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Korea: Background Papers

Author(s):
International Monetary Fund
Published Date:
January 1996
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VII. Trade Policy 1/

Korea’s trade policy since the early 1980s has been characterized by a series of comprehensive, albeit gradual, reforms designed to eliminate quantitative restrictions on imports, reduce average tariff rates, and open domestic markets to foreign direct investment. The pace of reforms has been faster in the manufacturing sector than in the agricultural sector, and by end-1994 Korea had removed virtually all nontariff barriers on manufactured imports, reduced the average tariff on nonagricultural imports to the level of industrial trading partners, and opened a significant share of domestic industries—mostly manufacturing—to foreign direct investment. Korea is a member of the World Trade Organization (WTO).

Despite progress in these areas, a number of issues have created frictions in bilateral trade relations. The most important of these issues currently concern Korea’s import diversification program designed to reduce large bilateral trade imbalances, the further opening up of the domestic services sector to foreign participation, and the removal of nontariff barriers, particularly for agricultural imports and automobiles.

1. Reform programs

Reforms in Korea’s trade regime have been carried out in a series of preannounced reform programs in the areas of import liberalization, tariff reduction, and the expansion of the number of industries eligible for foreign direct investment.

Import liberalization programs initially focused on eliminating quantitative restrictions on manufactured imports. As a result, virtually all licensing requirements 2/ on manufactured imports were lifted, raising the import liberalization ratio for manufactures to 99.7 percent in 1994. In recent years, the focus has shifted toward liberalizing agricultural imports. The current import liberalization program, covering 1995-97, was submitted to the GATT in April 1994, and reflects the outcome of the Uruguay Round of trade negotiations. Under this program, 142 products (of which 134 are agricultural, forestry and fishery products) of the remaining 150 products under quantitative restrictions are scheduled to be taken off the restricted list by 1997. 3/ As for the remaining 8 products (all agricultural), Korea will increase their import quotas or introduce tariffs in the year 2001. 4/ Completion of the current import liberalization program would fulfill Korea’s commitment to eliminate or otherwise bring into conformity with GATT provisions all remaining restrictions on merchandise imports by July 1997.

In addition to phasing out quantitative restrictions, Korea has implemented a tariff reform designed to lower average tariff rates and reduce the dispersion of tariffs. As a result, the average tariff on manufacturing imports was reduced to a level comparable to the rates in industrial countries. The weighted average tariff rate on total imports is currently 7.9 percent (16.6 percent for agricultural imports and 6.2 percent for nonagricultural imports). This compares to a weighted average rate of 18.1 percent for total imports (25.2 percent for agricultural imports and 16.9 percent for nonagricultural imports) in December 1988, when the current program was introduced. The tariff reform has resulted in a marked reduction in the dispersion of tariff rates. At present, the proportion of items with tariffs not exceeding 10 percent is 93.4 percent (compared to 25.8 percent in 1988), with only 6.7 percent of tariffs at 20 percent or higher (compared to 69.9 percent in 1988).

Steady progress has been made in opening up domestic industries to foreign competition. Nevertheless, foreign access to agricultural and services markets remains more restricted than to markets for manufactures where foreign direct investment is almost completely liberalized in all but 10 of 585 industries. The latest five-year plan for the liberalization of foreign direct investment, covering 1993-97, envisages an increase of the liberalization ratio for services (the share of industries eligible for foreign direct investment) from the current 84 percent to 87 percent by 1997. The transport and communications, and finance and insurance industries are presently among the least accessible to foreign participation.

2. Bilateral issues

Bilateral issues with Korea’s largest trade partners (the European Union, Japan, and the United States) in recent years have been largely related to foreign access to Korean markets rather than Korean exports to these markets. Reflecting that, the number of nontariff barriers on Korean exports has decreased marginally in recent years. 1/

Trade frictions with European Union countries have recently centered on pricing policies of certain Korean exports to these countries. While in the past the European Union had imposed antidumping duties on these exports, at present, these issues are being addressed through bilateral negotiations, which are scheduled to be concluded by the end of 1995.

A source of frictions in bilateral relations remains Korea’s import diversification program. This program was designed to correct large and persistent bilateral trade imbalances by encouraging importers to shift imports of designated items away from countries with which Korea maintains large trade deficits. The Korean Government has announced its plan to reduce significantly by 1998 the number of items currently included in the program—mostly heavy machinery and consumer electronics. To this end, it removed 47 items from the list in 1995, which now includes 183 items.

Three major issues in bilateral trade relations with the U.S. stand out at present, all pertaining to access to Korean markets: the testing, inspection, and shelf life of imported agricultural products; the opening of financial markets to foreign companies; and foreign access to Korea’s automobile market. As regards the first two issues, consultations are under way in accordance with WTO rules on the settlement of disputes. The U.S. has asked the Korean Government to change its testing and inspection system for imported agricultural products in order to expedite customs clearance, and permit producers to determine the shelf life of their products. It has also asked for an acceleration of the pace of opening the financial sector to foreign competition.

Some progress was made in 1994-95 in improving foreign access to Korea’s automobile market. The Korean Government took a number of measures in response to U.S. requests for tariff reductions, changes in the internal tax system, and elimination of restrictions in distribution and advertizing. A plan was introduced in June 1994 to open the domestic automobile market, mainly through a reduction in the tariff rate on automobile imports from 10 percent to 8 percent. Following negotiations with the U.S. Trade Representative, the U.S. and Korean Governments reached an agreement in September 1995 to further improve access in the Korean automobile market. The agreement envisages a reduction in the registration tax applied to luxury automobiles (which are mainly imported), the easing of certain standards and certification procedures, access for foreign financing firms to the Korean automobile financing business, and access for foreign automobile manufacturers to television advertizing. Progress on the implementation of the agreement would be monitored closely and the agreement would be reconsidered in June 1996.

1/Prepared by Dimitri Tzanninis.
2/Licensing for liberalized imports is automatic.
3/In 1995, 49 agricultural products were taken off the restricted list, raising the import liberalization ratio for agricultural products to 95 percent.
4/The Korean Government has adopted a slower pace of liberalization of agricultural trade primarily to protect farm incomes, and facilitate a gradual structural adjustment in the agricultural sector.
1/The number of restrictions imposed on Korean exports by trading partners remained broadly unchanged in 1994, with anti-dumping duties representing the single most common trade restriction. Exports of products facing restrictions to OECD countries have decline in recent years, reflecting an effort by Korean exporters to diversify out of such products and countries.

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