By Ahn Mi Young Oct 12, 2009, 6:46 GMT
Seoul - Last weekend's news that South Korea and China had agreed to begin serious negotiations aimed at forging a free trade deal took many analysts by surprise, leading some to ask: What's in it for Seoul?
The agreement was made in Beijing as Chinese Trade Minister Chen Deming and his South Korean counterpart Kim Jong-hoon signed a document to increase economic cooperation and trade between the two countries, at a time when the leaders of China, Japan and South Korea promised to cooperate for closer regional economic integration.
China replaced the United States as South Korea's largest trade partner in 2003, with its bilateral trade volume with South Korea forecast to double to 300 billion US dollars by 2015.
But despite growing economic ties, China has not been seen as a free-trade priority.
While South Korea has been pushing for free trade agreements (FTAs) with the US, the EU and India, China has seldom been mentioned as a free trade partner, for several reasons.
South Korean exporters appear to stand more to lose than to gain from a Beijing-Seoul trade deal because of the latter's higher tariffs.
China imposes an average tariff of 4.5 per cent on Korean imports, while South Korea imposes average tariffs of 7.29 per cent, according to data from the South Korean traders' association.
In addition, about half of China's purchases are components that are assembled and then re-exported, limiting Chinese consumers' options to buy South Korean products.
Most importantly, a free trade deal is forecast to deal a heavy blow to South Korean farmers. Despite Seoul's protective tariff shield, averaging 52.5 per cent for Chinese imported farm products, farmers already feel the pain of competing against relatively cheap Chinese farm products.
For its part, China imposes an average 25.6-per-cent tariff on South Korean farm imports. Therefore the farming sector is expected the thorniest issue in the Seoul-Beijing FTA negotiations. China has argued that there should be no exceptions for the farm sector in a free trade deal, while South Korea wants to exclude a list of farm products.
Trade observers have also expressed concerns about possible intrusion of China-based multinational enterprises into the Korean market if the FTA deal becomes effective, thereby allowing these Western companies tax-free entry.
However, the financial crisis served as a wake-up call to South Korea to recognize its excessive dependence on non-Chinese consumers is an unsustainable trade model for Asia's fourth-largest economy.
Although domestic consumption reportedly generates only one-third of China's gross domestic product (GDP), the Communist country appears poised to fulfill its 8-per-cent GDP growth target for this year, due largely to government investments.
With this potential market and the bilateral trade volume continuing to expand, South Korea can no longer afford to overlook Chinese consumers.
China represented 21.3 per cent of South Korea's total export shipment value in 2006, up from 10.7 per cent in 2000. During the same period, the US share decreased from 21.8 per cent to 13.3 per cent, while the Japanese share shrank from 11.9 per cent to 7.3 per cent.
The likelihood of a free trade deal between China and Taiwan has also motivated South Korea to get on the free trade bandwagon with China.
Media in Taiwan and China have reported that the two countries are to sign a FTA in the first half of 2010. If China then removes or reduces tariffs on Taiwanese imports of LCD panels or semiconductors, rival South Korean vendors are likely to suffer a major setback.
South Korean commentators have argued that the Taiwan-China FTA will be a win-win deal for both, largely at the expense of South Korean rivals, giving more impetus to the need of a separate FTA between Seoul and Beijing.
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