Office of Trade Agreements Negotiations and Compliance
TRADE POLICY REVIEW SUMMARIES - 1996
24 September 1996
KOREA UNDERTAKES MORE DOMESTIC REFORM AS ITS POSITIONING WORLD TRADE CONTINUES TO STRENGTHEN
Strong economic growth, deregulation, trade liberalization and an easing of foreign investment restrictions are helping Korea not only to become more competitive but also to take a more forceful approach to domestic reform. Referred to in a new WTO Secretariat report as "one of the world's most dynamic economies," Korea is now in the end phase of a five-year programme which seeks to reduce state control, abolish unnecessary regulations and restrictions, increase transparency of trade-related policies and align domestic laws with international regulations.
The WTO Secretariat report and a report by the Government of Korea will serve as the basis of two days of discussion at the WTO on 30 September and 1 October 1996. According to the WTO report, Korea's liberalization efforts were spurred on in part because of the Uruguay Round. Its commitments included tariff reductions, concessions in the agricultural and offers in many services sectors. Korea's final bound tariffs will average 8.3 per cent on a trade-weighted basis by 2004. Rates for all farm items have been bound while the level of tariff bindings for industrial products was increased from 10 to 90 per cent.
On-going reforms in agriculture have been driven mainly by external requirements, states the report, rather than efficiency considerations or consumer welfare. In lieu of fixing tariffs for rice, Korea undertook to expand its minimum access commitment. Rice imports will now rise from 1 to 4 per cent of domestic consumption over a 10-year period.
Korea's narrowly focused exports are somewhat vulnerable to product-specific market and policy developments, with semi-conductors and automobiles alone representing nearly 25 per cent of total merchandise exports. Recent initiatives by the government are intended to promote the capital goods industry, where the bilateral deficits with Japan are the highest.
While Korea does not grant subsidies in the form of direct payments to industry, the report notes that assistance is extended primarily for agriculture and coal mining via tax breaks and concessional interest rates. Under the WTO Agreement on Subsidies and Countervailing Measures, Korea plans to phase out all prohibited subsidies by 2002.
Korea's competition law has been overhauled since 1992 and complemented by institutional and organizational improvements in policy implementation. The reforms are intended to contribute to a more balanced economic structure in terms of company size, and reduce barriers for new entrants. While the reforms are conducive to long-term economic resilience, the report states that there may be no immediate gains as large industrial conglomerates are well represented in dynamic and innovative industries. Trading companies related to such conglomerates handled over 46 per cent of Korea's exports in 1995, up from 38 per cent in 1990 (including some products from small and medium-sized enterprises).
Korea's services sector currently accounts for about 60 per cent of GDP. The report notes that Korea has assumed commitments in over 80 sectors, followed by additional offers in the extended negotiations on financial services, basic telecommunications and maritime transport. However, significant portions of the transport, communications, financial and business services industries are still restricted for foreign investors.
Korea is a member of the World Intellectual Property Organization (WIPO), and has signed a variety of international conventions governing the protection of intellectual property rights. Recent legislative revisions included virtually all areas of protection, from copyrights to patents and trademarks. The authorities feel that most of the Uruguay Round implementation measures are now in place, in an attempt, by their own assessment, to comply as closely as possible with developed-country requirements under the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).
As a member of the forum for Asia-Pacific Economic Cooperation (APEC), 1 Korea views APEC's role as supplementary to and supportive of the multilateral trading system. Almost 70 per cent of Korea's external trade and 75 per cent of its foreign direct investment is with other APEC members.
The report concludes by noting that recent statements made by Korean officials indicate a gradual change in policy perception, implying both a more assertive role in international economic fora and a more dynamic approach to domestic reform. The strengthening of competition policy is an important signal, indicating confidence in the operation of market forces and their impact on resource allocation. Accelerated liberalization under WTO provisions would be the natural complement and, at the same time, match the political responsibilities ensuing from Korea's strong and still growing roe in world trade.
TRADE POLICY REVIEW BODY
REPUBLIC OF KOREA
Report by the Secretariat - Summary Observations
Since its initial Trade Policy Review in 1992, the Republic of Korea has continued to be one of the world's most dynamic economies. Relatively moderate growth in 1992 and 1993 was followed by strong expansion, exceeding 9 per cent in 1995. The stimulus came from both buoyant exports, in the wake of the appreciating Japanese yen, and strong domestic investment for equipment.
External Liberalization and Internal Reform
Trade liberalization and a commitment to WTO principles have been integral to Korea's economic policies in the 1990s. Based on pre-announced programmes, tariffs have been reduced and quantitative restrictions abolished across virtually all sectors. Applied tariffs currently average less than 10 per cent (some 7 per cent in manufacturing), some 15 percentage points below their 1982 levels.
External liberalization has been accompanied by internal deregulation. The Government's Five-Year Plan for a New Economy (1993-97) calls for reduced State control, including the abolition of unnecessary regulations and restrictions, increased transparency of trade-related policies, and the alignment of domestic with international regulations. The Plan is focused on structural adjustment and competitiveness in agriculture; technology enhancement in small and medium-sized enterprises (SMEs); accelerated adjustment of declining industries; and expansion of high value-added export sectors.
Gradual liberalization of inward foreign direct investment (FDI) is intended to improve domestic efficiency and meet foreign requests. Since 1993, the Government has simplified investment procedures, established a "one-stop" service system, provided tax exemptions and favourable financing, and created new industrial estates for foreign investors. Inward FDI has been outstripped by outflows in recent years, in part to develop new outlets and escape domestic cost pressure.
Financial liberalization is inspired and required by the needs of Korea's rapidly growing economy. There are some indications that capital shortage has tended to fuel pressures for sector-specific soft loans, delayed adjustments in declining labour-intensive sectors, and retarded Korea's shift onto a more capital- and technology-intensive development path. Opening will be at a deliberate rate, accompanied by disciplined macroeconomic management, to avoid abrupt currency appreciation and its adverse effects on export competitiveness.
Trade Policy Trends
Korea's undertakings in the Uruguay Round included tariff reductions, concessions in the agricultural sector, commitments in many services sectors, and accession to the Agreement on Government Procurement. Final bound tariffs will average 8.3 per cent (trade-weighted basis) and are being phased in over a ten-year period, until 2004, in line with developing-country provisions. All rates have been bound for farm items, as required under the WTO Agreement, while the level of tariff bindings for industrial products was increased from 10 to 90 per cent. This implies gains in predictability and security of access, although the relevant rates are in most cases higher than those currently applied.
Korea is committed to phasing out, or bringing into conformity with WTO provisions, a range of import restraints previously maintained for balance-of-payments reasons. Non-automatic licensing requirements were eliminated on 220 agricultural and fisheries products between 1992 and July 1996, and 73 additional items are to be liberalized in July 1997. The date for liberalization of eight categories of beef and cattle was extended in the Uruguay Round context to January 2001, compensated by increased quota levels and relatively low final tariffs. Restrictions on certain Japanese products, maintained under the Import Diversification Programme, are being phased out with a view to their full elimination by 1999. The current, comprehensive system of trade licensing, generally automatic, is to be replaced in 1997 by a system limiting licensing requirements to health, security and similar criteria.
Korea does not grant any subsidies in the form of direct payments to industry; assistance is extended primarily via tax breaks and concessional interest rates. Available evidence suggests that most financial support is destined for agriculture and coal mining. Under the WTO Agreement on Subsidies and Countervailing Measures, Korea plans to phase out all prohibited subsidies by 2002, invoking developing-country status.
Korea has acted to remove technical trade barriers, focusing in particular on the import and distribution chain. An expedited inspection and clearance system for fresh fruit and vegetables was introduced, and Government-mandated shelf-life indications for some 200 products were replaced by manufacturer-determined indications. In contrast to these trends, new origin labeling requirements have been introduced, mainly on farm products, with a view to better informing consumers at a time of steady import liberalization. An overhaul of competition law since 1992 has been complemented by institutional and organizational improvements in policy implementation. The reforms are intended to contribute to a more balanced economic structure in terms of company size, and reduce barriers for new entrants. However, while conducive to long-term economic resilience, there may be no immediate gains as large industrial conglomerates are well represented in dynamic and innovative industries. Trading companies related to such conglomerates handled over 46 per cent of Korea's exports in 1995, up from 38 per cent in 1990 (including SME supplies).
Korea is a member of the World Intellectual Property Organization (WIPO), and has signed a variety of international conventions governing the protection of intellectual property rights. Recent legislative revisions included virtually all areas of protection, from copyrights to patents and trademarks. The authorities feel that most of the Uruguay Round implementation measures are now in place, in an attempt, by their own assessment, to comply as closely as possible with developed-country requirements under the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). In addition, Korea is committed under a bilateral agreement with the EU to swift implementation of TRIPS provisions.
Sectoral Policy Developments
As the shift from light-industry to technology-intensive manufactures has continued, Korea's merchandise exports are increasingly focused on electrical and electronic products, motor vehicles, and telecommunications equipment. Uruguay Round tariff reductions are likely to further accelerate current export trends, while agricultural and light industrial products may gain on the import side. The United States remains Korea's single largest export market, although declining in importance, followed by Japan and the European Union.
A recent increase in trade deficits, in the wake of strong economic expansion, is attributable mainly to structural factors. Some of Korea's principal industries, including motor vehicles and electronics, rely heavily on imported components and capital goods. The deficits have proved politically sensitive, despite their relatively modest share of GDP, the underlying momentum of the manufacturing sector, and the strength of inward capital flows. In June 1996 the Government thus announced a number of measures to promote exports (e.g. increased ceilings for advance export payments, reduced import duties on certain raw inputs and expanded funding for export insurance).
Despite significant subsidization, support for Korean agriculture relies predominantly on border protection. Domestic prices may exceed their world market equivalents by several hundred per cent, peaking at over 700 per cent for soybeans in 1995; and there have been no signs of decline. Ongoing reforms have been driven mainly by external requirements, rather than efficiency considerations or consumer welfare.
Complying with WTO commitments to tariff quantitative import restrictions, tariff quotas were implemented in 1995 for 67 groups of agricultural products. In lieu of fixing tariffs for rice, Korea undertook to expand its minimum access commitment; rice imports will rise from 1 to 4 per cent of domestic consumption over a 10-year period. Tariff quota administration has typically been delegated to State-trading entities and associations previously responsible for price stabilization and other interventions, implying potential conflicts of interest.
Given its relatively narrow focus, Korea's export basket is somewhat vulnerable to product-specific market and policy developments; semi-conductors and automobiles alone represent nearly 25 per cent of total merchandise exports. Recent government initiatives were intended to promote the capital goods industry, where the bilateral deficits with Japan are highest; a Blueprint of May 1995 envisages improvements in export financing, formation of sales consortia, and new tax credits.
On grounds of public interest, Korea has continued to maintain licensing restrictions on new entrants in the oil refining, petroleum retailing and power generation industries. Apart from power generation, the restrictions are to be replaced by a simple registration system.
Strong emphasis is placed on the development of small and medium-sized enterprises (SMEs). Measures include tax breaks and reduced-interest loans for starting new businesses in rural areas. SMEs also receive by far the largest share of domestic funds for export financing; total SME-related funding in 1996 is estimated at W 1.5 trillion. While a range of activities, mainly in the local economy, have previously been reserved for SMEs, the reservations are being phased out progressively.
Korea's services sector currently accounts for about 60 per cent of GDP. Under the General Agreement on Trade in Services, Korea has assumed commitments in over 80 sectors, followed by additional offers in the extended negotiations on financial services, basic telecommunications and maritime transport. However, significant portions of the transport, communications, financial and business services industries are still restricted for foreign investors.
Telecommunications and financial services have been among the most dynamic segments in recent years, benefiting from demand trends, product and process innovation, and gradual policy reform. Liberalization moves in telecommunications have been partly synchronized with international developments, including current WTO negotiations. External opening of virtually all basic telecom services is scheduled for 1998, following domestic liberalization and deregulation.
Recent growth of the financial sector has relied in particular on savings institutions, insurance companies and investment houses. The Government seeks to promote segments which have been retarded by previous controls, such as the long-term bond market. A general limitation on foreign shareholdings, currently 15 per cent across all sectors, is to be reviewed with the possibility of complete elimination in 1998-99. Korea's accession to the OECD, which the authorities wish to achieve by autumn 1997, may help to promote further liberalization.
Trade Policies and Foreign Trading Partners
Korea's economic strength relies on industrial specialization, and the resulting economies of scale, under stable external trading conditions. Agriculture and significant services sectors have remained largely insulated from international competition, creating economic distortions at home and political frictions abroad. While the authorities are committed to continued investment and trade liberalization, their general approach has remained somewhat reactive in sensitive areas, responding predominantly to external policy developments. It is noteworthy, however, that the implementation of liberalization and deregulation programmes has been consistent, without significant slippages.
Recent statements indicate a gradual change in policy perception, implying both a more assertive role in international economic fora and a more dynamic approach to domestic reform. The strengthening of competition policy is an important signal, indicating confidence in the operation of market forces and their impact on resource allocation. Accelerated liberalization under WTO provisions would be the natural complement and, at the same time, match the political responsibilities ensuing from Korea's strong and still growing role in world trade.
TRADE POLICY REVIEW BODY
REPUBLIC OF KOREA
Report by the Government - Summary Extracts
Recent Developments of Korea's Trade Policy
The Korean Government has made rapid progress in lifting its regulations on economic activities, in particular, since 1993. This action was, of course, designed to push the economic system in a private-sector initiated and more market-oriented one. In order to lend support to this programme, the government established the Committee for the Deregulation of the Economic Administration Sector in March 1993, as well as the Special Measure Act for the Deregulation of Corporate Activities in June of that year. To date, it has taken all necessary steps to effectively implement these measures for the more than 1,700 subject items that were specified by the above-mentioned Committee. Deregulation of core areas such as finance, land and investment will be promoted continually within this framework.
The Korean Government has also accelerated its trade liberalization efforts. Korea's import liberalization ratio increased from 97.7 per cent in 1992 to 99.3 per cent in 1996. According to the schedule, the remaining restrictions will either be phased out or otherwise brought into conformity with international rules, that is, WTO provisions and the results of the Uruguay Round negotiation by the year 2001. At the same time, Korea has made major tariff reductions by voluntarily implementing the five-year Tariff Reduction Plan according to the pre-announced Schedule from 1989 to 1994. As a result, the average tariff rate was reduced from 18.1 per cent in 1988 to 7.9 per cent in 1994. Korea's tariffs on manufactured products averaged 6.2 per cent on a trade-weighted average in 1995. Furthermore, the Korean Government has continued to streamline and improve the import/export procedures. Among other things, the import-related procedures have been simplified to a significant extent. Other deregulation measures include the reduction of number of products subject to import approval, quality inspection, and so forth.
With regard to the foreign direct investment, an extensive package of liberalization measures is being implemented. As a result, Korea's foreign investment liberalization ratio increased from 83.0 per cent in 1992 to 97.4 per cent in 1996. By 2000, according to the schedule, this ratio will increase to 98.4 per cent and the number of restricted business line will be reduced to only 18 by that year. As a result, all sectors, except for a few closely related to the public interest, will be completely open. Aside from the liberalization programme, the Government has been making ongoing efforts toward improving the foreign direct investment environment in Korea, including a simplification of the investment-related procedure, the establishment of a one-stop service system as well as of the exclusive industrial parks for foreign investment, and etc.
In the financial sector, Korea is radically reforming the foreign exchange system by relaxing its foreign exchange controls and easing restrictions on portfolio investments and capital movement under the five-year Foreign Exchange System Reform Plan from 1995 to 1999. In December 1995, the Foreign Exchange Management Act was amended in order to better facilitate the liberalization measures in the future.
In tandem with these liberalization efforts, the Government has adopted various measures to enhance fair competition. Among other things, increased weight is being given to competition policy in Government decision making. Reflecting this new emphasis, the Korea Fair Trade Commission, formerly under the authority of the defunct Economic Planning Board, has been upgraded to an independent agency headed by a ministerial-level Chairman and with a larger staff. The Commission is expected to enhance its role as the 'watch-dog' agency that seeks to ensure fair competition in finance, industry, trade and other areas.
Korea's Future Policy Direction
Recognizing the fundamental changes in domestic and international conditions, Korea seeks to meet the challenges of the new era leading up to the 21st Century by gearing its external economic relations to strengthening the competition and cooperation. These two elements - competition and cooperation - will be kept in balance and harmonized within the context of the WTO-based multilateral trading system.
In line with this philosophy, the Korean Government will pursue four basic trade policy objectives-
- First, Korea will emphasize the long-term goal of balanced trade expansion based on the principle of free trade. As such, the government will promote both quantitative growth of trade and qualitative improvement in its structure.
- Second, Korea will make greater effort to promote industrial cooperation , as well as trade expansion.
-The third policy objective is to enhance Korea's contribution to strengthening the multilateral trading system.
- Korea's final major trade policy objective is to increase development cooperation and assistance to the less developed countries.
Footnote: The members, besides Korea, are: Australia, Brunei, Darussalam, Canada, Chile, China, Chinese Taipei, Hong Kong, Indonesia, Japan, Malaysia, Mexico, New Zealand, Papua New Guinea, the Philippines, Singapore, Thailand, and the United States.
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