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Picking Up Speed and Putting a Strain on Japan
Korea-China FTA
Picking Up Speed and Putting a Strain on Japan
  • By matthew
  • July 29, 2013, 05:32
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According to the Ministry of Trade, Industry and Energy, the second round of trilateral FTA negotiations between Korea, Japan and China kick off in Shanghai on July 30. Japan is expected to show a particularly aggressive stance with FTA talks between Korea and China picking up speed thanks to the recent summit conference. The first negotiations were held in Seoul in March this year, with another round of talks scheduled in Japan before the end of 2013.

Korea, Japan, and China together approach one-third of the global trade market.​It is expected that tariff concessions will be the major issue of the upcoming talks. Four months ago, the three countries agreed to have bilateral and trilateral talks regarding the goods segment and only three-way talks in the service, investment and trade rules sectors.

The two-way negotiations in the commodity segment are because sensitive items are different and it is difficult to open the commodity markets with a single concession plan. For example, agricultural and fisheries products and low-price industrial goods are sensitive items of China, yet in Japan it is machinery, electronics products and electronic components. Still, the countries are likely to have a battle of wits regarding tariff concessions since such two-party negotiations could make three-way talks somewhat less meaningful.

Another issue is whether they will start item-by-item negotiations from the get go as is the case with FTA talks in general, or adopt a modality approach, that is, entering negotiations after deciding first on the degree to which tariffs will be eliminated. Korea and China have adopted a modality approach in their two-way FTA talks as it is seen as being advantageous for the protection of sensitive items.

Japan is likely to be wary of the fast progress of an agreement between Korea and China, and is therefore likely to push forward with its own negotiations with the two nations. The Korean government is planning to take a cautious approach in regards to the three-way FTA as its discussions with China are showing rapid progress. Once a Korea-China FTA is concluded, the two countries will then be able to take the lead in three-party negotiations. “Discussions among Korea, Japan and China will take more time than free trade talks in general as it is a super-size deal,” said Choi Kyung-rim, Assistant Deputy Minister of Trade, Industry and Energy.

FDI in Korea Increased 12.5% in H1

It has been found that foreign direct investment (FDI) in Korea increased year-on-year in the first half of 2013. Specifically, US and European investors made large investments in the service sector, while FDI from Japan plunged.

According to the Ministry of Trade, Industry and Energy, total FDI stood at US$8 billion in H1 on a reporting basis, 12.5% up from a year earlier. On an arrival basis, the amount totaled US$4.41 billion, a 9.3% decrease year-on-year. The sum is US$1.05 billion bigger than the average over the past five years. The FDI on an arrival basis increased significantly in the second quarter in particular as geopolitical risks and policy uncertainties were mitigated to improve investment conditions.

The US and EU invested US$3.01 billion and US$2.41 billion, respectively, in the service industry, while Japan’s investment in the manufacturing sector stood at US$1.36 billion. Japan’s investment in Korea, which revolves around manufacturing, component and materials industries such as transportation machinery, electronics and chemical engineering, decreased significantly as Japan’s overall cross-border investment declined during the period. Meanwhile, American and European private equity funds’ investment in the form of M&A soared substantially.

The ministry remarked that the half-yearly result is quite meaningful in that investment conditions were quite unfavorable in the first half due to the weak yen trend, slow economic recovery and geopolitical risk factors, adding that the government’s investment attraction policy also played its part.

Still, it pointed out that an amendment to the Foreign Investment Promotion Act must be passed as soon as possible in order to allow joint ventures between sub-subsidiary companies and foreign-invested firms. At present, potential demand amounts to approximately 500 billion won each for SK Global Chemical and GS Caltex.

When it comes to prospects for the second half, favorable and unfavorable conditions are being found. The global economy is expected to get on a recovery track, yet the weak yen is predicted to linger on and the revitalization of domestic investment likely to take some time.