Weekly Korea Economic Digest_ March 2014

Weekly Korea Economic Digest

8 - 14 March, 2014

Office of Commercial Affairs,

Korea, Vietnam to hold new round of FTA negotiations

South Korea and Vietnam will hold a fresh round of negotiations for a bilateral free trade agreement this week, the South Korean government said Tuesday.

The fourth round of FTA negotiations between the two countries will be held in Ho Chi Minh City from Wednesday to Friday, according to the Ministry of Trade, Industry and Energy.

“At the upcoming fourth round of negotiations, the two countries plan to hold in-depth discussions on various areas, such as products, service, investment, country of origin, customs and cooperation,” the ministry said in a press release.

Negotiations for the Korea-Vietnam FTA were launched in September 2012 with the latest round held in ’s port city of Busan in October 2013.

Vietnam is South Korea’s sixth-largest trading partner, purchasing $21.09 billion worth of products from South Korea last year, according to the ministry. South Korea is Vietnam’s 16th-largest trading partner, with its imports from Vietnam surging 25.4 percent on-year to $7.17 billion in 2013.

Vietnam is part of the 10-member Association of Southeast Asian Nations, with which South Korea signed an FTA in 2009. The Korea-ASEAN FTA went into effect in 2010.

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ROK, Canada conclude free trade deal

South Korea and Canada on Tuesday concluded their negotiations for a bilateral free trade agreement (FTA) that, once implemented, is expected to help significantly boost their bilateral trade.

The conclusion of negotiations came at the two nations' trade ministers' talks held in Seoul earlier in the day, according to the Ministry of Trade, Industry and Energy here.

"At the trade ministers' talks, the sides confirmed that an agreement has been reached for the Korea-Canada FTA after all remaining issues have been addressed," it said in a press release.

The FTA will undergo a series of legal review by each side before it is initialed as early as in June.

The negotiations for the Korea-Canada FTA resumed late last year after a five-year hiatus. They were first launched in July 2007.

Canada has signed FTAs with nine other countries, but Korea is the first Asian country to sign an FTA with the North American nation.

"The FTA with Canada, which has not signed an FTA with any major countries since the North American Free Trade Agreement, will greatly help our companies secure a competitive edge in the Canadian market as the country will also be the first Asian country to sign an FTA with Canada," the ministry said in a press release.

Once the agreement is initialed, it can be officially signed after translations and additional legal reviews, according to Deputy Trade Minister Choi Kyong-lim.

Choi said the automobile industries will likely to be the biggest winners of the newly concluded South Korea-Canada FTA, while the sensitive agricultural market will get a needed cushion from the pact.

Under the proposed FTA, South Korea will completely remove its 8 percent import tariffs on all automobiles and auto parts from Canada as soon as the bilateral trade pact goes into effect.

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Canada will reduce its current 6.1 percent import tariffs on South Korean automobiles and parts to about 4 percent within 24 months of the implementation.

The two-year gap between the two countries stems largely from an existing bilateral trade imbalance, the ministry official said.

In 2013, South Korea shipped over 130,000 vehicles worth some US$2.23 billion to Canada while importing approximately $92 million worth of vehicles and parts.

"The FTA is expected to help South Korean firms secure an edge over their Japanese and European competitors in the Canadian market, as it will completely remove Canada's import tariffs on automobiles that currently account for more than 40 percent of South Korea's total exports to Canada within 24 months following its implementation," Choi told reporters.

Canada is already the world's fifth-largest market for South Korean automakers, also importing about 90,000 cars per year from South Korean manufacturers in the United States, according to the trade ministry.

The textile industry is also expected to benefit from the bilateral deal.

Under the FTA, Canada will remove most of its import tariffs on clothing and other textile products, which currently stand at a maximum of 18 percent, within two years of the FTA implementation.

Other products will become tariff-free immediately, such as South Korean washing machines that will lose their 8 percent import duties in Canada.

"It is a comprehensive FTA that addresses all aspects of a market from products, customs, service, investment, communications and finance to e-trade, government procurement, intellectual properties, competition, labor and environment," the ministry said.

The South Korea-Canada FTA is also a high-level deal that completely removes the two countries' import tariffs on 97.5 percent of products traded between them within 10 years from the day of implementation, it said.

Yet, the agreement, as it is currently written, better protects South Korea's agriculture industry than the country's previous FTAs with other major economies, including the U.S., government officials said.

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Under the latest FTA, 18.8 percent of all farm products, or 282 items, will be either exempt from market opening or be given a grace period of more than 10 years. The figure compares with 12.3 percent under the Korea-U.S. FTA, implemented in March 2012, and 14.7 percent under the FTA with the European Union, which went into effect in July 2011.

Of the 282 items, 211 products, including rice, will be permanently exempt from market liberalization, according to the ministry. Rice is often considered one of the most sensitive items in South Korea's FTA negotiations.

South Korea will gradually remove its tariffs on beef imports -- another sensitive item for local farmers -- from Canada over a span of 15 years.

Canadian beef accounted for less than 1 percent of South Korea's total imports in 2013, and Choi said the FTA will be an opportunity for Canadian exporters to expand their combined market share here.

"Canada is a member of Group of Eight nations and also the world's 11th-largest economy. But bilateral trade volume between South Korea and Canada currently stands at about $10 billion," he said.

"The FTA will be a chance for the two countries to significantly expand their bilateral trade that already has great potential."

SKorea-Canada FTA Likely to Have Most Impact on Pork

Farmers

As the Korea-Canada free trade agreement is concluded after almost nine years of negotiations, keen attention is now paid to whether and how much the agreement would have negative effect on agriculture and fishery sectors. In particular, it is forecast that pork farmers, rather than cattle ranchers, will bear the brunt of the impact.

According to Korea Agro-Fisheries Trade Corp. on March 11, the total 2012 volume of imports from Canada in agricultural, forestry, and fishery areas was US$1,182 million. This is about 40 percent of Australian primary goods imports in the same year. As for beef imports, the figure for last year was only $10.9 million although this is the segment that attracted most media attention before the agreement's conclusion. The countries

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from which Korea imported beef last year was Australia (55.6%), the United States (34.7%), New Zealand (8.8%), Canada (0.6%), Chile, Uruguay, and Mexico.

In 2013, the top import items from Canada were pulp ($291 million) and coniferous lumber ($151 million), both of which are already imported duty-free. When it comes to wheat, the No. 3 import item, whose 2013 Canada-originated import volume was $84 million, there is little domestic production to speak of.

Unlike the beef industry which is likely to be harmed little from Canadian competition, domestic pork producers have much to be worried about. The import volume of pork from Canada last year was 43,398 tons (valued at $79.76 million), the second highest after the United States (112,000 tons), but the fourth highest in value terms after the United States ($910 million), Germany ($313 million), and Chile ($120 million). To minimize the harm, the government will lower the duties on pork imports gradually for the next 13 years, instead of repealing the duties immediatel

S. Korea unveils measures to boost regional economy

South Korea said Wednesday that it will ease regulations on the use of areas freed from "green belt" development restrictions, a move intended to bolster regional economies through brisk investment.

The government also designated dozens of regional development blocks and said it will provide support for business projects led by regional governments so that they can boost their growth engines.

The moves were decided at a trade-investment promotion committee chaired by President Park Geun-hye to spur development of regional economy.

"So far, the central government has unilaterally pushed for one-size-fits-all regional (development) measures, which led to low level of satisfaction and were limited in creating jobs and inducing corporate investment," the government said.

"We will now push for a change in the paradigm under which local governments take the lead in drawing up their own development strategies and programs, while the central government provides all-out support for them," it added.

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The government designates certain areas as green belts in order to preserve forests and prevent reckless development by restricting construction of homes, factories and other commercial facilities. Even after the restrictions are lifted, the areas can only be used for building homes.

The government now plans to ease such restrictions to allow the construction of commercial facilities and factories "depending on circumstances facing each area."

About 8.5 trillion won ($7.9 billion) is expected to be invested over the next four years in 17 related development projects in such areas sized at 12.4 square kilometers, the government said.

In a related move, the government plans to ease regulations on development of mountain areas in a way that would make it easy to construct leisure and new renewable energy-related facilities. The plan also allows the construction of "peripheral" facilities to hospitals such as parking lots in preserved mountain areas.

The government said that it designated a total of 56 regional development blocks and will push for development projects that local governments have proposed in order to nurture their own growth engines.

Since January 2013, the government has received a total of 2,146 projects from local governments. It will finalize the list of projects it will support by the end of July.

In order to induce corporate investment in less-developed regions outside Seoul, the government said it will expand tax benefits to companies moving their headquarters or offices to provincial areas.

The government expects that these measures would induce about 14 trillion won worth of investment in provinces.

The regional development measures come amid growing concerns that provincial areas are suffering a steady decline in populations and a lack of job opportunities, undercutting the overall economic vitality there.

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Korea-US FTA Causing Trade Imbalance Concerns After 2

Years

South Korean Rep. Chung Ui-hwa, U.S. Senator Johnny Isakson and others agreed the FTA has contributed to advancing the quality of bilateral relations.

[Sound bite: Rep. Chung Ui-hwa]

"I know that as the agreement continues to generate effects, our countries will continue to become close both economically and culturally."

[Sound bite: Senator Johnny Isakson]

"South Korea has ascended to the six largest trade partner of the USA. We have a strong bond."

South Korean Rep. Choo Mi-ae called for presenting a new global trade standard based on what was achieved through the bilateral FTA.

[Sound bite: Rep. Choo Mi-ae]

"When the U.S. is viewing Korea, you shouldn't argue about minute details in the FTA and calculate gains and losses at hand. The focus should be placed on how to make China catch up with the global standard."

She suggested Seoul and Washington should look forward and find a clue to resolve concerns of intellectual property rights in China. She reminded that Seoul is preparing for a free trade agreement with Beijing.

Some U.S. firms at the meeting complained the U.S. deficit grew sharply under the trade deal with Korea. And data analyzed by the Korean Embassy in Washington shows sharp growth in Korea's trade surplus with the U.S. under the FTA.

The Institute for International Trade says South Korean exports to the U.S. reached 62 billion dollars last year, up six percent from 2012. Such exports had surged four-point- one percent from 2011 to 58-and-a-half billion dollars in 2012 when the FTA took effect. Imports from the U.S. grew minus four-point-two percent last year compared to minus

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two-point-eight percent in 2012. This was due to a drop in imports of semiconductors, airplanes, grain and feed.

Regarding the dispute, economic experts say Washington must not ignore the fact that the Korea FTA plays a positive role in the U.S. expanding trade in Asia.

Seoul's growing trade surplus with the U.S. is expected to intensify U.S. trade pressure on Korea.

Korea lags far behind in reform drive

The government recently unveiled a three-year plan to improve the economy. However, the blueprint seems late considering other developed countries have been restructuring their economies for quite some time.

According to the Ministry of Strategy and Finance, major economies like the United States, European Union, Japan and China have been actively seeking structural reforms since the global financial crisis of 2008.

“Many countries have been pondering how to recover growth potential. If we miss the chance, the gap may widen between us and those countries,” Strategy and Finance Minister Hyun Oh-seok said at a recent media briefing.

These countries have been working to overhaul their economic structures to address the fundamental question of sustainable growth.

“As growth faltered after the global financial crisis, many countries felt they should attract foreign direct investment to boost the economy,” said Byun Yang-gyu, director of the macroeconomic policy research division at the Korea Economic Research Institute.

“As such, lowering corporate taxes and attracting foreign businesses have become a global trend,” he added.

Experts warn that Korea shouldn’t fall behind in global restructuring.

“For instance, governments around the world are competing to establish special economic zones. Chinese President Xi Jinping recently said the country should expand the free trade zone in Shanghai,” Byun said.

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“What would it be like for competitors, say, if Shanghai becomes the logistics hub of East Asia instead of Singapore? Japan is establishing special economic zones, and Korea also plans to create one in Saemangeum. Every country is desperate not to fall behind.”

Boosting the domestic market

The Korea Institute for International Economic Policy (KIEP) noted that major economies around the world are focusing on boosting the domestic market and creating jobs trough structural reforms.

The United States is continuing to revive the housing market, which will promote consumption. It provides tax benefits to those purchasing their first homes, similar to a measure Korea adopted.

It is also considering lowering corporate taxes and giving tax incentives to U.S. companies returning to the homeland.

“The United States is pushing to lower the corporate tax rate from 35 to 28 percent. To foster a business friendly environment, it is heading toward a ‘broad base, low tax rate,’ strategy,” KIEP said in a report. Partly thanks to such efforts, the U.S. economy has been at the forefront of the global recovery.

EU countries are also easing regulations to promote corporate investment. France, for instance, is lessening the corporate tax burden, including giving back employment- related taxes.

Japan is continuing to promote investment by cutting the tax burden of businesses. It gives the companies tax incentives for facility investment and R&D. China is also seeking to improve the industrial structure, which will increase investment and production. China is putting top priority on nurturing the services sector.

Another key phrase in the structural reform of the developed economies is “job creation.” The United States is focusing on creating jobs in the manufacturing sector by bolstering the competitiveness of 11 core technologies.

Among EU countries, Germany is creating more jobs for women, and France is seeking to expand employment of youth and the elderly through job training and subsidies. Japan is also using government funds to create jobs, provide training and improve nurseries and day care centers to help working moms.

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Changing growth paradigm

The major economies are seeking structural reforms and changing the paradigm of growth.

The United States is putting top priority on strengthening the middle class. The recent health care reform program, better known as Obamacare, and expansion of the college funding program are among other measures it has implemented to lessen social inequality.

EU countries, meanwhile, are softening regulations to hone their competitive edge. France is preparing a tax reform to enhance growth and create jobs.

Meanwhile, the EU as a whole is reforming governance to lessen macroeconomic imbalances among member countries and recover public trust in the financial market.

Japan is establishing special strategic zones in Tokyo, Osaka and Nagoya to attract foreign direct investment through deregulation.

It is also establishing a control tower to nurture the health care and energy sectors, which it has designated as future growth engines, on top of reforming the agricultural sector.

China, which has enjoyed high growth led by exports and investments, is now seeking to achieve mid-level growth of around 7 percent, led by the domestic economy.

It has shifted its policy focus from quantitative growth to qualitative expansion. It is also opening up the economy, showing strong willingness to participate in global free trade agreement networks and planning the gradual opening of other sectors, including education, culture and health care.

China also plans to raise the ratio of R&D to GDP from 1.5 percent to 2.2 percent to advance the economic structure.

Korea needs master plan

Experts agree that while Korea’s three-year economic plan is in the right direction, it has hurdles to overcome. “The plan is meaningful, but it lacks a master plan on the economy as a whole,” Byun said. He pointed out that the government will be amending the plan as a result.

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He also explained that previous administrations also had their own economic plans, such as ones that aimed to improve the services sector, but they haven’t achieved much.

“There are many interest groups to consider in executing the plan, such as those opposing the entry of foreign hospitals or schools in the country,” he said.

Young Soo-gil, chief of the Sustainable Development Solutions Network Korea, said Korea should be more rigorous in executing reform plans. “As the government is reluctant to overcome objections, it ends up making only superficial changes.”

One of the sectors that needs innovation is services. In its “Going for Growth” report, the OECD noted that Korea should boost competition in services and promote labor force participation of women.

“Japan’s limitation was that its domestic market was neither too big nor too small. Many businesses were somewhat satisfied with the domestic market. Korea, meanwhile, had a domestic market that was too small, which prompted the country to become a strong exporter,” Byun said.

“Now that the manufacturing sector has lost competitiveness in wages, we should start nurturing services. I think we have an advantage as we are neighbors with China, the biggest market in the world,” he said.

Import prices dip for 18th month in Feb.

The nation’s import prices fell for the 18th straight month in February as oil prices declined amid the local currency's gain per the dollar, the central bank said Wednesday.

In local currency terms, the country's import prices declined 4.8 percent in February from a year earlier, compared with a 3 percent on-year fall in January, according to the Bank of Korea (BOK).

It marked the 18th straight month of on-year declines in import prices since September 2012 when such prices dipped 2.2 percent on-year.

Prices of Dubai crude, South Korea's benchmark, dropped 5.5 percent in February from a

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year earlier, according to the central bank.

The local currency gained 1.41 percent against the U.S. dollar in February compared with the previous year.

The import prices gained 0.8 percent last month from the previous month, a turnaround from a 0.3 percent on-year decline in January.

The data came as the BOK is slated to hold its monthly rate-setting meeting on Thursday. The central bank is widely expected to freeze its key interest rate at 2.5 percent for the 10th straight month.

In local currency terms, South Korea's export prices fell 3.6 percent on-year last month after dropping 1.9 percent in January.

Export prices rose 0.7 percent in February from the previous month, compared with a 0.1 percent on-month gain in January, the central bank said.

Fashion brands look overseas

Korea-born fashion brands are making a foray into overseas markets in search of a breakthrough amid the sluggish domestic fashion market.

Handsome, a fashion company owned by Hyundai Department Store, recently opened a branch of its fashion boutique, Tom Greyhound Downstairs, on Rue de Saintonge in Paris. The branch is Handsome’s first international outpost and part of the company’s global expansion strategy.

“The fashion boutique will be used as a showroom for our fashion brands in the European market,” said Vice President Jeff Jun of Handsome’s overseas fashion division.

“We expect its performance may help expand our business to other countries such as the United States.”

The fashion boutique, launched in May 2008, will sell other fashion brands such as Alexander Wang, Jil Sander and MM6 by Maison Martin Margiela to diversify its portfolio and attract more customers.

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SK Networks, an SK Group affiliate focusing on the hotel and fashion businesses, said it partnered with Taiwanese apparel distribution giant Munsin Garment Corp. on Feb. 26 in a bid to promote its women’s fashion brand O’2nd to other East Asian countries.

With the assistance of the Taiwanese distributor, O’2nd will open a branch in the second half of this year in Taiwanese department stores, including Pacific Sogo, the company added.

“We are putting much effort to securing the distribution channels for expansion markets rather than going overseas alone,” SK Networks official Jang Se-chan said.

The brand has already tapped into 18 countries and aims to increase its presence in Asian markets in the long run.

Samsung , an affiliate of Group, is also trying to capture Chinese customers. It plans to open a large store for its fast fashion brand 8ight Seconds in Beijing and Shanghai at the end of next year, a source who declined to be named said.

The fashion brand aims to earn some 10 trillion won in revenue by 2020 as part of its effort to become a global brand.

Since 2005, Samsung Everland has been operating more than 160 outlets of its casual fashion brand Bean Pole in Shanghai and Beijing, as well as some 30 outlets of its men’s casual fashion brand MVIO in Korea. It plans to increase the number of MVIO outlets to 50 this year.

E-Land Group, a fashion and food retail conglomerate, expanded its fast fashion brand SPAO to Japan and China in July and December last year, respectively. From the beginning, SPAO plans to surpass Japanese fast fashion brand Uniqlo. E-Land also plans to introduce the brand to Europe, in which they have already acquired fashion firms.

“Only large fashion companies can expand their business to overseas markets because doing so requires a significant amount of capital to secure distribution channels overseas,” a market insider, asking for anonymity, said.

“The expansion of brands overseas is an investment to capture future customers at young ages amid the competitive and sluggish Korean fashion market. China will be their first target because it is close to Korea and rapidly growing. Expanding to China can help

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companies secure capital for expansion to the European or U.S. markets,” the market insider added.

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