; most public sector entities now have their own internet web-sites.

These steps have greatly increased the transparency of Korea's trade and

investment regime.

Trade and Trade-Related Policy Developments

The customs tariff is Korea's main trade policy instrument, and is an important

source of revenue (some 6.5% of total taxes). Tariff rates have been

adjusted to accord with Korea's WTO binding commitments. In particular,

bindings were improved considerably with respect to automobiles and items

covered by the Information Technology Agreement (ITA); 91.7% of tariff lines

are now bound. Further improvements in bindings may result from the

implementation of remaining ITA undertakings, ITA-2 negotiations, and APEC's

Early Voluntary Sectoral Liberalization (EVSL) initiative.

The average applied MFN tariff is currently 13.8%, down slightly from 14.4% in

1996(1). The average applied MFN tariff for industrial products is 7.5%, while

that for agricultural products is of the order of 50%, reflecting the presence

of considerable tariff "peaks", largely as a result of the "tariffication" exercise.

At the same time, the tariff embodies a certain degree of escalation according

at times substantial and highly varied levels of border protection to domestic

industry. Consequently, the customs tariff is a potential distortion to

competition and an obstacle to the efficient allocation of domestic resources.

With its multiplicity of rates, involving 125 different types and levels of duty

(96 ad valorem rates, 11 specific rates and 18 alternate rates), it is also a

highly complex instrument, although its complexity has been reduced by virtue

of tariff reductions on industrial items in 1997, which mean that nearly two

thirds of all tariff lines are now subject to a rate of 8%. Moreover, applied

tariff rates currently fall short of bound rates by an average of 6.3 percentage

points. The consequent, albeit declining, gap between bound and applied

rates provides considerable scope for the authorities to raise applied MFN

tariff, either by increasing general rates or by occasionally levying "flexible"

tariffs, thereby imparting a degree of uncertainty to the applied tariff.

Furthermore, so-called "autonomous" tariff quotas (mainly for raw materials

and inputs) are used in addition to WTO-related agricultural tariff quotas.

Recourse to non-tariff protection has been confined mainly to agriculture

products and livestock.

Efforts have been made to streamline customs clearance procedures by, inter

alia, introducing an immediate release system and the progressive introduction

of paperless clearance through a computer network linking all customs offices.

Import prohibitions on sensitive items from Japan (under the Import

Diversification System), and on fish (length-based restrictions, seasonal bans)

were abolished, and the coverage of approval requirements for used goods

was reduced; at present, only beef and rice are subject to quantitative

restrictions. Overall, Korea has reduced its recourse to anti-dumping actions

and provisional measures in this area; nevertheless, it has taken safeguard

action (against skimmed milk powder preparations between March 1997 and

May 2000) and has regularly used Special Safeguard provisions (for certain

beans, buckwheat, ground nuts, wheat starch and sweet potato starch).

Efforts have been made to reduce the impact of technical standards on trade

and to bring them more into line with international rules; these efforts involve,

inter alia, eliminating or easing unnecessary mandatory requirements (e.g. in

the case of automobiles) reducing the coverage of shelf-life requirements, and

eliminating dual-price marking; coverage of the marks of origin requirements

has also been reduced.

Since its previous Review Korea has become a member of the WTO Agreement

on Government Procurement with implementation date of 1 January 1997. The

share of open tendering among different purchase methods has been reduced,

partly as a result of the crisis. Government procurement has been used to

support small and medium-sized firms (SMEs). Foreign suppliers (largely from

the United States and the EU) have apparently captured only a small share of

the government procurement market.

State involvement in the economy is being curbed to varying degrees in

agriculture, livestock, mining and energy, basic telecommunications, and public

utilities. Cash proceeds from privatization efforts have been low, however, as

the divestment process in certain activities (including public utilities) has been

slow or incomplete owing partly to the adverse impact of the crisis on the

stock-market prices; in 2000, progress is expected on the privatization of gas,

oil, heating, telecommunications, banking, and insurance activities.

It would appear that frugality or anti-import campaigns run by civic groups

have either ceased or been avoided.

Export restrictions now affect only a few items (fish, seafood, sand and

gravel). All voluntary restraints, except those relating to exports of textiles

and clothing, automotive parts (to Chinese Taipei) and silk waste (to Japan),

were eliminated as scheduled.

Korea suppressed three export-related subsidies in 1998; it now maintains one

subsidy for fruit and flowers. As of April 1999, a Simplified Fixed Drawback

Rate Schedule, covering more than a third of tariff items (mostly

manufactures), has been in operation for small and medium-sized enterprises.

Since 1999, the activities that may be carried out within free-export

processing zones, which remain reserved for firms with foreign participation,

have been expanded; firms in the zones are, inter alia, fully or partially exempt

from payment of duty and customs clearance procedures. Countertrade has

been envisaged as a means of improving export competitiveness and reviving

trade ties with regional partners affected by the crisis.

Several forms of financial support have been strengthened; such support

includes numerous tax incentives (with expiry dates set for December 2000 or

2003) whose effectiveness is dubious. Apart from traditional sectoral

recipients of assistance (e.g. agriculture, livestock), support has been

directed at small and medium-sized enterprises, research and development,

and firm relocation. Other forms of support have included preferential energy

pricing for farmers and manufacturers.

Indirect taxation, which accounts for 59% of total tax revenues, remains

complex and luxury-goods oriented; liquor tax rates on beer and "soju" have

been revised in response to a ruling by the WTO Dispute Settlement Body.

In addition to advance implementation of the WTO Agreement on

Trade-Related Aspects of Intellectual Property Rights, protection of such

rights has been strengthened by the signing of new treaties, increased

international cooperation, and stricter enforcement. Competition policy has

also been updated and strengthened to reflect the policy shift against chaebol

domination and illegal trading among subsidiaries (including those of public

entities); trade and foreign investment liberalization has also contributed to an

intensification of competition in the domestic market. Consumer protection has

been expanded in several areas (e.g. electronic commerce,

telecommunications, advertisement, child safety). Furthermore, in response to

growing concern over the environment, measures have been introduced, inter

alia, to support the building of "sustainable agricultural zones" and reduce

energy consumption.

Sectoral Policy Developments

Whereas government assistance for the politically and security-sensitive

agriculture and livestock sector remains strong and wide-ranging, mainly

involving border protection for several agricultural items, border protection for

fisheries has been reduced and is now confined to tariffs. Since 1996, nominal

applied MFN tariff protection has been reduced slightly from 51.8% to 50.3%,

nonetheless, it is still more than six times the average for manufactured

goods. Prohibitive import tariff rates ranging from 106.1% to 926.8% (manioc)

are applied exclusively to 99 agricultural and livestock items. While

quantitative restrictions have been eliminated in accordance with WTO

"tariffication" commitments, and are now confined to beef (until the end of

2000) and rice, and minor regulatory and institutional reforms are ongoing,

several producers' cooperatives and state-trading entities have continued to

implement trade-distorting measures. These measures include the

administration of quantitative restrictions (making it difficult for the annual

quota for beef to be met) and tariff quotas, exclusive importation rights,

mark-ups, price support, provision of inputs at below-market prices, provision

of soft loans, and marketing services. While observing undertakings in the

WTO to reduce AMS, domestic support to the sector has risen slightly, mainly

for rice. "Green box" assistance has remained significantly higher than support

subject to cuts. Given the relatively low level of agricultural productivity and

numerous distortions to competition, there would appear to be a great deal of

scope for efficiency gains in the sector.

While state monopolies (e.g. involving power transmission and generation) and

concessional tariffs have been maintained, market-oriented reforms in

electricity and gas supply, and greater private sector participation, have

increased competition in the energy sector. Mandatory cross-subsidization (of

the coal industry, for instance) and investments in sectors outside its

core-business, both at home and abroad, remain a standard practice of the

state-owned electricity supplier. Privatization is envisaged in the electricity

industry (as from 2002) and gas (by 2001).

Progress in the manufacturing sector, where a shift towards

"knowledge-based industrial development" has taken place, has been largely

based in consumer electronics and communications equipment, automotive

products, chemicals, machinery and equipment, and basic metals; the sector

remains dominated by the chaebols and their General Trading Companies.

State involvement in steel is being eliminated, and a dual pricing system for

exports, which was operated by the state-linked firm in this sector, was

suppressed in April 2000. Despite the use of adjustment duties and tariff

increases on sensitive items (food products and animal feed, textiles, clothing,

leather articles, including footwear, and rubber products), applied MFN tariffs

are now considerably below the national average. The elimination of import

prohibitions on sensitive industrial items from Japan has intensified competition

for certain motor cars, parts, and consumer electronics. In line with bilateral

undertakings, access to the domestic automobile market is being improved by

reducing tax and standards-related impediments; however, despite the

removal of these impediments in order to assist the recovery of sales hit by

the recession, imports' share of the domestic automobile market remains low.

Positive developments in the pharmaceuticals industry include the extension of

the national reimbursement scheme's coverage to foreign-made drugs and the

replacement of the "standard retail price system" by an "open pricing system".

In the period under Review (1996-2000) Korea has undertaken a remarkable

opening of the services sector to foreign investment (notably financial,

telecommunications, broadcasting, maritime and air transportation).

Nonetheless, both the State and the chaebols continue to be involved in

several activities (e.g. financial services, telecommunications, railroads, and

land development). In the aftermath of the crisis, financial services have

undergone far-reaching reforms aimed at increasing competition and

rehabilitating the financial system. A key element of these reforms involves

the recapitalization of insolvent financial institutions at an initial cost

equivalent to 13% of the GDP. Such rescue operations have reduced the

number of banks but temporarily increased state involvement in these

institutions. The share of the top five chaebols in the non-banking financial

sector (e.g. investment trust companies) has remained virtually unchanged.

Telecommunications services have been operated by the state-owned firm,

public entities from other sectors, and chaebol affiliates, thus allowing for

cross-subsidization and "inside trading". Some of the restrictions on the

allocation of advertisement time, the content of broadcasted television

programmes (including the use of a foreign language) and motion pictures

(which are subject to screen quotas) have been revised. Efforts have been

made to allow more competition and foreign presence in maritime services, and

to negotiate open skies agreements. Several distribution-related structural

impediments have been removed, and the expansion of electronic commerce

has been encouraged.

Korea has commitments under the General Agreement on Trade in Services

(GATS) in 80 activities within financial, communication, construction,

transportation, and environmental services; those on financial services and

basic telecoms, inter alia, improved conditions for foreign presence, and were

promptly ratified. Korea's sole GATS Article II MFN exemption remains on

computerized flight reservation services.

Prospects

Notwithstanding the seriousness of the Asian financial crisis and the severity

of the recession that followed, the Government of Korea has, by and large,

resisted protectionist pressures, opting instead for far-reaching market-based

reforms. These reforms have reinforced Korea's already outward-oriented

trade regime and its increasingly liberal attitude to foreign investment. These

reforms have helped pave the way not only for the remarkable recovery of the

economy during the past year or so, but for strong sustainable growth in the

future. For example, recent regulatory reforms in five sectors (construction,

distribution, electricity, road transportation, and telecommunications), whose

full effects have yet to be felt, are expected to raise GDP by 2.1% at first and

by 8.6% in the long run (ten years). Nevertheless, there is perhaps the

danger that as the recovery gains pace, the Government might become

complacent or, indeed, succumb to domestic pressures to dilute, or even put

off, fundamental reforms. Although currently well under way, such reforms are

still incomplete and yet essential for the achievement of a stable basis for

sustainable and equitable growth of the Korean economy and thus the

country's future prosperity.

While extending and consolidating the opening of its market at the multilateral

level, Korea appears to be becoming increasingly involved in regional

arrangements, notably the APEC forum, and is developing links with a grouping

consisting of ASEAN, Japan, and China. It is also exploring bilateral free-trade

agreements, having eschewed such arrangements in the past. It remains to

be seen whether such regional and bilateral arrangements erode Korea's

long-standing attachment to the multilateral trading system.

TRADE POLICY REVIEW BODY: KOREA

Report by the Government Part I and II

I. KOREA AND THE MULTILATERAL TRADING SYSTEM

1. Korea strongly supports the continued development of the open multilateral

trading system. In fact, Korea is one of its most outstanding beneficiaries.

The Korean economy has grown rapidly since Korea joined the GATT in 1967.

This was made possible by the open trade under the GATT/WTO system. As of

1999, Korea's total trade was equivalent to approximately 65% of its GDP.

2. Since its accession to the GATT, Korea has been fully committed to

complying with multilateral rules and obligations, and maintaining a free and

open market at home. Korea actively participated in the multilateral trade

negotiations of the Tokyo and Uruguay Rounds. Since the WTO's inception in

1995, the Korean Government has, in cooperation with its trading partners,

concluded agreements on trade in information technology products, financial

services, and basic telecommunications services. In the past two years, the

Korean Government has actively participated in discussions on the New Round

with the belief that an early launch of a comprehensive round is essential to

the strengthening of the multilateral trading system.

3. In December 1996, Korea joined the OECD. As part of its accession

commitments, Korea further liberalized the financial sector, in particular, the

foreign exchange and capital markets. Through its participation in the various

activities of the OECD, including the review of its economic development and

regulatory reform, Korea has strengthened its commitment to market openness

and stepped up measures to enhance market access.

4. Despite the serious downturn caused by the 1997 economic crisis, Korea

has continued to implement its commitments under the WTO agreements. In

fact, the crisis prompted Korea to accelerate liberalization and market opening

voluntarily. Much progress was made in improving the environment for foreign

direct investment (FDI). Korea is convinced that continued reform and

liberalization in trade will offer the best possible path to greater prosperity and

economic growth.

5. In 1998, Korea consolidated the dispersed trade functions of the

Government under the Ministry of Foreign Affairs and Trade (MOFAT). This

institutional change was designed to improve the trade policy-making process

and to implement the policies in a consistent manner.

II. ECONOMIC SITUATION AND PERFORMANCE

(1) CHANGES IN THE ECONOMIC SITUATION

6. Prior to the Asian economic crisis that began in 1997, the Korean economy

experienced high growth, low unemployment, and relatively moderate inflation.

However, in terms of external balances, there were signs indicating a number

of serious problems. The most notable was the rapid rise of the trade deficit in

the 1990s. The trade deficit reached more than 10 billion dollars in 1995, and

peaked at more than 20 billion dollars in 1996. While Korea had lowered its

border trade measures considerably by the 1990s, much of the increase in

Korean imports in 1995 and 1996 may, in fact, be attributable to the rapid

increase in foreign capital inflows, which increased the value of the Korean

won.

7. At the end of 1997, Korea experienced the worst economic crisis since the

Korean War. As foreign debt holders refused to renew the short-term

borrowing of Korean firms and banks, and withdrew their funds, Korea's foreign

exchange reserves were rapidly depleting. As a result of the capital flight, the

value of the won swiftly depreciated, from 965.10 won per dollar at the end of

October 1997 to a low of 1964.80 won in December 1997. At the request of

the Korean Government, the IMF agreed to provide a stand-by arrangement,

supplying urgently needed liquidity to the foreign exchange market in Korea.

8. From the onset of the crisis and throughout much of 1998, the Korean

economy experienced a serious downturn in all aspects. Real GDP fell by 6.7%

in 1998. The unemployment rate rose, reaching a high of 8.6% (seasonally

adjusted) in February 1999. At the height of the crisis, Korea's usable foreign

exchange reserves were depleted down to just 3.9 billion dollars. The crisis

affected the manufacturing, construction, and service sectors, and caused

private consumption to drop to its lowest level. Consequently, external trade

volumes also dramatically decreased.

9. In late 1998, the Korean economy began to show signs of recovery, as a

result of the Korean Government's efforts to stabilize the economy. And by

1999, indicators showed that the economy has returned to its pre-crisis

levels. For example, real GDP rose by 10.7% in 1999, the unemployment rate

fell to 4.8% by December 1999, and the value of the won recovered and

remained stable at approximately 1,200 won per dollar throughout 1999.

Korea's current account recorded a surplus of 40 billion dollars in 1998 and

25.2 billion dollars in 1999.

Table 1

Major Korean Economic Indicators (1990-1999)

Nominal GDP

(US$ billion)

Real GDP

Growth Rate

Gross National

Income per capita

(US dollars)

Unemployment Rate

Inflation Rate

(Consumer Prices)

Won / dollar

1990

252.5

9.0

5,886

2.4

8.5

708.0

1995

489.4

8.9

10,823

2.0

4.5

771.0

1996

520.0

6.8

11,380

2.0

4.9

804.8

1997

476.6

5.0

10,307

2.6

4.5

951.1

1998

317.7

-6.7

6,742

6.8

7.5

1,398.9

1999

406.7a

10.7

8,581a

6.3

0.8

1,189.5

a Preliminary figures.

Note: Unemployment rate and exchange rate are annual averages.

Source: Bank of Korea.

(2) EXTERNAL TRADE AND INVESTMENT

10. The economic crisis took a heavy toll on Korea's trade. In 1998, the value

of Korean exports fell by 2.8%. Despite the massive currency depreciation of

the Korean won, Korea's exports did not increase because of widespread

recession in other Asian markets, which accounted for a great share of

Korea's total exports. Korean imports fell even further, by 35.5%, resulting in

the highest trade surplus in Korean history 39 billion dollars. This trade

surplus indicated a weak economy rather than a strong one, since it was

largely due to the sudden decrease in imports rather than an increase in

exports.

11. In 1999, Korean exports and imports both recorded a substantial growth of

8.6% and 28.4% respectively, and resulted in a trade surplus of 23.9 billion

dollars. While the size of the surplus was smaller than that of 1998, it marked

a positive turn for the economy, because it resulted from increases in both

exports and imports.

Table 2

Korean Trade Statistics

(US$ million)

Exports

Growth Rate (%)

Imports

Growth Rate (%)

Trade Balance

Current Account

1990

65,016

4.2

69,844

13.6

-4,828

-2,003

1995

125,058

30.3

135,119

32.0

-10,061

-8,508

1996

129,715

3.7

150,339

11.3

-20,624

-23,005

1997

136,164

5.0

144,616

-3.8

-8,452

-8,167

1998

132,313

-2.8

93,282

-35.5

39,031

40,558

1999

143,685

8.6

119,752

28.4

23,933

25,000

Note: Figures are based on customs clearance statistics.

Source: Korea International Trade Association.

12. During the 1990s, the geographical distribution of Korean trade changed

considerably. While the United States, Japan, and the European Union

remained Korea's largest trading partners throughout the 1990s, their shares

in Korea's total trade fell as trade with other Asian countries gradually

increased.

Table 3

Geographical Distribution of Korean Trade

(US$ million)

Exports

Imports

1990

1996

1997

1998

1999

1990

1996

1997

1998

1999

Total 65,016

129,715

136,164

132,313

143,685

69,844

150,339

144,616

93,282

119,752

Asia 24,639

65,744

68,530

57,539

65,833

28,515

57,602

55,544

35,691

50,439

North America 21,091

22,874

23,140

24,356

31,113

18,408

36,029

32,726

22,378

23,715

Latin America 2,102

8,961

8,668

8,867

8,645

1,726

4,392

4,076

2,197

2,865

Europe 12,001

21,395

24,817

28,749

26,091

10,501

26,244

23,688

14,281

16,579

Africa 892

2,250

3,049

2,821

2,347

363

2,521

4,442

1,977

2,944

Oceania 1,214

2,433

2,685

3,222

3,061

3,201

7,404

6,846

5,302

5,486

Note: Figures are based on customs clearance statistics.

Source: Korea International Trade Association

13. Throughout the 1990s, based on the Uruguay Round and OECD

commitments, Korea continued to remove its barriers to both incoming and

outgoing foreign investment. As a result, Korea's overseas direct investment,

as well as foreign investment into Korea, increased substantially during this

period.

14. Following the 1997 economic crisis, Korea actively dismantled nearly all of

its barriers to incoming FDI. Such liberalization was intended not only to

attract foreign capital, but also to introduce greater world market competition

and international management standards in the Korean economy.

15. As a result, FDI into Korea grew by 90.4% in 1998 and 62.5% in 1999. The

European Union's FDI into Korea grew by 117% in 1999, on a registration

basis, making the European Union the source of largest foreign investment in

Korea and surpassing the United States.

16. Korea's outgoing FDI had been growing before the economic crisis.

However, it went through fluctuations after the crisis, as Korean firms

reassessed their overseas investment strategies. In 1999, Korea's overseas

direct investment fell by 15.7%, to 4.0 billion dollars.

Table 4

Foreign Investment in Korea and Outward Investment by Korea

(US$ million)

1990

1995

1996

1997

1998

1999

Foreign Direct Investment 788.5

1,775.8

2,325.4

2,844.2

5,415.6

8,798.4

Net Portfolio Investment 83.6

11,590.7

15,184.6

14,295.3

-1,878.2

8,825.2

Outward Investment 1,051.6

3,552.0

4,670.1

4,449.4

4,799.4

4,044.1

Source: Bank of Korea