Op-Ed Commentary: Kangkyu Lee
Ongoing trade talks between China and South Korea have been making good progress according to a Chinese Ministry statement released following the 13th round of negotiations last week. Given the regional importance of bilateral economic relations between the two countries and the fast approaching Asia-Pacific Economic Cooporation forum summit in November, this should be cause for celebration for local ministers and foreign investors alike.
China’s commerce ministry is confident that a deal could be reached as soon as the end of this year. While formal talks on bilateral free trade have been ongoing since May 2012 and tainted by disagreements, there is optimism for the next round of negotiations; in July both countries pledged to reach agreements by the end of 2014 .
With a uniform and consolidated free trade agreement (FTA), both China and Korea would benefit significantly. The economic bounties include reduced tariffs and barriers in the domains of trading hi-tech goods and services, investment, and rules of origin for imports. These are all important factors to keep in mind as an economically aligned China and Korea would be a boon for investors. There is little risk in investing as relations between the two nations are stable. The most vivid piece of evidence demonstrating goodwill was displayed in the July summit where South Korean President Park Geun-hye and Chinese President Xi Jinping agreed to work together to achieve an agreement and emphasized the importance of bilateral free trade.
However, it should be noted that there are still disagreements impeding progress, in particular regarding the scaling and timing of tariff cuts on their respective ultra-sensitive goods – the agricultural and fishery industries for South Korea and the manufacturing industries (including the automobile, machinery and oil sectors) for China. The two nations want to waste no time in reaching a fruitful decision; however, to make this happen it appears there is no option but to establish longer-term tariffs of more than 20 years. This, of course, is a heavy commitment and conscientious ministers on both sides, for fear of being too hasty, are reluctant to publically voice their support.
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There are also significant implications for China should it open its manufacturing sector to South Korean imports. Notwithstanding the volatile nature of the Chinese domestic market, the Korean economy would be that much more reliant on Chinese exports. Furthermore, President Park would need to contemplate the effect of Chinese imports on Korea’s essential agricultural markets. In other words, she will prioritize shielding South Korea’ food producers.
Within the grand framework, these are the only two issues remaining impeding the completion of a wide-arching bilateral FTA. Despite the challenging rhetoric, both sides are optimistic in overcoming these hurdles. As the South Korean Ministry of Trade, Industry and Energy confidently asserted at the last round of negotiations, talks are slowly closing the gap between the two sides. Also chiming in, China’s Ministry of Commerce (MOF) stated that further in-depth exchange of views would allow for successful completion of the agreement in accordance with the proposed target.
To understand how important a bilateral FTA would be for these two nations, one need look no further than their past and current economic relationships. China is South Korea’s primary trading partner in terms of both imports and exports. According to Chinese Ministry of Commerce figures, total trade between the two reached over US$270 billion in 2013 with both Park Geun-Hye and Xi Jinping aiming for US$300 billion by 2015. Both countries depended heavily on each other in the early 1990s.
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Their respective economic goals were set with China’s inauguration into the WTO in 2001, where China pursued an all-out export approach. Korea funneled more money into China and as investment accrued, Korea’s commitments in China ended up overtaking the comparatively modest goals of Chinese companies in Korea. In other words, Korea’s trade patterns are now firmly embedded in the Chinese market. The economic and financial gravity of the FTA is likely to do more than simply facilitate trade and investment – they will perpetuate and augment a highly important economic partnership.
Both countries are keen to reach a deal and their current economic climates are particularly favorable. There is no clearer symbol of cooperation than that of presidents Park Geun-Hye and Xi Jinping declaring a successful conclusion to the agreements by the end of the year. Even with economic factors out of the equation, with South Korean culture continuing to create booms in Chinese investment (particularly in the entertainment industries), their relationship won’t be cooling any time soon.
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email asia@dezshira.com or visit www.dezshira.com.
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