Report by the Secretariat s16

RESTRICTED WORLD TRADE WT/TPR/S/137137 18 August 2004 ORGANIZATION (04-3435)

Trade Policy Review Body

TRADE POLICY REVIEW

Republic of Korea

Report by the Secretariat

This report, prepared for the fourth Trade Policy Review of the Republic of Korea, has been drawn up by the WTO Secretariat on its own responsibility. The Secretariat has, as required by the Agreement establishing the Trade Policy Review Mechanism (Annex 3 of the Marrakesh Agreement Establishing the World Trade Organization), sought clarification from the Government of the Republic of Korea on its trade policies and practices.

Any technical questions arising from this report may be addressed to Mr. Masahiro Hayafuji (tel: 022 739 5873) and Mr. Michael Daly (tel: 022 739 5077).

Document WT/TPR/G/137 contains the policy statement submitted by the Government of the Republic of Korea.

Note: This report is subject to restricted circulation and press embargo until the end of the meeting of the Trade Policy Review Body on the Republic of Korea. Republic of Korea WT/TPR/S/137 Page iii

CONTENTS

SUMMARY OBSERVATIONS vii

(1) MAIN ECONOMIC DEVELOPMENTS vii

(2) TRADE AND FOREIGN INVESTMENT REGIME viii

(3) TRADE POLICIES AND PRACTICES ix

(4) TRADE POLICIES BY SECTOR xi

(5) OUTLOOK xii

I. ECONOMIC ENVIRONMENT 1

(1) MAIN ECONOMIC DEVELOPMENTS 1

(2) MACROECONOMIC POLICIES 4 (i) Fiscal policy 4 (ii) Monetary and exchange rate policy 5 (iii) Structural policies 6

(3) DEVELOPMENTS IN MERCHANDISE TRADE 8 (i) Composition of trade 8 (ii) Direction of trade 10

(4) TRENDS AND PATTERNS IN FOREIGN INVESTMENT 10

(5) OUTLOOK 13

II. TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES 14

(1) OVERVIEW 14

(2) GENERAL CONSTITUTIONAL AND INSTITUTIONAL FRAMEWORK 15

(3) DEVELOPMENT AND ADMINISTRATION OF TRADE POLICY 16 (i) Main trade laws 16 (ii) Development and implementation of trade policy 17

(4) TRADE POLICY OBJECTIVES 19

(5) TRADE AGREEMENTS AND ARRANGEMENTS 21 (i) WTO 21 (ii) Regional agreements 24 (iii) Bilateral agreements 27 (iv) Unilateral and other trade preferences 29

(6) FOREIGN INVESTMENT REGIME 30 (i) Recent performance and developments 30 (ii) Legislative framework and procedures 30 (iii) Promotion and facilitation 33 (iv) Incentives 34 (v) International investment agreements 36

III. TRADE POLICIES AND PRACTICES BY MEASURE 38

(1) OVERVIEW 38

(2) MEASURES DIRECTLY AFFECTING IMPORTS 39 (i) Customs procedures 39 WT/TPR/S/137 Trade Policy Review Page iv

(ii) Customs valuation 41 Page

(iii) Tariffs 42 (iv) Tariff quotas 51 (v) Other levies and charges 52 (vi) Import licensing, quotas and prohibitions 53 (vii) State trading 54 (viii) Contingency measures 54 (ix) Standards and other technical requirements 57 (x) Government procurement 63

(3) MEASURES DIRECTLY AFFECTING EXPORTS 66 (i) Registration, documentation, and clearance 66 (ii) Export prohibitions, restrictions, and licensing 66 (iii) Export subsidies 66 (iv) Duty and tax concessions 67 (v) Export finance, guarantees, and insurance 67 (vi) Export promotion and marketing 67

(4) MEASURES AFFECTING PRODUCTION AND TRADE 68 (i) Taxation 68 (ii) Financial assistance 70 (iii) State-owned enterprises and privatization 73 (iv) Competition and consumer policy 74 (v) Intellectual property rights 77

IV. TRADE POLICIES BY SECTOR 82

(1) INTRODUCTION 82

(2) AGRICULTURE 83 (i) Overview 83 (ii) Policy developments 84 (iii) Selected activities 88

(3) FISHING 90

(4) POLICY DEVELOPMENTS IN THE ENERGY SECTOR 90 (i) Petroleum and petroleum products 91 (ii) Other energy 91

(5) POLICY DEVELOPMENTS IN THE MANUFACTURING SECTOR 94 (i) Textiles and clothing 95 (ii) Motor vehicles 95

(6) SERVICES 96 (i) Financial services 97 (ii) Communications 103 (iii) Transportation 108

REFERENCES 113

APPENDIX TABLES 117 Republic of Korea WT/TPR/S/137 Page v

CHARTS Page I. ECONOMIC ENVIRONMENT

I.1 Product composition of merchandise trade, 2000 and 2002 9 I.2 Merchandise trade by main origin and destination, 2000 and 2002 11 I.3 Inflows of foreign direct investment, 1999-03 12 I.4 Outflows of foreign direct investment by destination, 1999-03 13

III. TRADE POLICIES AND PRACTICES BY MEASURE

III.1 Average (unweighted) applied MFN tariff rates, by HS section, 2000 and 2004 44 III.2 Distribution of MFN tariff rates, 2000 and 2004 45 III.3 MFN tariff escalation by 2-digit ISIC industry, 2000 and 2004 47

TABLES

I. ECONOMIC ENVIRONMENT

I.1 Selected macroeconomic indicators, 2000-03 2 I.2 Basic economic and social indicators, 2000-03 4

II. TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES

II.1 Main trade-related laws 17 II.2 WTO notifications, 2000 to end-March 2004 22 II.3 FDI restricted sectors 32 II.4 Main FDI tax incentives 35

III.1 Structure of Korean MFN tariffs, 1996 to 2004 43 III.2 State trading entities and products 54 III.3 Outstanding anti-dumping measures, 2003 55 III.4 Progress in meeting original privatization plan of 1998 74

IV. TRADE POLICIES BY SECTOR

IV.1 Share of GDP by sector, 2000-03 83 IV.2 Agricultural support by commodity, 1986-88 and 2000-03 85 IV.3 Direct payments to agriculture, 1986-88 and 2001-03 87 IV.4 Use of public funds for financial sector restructuring, as at end-September 2003 98 IV.5 Substandard and below loans (SBLs) by selected type of financial institution, 2000 to end-September 2003 99 IV.6 Government and foreign ownership of commercial banks, end 2003 100 IV.7 Facilities-based telecommunications liberalization 104 IV.8 Foreign investment in major ports 110 WT/TPR/S/137 Trade Policy Review Page vi

APPENDIX TABLES Page

I. ECONOMIC ENVIRONMENT

AI.1 Exports by product groups, 1998-02 119 AI.2 Imports by product groups, 1998-02 120 AI.3 Exports by destination, 1998-02 121 AI.4 Imports by origin, 1998-02 122

II. TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES

AII.1 Involvement in the WTO dispute settlement mechanism, 2000 to end-March 2004 123

AIII.1 MFN tariff averages by HS chapter, 2000 and 2004 125 AIII.2 Non-ad valorem (alternate) MFN tariffs, 2004 130 AIII.3 MFN applied tariff escalation and tariff ranges, 2000 and 2004 132 AIII.4 Adjustment duties, 2004 134 AIII.5 Tariff quotas on agricultural products, 2004 135 AIII.6 Fill ratios for agricultural tariff rate quotas, 2003 140 AIII.7 Major changes to management of agricultural tariff rate quotas since 2000 142 AIII.8 Autonomous tariff quotas, 2004 144 AIII.9 Anti-dumping action, 2000-03 148 AIII.10 Quarantine prohibitions on imports of plants and plant products 150 AIII.11 Domestic agricultural support notified to the WTO, 2000 152 AIII.12 Sanctions and surcharges imposed by the KFTC, 1999-03 154

IV. TRADE POLICIES BY SECTOR

AIV.1 Number of financial institutions, 1997-03 156 AIV.2 Investment in port developments 157 Republic of Korea WT/TPR/S/137 Page vii

SUMMARY OBSERVATIONS growth was in the order of 3.1% in 2003, but based on continued export expansion is set to 1. Since its previous Trade Policy recover to over 5% in 2004. The decline in Review in 2000, Korea's impressive economic consumption in 2003 may also reflect a growth restored its GDP per capita slowdown in the growth of household (US$12,000) to pre-Asian financial crisis borrowing, which had previously grown levels by 2003. The current recovery since rapidly against the background of a boom in mid-2003 has been fuelled mainly by buoyant credit card use. The Korean economy started growth in industrial exports, which has recovering in late 2003, however, led mainly compensated for the weakness in domestic by external demand. Since the first quarter of demand, the main source of growth during the 2000, the unemployment rate in Korea has earlier part of the period under review. fallen, reaching 3.4% in the fourth quarter of 2003. Inflation has remained largely within 2. Despite the significant improvement in the official medium-term target range, with economic performance, Korea faces several consumer prices increasing by 2.7% in 2002 related economic challenges. In particular, and by 3.6% in 2003. there are downside risks to the sustainability of the present recovery. Sluggish domestic 4. The Government's fiscal stance was demand has resulted in possible over-reliance slightly expansionary in 2003; its medium- on exports as the main source of current term target for fiscal consolidation is to growth, thus making the economy vulnerable achieve fiscal balance (excluding social to a slowdown in export growth, particularly security) by 2007. The Bank of Korea has to China, which has been the major driving maintained a moderately expansionary force behind the recent rise in exports. monetary policy since 2002, reducing the Further structural reforms, including trade target overnight call rate in July 2003 to and investment liberalization, would 3.75% (a historic low), where it has remained. contribute to a robust recovery by strengthening competition and thereby 5. The Government has continued to boosting productivity, especially in agriculture undertake structural reforms, notably of the and services, where productivity is financial and corporate sectors. Its efforts to significantly lower than in manufacturing, by improve the domestic economic environment far the most open sector of the economy. and to develop a more competitive economy, Improved industrial relations, and further supported by the rules-based multilateral corporate and financial sector restructuring trading system and based on foreign would also contribute to a sustained recovery. investment, have been major factors in Confronted by these economic challenges, the restoring confidence. The Government has, by Government has renewed its reform efforts. and large, resisted protectionist pressures, maintaining outward-oriented non- (1) MAIN ECONOMIC DEVELOPMENTS agricultural trade and investment policies.

3. Following economic reforms in 6. With gross national saving exceeding response to the Asian financial crisis in 1997, gross domestic investment, the current the Korean economy grew in real terms by account balance has continued to record 3.8% and 7.0%, respectively, in 2001 and surpluses, albeit declining; international 2002. The recovery in 2002 was led by strong reserves have continued to accumulate, and domestic demand, notably private external liabilities have been reduced. consumption, which grew by 7.9%, and Korea's current account surplus in 2001 stood residential construction. As a consequence of at about US$8.2 billion (or 1.7% of GDP) the economic downturn in the early part of the reflecting a decline in the merchandise trade year, reflecting declines in both consumption surplus and an increase in the services deficit; and the growth of fixed investment, GDP in 2002, a reduced current account surplus WT/TPR/S/137 Trade Policy Review Page viii

(1.0% of GDP) reflected the recovery of as part of the Government's goal of achieving domestic demand, which led to an increase in a "fair and transparent market-driven imports of services. By the end of 2003, economy". Regulatory reform, driven by the Korea's foreign exchange reserves had risen Regulatory Reform Committee, remains a high to US$155 billion, a level equivalent to more priority; improved customs procedures were than ten months of merchandise imports. selected as a trade-related strategic goal in Following a peak in 1999, the level of total 2003. external liabilities gradually dropped until 2001; it rose again in 2002 and 2003, 10. Trade policy formulation and although the debt service ratio has been implementation is primarily the responsibility decreasing since 2002. of the Ministry of Foreign Affairs and Trade (MOFAT). The Ministry of Commerce, 7. Korea is a major global trader; it was Industry and Energy (MOCIE) regulates the world's eighth and seventh largest imports and exports. The principal trade merchandise importer and exporter, policy objective is to build a "free and open respectively (counting the EU as one) in 2002. economy" based on market principles to The share to GDP of imports of goods and promote structural reform and efficiency. services declined from 37.7% to 35.6% Raising exports is seen as a major growth between 2000 and 2002; the share to GDP of engine for meeting the political target of exports also declined, from 40.8% to 38.2%. doubling average per capita annual income to Korea's high dependence on industrial exports US$20,000 (by 2010). Korea's "global increased from 90% of total merchandise leadership" trade and investment strategy in exports in 2000 to 92% in 2002. key sectors, such as motor vehicles, steel, and Manufactured and mining products account IT industries, is aimed at enhancing the for most imports, about 63% and 27%, economy’s efficiency and achieving economic, respectively, in 2002, followed by agriculture including export-led, growth. Expanding (9%). The United States, Japan, and the EU high-technology industries and higher-value- have continued to be Korea's main trading added exports, and making Korea a Northeast partners, while China's share in Korea's Asia business and financial hub are high trade, especially exports, has been rising. priorities. Advisory councils independently advise ministries, including MOFAT, and 8. After peaking in 1999, foreign several government-funded institutions, investment inflows have declined; Korean including the Korean Institute for overseas investment also dropped against the International Economic Policy, conduct background of the recent slowdown in relevant government research and analysis. domestic recovery and increased external The outcome is greater transparency and uncertainty. consequent public scrutiny of trade policies.

(2) TRADE AND FOREIGN INVESTMENT 11. Korea participates actively in the REGIME multilateral trading system, especially to support stronger rules. It took part in the 9. Since its previous Review in 2000, extended GATS negotiations on financial Korea has continued to liberalize its trade and services and basic telecommunications, and is investment policies to promote structural a member and observer, respectively, of the reform and thereby improve the economy's plurilateral Agreements on Government efficiency. While there have been no Procurement and Trade in Civil Aircraft. It significant changes in the general legal or resolves trade disagreements using in institutional framework, nor in the way in particular the WTO dispute settlement system. which trade policy is formulated or implemented, trade and business laws have 12. A major departure from Korea's been strengthened and transparency improved previous trade policy has been its increasing Republic of Korea WT/TPR/S/137 Page ix willingness to negotiate regional free-trade was also introduced for foreign investors in agreements. The Asian financial crisis was an 2004. On the other hand, income tax holidays important factor in altering its past opposition are to be reduced from ten to seven years from to preferential trade agreements. Korea sees 2005, as incentives become available to more these agreements as a means of liberalizing its foreign investors. trade and investment regimes to revitalize the economy, and to secure foreign markets and (3) TRADE POLICIES AND PRACTICES promote regional integration in response to the trend of growing regionalism. Korea's 14. Since 2000, the general thrust of first such agreement, with Chile, effective Korea’s trade and investment policies has 1 April 2004, covered industrial and certain been greater liberalization, including the agricultural products comprehensively. further opening of its economy to international However, rice and a number of other trade and foreign investment. This has significant farm commodities were excluded, exerted additional competitive pressure on some permanently, thereby reducing the domestic producers to improve productivity, agreement’s liberalizing impact on and contributed to a more efficient allocation agriculture, where high protection persists. of Korea's resources. Nevertheless, some Korea is also negotiating free-trade protectionist measures continue to shield agreements with Singapore and Japan, due to domestic producers, especially farmers, from conclude in 2004 and by end-2005, foreign competition. respectively. It has also launched a joint study on an FTA with ASEAN, and agreed to 15. The tariff is Korea's main instrument conduct similar studies with Mexico and of trade policy. It is also a significant source EFTA. Korea's longer term goals include a of tax revenue. The Korean tariff remains a trilateral agreement with China and Japan, relatively complex instrument and as such and the formation of an East Asian Free Trade constitutes a potential distortion to Area (EAFTA) among "ASEAN+3" members. competition and an obstacle to the efficient allocation of resources. The applied MFN 13. Korea's relatively liberal foreign rate averaged 12.8% in 2004; falling slightly, direct investment (FDI) regime has benefited from 13.8% in 2000, owing to implementation the economy. Foreign firms play an of WTO commitments. No unilateral tariff increasingly important role and are seen as an cuts occurred during the period under review. essential source of export and employment High tariffs, averaging 52.2% in 2004 growth. All forms of FDI, including (compared to 54.8% in 2000), apply to establishment, stock acquisitions, mergers agriculture (WTO definition); out-of-quota (including hostile) and long-term loans, are tariffs, often exceeding 200%, apply to many allowed. Sectoral restrictions on FDI have other commodities. By contrast, industrial been relaxed. Only radio and television tariffs (WTO definition) averaged 6.7% in broadcasting, plus rice and barley growing, 2004 (7.5% in 2000). The multiplicity of tariff are wholly closed to FDI. Several, mainly rate bands (often involving small rate infrastructure, sectors are partially closed and differences and decimal points) adds to the have foreign equity limits. At the same time, tariff's complexity. Almost all tariffs are ad Korea provides tax and other incentives in an valorem, contributing significantly to tariff effort to attract FDI, including in advanced transparency. On the other hand, alternate technology activities, and in manufacturing, specific rates (mainly as out-of-quota duties) logistics, and tourism activities located in tend to conceal relatively high ad valorem various types of designated zones. Investment equivalents, which vary between the same incentives are being extended, including commodities (depending upon quality) and through the creation of three Free Economic over time, providing greatest protection when Zones (FEZs) in 2003 (Incheon, Busan, and world prices are lowest. These non-ad Gwangyang ports). A negotiable cash rebate valorem duties undermine tariff transparency, WT/TPR/S/137 Trade Policy Review Page x and predictability. Other measures (e.g. codes and related regulations in line with "autonomous" tariff quotas, usage tariffs, and international requirements. However, duty concessions) that selectively reduce significant differences, including in conformity tariffs on inputs, often according to end-use, testing, inspection, and acceptance of overseas also contribute to tariff complexity and results, seemingly remain, mainly for uncertainty. Although 91% of tariff rates are pharmaceuticals, cosmetics, and possibly bound, the predictability of the tariff is eroded food. Quarantine arrangements, especially by the considerable leeway to raise applied for fruit, and SPS requirements also appear tariffs provided by the substantial gap between relatively strict, despite Korea's continuing applied and bound MFN rates. Korea has efforts to comply with international norms. used this gap to apply higher "adjustment duties" as "flexible tariffs" on several 18. Anti-dumping provisions have products. protected a number of industries from competitive imports. General safeguard 16. Limited tariff preferences, restricted measures have been used only for garlic since generally to certain manufactured goods from the last Review. While sector-specific several developing countries, and all LDCs, safeguards on textiles have never been used, means that Korea applies MFN rates on those on agricultural products are used almost all (95%) imports. However, the frequently. relevance of MFN rates to Korea's trade may have begun to erode with the recent granting 19. A member of the WTO Government of widespread preferential duties to Chilean Procurement Agreement, Korea has largely imports, based on substantial and varied rules computerized its government procurement of origin. This trend looks set to continue, system, including operating the e-Procurement with other FTAs in the pipeline, such as those System since September 2002. This has with Singapore and Japan. In 2004, imports increased transparency and access by foreign from Chile were subject to average suppliers. However, certain procurement is (unweighted) tariffs of 6.9%, just over half of not covered by Korea's multilateral Korea's average MFN rate. Most reductions commitments; for example, procurement from occurred on industrial goods; the average SMEs where private (non-competitive) agricultural tariff (WTO definition) on imports tendering prevails. Although no domestic from Chile only fell to 49.8%, reflecting price preferences apply, government minimal liberalization at least to date of farm procurement is still seemingly used as an products under the Korea–Chile FTA. instrument of economic policy, including regional and industrial development. 17. Whereas tariff quotas for beef were Procurement has become more decentralized. replaced by a tariff (currently 40%) from January 2001, rice imports are still subject to 20. A range of financial measures are quantitative restriction. State-trading intended to support trade and production, enterprises and producer associations still including R&D investment. These include tax administer tariff quotas affecting many incentives and provision of credit and equity, agricultural imports, although greater including venture capital, largely channelled auctioning of import entitlements has through various government-operated funds introduced greater market discipline in quota and state-owned financial institutions. SMEs management. Import licensing and are major beneficiaries, especially those prohibitions apply mainly for health, safety or engaged in information technology activities. security reasons. Korea has harmonized many Direct export subsidies to reduce marketing voluntary standards and mandatory technical costs apply to several agricultural goods, and regulations with international norms to the sector also benefits from substantial improve transparency and reduce unnecessary domestic financial support under the WTO obstacles to trade, and continues revising food Green Box or the de minimis provisions. Republic of Korea WT/TPR/S/137 Page xi

21. Corporate restructuring is well double world levels in 2002, or three times advanced, helped by a strengthened corporate higher for rice). MFN tariffs averaged 52.2% governance framework, including on agricultural products in 2004 (more than improvements in bankruptcy laws as well as in seven times higher than on non-agricultural accounting and disclosure requirements. goods).

22. Although privatization is behind 25. Agricultural protection also schedule, there has been considerable undermines Korea's economic efficiency and progress, and the Government remains tends to penalize efficient exporters, including committed to further divestment, including to manufacturers. Although self-sufficiency foreign interests. Application and goals and other "non-trade" concerns enforcement of Korea's extensive competition underpin agricultural protection, the resulting policy has been strengthened, including extra- higher food prices are borne territorially, against cartels and other anti- disproportionately by poor consumers. The competitive behaviour. Conglomerates measures used are an economically inefficient ("chaebols") are subject to special regulation, and costly means of achieving food security, including ceilings on shareholdings in other and have contributed to surplus production of domestic firms. Certain collusion by SMEs key commodities, like rice and dairy products. remains exempt from competition legislation. 26. Manufacturing accounted for a 23. Korea has continued to strengthen substantial, albeit declining, 26.6% share of protection of intellectual property through Korea's GDP in 2003. The sector is heavily extensions of its comprehensive legislation in outward oriented, generating almost all of line with international developments, and Korea's merchandise exports. Information enhanced enforcement. It is currently and communications equipment (mobile acceding to the WIPO Copyright Treaty, phones, PC equipment, and semi-conductors) which was expected to take effect on comprise Korea's single largest export 24 June 2004. category.

(4) TRADE POLICIES BY SECTOR 27. Services accounted for 69.7% of GDP in 2003 (up from 65.3% in 2000). Korea is 24. Korea is a dualistic economy as continuing to de-regulate and privatize the key regards protection. Relatively low energy markets of natural gas and non- manufacturing protection, except for a few nuclear electricity, albeit slowly. State pockets of moderate protection (e.g. textiles, monopolies are being relaxed, and majority clothing, and footwear), contrasts with high state-owned enterprises (Korea Gas levels of protection and low market Corporation (KOGAS) and Korea Electric orientation in agriculture, the most distorted Power Corporation (KEPCO)) structurally sector. Korea's net agricultural support unbundled to facilitate further privatization exceeds the sector's GDP contribution (3.6% and market orientation, based on third-party in 2003), and is among the highest in the access and sectoral regulation to safeguard OECD. The average Producer Support competition. However, delays persist, and Estimate (PSE) for agriculture was 60% in final arrangements, including the regulators' 2003 (equivalent to additional farm incomes independence, remain unclear as plans of W 20.2 trillion), and was highest for rice change and many crucial details remain (74%) and oilseeds (89%). Most assistance obscure. Restrictive caps still apply to foreign involves market price support from trade equity (30% for KOGAS, 40% for KEPCO, barriers and price stabilization schemes. 30% for KEPCO's five subsidiary power These distort agricultural trade and generation companies, and 50% for power production, and force Korean consumers to distribution and transmission generally). pay much higher prices (on average well over Prices are regulated based on rate of return WT/TPR/S/137 Trade Policy Review Page xii

(on assets) criteria, which encourages Communications Commission); possibly inefficiency. Significant cross-subsidies inappropriate use of the fully distributed cost between users, although being reduced, also method (FDC) for setting access prices; and create inefficiencies. requiring approval instead of a price cap regime to regulate key prices[, including in 28. A major policy priority and the competitive mobile market. The achievement has been the rehabilitation of the Government is addressing these issues, and financial sector. It has been considerably plans, for example, to introduce a marginal restructured, especially in banking, where cost-based measure for access pricing (long policy reforms have been focused since the run average incremental cost, or LRAIC) in Asian financial crisis. Government-led 2004. Licensing restrictions for new entrants financial restructuring, involving public funds in basic telecommunications could perhaps be of W 161 trillion (one quarter of current GDP) further eased, including introduction of a class has re-capitalized institutions, mainly banks, licensing system. and cleaned up loan portfolios. Non- performing loans (NPLs) have fallen in the 30. Greater private sector involvement is sector, from 10.4% at end 2000 to 3.6% at end occurring in transport, especially in port 2003. However, while relatively low for banks development. The highly indebted and (under 3%), NPLs are much higher for non- inefficient state-owned rail monopoly, Korail, banks (averaging 6.4% at end 2003), is also being restructured and its services reflecting significant but uneven and unbundled to facilitate greater competition incomplete progress in non-bank and eventual privatization. Cabotage restructuring. Privatization is well advanced, restrictions apply to air and sea transport. especially of banks, where state ownership has fallen to about 20%, almost pre-crisis levels (5) OUTLOOK (compared with 60% at end 1998). Full foreign equity is allowed in banks, subject to 31. Renewed economic growth of 5.5% is special permission; it has risen, on average, forecast in 2004, while inflation and from under 10% at end-1998 to 30% at end- unemployment are both expected to fall to 3%. September 2003. The financial sector has The Government's economic priorities in 2004 returned to profitability, although recent are to boost investment and enhance job exposures to household credit on real estate opportunities. and credit cards have reduced it, and required the Financial Supervisory Commission to 32. Korea's future economic performance strengthen prudential measures further. will depend to a large extent on external Further restructuring of the non-bank sector, factors, such as the pace of recovery in the notably investment trust companies and credit world economy, and especially on China's card companies, would strengthen the continued expansion, which through rising financial sector. exports, has been a major source of Korea's recent economic growth. Of greatest 29. The telecommunications market has importance, however, to Korea's longer-term been de-regulated and fully privatized; the growth prospects will be its own efforts to State's remaining share in Korea Telecom implement structural and other economic (KT) was sold in May 2002. Foreign equity is reforms to curb the widening mis-match unrestricted in most services, but is capped at between domestic and export demand as a 49% for KT and other basic source of sustained growth. Sustained growth telecommunications providers. Weaknesses in is also likely to require further liberalization the regulatory regime have hampered effective or deregulation of trade and trade-related competition in basic telecommunications. policies, including in sensitive sectors, reform These weaknesses include: the apparent non- of labour markets (particularly industrial independence of the regulator (the Korea Republic of Korea WT/TPR/S/137 Page xiii relations), and further strengthening of the financial, especially non-bank, sector.