On November 10, 2014 at the APEC Summit in Beijing, President Park Geun Hye and General Secretary Xi Jinping announced that the Korea-China free trade agreement negotiations were “practically concluded.” On November 19 2014, ISC Policy and Research Coordinator Dae-Han Song interviewed Hanshin University Professor of International Relations Lee Hae Young to more broadly understand the impact of the “practical conclusion” of the Korea-China FTA negotiations. [Photo sourced from the Hankyoreh.] *This interview is part 1 of a 4-part expose by the International Strategy Center on the impact of the Korea-China FTA on Korean civil society.*
What is your reaction to the Park and Xingping Administration’s announcement of a “practically concluded” Korea-China FTA?
There are no such thing as “practically concluded” and “not practically concluded” trade negotiations. Either a negotiation is concluded or it is not. But since this bilateral meeting was in an APEC summit, they came up with “practically concluded.” We can understand this announcement as an expression of both parties’ commitment to finishing this agreement.
What happens next?
After the agreement is concluded, we [South Korea] have a legal screening. Then we have to have a scrubbing, where we take out and iron out the parts that don’t work legally. Then we have an initialization. Then we have to sign it. We still have a ways to go, probably until the end of this year. Investment and services is very important to us, so these parts need to be negotiated very well. To evaluate the success of the negotiations, we need to see the schedule of concessions and commitments which the government has yet released.
Getting a negative list for services is important to us. Currently we have the positive list which only lists what will be opened up. They say the financial sector is included but we don’t know the contents yet. China said that they opened up the entertainment sector, but they are allowing only 50-50 joint investments. All this makes me wonder if there is anything to expect from the service sector negotiations.
Going from the positive to the negative list in the service sector will be a huge undertaking. If now they only identify sectors to be opened up, later they can only identify sectors to protect with the rest being opened up. Switching from the positive to the negative list will not be easy. As you know, China is very important for Korean investment. There is a lot of money being invested.
The Korea-China FTA, has provisions for investment protection, but most of those investment protections are already included in the Korea-China BIT. Trade liberalization is about being able to invest anywhere you want; protection is about protecting that which is already invested. They are saying that now they will go from protection to liberalization. But this will not be so easy. There is a lot of Chinese investment money. That means that Chinese investment money can invest wherever they want in Korea. In addition, the government has to guarantee full rights to them through the ISD. This will be very difficult.
If there are so many difficulties ahead, why did the governments make the “practically concluded” announcement?
Both countries’ interests were aligned to make such a statement. Since the US TPPA is in its final stages, China needed to make Korea a stepping stone [for its own regional bloc] as soon as possible. In order to break through the US attempt to create a TPPA, China is pushing its FTA Asia Pacific (FTAAP).
From the Korean government’s point of view, this announcement can be sold to the public as a huge foreign policy success. The Chinese market is very important for Koreans. Thus, there is an interest for the Korean government to publicize that we have made inroads into the Chinese market.
Are there any misconceptions about the Korea-China FTA?
One myth is that the Korea-China FTA will give a huge boost to manufacturing in Korea. Automobiles have been left out of the Korea-China FTA. Yet, automobiles were supposed to benefit manufacturing. In that regard, I think the government exaggerated the benefits of the Korea-China FTA.
The second myth is that the government protected agriculture and livestock by maintaining high tariffs through concessions. The reality is very different. In reality, the part of the final price [that which the consumer pays] made up by tariffs is just about 1-2 %. The value of a tariff is determined not by the final price but by the cost of the product upon import. So if an item costs 100 won, but its cost at the price of import was 20-30 won, the tariff that is applied is based on the 20-30 won. So in reality tariffs contribute very little to the final price of a good.
Who benefits from all this?
It will be the corporations that export and that were included in the FTA. The schedule of concessions and commitments has not yet been released. We would have to take a look at that, but possibly: auto, steel, machinery, electronics. Auto has been taken out so they are not really going to benefit. However, some auto parts will probably be tariff free. However, the key auto parts have been excluded. As regards to steel, there will be access, but there is already an excess of steel in China. Then, we have electric and electronics. But that is a toss-up. We can win or lose. That’s because there will also be cheap electronic goods coming into Korea.
There will be profits for sure but it’s unclear exactly who will get it since the schedule of concessions and commitments has not been made public. If you are a Korean exporting company that has advanced technology and capital I think you will receive some sort of benefit.
Who wants this?
The way I look at it, FTAs have become a type of group thinking. There is a notion among the Korean power elite that we must have FTAs. This is group thinking. Have they examined whether the FTAs yielded what they promised? Let’s look at the Korea-EU FTA. It has already been three years. Before, the Republic of Korea had a 10 billion dollar surplus with the EU; now, it has a trade deficit. Yet, no one is taking responsibility. At the beginning of the Korea-EU FTA, they stated that there would be a total GDP growth of 5.6%, that 260,000 jobs would be created, and that exports would increase. Jobs didn’t increase, GDP didn’t grow, and Korean exports plummeted.
There is a cartel of silence. No one says anything. This cartel of silence keeps the group thinking going. If someone outside states, “That’s not true.” There’s no response.
The government talks about a linchpin policy between China and the US. What do you think about this?
It’s a fantasy. The concept behind the linchpin is that we can be the pin that connects the two G2 countries. Maybe this could be true if Korea’s economy was sizable enough to have an impact on both countries, but if we look at Korea’s economy within China’s or the United States, it is just one component in it. It may not be negligible – China is the 4th trading partner and the US is the 8th trading partner – but it is not enough. You have to play a much larger role in each of the economies for Korea’s economy to influence them.
Who loses from this?
Agriculture, livestock, and fisheries in particular the small and medium scale ones; small and medium merchants and enterprises. 90% of small and medium enterprises produce for domestic consumption. For example this table that we are sitting at or printing business cards. If the Korea-China FTA takes place, then these small medium enterprises might as well just move their factories in China produce their goods there cheaper and then export them freely to Korea since there are no tariffs.
What will be the impact of this on people?
There will be an increase in unemployment and a reduction in income to all those connected. The decrease in income will decrease consumption and savings. If there is a decrease in consumption, then there will be a decrease in production. And so the economy will worsen.
In some regards the Korea-China FTA is different from the Korea-EU or Korea-US FTAs, as China can be considered technologically weaker than Korea, unlike the United States and the EU. What are the differences if any between the Korea-EU and Korea-US FTA with the Korea-China FTA?
In terms of the level of liberalization, the Korea-US FTA is at the highest level and is the most comprehensive. Service was also liberalized the greatest. The Korea-EU FTA is about the same. It started after the Korea-US FTA and the Korea-US FTA served as its prototype. So the Korea-EU FTA was like Korea-US FTA plus more. The Korea-US FTA became the prototype FTA for Korea.
If we compare the FTA with China to that with the US and the EU, it is much lower. All the chapters are there, but the level of liberalization in the service market, or the liberalization of investment is lacking.
Is this because Korea wanted it this way? Or is it because conceding to more would not have fit with China’s economy?
In terms of GDP, Korea has recently become a developed country and China is a developing one. However, in terms of the size of China’s manufacturing, its market, and size of its capital – all of these surpass even that of the United States. So, in that regard, if China says no, then it’s no.
Then can we say that the Korea-China FTA is closer to what China desires?
Yes, because what we would have desired is a greater opening of the services market. The automobile market would also have been opened up. But, this can cut both ways. Hyundai knows that while Korea’s automotive industry is internationally competitive, opening up the auto market will also allow Chinese cars to enter. If they do, we won’t be able to compete. We wouldn’t be even able to compete with Chinese assembled German cars. These cars would just be slightly more expensive than the Equus [Korean luxury car]. Furthermore, if Korea can produce economy cars for 10 million won, China would be able to produce Chinese cars at a fraction of that cost even if the technology is inferior.
Do you think new FTAs in Korea and around the world will keep on being created or will something shift in the future?
I think we will reach a turning point soon. Currently, Korea is only missing an FTA with Japan. That will get figured out when Korea joins the TPPA. At that point, Korea would have had established an FTA with most countries. The only countries that remain will be the developing ones. But that won’t be very significant: As the number of FTAs increase, their impact decreases. Two FTAs don’t yield double one FTA. This is because while FTAs create trade, they divert it at the same time. Also on a global scale, tariffs have been going down for a long time. With the expansion of FTAs, they have been further decreasing. At some point they will be zero.
I think that we will stop once the US achieves the level of liberalization that it desires. This is not something that could keep going on infinitely. It is also not a sustainable structure. We started with small FTAs in the 50s and 40s now 60-70 years later it expanded so greatly; during that time, the WTO was created. It was created based on one country one vote, but because the United States is an empire it couldn’t accept that. So to bypass that process, it started to do FTAs bilaterally. The FTA is a old historical relic.
Regional Comprehensive Economic Partnership and Free Trade Area of Asia Pacific, and Trans-Pacific Partnership Agreement – will they converge or remain divided?
It will not be easy. In a global market economy, all markets don’t grow equally. Some countries boom and others bust. Each country has different conditions. They all differ in their levels of industrial development, the character of their market, or the opening of its financial markets. The US is using FTAs to weaken the structure of the WTO because what it wants cannot be achieved by the WTO. So will this naturally come together into one system? No one is interested in this. They are just driven by whether it can make a profit or not. They don’t care about what will happen in the future.
The government predicts a 2-3% increase in the GDP, what is your response?
That’s not going to happen. You can be sure of that. It’s risky for me to say that, but I am sure about it. They used Computable General Equilibrium (CGE) economic modeling to calculate those values. It is an economic modeling program that estimates the impact of trade. But, there are too many assumptions. That result only comes out when all the assumptions hold. But, the assumptions are too unrealistic. If unemployment rises, then it is supposedly reabsorbed into another sector. If there is a deficit in one sector, then this is balanced by surplus in another. So, supposedly it all balances out. If this were true why have the levels of unemployment in Europe and Korea increased? And if after all these assumptions, if you still don’t receive the values that you want then you “massage” the data a little bit. The government has been tossing around 2-3% GDP growth for a while. Our estimates come out to a tenth of that. Some of us academics did an independent estimate and we got something like 0.3%. And this is the total growth over 10 years. If we look at that compared to the Korean GDP, this is insignificant. As regards to employment, our data shows that there will be 21 new jobs every year. 21 jobs?!
So in short the Korea-China FTA has little benefits but a lot of pain.
No, this means that it can give great benefits to some and great detriment to others. If we look at it in its net totality, its benefits may be very little, but some sectors may gain a lot while others lose a lot. One part makes a whole lot of money, but another part loses 98%. What remains is 2% growth. The parts that can gain a lot will be for example the companies that focus on exports.
Is it possible for 2nd 3rd round negotiations to take place in the future?
Yes, of course if both countries want it then they can because it is a bilateral agreement. Renegotiation is possible on everything.
What does a just and fair trade treaty look like?
It will look like the People’s Trade Agreement in Venezuela. Venezuela is an oil producing country. Cuba does not have oil; it does not have energy. So, Venezuela sends Cuba oil, and Cuba sends medical services. Don’t both countries benefit? I think this is free trade.
Why is it possible over there, but not in Korea?
Sure, that economy is significantly smaller than Korea’s, but free trade is a tool, it is not the end. Free trade is for something. Why are we doing free trade agreements? In the case of the People’s Trade Agreement, they do it to provide for example eye surgery for people. They do it because Cuba does not have oil. This is comparative advantage. But here, it is for profit. What is the weakness of that country? How can we exploit that weakness and profit the greatest and be free to escape? The purpose of these international agreements is to guarantee profits. The profits of the conglomerates are the most important thing. If there is any money left, then maybe use some of that for welfare programs. But there is no motivation such as treating people’s eyes. The People’s Trade Agreement is also the same as the free trade agreements, it is about getting rid of tariffs. But the question is why are we getting rid of these tariffs? Over there it is to treat ill people, here profit for conglomerates is the main purpose.