Download 10. Trade Policies and Practices by Measures

Evolution of the International
Economic Policies in the Republic
of Korea
September 2013
Young Youn Lee
apca
Contents
1. Korea’s Economic Achievements
2. Foreign Exchange Rate and Trade Policies in the 1950s
3. Foreign Exchange Rate and Trade Policies in the 1960s
4. Industrial and Trade Policies in 1970s
5. Globalization of the Korean Economy from 1998
6. Evolution of FDI Policy
7. Liberalization of Outward Direct Investment
8. Liberalization of the Financial Sector
A. Introduction
9. Trade Agreements
and Arrangements
B. Tradeand
promotion
Strategies
10. Trade Policies
Practices
by Measures
Black Shoes(1950)
Korean War Soldier's Helmet(1950)
Food Aid
for Orphans(1954)
3
1. Korea’s Economic Achievements
▶ Over
the past five decades, Korea became an
advanced industrialized country from a poor
agrarian country.
▶ GDP increased annually 6.81% during the
1962-2012
Korea ranks 15th in the world in 2012.
▶ per capita GDP increased from US$ 104 in 1962
to US$ 22,590 (Annual growth rate is 5.43 %)
and
US$30,722(PPP) in 2012.
4
1. Korea’s Economic Achievements
▶ Exports increased annually 16.39 % during the period and
the amount reached to US$ 555,213 million in 2011, which is
about 56% of the GDP.
▶Trade (% of GDP) : 110.5 (2011).
▶ Share of GDP by Sector: Agriculture – 39.4%(1965)
→ 2.7%(2011), Manufacturing – 14.3% (1965) → 31.2%(2011),
Service - 39.3%(1965 ) → 58.1%(2011).
▶ Korea leads globally in manufacturing of Liquid Crystal
Displays, memory chips, and smart phones. 1st shipbuilder
5th automobile producer
5
1. Korea’s Economic Achievements
▶Korea Achieved “Shared growth” with relatively equal
income distribution, but income distribution is deteriorating.
- Gini coefficient, at disposal income, post taxes and transfers
(before taxes and transfers): 2006 – 0.306 (0.330) →
2011 - 0.311(0.342)
- Poverty rate before taxes and transfers:
2006 - 0.158 → 2011 - 0.173
▶ Human Development Index of UNDP ranks 12 out of 187
countries in 2012.
▶The Political structure changed from an authoritarian
one to democratic system after 1987.
6
□. Average Annual Growth Rates(1962-2012), %
1962-
1980-
1988-
1993-
1998-
2003-
2008-
1979
1987
1992
1997
2002
2007
2012
(Park
(Chun
(Roh
(Kim
(Kim
(Noh
(Lee
Jung-
Doo-
Tae-
Young
Dae-
Mu-
Myung-
hee)
hwan)
woo)
sam)
jung)
hyun)
bak)
GDP
8.46
7.43
8.36
7.10
4.46
4.34
2.92
6.81
GDP per capita
6.20
6.09
7.30
6.02
3.72
3.90
2.34
5.43
Exports
25.59
13.46
7.10
17.34
11.02
13.20
4.86
16.39
1962-
2012
Whole
period
Source: databank.worldbank.org/data/home.aspx, KOSIS(2012 exports)
Note: ( ) represents president of Korea in those period. Rates are calculated by author.
7
Per cent
2007
(a)
2011
Exports (f.o.b.)
Other
consumer goods
8.1
Textiles & clothing
3.3
Other
0.2
Agriculture
1.7
Fuels
6.6
Mining
9.1
Other
consumer goods
8.1
Other mining
2.5
Iron & steel
5.1
Non-electrical
machinery
7.4
Other electrical
machines
4.8
(b)
Iron & steel
5.7
Mining
11.8
Transport
equipment
23.3
Chemicals
10.9
Manufactures
85.3
Other electrical
machines
5.7
Office machines &
telecommunication equipment
25.0
Total:
Other mining
2.3
Other semimanufactures
4.0
Manufactures
88.9
Fuels
9.6
Textiles & clothing
2.6
Chemicals
10.1
Transport
equipment
21.3
Other
0.6
Agriculture
2.3
US$371.5 billion
Office machines &
telecommunication equipment
17.3
Other semimanufactures
3.9
Non-electrical
machinery
7.8
Total: US$555.2 billion
Imports (c.i.f.)
Other consumer goods
6.4
Other
0.6
Textiles & clothing
Other consumer goods
5.8
Agriculture
6.2
Textiles & clothing
2.2
Transport equipment
3.7
2.4
Transport equipment
3.8
Other electrical
machines
4.9
Office
machines &
telecom. equip.
12.8
Fuels
27.0
Manufactures
57.8
Other electrical machines
4.3
Office machines &
telecommunication
equipment
9.9
Mining
35.5
Non-electrical
machinery
7.5
Non-electrical
machinery
8.6
Other semimanufactures
3.8
Other mining
8.4
Chemicals
9.1
Total:
Iron & steel
6.0
US$356.8 billion
Other
0.4
Agriculture
6.6
Fuels
33.1
Manufactures
51.0
Other
semi-manuf.
3.5
Chemicals
9.1
Iron & steel
4.9
Total:
Mining
42.0
Other mining
8.9
US$524.4 billion
Per cent
2007
(a)
2011
Exports (f.o.b.)
Other
1.6
Other Asia
11.6
Singapore
3.5
Chinese Taipei
3.2
Hong Kong,
China
5.0
Other
1.4
United States
12.4
Other Asia
15.1
Other America
7.8
Americas
20.2
Asia
52.5
EU27
15.1
Japan
7.1
Americas
18.2
Chinese Taipei
3.3
Hong Kong,
China
5.6
EU27
10.2
Asia
59.1
CISa 2.6
Japan
7.1
Africa 3.3
Middle East
5.2
Africa 3.0
Middle
East
4.5
China
24.2
Total: US$371.5 billion
(b)
Other America
8.1
Singapore
3.8
CISa 3.0
China
22.1
United States
10.2
Total: US$555.2 billion
Imports (c.i.f.)
Other Asia
9.2
Other
2.8
Indonesia 2.6
Australia 3.7
Asia
51.7
Japan
15.8
CISa 2.2
Other
2.5
Indonesia 3.3
Australia
4.8
EU27
10.3
Americas
14.5
Chinese Taipei
2.8
Other Asia
9.2
United States
10.5
Other America
4.0
EU27
9.0
Americas
13.6
Chinese Taipei
3.2
CISa 2.3
Asia
50.0
Middle East
18.4
United States
8.5
Other America
5.0
Saudi Arabia
5.9
Japan
13.0
Middle East
22.5
U.A.E. 2.8
United Arab Emirates 3.5
Qatar 2.4
China
17.7
Kuwait 2.5
Other
Middle East
4.1
Total: US$356.8 billion
Saudi Arabia
7.1
Qatar 4.0
Kuwait 3.2
China
16.5
Other
Middle East
5.4
Total: US$524.4 billion
2. Foreign Exchange rate and Trade policies in the 1945 - 1950s
◇ Reconstruction Period
▶ Aid from
the UN and the U.S was crucial in the reconstruction of the

Korean economy: 585 million dollars was provided during the 1945-50 ,
and During 1953-1960, 2,083.3 million dollars by the US and UN, which
accounted for 58 .3 – 86.6 % of import in respective years . Aid as a
proportion to GDP was 11%(1954) -23%(1957). Project assistance made up
27% and non- project assistance 73%.
▶ The exchange rate policy was aimed at keeping Korean currency (WON
valuation as high as possible to promote import - substitution
industrialization through reconstruction plans
▶ Besides the official exchange rate, there were other exchange rates –
export exchange rate, market exchange rate etc.. Market exchange rate to
official exchange rate was 2.56 in 1955, but declined to 1. 03 in 1962.
10
2. Foreign Exchange rate and Trade policies in the 1950s
▶The Import policy began when an “Import and Export Licensing System”
was introduced in 1946. It was replaced by the “Import Quota System” in
1949, which specified not only the items that could be imported but also
the quantity.

▶ In 1955, the Trade Program (Import Program) was instituted,
“A positive-list system” that listed ‘ approved import items’,
which was divided into ‘automatically approved items’ and ‘ restricted
items’.
▶ In 1952, the government introduced ‘ tariff exemptions’ on
imports of capital equipment required for certain industries.
11
2. Foreign Exchange rate and Trade policies in the 1950s
▶ In terms of export policy, there were initially export controls to prevent the
export of essential domestic products.
▶ One of the earliest export promotion measures was the “ Trade Credit
 known as the Export Credit System) introduced in 1950, under which
System”(later
exporters enjoyed priority in the allocation of domestic credits.
▶ Another early measure was the “Preferential Export System”, adopted in 1951,
under which the exporters of so-called non-essential products enjoyed the right to
use a certain percent of foreign exchange earnings for importing popular items.
▶ From 1950 to 54, exporters enjoyed ‘preferential access to foreign exchange
loans’ in a scheme that allocated government-held foreign exchange reserve(KFX)
to domestic users.
▶ ‘Tariff exemptions’ were introduced in 1959 on imports of raw materials and
intermediate goods for export products, and it was changed into a ‘tariff rebate’ in
1974.
12
3. Foreign Exchange rate and Trade policies in the 1960s
▶ Korean government started first 5-year economic development
plan(1962-66). Beginning in 1964, the Korean government
focused on export promotion and this has been a top priority in
economic policy since then.

▶ Exports began to grow rapidly following the two round of devaluation in
February and October in 1960 (Official exchange rate: 1960-KRW62.5
→ 1961 -KRW127.5 per US$).
▶ Exchange rate system changed from “Fixed Exchange Rate System” to
“Unitary Floating Exchange Rate System” , and exchange rate
increased to KRW255 in 1964 from KRW130 per US dollar.
▶ Even before the exchange rate reform, exporters could convert their
foreign currency earnings into domestic currencies at market rates
through the “Foreign Exchange Deposit System”. Devaluation of the
won therefore did not suddenly increase exporters profit.
▶ The exchange rate reform closed out the zero-sum sources of rent,
reduced opportunity costs, and drove rent-seekers in productive sum
activity.
13
3. Foreign Exchange rate and Trade policies in the 1960s
▶ Korean government adopted Comprehensive Export Promotion Program
in 1964. It may be regarded as much as an industrial policy rather than
trade policy since it attempted to pick and promote export industry.

▶ Export credit
incentives were greatly expanded by increasing the
number of types and volume of loans for exports that offered
preferential interest rates. Preferential interest rate was 6.0 % and
general loan interest rate was 24 %, and whole sale price rise was
6.4 % in 1967.
▶ Export credits that were automatically extended to exporters who
turned in letters of credit. The share of export credits in total bank
credit rose from 4.5 % in 1961-65 to 7.6 % in 1966-72 and then to
13.3% in 1973-81. The interest rate on export credits was kept low
level, and the gap with the general interest rate reached 17% points
during the high interest rate period of 1966-72.
▶ Generous “ waste allowances” were introduced in 1965, which
allowed the exporters to import inputs for production over and above
established needs. Also in 1965, a system of local letters of
credit(L/Cs) was introduced.
14
3. Foreign Exchange rate and Trade policies in the 1960s
▶ Tariff exemption of raw materials for export, introduced in 1959,
continued in 1960s, and various favorable tax rates and exemptions –
income tax, corporate tax, business tax, commodity tax were applied
to exporters.

▶ Korea Trade Investment Promotion Agency(KOTRA) was established
in 1962.
▶ In 1965, president Park Chung –hee began to preside over the “ Monthly
Export Promotion Meeting” attended by various economic
ministers, the Bank of Korea governor, the heads of KOTRA, KITA
and the Korea Chamber of commerce, the chief executives of banks and
financial institutions, the chairmen of leading export firms, and trade
experts. These changes in policy represented an all-out effort by the
government for export promotion.
▶ The “ Export Insurance System” was introduced in 1969 to
exporters, producers and foreign investors for possible losses from
credit risks and political risks.
15
3. Foreign Exchange rate and Trade policies in the 1960s
▶ Import policy was gradually liberalized fro the mid-1960s, as
the balance of payments improved. Korea recorded US$ 100
millionexport in 1964.
▶ Korea joined GATT in 1967, and the “Negative-list Trade
Program”was adopted in 1967. The import liberalization ratio,
the proportion of automatically approved items in total import
items, rose from 12 to 60 %.
▶ Most effective export promotion policies in 1960s were
i) reform of the foreign exchange system,
ii) preferential export finance, and
iii) monthly export promotion meeting.
16
3. Foreign Exchange rate and Trade policies in the 1960s
▶First of all, three devaluations triggered the rapid export
expansion and the devaluations were rather accidental in nature.

- In February 1960, Korean government reluctantly accepted the
first of three devaluations, because it had agreed with the U.S
government to change the exchange rate in accordance with the
price index.
- In October 1960, the Korean government accepted the second
devaluation suggested by the U.S. government.
- The last was the Korean government’s own decision, would
have been very difficult without the previous two.
▶ Secondly, the beginning of rapid rapid export expansion led to
the switch in policy in 1964 from import substitution to export
promotion.
17
□. Change to the Foreign Exchange Rate Regime
Date
Change to the exchange rate regime Remarks
1945.10 – 1964.5
Fixed exchange rate, which was

pegged to the U.S. Dollar
1964.5 - 1980.2
Unitary floating system was
established. Foreign exchange
certificate was introduced, which
could be sold in a free market.
Basic Rate of W255.00 per
U.S. Dollar
1980.3 – 1990.3
Multiple currency basket peg system SDR, US, Japan, Germany
was introduced. Starting from 1989, and Canada
the exchange rate was allowed to
fluctuate within a percentage range
against the basic rate.
18
□. Change to the Foreign Exchange Rate Regime
Date
Change to the exchange rate regime Remarks
1990.3 – 1997.12
The effective exchange rate was

replaced by a Market Average Rate.
There was a managed floating
exchange rate regime and the
exchange rate was determined by
the market forces in the interbank
market, the Seoul Foreign Exchange
Market.
1997.12 present
The fluctuation range of
exchange rate in the
interbank market was
widened from 0.4% to
2.25% during 1990 –
1995.On November 1997,
the Korean government
widened its Won trading
band to 10%.
The exchange rate of the Korean
Won was allowed to float freely
which was determined on the basis
of supply and demand.
19
□. The Role of “Monthly Meeting” (1/7)
5-year economic development plans and the role of
“Monthly Meetings”
• 5-year plan: suggesting blue print and vision
• Monthly meeting: monitoring and trouble-shooting
session
* Monthly Export Promotion Meeting and Monthly
Economic Trends Report Meeting
Bureaucrats, bankers, business associations attended
• During 1965-1979, about 300 monthly meetings were held
25
. The Role of “Monthly Meeting” (2/7)
Monthly Export Promotion Meeting prepared by MCI
• Export targets were set for each firm based on projected sales.
• Best performers were rewarded with financial supports and were
given achievement awards
Monthly Economic Trends Report Meeting prepared by
EPB
• Success stories of Saemaul Projects were presented at this
meeting. Between 1971 and 1979, 150 Saemaul leaders presented
their success stories.
22
8
26
 The Role of “Monthly Meeting” (3/7)
Troubled shooting session: identification of major
bottlenecks & immediate policy responses
• If some projects were found to be lagging behind
schedule, the causes of the delay were analyzed and
a decision on corrective action was taken, often on
the spot.
By doing so, this led to vision sharing among gov’t and
private sector that allowed better policy coordination
22
8
30
24
 The Role of “Monthly Meeting” (4/7)
Examples of Troubled shooting session
• When the government assessed the progress of plant
constructions for the chemical industry complex and found that
they were well behind schedule because the lending banks were
providing insufficient support, it summoned the bank presidents
and asked them for greater cooperation in supporting the project
• When exporters reported in the monthly export promotion
meetings that the international market was slow and that they
had begun accumulating inventory, the government urged
bankers to extend greater working capital credit to exporters.
22
8
31
24
 The Role of “Monthly Meeting” (5/7)
28232
Presentation of success story by village leaders in
front of ministers and political leaders.
• President Park emphasize the importance of success story
of Saemaul project. He believed the success story itself
could be a good textbook.
• Success story were presented in the Monthly Meeting,
which key ministers and political leaders attended.
* Listening to the success story, the ministers and political
leaders realized and understood the Saemaul movement
better
 The Role of “Monthly Meeting” (6/7)
Monthly Economic Trends Report Meeting served
as a trouble shooting session for Saemaul project
• In one of the meetings, a village leader told how he was
frustrated because he could not find any hospital in the
village when an urgent sick person needed help.
→ The government responded to establish a village clinic
at each village, where a medical college graduated
intern and a nurse dispatched.
• Another leader told about the inconvenience occurred in
emergency situation because they do not have a
telephone.
→ President Park instructed to install a village telephone.
22
8
33
24
 The Role of “Monthly Meeting” (7/7)
Monthly Meetings helped review both bureaucratic and
firm performance → “Beauty contest” for gov’t officials
• Every official had to be alert to ensure that a project on
his authority did not become an object of negative
attention at the meeting in the presence of the President.
• Performance of officials was the critical element of their
evaluation and promotion.
• Relatively corruption-free
22
8
34
25
2
□. Frequency of Monthly Meetings
Economic Trends Meeting
Export Promotion Meeting
Total
1965
11
5
16
1966
10
11
21
1967
12
12
24
1968
11
12
23
1969
11
12
23
1970
11
12
23
1971
11
11
22
1972
11
11
22
1973
11
10
21
1974
11
11
22
1975
9
10
19
1976
8
10
18
1977
8
10
18
1978
7
9
16
1979
4
6
10
□. List of Participants for the Third Monthly Export
Promotion Meeting in 1967
The List of Attendants
Central
Government
Ministers and
Vice-ministers
Directors and
others
Financial institution
The Deputy Prime Minister, Minister of Home Affairs, Minister of
Finance, Minister of Health & Welfare, Minister of Transportation,
Minister of Construction, 2 Ministers without portfolio, Viceminister of Foreign Affairs, Vice-minister of Commerce and
Industry, Vice-minister of Public relations, 3 PACST(Presidential
Advisory Council on Science and Technology) members,
Commissioner of National Tax Service, Chief of Korea Forest
Service, and etc. (18)
2 Directors from Ministry of Foreign Affairs, 4 Directors from
Ministry of Finance, 1 Director from National Tax Service, 6
Directors from Ministry of Commerce and Industry, 1 Director
from Ministry of Agriculture, 1 Director from Ministry of
Maritime Affairs & Fisheries, 2 Secretaries from Prime Minister
(17)
Governor of BOK, Governor of KDB, President of KEB, President
of Industrial Bank Korea, CEO of Federation of Agricultural
Credit Cooperatives, CEO of Federation of Fishery Credit
Cooperatives (6)
22
8
24
□. List of Participants for the Third Monthly Export
Promotion Meeting in 1967
State-owned institutions,
business associations
Academia
Law makers and
Prosecutors
Representatives from
businessmen
Regional Reprensentatives
President of KOTRA, CEO of KITA, Chairman of
KCCI(Korea Chamber of Commerce & Industry),
Vice chairman of FKI(Federation of Korean
Industries), Executive Vice Chairman of KITA,
Chairman of Korea Tourism Organization, CEO of
Korea Express, CEO of KOSIC (8)
3 Professors
Director from the ruling party, Chairman of the
Commerce, Industry Committee, 1 Law maker, 1
Prosecutor (4)
CEOs or presidents from leading companies (12)
Mayor of Pusan, Governor of Kyungsang-Namdo, etc.
10 chiefs in the region of Pusan and KyungsangNamdo
8 professors in the region of Pusan and KyungsangNamdo
Source: YH Rhee (2006): “Economic Policy Coordination and Assessment: Monthly Economic Trends
Meeting and Monthly Export Promotion Meeting.”
22
8
24
Monthly Export Promotion Meeting
Monthly Export Promotion Meeting
4. Industrial and Trade policies in the 1970s
▶ The second plan (1967-71) placed emphasis on HCIs, including steel,
machinery and petrochemical industries.

▶ The Seoul-Incheon,
Seoul-Busan and Honam Expressways were
opened in 1968, 1970 and 1973 respectively.
▶ A full-scale drive toward HCIs began in 1973. To achieve a 10billion
dollar target of annual exports by early 1980s, the share of HCIs in
total exports should be raised to well over 50 %. For this purpose, six
strategic industries – steel, nonferrous metal, machinery, shipbuilding,
electronics, and chemical engineering – were selected.
32
4. Industrial and Trade policies in the 1970s
▶ Government support to HCIs took various forms; (1) providing longterm credits and tax incentives to selected industries; (2) establishing
and expanding vocational schools and training centers to supply skilled
man powers; and (3) creating government-funded research institutions
to carryout R&D activities as a public goods.
▶ By controlling the financial sector, government could supply vast
amount of direct credits with low interest rates and share investment
risk with private enterprises – “Risk sharing”.
33
4. Industrial and Trade policies in the 1970s
▶ On top of directed credits, various tax incentives were offered to HCIs. Margina
tax rates of HCIs to be 30-35 percentage points lower than those of light industrie
during the height of HCI drive(1974-82).

▶Characteristics of the HCI drive: (1) it had clear export orientation,
going beyond import-substitution industrialization; (2) the government
led the drive but left actual implementation to the private sector;
(3) the HCI drive took demand conditions and government budget
constraints into full consideration.
▶ The HCI drive has also been criticized for its negative impact on other
aspects of the national economy; concentration of economic
power(chaebol), excessive monetary expansion and chronic inflation,
financial repression obstructed the development of a competitive
financial sector and increased the inefficiency in financial
intermediation.
34
Future is the Achievement of Dreamer.
Ulsan Industrial Complex (1962)
POSCO(1970)
New Village35(Samaul) Movement(1971)
Honoring Saemaul Leaders
15
2
19
29
Future is the Achievement of Dreamer.
Export 10billion Dollar(1977)
64KD RamDevelopment(1983)
37
Future is the Achievement of Dreamer.
Gold Collection(1998)
4Th in the World Cup(2002)
38
Export 550
billion dollar(2011)
5. Globalization of the Korean economy from 1998
▶ The Asian financial crisis of 1997 caused a great economic turmoil in Korea.
High economic growth depended on an excess amount of foreign loans, which
reached 180 billion dollars, most of which were short term debts. In 1977, Korea’s

manufacturing
sector had a debt-to-equity ratio of 400%.
▶ The IMF bailout agreement accelerated the liberalization of the Korean economy
Korea agreed to eliminate trade-related subsidies, restrictive import licensing, and
the import diversification program, in addition to streamlining and improving the
transparency of import certification procedures. Moreover, Korea agreed not to
postpone liberalization plans for reasons of its balance of payments.
▶From the late1990s, Korea began to pursuing a FTA policy, turning away from a
trade policy that focused on the WTO’s multilateral trade liberalization. The FTA
policy also was seen as necessary to secure export markets and promote the
efficiency of Korea’s economic system.
(Table 4-5).
39
5. Globalization of the Korean economy from 1998
▶The trade adjustment assistance system was introduced after the conclusion of
the Korea-U.S. FTA. But, Korea needs to improve the trade adjustment assistance
system and make the social welfare infrastructure more relevant to an open

market economy.
▶ The Exchange rate was an important part of Korea’s export promotion policy.
Before 1980s, Korea had a fixed exchange rate system with its currency pegged to
the U.S. dollar. Then, the government adopted a multiple currency basket peg
system. In March 1990, the exchange rate system was switched to a market
average rate system with a narrow band of intraday fluctuation. The 1997 financial
crisis caused a sharp depreciation of won. The government widened its won
trading band and finally abolished the band to allow the won to float freely.
40
6. Evolution of FDI Policy
▶ FDI in Korea was allowed in 1962. However, the Korean government depended
on foreign loans rather than FDI in its development strategies, with FDI being
restricted until the early 1980s. In July 1984, the Korean government changed its F

야 policy from
a positive list system to negative list one in order to expand the
number of business categories that would be liberalized for F야. It lofted the
horizontal restriction in foreign equity ceiling of 50 %.
▶ In 1992, it introduced a notification system in principle. In 1996, with Korea
joining the OECD, the government took further liberalization steps on F야. It started
to open up the service sector, including financial ,telecommunications and
distribution services. In February 1997, The government eased rules on mergers
and acquisitions(M&As) of domestic companies by foreign firms, with allowing
friendly M&As.
41
6. Evolution of FDI Policy
▶In 1998, with the Korean economy trying to recover the Asian financial crisis, the
government promoted F야 by enacting the Foreign Investment Promotion Act.

Korea Investment
Service Center (KISC)was established to provide one-stop
service to potential foreign investors. In 1999, an Ombudsman system was
introduced in order to address any complaints by foreign investors. The KISC was
renamed as Invest Korea in 2003, and free economic zones(FEZs) started to be
designated in regional areas.
▶ FDI in Korea was minimal until the mid-1990s, but it has increased dramatically
after Korea joined the OECD and went through economic restructuring following th
Asian financial crisis in 1997.
42
6. Evolution of FDI Policy
▶ In 1992, it introduced a notification system in principle. In 1996, with Korea
joining the OECD, the government took further liberalization steps on F야. It started
to open up the service sector, including financial ,telecommunications and
distribution services. In February 1997, The government eased rules on mergers
and acquisitions(M&As) of domestic companies by foreign firms, with allowing
friendly M&As.
▶In 1998, with the Korean economy trying to recover the Asian financial crisis, the
government promoted FDI by enacting the Foreign Investment Promotion Act(FIPA
Korea Investment Service Center (KISC)was established to provide one-stop
service to potential foreign investors. In 1999, an Ombudsman system was
introduced in order to address any complaints by foreign investors. The KISC was
renamed as Invest Korea in 2003, and free economic zones(FEZs) started to be
designated in regional areas.
▶ Korea’s new F야 policy was intended to catch five birds with one stone, bringing
not only an injection of new capital, but also enhanced transparency of business
management, the transfer of advanced management techniques, an expansion of
markets and job creation.
43
6. Evolution of FDI Policy
▶ The FIPA was amended in 2000, which can be classified into two areas: i)
introduction of the Foreign Investment Zones(FIZs), ii) revisions to improve the
investment environment and strengthen the follow-up management function by

relaxing registration
requirements, introducing the foreign investment ombudsman
and strengthening the notification system for foreign investment restrictions.
▶ The major changes included:
- opening additional sectors to foreign investment, as of September
1988, only 13 out of a total of 1,148 business sectors remain closed to
FDI, and 18 were partially opened.
- expanding investment incentives
- full-fledged liberalization of cross-border M&As
- removing regulations on foreign ownership for real estate
- streamlining foreign investment procedures
44
6. Evolution of FDI Policy
▶ Under the FIPA, virtually all business sectors are now open to foreign
investors and FDI is subject to no specific restrictions provided it does
 national security, public order, public health, environmental
not violate
preservation or social morals.
▶ Korea’s new F야 policy was intended to catch five birds with one stone, bringing
not only an injection of new capital, but also enhanced transparency of business
management, the transfer of advanced management techniques, an expansion of
markets and job creation.
45
6. Evolution of FDI Policy

46
6. Evolution of FDI Policy

47
7. Liberalization of Outward Direct Investment
▶ Outward Foreign Direct Investment(OFDI) began to take off in the late 1980s
when Korea started to ease restrictions on OFDI. Outflows reached a record USD
25 billions in 2011 (Figure 5).

▶ Korea’s policy approach towards OFDI has evolved strategically over time,
reflecting the needs of the Korean economy at different stage of development.
Initially restrictive until the late 1970s, gradual liberalization started in the 1980s.
But active promotion of OFDI only began in the 1990s. Korea’s accession to the
OECD was a watershed in terms of OFDI policies.
▶ Under the FIPA, virtually all business sectors are now open to foreign
investors and FDI is subject to no specific restrictions provided it does
not violate national security, public order, public health, environmental
preservation or social morals.
48
7. Liberalization of Outward Direct Investment
▶ Six stages of OFDI policies

1) Introduction
(1968-79) : OFDI by Korean nationals was strictly
controlled by the government in the 1970s in the face of chronic
current account deficits. The bank of Korea was in charge of giving
‘ Prior approval’.
▶ 2) Institutionalization (1980 -1985): Resource nationalism and trade
protectionism caused by second oil shock led to the first steps by the government
to promote outward investment. Prior approval system was removed in 1981.
“Committee of Investment Overseas” was established.
49
7. Liberalization of Outward Direct Investment
3) Liberalization (1986-1990): Beginning in mid-1980s, the Korea Won
Appreciated, domestic labor costs increased, the balance of payments was in
surplus and trade conflicts deepened. In response, the government’s attitude
 became more proactive. The Government adopted notification system
towards OFDI
in 1987.
4) Reorientation (1991 – 1998): In the 1990s, promotion of OFDI came to be
associated with broader industrial policies which pushed the government to
liberalize further its OFDI policies. The government adopted the notification system
for all OFDI projects in 1997.
50
7. Liberalization of Outward Direct Investment
▶ 5) Private-led promotion (1999-20040: The Foreign Exchange Control Act was
replaced by the Foreign Exchange Transaction Act to allow simplification of
procedures and to ease the pre-requisite conditions. The Service Centre for

Korean Overseas
Investors opened its first office in Beijing in 2004. The
government provided support for Korean firms in bidding for contracts to build
large scale oil plants and other natural resource projects.
6) Proactive promotion (2005 - ): The government has actively promoted OFDI
since 2005, encouraging domestic firms to invest abroad and to deepen business
alliance with foreign multinational enterprises operating in Korea. In 2007, the
policy for supporting Korean Firms to Invest Abroad was adopted to transform
Korean from into one of the strongest outward investor countries, and the
Committee for Global Business Operation was established.
51
8. Liberalization of the Financial Sector
▶ The liberalization of the financial sector in Korea involved both external and
internal factors. It started from the Long-Term Plan for Globalization of Capital
Market in 1981.Then Korea Fund was introduced in 1984 which was listed on the
New York Stock Exchange to invest in Korean stocks. (Box 6).
▶ Towards the late 1980s, liberalization of the financial sector became a necessity
The government announced a Three-Stage Plan for the Globalization of the Capital
Market to be carried out during 1989 – 1992.
Raised foreign shareholding limit in Korean securities firms in 1989. In 1992, Stock
market opened for individual foreign investors.
52
8. Liberalization of the Financial Sector
▶ In 1993 another Three Stage Blueprint for Liberalization of the Financial Sector
was introduced. Raised the limit of foreign equity holdings to 20% from 3% and
allowed foreign investment in the primary market for bonds while facilitating

foreign banks’
establishment of branches in 1994. And in 1996, foreign financial
firms were allowed to hold shares of domestic banks.
▶ The government adopted a new year-by –year Blueprint for the Liberalization
of the Financial Sector(1997-2000) in September 1996 with Korea’s accession to
the OECD.
53
7. Liberalization of the Financial Sector

54
7 . Liberalization of the Financial Sector

55
8. Liberalization of the Financial Sector
▶ The Blueprint was divided into two parts: a liberalization plan for capital
movement and another one for opening up the financial sector. Korea’s OECD
accession was a cornerstone in setting the country on a path towards greater
 less government interference in the financial sector.
openness and
▶ The Asian financial crisis accelerated and deepened the liberalization of the
financial sector. The full liberalization of the equity market was undertaken in
1998 with the crisis rather than in 2000 as foreseen by the blueprint.
▶ In 1999, allowed full foreign ownership of Korean Banks. In 2000, abolished
foreign equity shareholding restriction of 50% in credit rating companies, and
opened non-life insurance industry to foreign firms.
56
9. Trade Agreements and Arrangements
1) Korea and WTO
▶ Korea participates actively in the WTO and is committed to the multilateral
trade system. Korea is an export-dependent country and one of the biggest

beneficiaries
of the multilateral trading system. It attaches high priority to the
successful conclusion of the Doha Development Agenda(DDA).
▶ In 2010, Korea became a member of the OECD Development Assistance
Committee(DAC), its Official Development Assistance(ODA)amounted to
USD1.17 billion, representing 0.12% of its GNI, and it is committed to triple this
amount to USD 3 billion of 0.25% of its GNI by 2015.
2) Multi-regional Agreements
(a) Asia-Pacific Economic Cooperation(APEC)
Korea has been a APEC member since 1980. It has intended to meet APEC’s
target of free and open trade, including in services and investment by 2020.
57
9. Trade Agreements and Arrangements
(b) Association of Southeast Asian Nations(ASEAN)
- ASEAN + 3: Korea attaches high priority to closer trade relations and other ties
 The ASEAN + 3 members(China, Japan, and Korea)agreed in
with ASEAN.
November 2000 to study and formulate option to gradually establish an East Asia
Free Trade Area(EAFTA).
- ASEAN: The ASEAN and Korea FTA on goods, which entered into force on June
1 for Korea, Singapore, and Malaysia(goods), and on May 2009 for Korea, Brunei,
Malaysia, the Philippines, Singapore and Vietnam(services) was notified to WTO.
(C) Asia –Europe Meeting (ASEM)
The ASEM informal process of dialogue and cooperation among 48 members,
address political economic, social, and other issues to strengthen regional
relationships.
58
9. Trade Agreements and Arrangements
3) Bilateral Agreements
Korea continued its vigorous pursuit of FTAs.
(a)Korea –Chile FTA
The agreement entered into force on 1 April 2004. Korea undertook to eliminate
tariffs on over 96% of its tariff lines within ten years, under a phased elimination
schedule.
(b) Korea – Singapore FTA
The agreement with Singapore, which entered into force in March 2006, included
immediate duty-free entry into Singapore for all of Korea’s exports, and
liberalization of 59.7% of Korea’s good imports from Singapore.
59
9. Trade Agreements and Arrangements
3) Bilateral Agreements
(c) Korea –EFTA (Norway, Switzerland, Iceland, Liechtenstein) FTA

The agreement entered into force on 1 September 2006, the parties undertook to
eliminate all tariffs on substantially all trade in goods with exception of agricultural
goods.
(d) Korea – United States(KORUS) FTA
The KORUS FTA signed in June 2007, was followed by a related agreement,
ratified on 22 November 2011, and entered into force on 15 March 2012.
60
9. Trade Agreements and Arrangements
3) Bilateral Agreements
(e) Korea – India Comprehensive Economic Partnership Agreement(CEPA)

This agreement entered into force on 1 January 2010, Korea eliminated or
reduced immediately tariffs on 93% of tariff items and 90% of the trade value of
Indian goods, while India will eliminate or reduce tariffs on 85% of Korean goods
on the basis of tariff items and trade value.
(f) Korea-EU FTA
Under this agreement ratified on 4 May 2004 and applied as of 1 July 2011, the
parties undertook to eliminate all tariffs on substantially all trade goods with the
exception of most sensitive agricultural goods for Korea.
(g) Korea – Peru FTA
Under this agreement, which was entered into force on August 2011, all tariffs on
the items currently traded between the two countries will be eliminated within ten
years.
61
9. Trade Agreements and Arrangements
4) FTA negotiations and Plans
▶Korea is currently negotiating with Australia, New Zealand, Colombia, Canada,
 Mexico as well as the Gulf Co-operation Council countries.
Turkey, and
▶ Korea also conducting preparatory talks or joint research projects with
prospective FTA partners including China, Japan, MERCOSUR, Israel, Vietnam,
Central America, Malaysia, and Indonesia, though no decision has been made in
respect.
62
□. Challenges of Regionalism
Major economies of the world have pursued regionalism, while
multilateralism under the WTO has been staggering.
 Through FTA, Korea aims to enhance regional cooperation and to be a center of R&D,
logistics and financial services in Asia.
 It also endeavors to transform into an open and globalised economy, promoting FTA
with a variety of economies.
< Korea’s Promotion of FTA >
Chile, Singapore,
FTA completed
EFTA, ASEAN, USA
Negotiation in
progress or to be
started
EU, Canada, Japan, Mexico,
India, GCC
FTA under
consideration
China, MERCOSUR, Australia,
New Zealand
63
10. Trade Policies and Practices by Measures
1)Measures directly affecting imports
(i) Customs Procedures

▶Korea continued to make wide-ranging trade facilitation efforts and remain a
world leader in this area. The world’s Best Custom 2012+ plan was initiated in
2008, which consist of five categories: cooperating with the private sector for
governance-based customs administration, emphasizing both self regulation and
participation of every company, expanding the role of customs to secure public
health and welfare, re-aligning customs procedures, practices, and regulations
with international standards, and improving the u-Customs level of KCS.
▶ The KCS operates a seven-fields paperless e-clearance system to handle
export/import clearance operation s, import cargo management, duties collection,
duties drawback system, and a single-window system covering requirementconfirmation process, including quarantine and inspection.
64
10. Trade Policies and Practices by Measures
▶Free Trade Zones(FTZs) operate under the 2004 Act on Designation and
Management of Free Trade Zones; they are exclusive areas outside the national

customs boundary,
exempt from customs requirements. Korean goods entering the
zones are treated as export, but if sold domestically , are subject to import duties
and domestic taxes.
(ii) Customs valuation
▶ Imports are valued at their c.i.f. price. The main method used is transaction
value.
65
10. Trade Policies and Practices by Measures
(iii) Tariffs
 2012, Korea introduced the 2012 version of the Harmonized System
▶ In January
of Tariff Classification(HS) consisting of 12,232 ten-digit lines. The tariff
comprises several rates according to the source of imports. These are the MFN
tariffs from non-preferential sources, and various preferential tariffs.
▶The 2012 simple average MFN tariff increased to 13.3% (12.8% in 2008), tariff
protection varies substantially across and within sectors, averaging 55% for
agricultural products and 6.6% for industrial goods in 2012.
66
Tariff structure, 2008, 2011, and 2012
(%, unless otherwise indicated)
MFN applied
Final bound
2008
2011
2012
Bound tariff lines (% of all tariff lines)
90.8
90.8
89.9
89.9
Simple average rate
WTO agricultural products
WTO non-agricultural products
Duty-free tariff lines (% of all tariff lines)
Simple average rate of dutiable lines only
12.8
53.6
6.5
15.9
15.2
12.6
52.8
6.5
16.5
15.1
13.3
55.0
6.6
16.2
16.2
17.6
63.4
9.2
14.2
20.9
1.6
0.7
1.6
0.7
1.9
0.8
1.9
1.0
2.7
2.6
3.0
2.8
9.1
52.2
4.1
9.0
51.3
4.1
10.5
53.6
4.0
18.1
56.6
3.2
2.0
1.8
1.7
1.8
Tariff quotas (% of all tariff lines)
b
Non-ad valorem tariffs (% of all tariff lines)
Domestic tariff "peaks" (% of all tariff lines)
c
International tariff "peaks" (% of all tariff lines)
Overall standard deviation of tariff rates
Coefficient of variation of tariff rates
Nuisance applied rates (% of all tariff lines)
a
b
c
d
e
Note:
e
d
a
Final bound rates are based on the 2012 tariff schedule in HS12 nomenclature. Implementation of final bound rates was
reached in 2009.
Excluding tariff quotas applicable to rice and rice products.
Domestic tariff peaks are defined as those exceeding three times the overall average applied rate.
International tariff peaks are defined as those exceeding 15%.
Nuisance rates are those greater than zero, but less than or equal to 2%.
The 2008 and 2011 tariff schedules are based on HS07 nomenclature, consisting respectively of 11,729 and 11,900 tariff lines.
The 2012 tariff schedule is based on HS12 nomenclature, consisting of 12,232 tariff lines. Calculations for averages are based
on national tariff line level (10-digit), excluding in-quota rates and including the ad valorem part of alternate rates.
Including
AVEs for non-ad valorem rates the simple average rate rises to 13.6% in 2012.
Source: WTO Secretariat calculations, based on data provided by the Korean authorities.
Summary analysis of the Korean preferential tariff, 2012
(%)
Total
Average
(%)
MFN
Duty-free
a
rates (%)
WTO agriculture
Coverage
(%)
b
WTO non-agriculture
Duty-free
a
rates (%)
Average
(%)
Duty-free
a
rates (%)
55.0
5.5
6.6
18.0
Average
(%)
13.3
16.2
13.1
12.9
16.2
17.4
10.0
11.8
54.9
54.8
5.6
5.6
6.3
6.2
18.0
19.3
6.3
91.4
76.2
41.8
68.4
0.5
95.2
Chile FTA (KCFTA)
6.3
92.5
79.7
45.2
55.9
0.0
98.5
Singapore FTA (KSFTA)
7.3
76.0
73.7
45.2
43.3
1.2
81.4
Iceland
7.6
85.6
76.7
53.2
20.8
0.2
96.1
Norway
7.6
85.3
75.2
53.5
18.7
0.2
96.1
Switzerland
7.5
84.9
73.9
53.1
16.2
0.2
96.1
7.4
77.8
82.0
45.8
36.4
1.2
84.6
India CEPA
8.8
58.6
75.1
52.4
9.6
1.8
66.6
EU FTA
7.5
79.6
82.6
46.8
40.7
1.2
86.0
Peru FTA (KPFTA)
7.0
82.8
82.3
46.4
25.9
0.6
92.1
TNDC
13.3
16.2
0.0
55.0
5.5
6.6
18.0
GSTP
13.3
16.2
0.1
55.0
5.5
6.6
18.0
7.0
90.4
74.2
46.4
59.7
0.6
95.4
Regional agreement
c
APTA
APTA for Lao PDR
and Bangladesh
ASEAN
Bilateral agreement
EFTA FTA
U.S. FTA (KORUS FTA)
d
LDC
a
b
c
d
Duty-free lines as a percentage of total tariff lines.
Per cent of total number of lines. Only rates that are lower than the corresponding MFN rate are taken into account.
Preferential rates under APTA are applicable to the China, Sri Lanka, Bangladesh, India, and Lao PDR.
Comprehensive Economic Partnership Agreement.
Note:
Calculations are based on national tariff line level (10-digit);
ad valorem part of alternate rates.
Source:
WTO Secretariat calculations, based on data provided by the authorities of the Republic of Korea.
excluding in-quota rates and specific rates and including the
10. Trade Policies and Practices by Measures
▶ Over 99% of tariffs are ad valorem duties. Korea applies temporary higher
MFN duties (termed as “flexible “tariffs). The flexible tariffs mechanism includes
not just the adjustment and seasonal duties, but also autonomous tariff quotas as
well as safeguard and special safeguard duties.
▶ Preferential rules of origin apply to imports under preferential trading
arrangements and FTAs, which increases the complexity of implementing its
preferential tariffs. Rules of origin covering imports under APTA, GSTP, TNDC,
and LDC preferential treatment are based on the provisions of the Korean Customs
Act.
69
10. Trade Policies and Practices by Measures
(iv) Tariff Quotas

▶ Korea applied
tariff quotas, under its multilateral agricultural market-access
commitments, on about 187 ten-digit tariff items in 2011.
(v) Other levies and charges
▶ A surcharge levied on petroleum imports provides funds to ensure adequate
supply and price stability. The surcharge is currently set at KRW 16 per litre.
70
10. Trade Policies and Practices by Measures
(vi) Import licensing, quotas, and prohibitions
▶ Import approval is governed by the Foreign Trade At and 51 other laws. Rice is
subject to import quota restrictions under Korea’s WTO minimum market access
commitments under annex 5 of the WTO agreement on agriculture.
▶ Korea prohibits a few imports, mainly to protect health, safety, security, public
morality, the environment, and natural resources, and to prevent deceptive
practices.
(vii) State trading
▶ Despite privatization efforts, the State participate in a wide range of trade
and/or trade-related
71
10. Trade Policies and Practices by Measures
(viii) Contingency Measures
▶ Contingency (trade remedy) measures are authorized under the Customs Act
and the Act on the Investigation of Unfair International Trade Practices and
Remedy Against Injury to Industry. The Korea Trade Commission(KTC)
administers the measures and investigates and determines whether imports are
dumped or subsidized and whether they cause or threaten to cause injury to the
domestic industry.
▶ Anti-dumping and countervailing measures. Safeguard measures, including
provisional, may be applied where increased imports cause or threaten to cause
serious injury to domestic producers of a like or directly competitive products.
(ix) Standards and other technical requirements
▶ Standards, testing, and certification. The Korean Agency for Technology and
Standards (KATS) sets, administers, and disseminates Korean Industrial Standards
㉿ on the basis of the National Standardization Act and the Industrial
Standardization Act.
72
10. Trade Policies and Practices by Measures
Food and health-related products
▶ Legislative responsibility for regulating food safety and quality is diversified and
 several ministries, which often perform similar activities.
overlaps with
(x) Government procurement
▶ In 2010, Korea’s government procurement market was KRW 104 trillion or abou
8 % of GDP. Although government procurement is directed at achieving “ value for
money”, it also focuses on promoting SMEs, companies in a “disadvantageous
position”, regional development, and green purchasing.
73
10. Trade Policies and Practices by Measures
2) Measures Directly Affecting Exports
(i)registration, documentation, and clearance

▶ More than 95 % of export declarations are submitted electronically to Customs
without supporting documents, and accepted automatically by the e-clearance
system. Clearance time is under two minutes on average, and export time seven
days
(ii) Export prohibitions, restrictions, and licensing
▶ export prohibitions – Export prohibitions protect animal rights, endangered
species, and preserve natural resources.
Export licensing and restrictions – Korea may restrict exports of certain products
periodically to ensure adequate domestic supplies, potentially assisting
downstream processing of thee products.
74
10. Trade Policies and Practices by Measures
(iii) Export subsidies
▶ Korea does not have export subsidy commitments: it maintains export
 certain farm products under the provisions of Article 94 of the WTO
subsidies for
agreement in Agriculture. The subsidies were used to reduce exporters’ marketing
costs .
(iv) Duty and tax concessions
▶ Raw materials used in exports are exempt from customs duties, and a customs
drawback scheme provide refund.
(v) Export finance, guarantees, and insurance
▶ The government owned Export-Import Bank of Korea provides export credit
and financial guarantees to support Korean enterprises in conducting overseas
business. Project-related guarantees are also provided to foreign buyers in the
event of exporters’ failure to meet contractual arrangements.
75
10. Trade Policies and Practices by Measures
▶ Export loans of up to 100% of the contract value are available provided the
“ minimum foreign exchange earnings ratio” is no less than 25%.

▶ Export credits are subject to minimum commercial interest reference rate (CIRR
and other terms.
▶ The state-owned Korea Trade Insurance Corporation (K-sure) provides export
credit insurance against non-payment risks.
(vi) Export promotion and marketing
▶ Korean exporters benefit from the promotional activities of the state-owned
Korea Trade and Investment Promotion Agency (KOTRA). With 111 Korea
Business Centers in over 76 countries, the agency operates a “ business
matchmaking” service introducing foreign importers to Korean business.
76
10. Trade Policies and Practices by Measures
3) Measures Affecting Production and Trade
(i)Taxation
▶ Total taxes as a share of GDP remain relatively low (18.6 % in 2009). Korea
relies on indirect taxes for 48.1% of tax revenues. VAT remains the main indirect
tax component, followed by the transportation-energy-environment tax. Custom
duties contributed as a substantial 6 % to total revenues in 2010.
▶ Exports are generally exempt from indirect taxes, except mainly for individual
consumption and transportation-energy-environment taxes applied to inputs of
petroleum products used in their production. Exports are zero-rated for VAT.
▶ Exports are generally exempt from indirect taxes, except mainly for individual
consumption and transportation-energy-environment taxes applied to inputs of
petroleum products used in their production. Exports are zero-rated for VAT.
77
10. Trade Policies and Practices by Measures
▶ The VAT, at 10%, applies to goods and services. The individual consumption
tax applies to wide range of goods, including luxury products.
 assistance
(ii) Financial
▶ State-owned financial institutions have a major role in assessing Korea’s
industrial development. State intervention dominates the large venture capital
market, which benefits mainly SMEs.
▶ Two major public institutions, the Industrial Bank of Korea(IBK) and the Korean
Development Bank (KDB), plays a substantial role in industrial development.
▶ The Korea Credit Guarantee Fund (KODIT) and KIBO technology Fund provide
credit guarantees to enable emerging firms, especially SMEs, to gain access to
finance.
78
10. Trade Policies and Practices by Measures
(iii) State-owned enterprises and privatization
▶ Sate involvement in the economy persists despite recent privatization efforts,
particularly in the service sector. Korea had 59 SOEs in 2009 with assets valued at
USD 177.6 billion employing 120,655 persons
79
Thank You !!