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FTA Insights from Korea

Be Prepared, Be Competitive, Be Inclusive


Be Prepared, Be Competitive, Be Inclusive


South Korea has a strong infrastructure in place for negotiating and carrying out FTAs, but it wasn't always that way. The lessons gained over the past 20 years offer plenty for Taiwan to think about.



Be Prepared, Be Competitive, Be Inclusive

By Shu-Ren Koo, Yi-Shan Chen
From CommonWealth Magazine (vol. 546 )

At the beginning of April 2014, Seoul was shrouded in haze blown in from China, but the atmosphere inside Cheong Wa Dae, the presidential office, was positively sunny.

South Korean trade minister Yoon Sang-jick and his Australian counterpart Andrew Robb were signing a bilateral free trade agreement (FTA), with South Korean president Park Geun-hye and Australian prime minister Tony Abbott looking on.

At the same time as students were still occupying Taiwan's parliament in a protest against a trade deal with China, Seoul was signing its 11th free trade pact. Just a month earlier, South Korea had concluded negotiations on an FTA with Canada, another conquest in the country's international trade empire that only further distanced it from Taiwan.

Unlike in many countries where free trade deals can be politically contentious, the pacts with Canada and Australia sparked little discussion in South Korea. That's mainly because "negotiating FTAs with other countries is no longer the government's top priority," says Bark Tae-ho, a professor of international trade at Seoul National University who served as the country's trade minister from December 2011 to March 2013.

It's not that the Korean government no longer considers FTAs of major importance; it's just that the country's FTA strategy has changed since Park took office last year. The emphasis has gone from quickly closing deals to working at a steady pace and taking time to digest the results; from expanding the country's reach overseas to stressing domestic economic benefits; and from gaining benefits that almost exclusively went to the big conglomerates to taking into account the interests of small and medium-sized enterprises (SMEs). The focus on trade negotiations has been diverted to strengthening the bond between foreign trade and industrial development, and the government's once dominant position on trade policy is being opened to greater public participation.

The purpose of these adjustments is "to deal with the controversies left behind over the past 10 years," Bark says.

When Taiwan assesses South Korea's FTA success, it often points to Seoul's FTA strategy featuring clear goals and a complete package of contingency measures. The reality, however, is that the country's elaborate plan was not in place from the beginning.

South Korea's pursuit of free trade pacts has spanned 20 years and four presidents, constantly involving the subtle power struggles of international politics. The process had to be learned through trial and error and by making constant adjustments and accumulating experience.

That growth has come in three stages, a "growing" stage from 1998 to 2004, the more aggressive push from 2004 to 2012, and a new period of adjustment that began in 2013.

Growing Stage (1998-2004): Starting Small

South Korea's first FTA was signed with Chile in 2003, but its origins trace back to the early 1990s when the world was suddenly caught up in a free trade wave.

At the time, Koreans believed that if their trade-dependent country did not jump on the free trade bandwagon, it would lose its competitiveness.

But having no FTA experience, South Korea decided to use negotiations with a relatively small country as a training ground, and it settled on Chile, a country with whom it had only limited bilateral trade but whose economy was highly complementary to Korea's.

The most important factor in choosing Chile was that it "had signed five to six FTAs at that time, and so Korea could learn from their experience," explains Kim June-dong, executive director of the Department of International Trade at the Korea Institute for International Economic Policy (KIEP) .

After concluding the pact with Chile, South Korea would go on to sign FTAs with Singapore and the European Free Trade Association (consisting of Switzerland, Norway, Iceland and Liechtenstein) over the following two years, "warm-ups" for future trade negotiations with the Association of Southeast Asian Nations (ASEAN) and the European Union.

South Korea also started early in developing the needed infrastructure to support free trade negotiations.

As early as 1989, the South Korean government established KIEP, which would become the country's most important international economic policy think tank, cultivating talent and building international economic analysis capabilities.

Today, there are 23 think tanks under the prime minister's office that not only offer policy advice but also serve as a major talent pool for government posts. Many researchers and experts have led government ministries. Bark Tae-ho, who got his start at KIEP, is a typical example.

In addition to the think tanks, President Kim Young-sam in 1997 convinced big conglomerates to fund international affairs departments at nine elite universities to groom people who could serve the country in the international arena.

The Big Push (2004-2012): Taking Major Strides Forward

Taiwan may think it is lagging 10 years behind South Korea in the free trade race, but to Seoul, "when Korea signed the first FTA in 2003, we were already 10 years behind the international trend," says Jung Hong-sang, director-general of the Bureau for International Economic Cooperation under the Ministry of Strategy and Finance.

According to Bark, South Korea believed that if they had the same FTA target countries as their competitors had, it was important to sign FTAs as quickly as possible, or face the prospects of falling further behind. The later agreements were reached, the fewer the benefits, because rivals will have already taken advantage of them.

With that in mind, South Korea launched the country's aggressive free trade campaign with an "FTA Roadmap" in 2003, identifying Japan, ASEAN, the United States and the European Union as the major targets of the initiative, and engaging in negotiations with all of them simultaneously.

To make sure that the government was in position to accelerate the promotion of FTAs, President Kim Dae-jung decided soon after he took office in 1998 to merge the foreign affairs ministry and the international trade office into a "Ministry of Foreign Affairs and Trade."

By the time Lee Myung-bak assumed the presidency in early 2008, South Korea's free trade team had grown in size to nearly 200 people, an indicator that FTAs were seen as the country's most important foreign policy and needed to be expedited.

"At the time, government posters promoting FTAs were everywhere on the street, and FTA was the most popular issue on the TV talk shows," recalls Choe Sang-hun, Seoul correspondent for the International Herald Tribune.

During this stage, President Roh Moo-hyun (2003-2008) pushed hard for a free trade pact with the United States, which became a key strategic pillar of South Korea's emergence on the international political and economic stage.

"Korea's FTA achievement has to be attributed to President Roh Moo-hyun," says Inkyo Cheong, director of the FTA Research Center at Inha University who is known in Korean academic circles as the godfather of FTA research.

In the plan espoused in the 2003 FTA Roadmap, Japan was supposed to be the first FTA target, but the talks ran aground in 2004 and were postponed indefinitely after Tokyo refused to budge on agricultural issues.

President Roh decided to turn his attention to talks with Washington, with two key strategic considerations in mind: to use the U.S. market to balance Korea's growing dependence on China and transform the U.S.-dominated alliance between Washington and Seoul into more equitable relations through an FTA.

One Korean scholar recalls that the United States had previously declined to enter into trade talks with South Korea on the grounds that Seoul "wasn't ready." But after Roh, who was perceived as being anti-American, took office, Washington wanted to win over South Korea and changed its attitude on the idea.

The two countries announced in 2005 that FTA negotiations would soon begin, creating a domino effect that led to South Korea's signing of a free trade pact with Europe in 2010 and the launch of FTA talks with China in 2012 after the FTA with the United States finally took effect.

"The Korea-U.S. FTA attracted the world's attention, so it was strategically significant to Korea," says Seoul National University's Bark Tae-ho.

But just as Taiwan's contentious relations with China cast a shadow over the Economic Cooperative Framework Agreement (ECFA) the two countries signed in 2010, the historically complex and often strained relations between the U.S. and South Korea sparked intense controversy, which is why the deal did not take effect until 2012, six years after talks began.

Adjustment Period (2013 to today): A New Strategy

The spirited resistance to the U.S.-ROK free trade pact led President Park, soon after she took office, to conduct a full review of the country's FTA policy over the previous 10 years and the disputes it triggered. It focused on three basic complaints – the pacts only favor large conglomerates, they do not benefit the domestic economy, and the process has lacked transparency – issues that have also fueled doubts about free trade among many Taiwanese.

In July 2013, Park's government issued a "New Trade Policy Roadmap" in which it pledged to change the core approach to foreign trade from "trade negotiations" to "strengthening the links between trade and industry." It also hoped to use trade to create more jobs and provide greater access to overseas markets for SMEs.

"Now we emphasize more stakeholders' participation, negotiation transparency, and increased FTA utilization, benefiting both large and small companies," says KIEP's Kim. "But it doesn't mean slow down, just more scrutiny."

As part of the new trade FTA policy, the president restructured central government agencies, splitting international trade agencies away from the Ministry of Foreign Affairs and Trade and merging them with the Knowledge Economy Ministry into a new body called the Ministry of Trade, Industry and Energy. The reorganization signaled that South Korea, having already completed its most important phase of FTA signings, is now focusing on strengthening its industrial competitiveness and international trade marketing.

At the same time, Park has also restored a position her predecessor abolished – deputy prime minister for economic affairs – to be held concurrently by the minister of strategy and finance. The current holder of the position, Hyun Oh-seok, holds two ministerial meetings on international economic affairs a month that serve as the country's highest decision-making body on foreign economic issues. Hyun is also responsible for coordinating FTA policy among different agencies and making sure the policy's new approaches are being implemented.

New Approach No. 1: Helping SMEs

The most important policy of the new FTA roadmap is to build a mechanism that enables SMEs to truly benefit from the country's free trade deals. The mechanism was the brainchild of the FTA Research Center's Cheong, who first raised the idea in the 2003 FTA Roadmap. Over the past two to three years, Cheong has spent the majority of his time heading a government research project on increasing SMEs' utilization of free trade pacts.

Cheong explains that of the nine FTAs signed and ratified by South Korea over the past 10 years, some, like the one with Chile, have utilization rates of over 90 percent, with large conglomerates still the primary beneficiaries.

Another type of agreement, typified by South Korea's pact with ASEAN, has a utilization rate of only 20-30 percent, Cheong says.

Both types of accords have drawn sharp criticism from anti-FTA groups, which Cheong blames on the government's practice of relying exclusively on holding seminars or posting information on official websites to promote its FTA policy.

"That was nothing but policy advertisement. It didn't really help companies," he says.

Making use of the country's FTAs requires mastering several technical and legal details. That has made even the simple step of applying for certificates of origin too much of a burden for SMEs, but not for conglomerates, which have the resources and legal and trade expertise to work through the technicalities.

To help SMEs overcome these obstacles, the government needed to set up a system offering them information and consulting services and provide examples of companies successfully making use of FTA provisions.

Based on Cheong's recommendations, South Korea established an FTA Information and Business Support Center under the Korea Foreign Trade Association (KFTA) in 2012 that acts as a consultant to small companies seeking help on FTA issues.

The center is headed by Kim Young-hwan, who was transferred from the Ministry of Trade, Industry & Energy and has 25 years of experience in working on FTAs. Aside from the center's Seoul headquarters, which has a staff of 35, it has 16 other offices around the country, each with a staff of 5-10 people.

Hanging on the wall at the center's headquarters are several posters of a smartphone with an orange question mark on the screen highlighting the numbers 1, 3, 8, and 0 on a numerical keyboard. The poster advertises an FTA 1380 Call Center established in June 2013.

Companies with any doubts about FTAs can call the hotline and get in touch with the FTA support center. If necessary, the center will even send highly experienced customs brokers to the companies' offices to offer advice and help them understand and make use of FTAs.

"We have been investing so much effort and resources to sign those FTAs, so we really don't want to waste them. That is why we established this center," says the center's director-general Kim Young-hwan. "Completing FTA negotiations is one thing. Utilizing it is another thing."

In 2013, the center took more than 10,000 phone calls, arranged 1,400 on-site consulting visits, and held FTA training sessions for 800 CEOs.

These many initiatives have helped South Korea's FTA's utilization rate increase from about 20 percent five years ago to 70 percent today, according to KFTA statistics.

New Approach No. 2: Improving FTA Legislative Procedures

The same year it set up the FTA Information and Business Support Center, the South Korean government also subsidized the creation of graduate-level FTA business and strategy programs at seven universities to cultivate FTA talent.

Another key priority was legislating FTA procedures. In 2012 South Korea's National Assembly passed the Procedures for Concluding Agreements for Fair Trade, which formed the legal basis for negotiating and signing future FTAs. It enhanced the transparency of the FTA process and clearly stipulated the level of participation by the National Assembly and the public in the process.

"The parliament's role is to adjust the speed at which the government is proceeding," says Cho Kyoung-tae, a lawmaker with the opposition United New Democratic Party, during an interview with CommonWealth Magazine at his parliamentary office in Seoul's Yeouido district along the Han River.

Cho believes that if a majority of people support an FTA, the government will not have any trouble pushing it through. "But if it's a 50-50 proposition, and the public's attitude is ambiguous, the government has to be extremely careful in promoting a policy. If it moves too quickly, it will definitely face public resistance," Cho says.

Through ups and downs over the past 20 years, South Korea has amassed a wealth of experience in preparing for, negotiating and implementing free trade pacts and building a strong support system that enables it to launch new free trade negotiations at any time. On the international stage, the country has successfully turned itself into a global FTA hub, carving out a perfect international strategic position for itself.

But even then, South Korea still has to confront and deal with the uneven legacy of FTAs signed over the past decade so that all of its people can share in the benefits.

When we asked Kim Young-hwan, who has worked on free trade pacts for 25 years, how FTAs should be assessed, he took a deep breath and then answered with a laugh, "This is a really good question."

"FTA is not absolutely good, also not absolutely bad. Actually it is a neutral thing. The key is to establish a mechanism allowing the pros and cons to be discussed sufficiently. All the good things and bad things about FTA have to be exposed to the sun," Kim says.

"You need to be prepared. The industries need to be competitive. Then you can get real benefit from FTAs."

To a Taiwan desperate to join the global FTA club, it's advice that is truly worth pondering.

Translated from the Chinese by Luke Sabatier