Korea-China FTA: Will it be a favorable tide?
Korea-China FTA: Will it be a favorable tide?
  • Reporter Gwak Jun-ho, Lee Il-b
  • 승인 2016.01.01 23:56
  • 댓글 0
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On Nov. 30, the Korea-China FTA ratification document was officially approbated by the Korean National Assembly, meaning that Korea-China FTA is very likely to come into effect. As we are dealing with the second largest economy around the world, there will undoubtedly be considerable economic influences. The Postech Times will introduce the definition of FTA and what major economic differences are expected by Korea-China FTA coming into effect.

What exactly is FTA?
Essentially, Free Trade Agreements (FTA) are designed to reduce the trade barriers between two or more countries, which are in place to protect local markets and industries. Trade barriers typically come in the form of trade tariffs and quotas. For example, before the Australia-Japan FTA was executed, Japan’s trade tariffs allowed 19.5% of Australian beef to be imported, compared to the current status of 38.5%. Within the Free Trade Area forged by FTA, the associated countries are allowed to focus on their comparative advantages and produce goods that they are comparatively more efficient at making, thus increasing the efficiency and profitability of each country. As a result, the consumers have access to less expensive and/or better quality foreign goods. At the same time, producers may struggle with increased competition, but they may also acquire expanded market with potential consumers. Workers in some countries and industries may lose jobs, as the production shifts to become more efficient overall.
One of the downsides of FTAs is the ability of powerful countries to impose their will over smaller, developing counties. Most often, this comes in the form of a smaller economy making more concessions than are beneficial in the long term, while the larger economy keeps its trade restrictions in place. In order to minimize such absurdities, countries in interest must go over abstruse negotiations about such as customer procedures, allowance of tariffs and their costs, resolution of trade disputes, methods for goods transportation, etc.

Expected Effects
The Korea-China FTA was first discussed in 2002 at the Korea-China-Japan Summit. Its detailed negotiation started in 2012, and initialing was on Feb. 25, 2015. Since the FTA shows both benefits and disadvantages, there have been issues in specific industries.
The most obvious disadvantage is for agricultural industry. According to the Korea Institute for International Economic Policy (KIEP) and Samsung Economic Research Institute (SERI), domestic agricultural production is expected to be reduced by 7.56%, and imports from China will increase by 104% to 209.9%, when tariffs are decreased by 50%. However, negotiation finished with the highest rate of sensitive and supersensitive items. Each country classifies items as ordinary, sensitive, and supersensitive. Rice, beef, pork, chicken, milk, egg, fruit, vegetable, and traditional foods are classified as supersensitive items and excluded from tariff reduction. The ratio of tariff preserving items for Korea-China FTA is 33.5%, while U.S. 1.1%, EU 2.8%, and Australia 10.5%. But farmer organizations say its influence is bigger than any other FTA because China is geographically closer and bigger than other countries. KIEP expected the economic loss of agricultural industry as 4 times of the Korea-U.S. FTA.
On the other hand, the Korea-China FTA brings slight advantage for some industries. Petrochemicals are a good example. Forty five percent of domestic production of petrochemicals is exported to China. Due to the tariff reduction, increased price competitiveness is expected. However, China recently has built relevant equipment and raised the ratio of domestic products. Therefore, export rates to China continuously have been decreased, and it remains as a weak point of petrochemicals.
POSCO’s representative industry, steel, shows gloomy predictions. Currently, Korea does not impose tariffs on steel products, due to the World Trade Organization (WTO) agreement in 2004. The Korea-China FTA rather promotes the invasion of Chinese steel products in Korea.
The Korea-China FTA will come into effect. The die has already been cast and it is hoped that the Korea-China FTA become a win-win strategy, as both countries initially designed.


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