Pact expected to follow in footsteps of past 9 economy-boosting agreements

Will the free trade agreement with China help the Korean economy climb out of its current state of deceleration?

In a report released yesterday, the Korean government said it expects the trade pact to help raise the nation’s gross domestic product by 0.95 to 1.25 percent over the next five years. The government also predicted the FTA would help create up to 240,000 new jobs.

China’s GDP last year was worth $9.2 trillion, which accounts for roughly 12 percent of the world’s total GDP.

But most importantly, the agreement with China means Korea has established an FTA network that includes the world’s three largest economies: the United States, the European Union and China.

Korea is the first among the world’s 10 largest traders to have an FTA with the trio of top economies and is the third country ever to do so, after Chile and Peru.

The Korean government has been aggressively pursuing free trade agreements with major economies since it reached its first pact with Chile in 2004.

Since then, it has secured nine FTAs and concluded negotiations for three more, with Colombia, Australia and Canada.

According to a report by the Korea International Trade Association (KITA), over the past decade since the agreement with Chile took effect, FTAs have contributed significantly to increasing Korea’s trade volume and overseas competitiveness.

Trade volume with Chile has grown an average of 16.3 percent per year for the past 10 years, almost quadruple the amount before the pact was signed, according to the government’s report. It added that Korea saw similar growth with all nine regions with which it has active FTAs.

It has been more than two years since the Korea-U.S. FTA took effect in March 2012. Since then, Korea’s trade volume with the country has expanded 1.4 percent, its exports grew 5.1 percent and imports decreased 3.5 percent.

The growth in Korean exports to the United States since the implementation of the FTA was higher than exports to all other countries, accounting for 0.4 percent of the nation’s total exports.

“The Korus FTA served as a buttress for the Korean economy during the global financial crisis, supporting the country’s export pillar,” the report said.

Since the implementation of the Korea-EU FTA in 2011, Korea’s trade volume with the economic bloc rose 4.4 percent on average over the past three years. In 2013, trade volume jumped 13.9 percent compared to 2010.

However, Korea’s exports to the continent declined 3 percent last year due to a plunge in shipping-related exports amid the recession in the global shipbuilding market. Imports from the EU climbed 13.2 percent on average during the period.

Because of the nine FTAs, tariffs on Korean goods dropped slightly from 5.28 percent in 2004 to 4.65 percent in 2013. The percentage represents the proportion of tariffed goods to the country’s total export value. The KITA report said that because of the lower tariffs, Korea gained about $7.99 billion.

“If the FTAs with Colombia, Australia and Canada take effect, the reduction in tariffs [that Korea would have to pay] would reach $10 billion,” said Myung Jin-ho, a senior researcher at KITA’s Institute for International Trade.

If the current tariff on Korean automobiles exported to the United States is eliminated in 2016, Korea will gain about $380 million.

If the three pending FTAs are passed, the benefit from reduced tariffs on Korean automobiles would expand to $640 million, according to the report.

The Korea Development Institute (KDI) also released a study yesterday warning that Korea must broaden its trade ambitions to focus on emerging economies, rather than relying on China.

“Korean exports to China are more closely related to China’s domestic investments, not consumers’ direct spending,” KDI report said.

The report cited China’s slowing economic growth as the main reason Korea should look to other markets. The institute explained that China has recently undergone an economic shift to reduce domestic investments, mainly due to the maturity of its economy, which is expected to grow by 7 percent next year compared to an earlier prediction of 7.4 percent earlier this year.

According to the study, the Chinese government is pushing spending to boost the economy instead of its previous focus on domestic investments.

“As China is encouraging spending instead of further investment, Korea should diversify its flagship export items to include more products while reducing direct investments there,” the report said.

BY SONG SU-HYUN, KIM JI-YOON [ssh@joongang.co.kr]