CHUNG Chul: Looking Forward To Working at a Deeper Level of Free Trade Reporter: XING Yanjing CHUNG Chul Senior Research Fellow, Executive Director of the Dept. of Asia-Pacific, Korea Institute for International Economic Policy The recent conclusion of the China-South Korea FTA, will not only bring about a remarkable growth in the volume of trade between China and South Korea, but will also increase the vitality of investment and exchange activities between the two countries. The most important impact that the FTA is expected to have on Chinese enterprises is that it will expose them to face increased cooperation and competition. This increased market competition will encourage them to practice self-motivated transformation, thus enjoying a higher production efficiency. In regards to the government, the most essential aspect will be to build up trust and reputation through cooperation on the FTA, which is of high importance to both China and South Korea. A high reputation will be of benefit for pushing for further developments in the treaty, and will act as a benchmark when expanding on common interests and signing FTAs with other new trade partners.
Reporter:The China-South Korea FTA will play a positive role in promoting the comparative advantages of various industries in the two countries, such as, the agricultural and textile industries in China, as well as the electronic and chemical industries in South Korea. In addition to the growth in sales which can be directly observed, what other positive impacts will FTA bring to the various industries in the two countries? CHUNG Chul: The conclusion of the China-South Korea FTA, will not only bring about remarkable growth in the volume of trade between China and South Korea, but will also increase the vitality of investment and exchange activities between the two countries. As the business environment improves, cooperation between the two countries will be promoted across a broader range of economic areas. The most obvious and meaningful impact is that more Korean enterprises will make investments in China, as will Chinese enterprises in South Korea, thus taking advantage of the production strengths of both countries in the global value chain and will improve production process to become more efficient. In addition, the FTA will make it more convenient for enterprises to capitalize on the consumer markets of the other country. The Chinese consumer market is very large, and is therefore quite attractive to Korean enterprises. Reporter : China has developed extremely fast over the past 30 years, particularly in the manufacturing industry, earning itself a reputation as the world s factory, however China still finds itself at the bottom of the Smile Curve in the global value chain. As China is now actively transforming to develop a high value-added manufacturing industry, how will the cooperation between China and South Korea help to promote this transformation? CHUNG Chul: The most important impact that the FTA is expected to have on Chinese enterprises is that it will expose them to face increased cooperation and competition. A more competitive market will encourage them to practice
self-motivated transformation, thus enjoying higher production efficiency. Another phenomenon which should also be emphasized is that China is becoming increasingly open, and certain low-end industries have already been challenged by some Southeast Asian countries. This phenomenon indicates that China has to leave from the bottom of the Smile Curve and speed up the transformation of its enterprises. It should be noted that in the process of cooperation, foreign countries will not simply reveal their core technology, but rather the mechanisms of competition and cooperation can assist to encourage Chinese enterprises to practice self-motivated transformation and gradually develop their own high technology and core technology. The automobile industry is a good example of the aforementioned transformation. Reporter: Through this competition and cooperation, what are some of the benefitsthat can China and South Korea provide to each other? CHUNG Chul: It should be pointed out that the negotiation process of the China and South Korea FTA was very slow, requiring over ten years of investigation, joint study, and negotiations before,eventually leading to a consensus on the present contents of the China-South Korea FTA. Even now the level of liberalization of trade between the two countries is very low, thus this agreementis not considered as one of the high quality free trade agreements for various reasons. Currently the proportion of the liberalization of trade in goods is about 90% of the tariff items but only 85% in terms of the trade volume, while the trade liberalization in services has seen minimal advancement. The percentage of tariff lines subject to tariff elimination for the China-Korea FTA is 91% for China and 92% for Korea over the next 20 years. This is not an impressively high figure, particularly compared to Korea's other FTAs such as Korea-US FTA and Korea-EU FTA, which are going to eliminate tariffs for at least 97% for both parties over 10 years after entry into effect. In terms of the trade of goods, Korea wishes to protect its agricultural sector, while China wants to protect some of its manufacturing sector -because both countries have
faced with resistance within their own country. As you can imagine, even if these sectors are to be liberalized at a later date, it will still meet with local protectionism, and therefore it will be very difficult to further liberalize these sectors. Of course, if the cooperation between China and South Korea is practiced in a smooth manner based on the existing contents of the bilateral FTA agreement, the successful experience will provide baselines for other countries when they negotiatewith China. The significant gains from the China-South Korea Free Trade Agreement will attract more countries to participate in FTA partnerships. Reporter: How will the advantage of industries in Korea such as health care and cosmetic surgery impact upon the relevant industries in China? Furthermore, the Korean Wave has already had a huge impact, how will China and Korea continue to cooperate in the cultural industry? CHUNG Chul: Health care and cosmetic surgery are indeed very advanced industries in Korea. China and Korea have included minimal cooperation on the trade in services in the FTA, but the development will still be very fast - Korea and China agreed to hold a second round of negotiations on service trade and investment within two-years after the FTA enters into effect. Considering that China is also negotiating with United States on the bilateral investment treaty (BIT), after both sides reach a consensus on the BIT, the China-South Korea FTA will go further in lifting trade barriers in services and create new opportunities for some of these Korean industries to enter the Chinese market. As for the cultural industry, China and Korea have already cooperated in this field through the joint production of a number of movies and TV series. China has a significant interest in investing in the Korean film and television industries. Korea has highly advanced technology used in the production of movies, including some high technology and appealing content. Through the agreement,chinese side has more opportunities to invest, and the Korean cultural industry may provide very good
investment opportunities for Chinese investors. Reporter: The conclusion of the FTA is just the first step, what do you think will be the respective tasks of government and enterprises in the subsequent process? CHUNG Chul: The free trade agreement enables enterprises to face increased cooperation and competition, thus forcing the enterprises to become more innovative and creative. There is no need for us to worry about the enterprises, and we do not have to tell the enterprises where the opportunities lie, as the profit-seeking instinct of the private sector will naturally lead them to find and take advantage of new opportunities. In regards to the government, I think the most essential thing will be to build up trust and reputation through the FTA cooperation, which is important to both China and South Korea. It will be a loss to both countries if unfortunate events were to occur and damage the reputation. A high reputation will be of benefit for pushing further developments in the treaty,and will act as a benchmark when developing common interests and signing FTA treaties with other new trade partners. Additionally, due to the fact that enterprises change very fast whilst developing, and will encounter many new problems, it will be imperative that the government strives to update its policies in a timely manner to keep up with the requirements of businesses. Reporter: A good example of the cooperation between Chinese government and enterprises is the Korean Industrial Park in Wenzhou, where the local government helped to introduce many Korean service agencies and provide consumer markets for products, what do you think of such forms of cooperation? CHUNG Chul: I think this is a very good example of improving understanding and cooperation. The local government and central government play different functions. Establishing similar free trade areas is a very good effort, and if more such places are set up, both the local and central governments will gain experience which will be extremely beneficial in implementing the content of the agreement.
Reporter: In what regards do you think that the Asian Infrastructure Investment Bank and FTA can produce synergies? CHUNG Chul: The Asian Infrastructure Investment Bank is a part of China s national strategy, and is closely tied to the One Belt and One Road initiative. The One Belt and One Road initiative is devoted to investing in poor or developing countries and helping them to build railways, roads, telecom and other infrastructure. FTAs are another part of China s national strategy, promoting China s trade and investment with other countries. The experience gained from FTA investment will be extremely beneficial to the Asian Infrastructure Investment Bank and its investments. The FTA partners can also undertake and follow up the investment of the Asian Infrastructure Investment Bank, accelerating the development process and improving investment returns. The Asian Infrastructure Investment Bank will also lead more countries to sign FTAs, and increase cooperation.