72652 v1 World Trade Indicators 2009/10 Republic of Korea Trade Brief Trade Policy telecommunications and its service trade GATS commitment index score is relatively high. Since the East Asian crisis, the Republic of Korea’s trade policy has further opened up the country to To contain rising food prices in early 2008, Korea international trade. Nevertheless, some protectionist decreased tariffs on imports of wheat, maize, and measures continue to shield domestic producers from soybeans.2 High fuel prices also prompted tariff foreign competition. Korea’s MFN Tariff Trade reductions on several oil-related products in March.3 Restrictiveness Index (TTRI)1 for overall trade has By December 2008, the sharp fall in oil and food decreased slightly in the past few years to 8.2 percent, prices induced by the global downturn prompted the ranking 83rd among 125 countries (where 1st is least government to raise tariffs on oil and flour imports.4 restrictive). Korea’s protection level is higher than the 3.7 percent average TTRI (all goods) for high-income The global downturn has had a strong negative impact countries (3.9 percent among OECD high-income on demand for Korean exports and the economy countries). The government remains protective of its contracted by 5.1 percent in the last quarter of 2008. A agricultural sector, which has a TTRI of 65.3 percent front-loaded stimulus package has managed to push (compared to 15.2 percent for high-income OECD the economy to positive growth of 0.1 percent in the countries). For all other goods, the TTRI is only 4.4 first quarter of 2009. Although Korea initiated only 5 percent. The simple average of the MFN applied tariff antidumping investigations in 2008, compared to the rate now stands at 12.2 percent, above the 5.7 percent 15 initiated in 2007, as of the first quarter of 2009 average tariff of its income group comparators. The Korea initiated 4 antidumping duties on yarns and MFN applied tariff on agricultural goods (49 percent) particle board.5 In March 2009, the country cut the is more restrictive than the applied tariff for non- number of work permits for unskilled/semi-skilled agricultural goods (6.6 percent). Korea’s maximum foreign workers by two-thirds, although foreign tariff on all goods, taking into account ad valorem professionals saw no change in policy.6 equivalents of specific tariffs, (excluding alcohol and tobacco) increased slightly in 2008 to 831.2 percent. External Environment The trade policy space, as measured by the wedge between bound and applied tariffs (the overhang), has Korea’s Market Access TTRI7 (including preferences) remained constant in recent years at a relatively low for 2007 is 4.6 percent for all goods, with the tariff level (4.4 percent) compared with high-income rate for agricultural goods more than twice that for countries as a group (10.9 percent). Over the 1995– non-agricultural goods. This is higher than the average 2008 period, Korea was the 9th most frequent initiator for both high-income countries, which is 3.6, and of anti-dumping investigations (108) in the world. In high-income OECD countries, which is 4.1 percent. the area of services, Korea took part in the extended The simple average of the rest of the world tariff faced GATS negotiations on financial services and basic by Korean exports is 10 percent. When weighted by actual exports, it is 4.2 percent, with agricultural goods facing a much higher barrier than non-agricultural goods, at 25 and 4.1 percent, respectively. In 2008, Korea had 8 anti-dumping investigations initiated Unless otherwise indicated, all data are as of August 2009 against it, which was much higher than the regional and are drawn from the World Trade Indicators 2009/10 average (excluding China) of 1.5 per country. Database. The database, Country Trade Briefs and However, there has been a downward trend, and so far Trade-at-a-Glance Tables, are available at in 2009 Korea has been the target of only one http://www.worldbank.org/wti. additional investigation. Over the course of 2008, the If using information from this brief, please provide the Korean won depreciated by 18.6 percent against the following source citation: World Bank. 2010. “Republic U.S. dollar, making exports relatively less expensive in of Korea Trade Brief.� World Trade Indicators 2009/10: dollar terms.8 Country Trade Briefs. Washington, DC: World Bank. Available at http://www.worldbank.org/wti. World Trade Indicators 2009/10 Republic of Korea Trade Brief Korea is in the process of negotiating free trade period of 10.4 percent did not continue during 2008, agreements (FTAs) with several trading partners. The when total trade grew by only 4.8 percent in real services FTA with the Association of Southeast Asian (constant 2000 U.S. dollars) terms. Real export growth Nations (ASEAN) came into effect in May 2009, and was 5.7 percent, but this was half of its value over the an agreement to liberalize investment regimes was 2005–07 period. Real import growth was more than reached a month later, complementing their FTA on halved in 2008 to 3.7 percent. Expectations are that goods trade. In July 2009, a FTA between Korea and real exports and imports will fall in 2009, with a the EU was reported to be in its final stages, steeper fall in exports. suggesting a resolution of issues centering on rules of origin and duty drawbacks on Korean products. An In nominal terms, total trade grew by 17.6 percent in FTA with India signed in August 2009. 9 An FTA with 2008, which was a slight increase over 2007. The the United States was finalized in 2007 but remains global economic slowdown has triggered sharp unratified by both sides. decreases in demand for many products, particularly electronics. Total exports increased by 15.3 percent, driven by increases in services exports, which grew by Behind the Border Constraints 20.6 percent. The gains came from early in the year, however, and by the last quarter of 2008, the Korea remained in the top 20 percent of institutional economic crisis led to a drop in exports of 9.9 percent environments conducive to business in 2009, being in nominal terms over the fourth quarter 2007. ranked 19th out of 183 countries in the Ease of Doing Decreases in global demand are expected to lead to a Business Index. The Logistics Performance Index, a fall in exports during 2009 of 14.3 percent. National measure of the ease of trade facilitation, rates Korea a statistics 12 indicate that as of the first half of 2009 the high 3.52 on a scale from 1 to 5 with 5 being the drop in exports has been 22.1 percent in U.S. dollar highest performance. It ranked 25th in the world and terms compared with the first half of 2008, though the 24th out of the high-income countries (with Singapore decline slowed in the second quarter. leading the regional group). This is compared with 3.67 for countries in the high-income group. The area Increases in the price of crude oil, which accounts for in which it performed the best was the timeliness of a significant portion of all imports, contributed to an shipments in reaching their destination and it needs overall increase in the value of imports during the first most improvement in lowering domestic logistics half of 2008. The domestic energy supply is dependent costs. upon imports, which account for over 95 percent of all Korean energy consumption.13 As a result of the In order to stimulate exports, the government also high cost of these energy products and other implemented programs to provide trade financing. At commodities during the first half of 2008, total the end of 2008, the government increased the nominal imports grew by 20.1 percent for the year. availability of export financing and expanded loan These higher prices are reflected in the increase in guarantees for SMEs. As credit continued to be scarce imports of goods of 22.3 percent in 2008, while in March 2009, the government increased available services increased by 10.9 percent. As prices fell in the financing further for exporters and ship parts makers, second half of 2008 imports declined, falling by 9 expanded export insurance to encourage banks to lend percent in the last quarter of 2008, compared with the to exporters (May), and in July the Export-Import same quarter 2007. In 2009, imports are expected to Bank of Korea issued bonds in order to fund fall sharply by 21.6 percent, mostly due to a fall in additional export financing.10 goods imports. Import declines (34.5 percent in the first half of 2009 on a year–on-year basis) have Trade Outcomes exceeded export declines, and the decline accelerated in the second quarter, although indications are that the Trade is vital to the Korean economy, and its total economy may recover earlier than expected. Foreign trade share of GDP was 110 percent in 2008. Over the direct investment accounted for 0.2 percent of the last three decades, the export sector has moved from country’s GDP in 2008. labor-intensive goods, such as clothing and footwear, to more capital-intensive goods, especially electronics, which now comprise around 40 percent of all exports.11 The high growth rate of total trade in goods and services that Korea enjoyed during the 2005–07 Republic of Korea Trade Brief World Trade Indicators 2009/10 Notes or Market Failure?� World Bank PRMTR Trade Group. World Bank, Washington, DC. 1. TTRI calculates the equivalent uniform tariff that Economic and Social Commission for Asia and the would keep domestic welfare constant. It is weighted by Pacific (ESCAP). May 2008. E-TISNET Monthly import shares and import demand elasticity. News. United Nations. 2. FAO, 2009. Economist Intelligence Unit. 2008. Country Profile 2008: 3. ESCAP, 2008, p. 5. South Korea. The Economist Intelligence Unit. 4. World Bank PREM Trade Group, January 2009, p. 14. Food and Agriculture Association of the United Nations 5. World Bank PREM Trade Group, April 2009, p. 3. (FAO). 2009. “Policy Measures Taken by 6. WTO, July 2009. Governments to Reduce the Impact of Soaring 7. MA-TTRI calculates the equivalent uniform tariff of Prices (As of 15 December 2008).� FAO. December trading partners that would keep their level of imports 15, 2008. . demand elasticities of trading partners. International Monetary Fund (IMF). October 2007. 8. IMF, 2009. “Republic of Korea: Selected Issues. IMF Country 9. Bilaterals.org, 2009a, 2009b, 2009c, 2009d. Report No. 07/345.� IMF, Washington, DC. 10. World Bank PREM Trade Group, 2009. ———. 2007. “Republic of Korea: 2007 Article IV 11. IMF, 2007. Consultation.� IMF. 12. Korea Development Institute, August 2009. ———. August 2009. International Financial Statistics 13. Economist Intelligence Unit, 2008. (Country Tables). IMF, Washington, DC. Korea Development Institute. August 2009. Economic Bulletin. Seoul. References World Bank PREM Trade Group. January 14, 2009. Bilaterals.org. April 2009a. “Korea.� . Financial Crisis on Trade and Trade Finance.� World ———. June 2, 2009b. “ASEAN-Korea FTA on Bank, Washington, DC. Investment Signed.� . ———. “Updated July 30, 2009. Trade Finance ———. June 29, 2009c. “India May Approve India- Measures Taken to Mitigate the Impact of the South Korea FTA Next Week.� . ———. April 21, 2009. “Update on Trade Measures and ———. July 8, 2009d. “South Korea-EU FTA Sector-Specific Support.� World Bank, Washington, Imminent.� July 8, 2009 . DC. Chauffour, Jean-Pierre, and Thomas Farole. June 19, 2009. “Trade Finance in Crisis: Market Adjustment