In early 2012, the negotiation for the China-ROK FTA between China and South Korea was initiated, and was officially signed on June 1st, 2015 in Seoul, South Korea. The FTA, which ultimately took effect on December 20, 2015, should have great influences on the trade between these two countries through its tariff reduction policy.
The China-ROK FTA covers 17 areas including trade in goods and services, investment and trade rules, and topics such as e-commerce and government procurement. The FTA between China and South Korea will remove tariffs on about 90% of goods traded between the two nations over the next two decades. To be specific, what will be the economic impact of the FTA in dollar value? According to the FTA, Korea will eliminate tariffs on 92 percent of products ($73.6 billion of import value), and China will eliminate tariffs on 91 percent ($141.7 billion of import value). How about the effect on different industries for these two countries?
As for Korea, the big issue will be its agricultural industry. Compared to China which is a labor abundant country, Korea has a high cost of labor. This makes its agricultural products less competitive, and most of the negative impacts of the bilateral FTA will be felt in this sector. For the politics side, farmers have a say in president selection. So every president does not want to object to farmers’ profits. The FTA between South Korea and United States was signed in 2007 but only been ratified after three years because of the cattle farmer protest in South Korea. The president of South Korea Lee Myung-bak at that time was really annoyed about this. The same situation happened when China and South Korea was negotiating the FTA, farmers protested against government moved for FTA with China. So is it true that agricultural sector in South Korea will suffer from this bilateral FTA?
South Korea agreed to remove tariffs eliminate tariffs on 36.6 percent of products; 36 percent of “highly sensitive” products, including rice, will be either permanently excluded from liberalization or face only partial tariff reduction. This agreement still helps South Korea to protect its farmers from the adverse effect from FTA. On the other hand, China agreed to eliminate tariffs on 91 percent of agricultural products within 20 years. This means that almost two-thirds of Korean agricultural imports will be able to enter the Chinese market duty-free in 10 years. For example, instant noodles, and kimchi will face zero tariffs within 20 years. This can help Korea to increase the price competitiveness of its agricultural products, increase its exports and strengthen its economy.
Although China has low labor cost and comparative advantage on the agricultural products, it recorded huge trade deficits in the automobiles sector. In this bilateral FTA, China and Korea will continue to impose 25 and 8 percent tariffs, respectively, on auto imports. This shows that China want to protect its auto sector. Instead of increasing the access through exports, China prefers Korean automobile manufacturers invest in assembly production in China. If South Korea want to use this bilateral FTA to increase its market share in China, its auto producers have to invest more in China. This has a positive impact on Chinese market and helps to boost Chinese auto sector and strengthen its economy. However, this disappointed South Koreas as auto industry has been an engine of Korean economic growth.
Besides for the significant effect on the trade between China and South Korea, this bilateral FTA also has great impact on the trilateral FTA among China, South Korea, and Japan (CJK FTA). These three countries started to negotiate CJK FTA in 2012, however, due to the politics issue and intensive relationships among these three countries, the negotiation strike. The China-ROK FTA can play an important role to propel the negotiation process for CJK FTA. As the three most important economy entities in Asia, the cooperation among these three countries can help them to stand strong against United States and European Union as well as boost their own economy.
Right now, China and South Korea are still negotiating on the sensitivity products and service industry. I believe more tariffs will be reduced and this bilateral FTA will have great impact on their economy in the long term.