ࡱ> )+$%&'(@ ]bjbjFF 7,,r&. ^^^8Nj**:dddd'N)N)N)N)N)N)N$PRdR&MN dd  MNddbN### dd'N# 'N##N9>d Ћo^>0@ xN0N>0SG"S`>S>vp!#'vvvMNMNvDLcBe#vctrade policy regime: framework and objectives Overview Since its last Review, in 2000, Korea has continued to liberalize its trade and investment policies to promote structural reform and improve the economy's efficiency. There have been no significant changes in the general legal or institutional framework, nor in the way in which trade policy is formulated or implemented. Trade and business laws have been strengthened, however, and transparency improved as part of the Government's goal of achieving a "fair and transparent market-driven economy". Regulatory reform, driven by the Regulatory Reform Committee, remains a high priority; improved customs procedures was selected as a trade-related strategic goal in 2003. Trade policy formulation and implementation is primarily the responsibility of the Ministry of Foreign Affairs and Trade (MOFAT). The Ministry of Commerce, Industry and Energy (MOCIE) regulates imports and exports. The principal trade policy objective is to build a "free and open economy" based on market principles to promote structural reform and efficiency. Raising exports is seen as a major growth engine for meeting the political target of doubling average per capita annual income to US$20,000 (by 2010). Korea's "global leadership" trade and investment strategy in key sectors, such as motor vehicles, steel, and IT industries, is aimed at enhancing the economys efficiency and achieving economic, including export-led, growth. Expanding high-technology industries and higher-value-added exports, and making Korea a Northeast Asia business and financial hub are high priorities. Although no independent statutory body publicly assesses trade or assistance policies within a national welfare framework, trade policy formulation and implementation is now more open. Advisory Councils independently advise ministries, including MOFAT. ϲʹ Agreements rank alongside domestic laws and can be invoked in national courts. Korea participates actively in the multilateral trading system to support stronger rules. It took part in the extended GATS negotiations on financial services and basic telecommunications, and is a member and observer of the plurilateral Agreements on Government Procurement and Trade in Civil Aircraft, respectively. It resolves trade disagreements using the ϲʹ dispute settlement system, and has complied on time with the DSB's findings in cases brought against it since its last Review. A major departure from previous practice in Korean trade policy has been an increasing willingness to negotiate regional free-trade agreements. The Asian financial crisis was an important factor in altering Korea's past opposition to preferential trade agreements. Korea sees these agreements as a means of liberalizing its trade and investment regimes to revitalize the economy, and to secure foreign markets and promote regional integration in response to the trend of growing regionalism. Korea's first such agreement, with Chile, effective 1April 2004, covered industrial and certain agricultural products comprehensively. However, rice and a number of other significant farm commodities were excluded, some permanently, thereby greatly reducing the agreements liberalizing impact on agriculture, where high protection persists. Korea is also negotiating free-trade agreements with Singapore and Japan, due to conclude in 2004 and by 2005. It has also launched a joint study on an FTA with ASEAN, and agreed to conduct similar studies with Mexico and EFTA. Korea's longer term goals include a trilateral agreement with China and Japan, and the formation of an East Asian Free Trade Area (EAFTA) among "ASEAN+3" members. Korea's relatively liberal FDI regime has benefited the economy. Foreign firms play an increasingly important role and are seen as an essential source of export growth. All kinds of FDI are allowed, including establishment, stock acquisitions, mergers (including hostile), and long-term loans. Sectoral restrictions on FDI have been relaxed. Only radio and television broadcasting, plus rice and barley growing, are wholly closed to FDI. Several, mainly infrastructure, sectors are partially closed and have foreign equity limits. Korea provides tax and other incentives to attract FDI, including in advanced technology activities, and in manufacturing, logistics, and tourism activities located in various types of designated zones. Investment incentives are being extended, including through the creation of three Free Economic Zones (FEZs) in 2003 (Incheon, Busan, and Gwangyang ports). A negotiable cash rebate was also introduced for foreign investors in 2004. On the other hand, income tax holidays are to be reduced from ten to seven years from 2005, as incentives become available to more foreign investors. General Constitutional and Institutional Framework There have been few, if any, significant changes in Korea's general constitutional or institutional framework since its previous Review in 2000. A democratic unitary republic, Korea has a presidential parliamentary system. The National Assembly (Parliament) exercises legislative power by enacting laws and monitoring state administration, including control of the Budget. Executive authority rests with the President and the State Council (Cabinet). It is chaired by the President, and comprises the Prime Minister and all ministers. Korea has 16 provincial governments and 234 lower-level municipalities; although they are empowered to collect local taxes and fees, local autonomy remains limited in certain areas. Provincial governments (headed by an elected governor) serve mainly as administrative intermediaries between the Central Government and lower-level municipalities. The State has constitutional power to "foster, regulate and coordinate" foreign trade. The executive, through relevant ministers, mainly introduces legislation into the National Assembly. Korea's legislative framework distinguishes between these acts and subordinate statutes issued under authority delegated by specific legislation. In hierarchical order, these consist of presidential decrees, ordinances, and administrative rules (called directives, regulations or public notices). The State Council endorses presidential decrees. Ordinances are issued by the responsible minister, including the Prime Minister. Administrative rules published by the relevant ministry govern public administration. When issued under specific legislation or subordinate statutes, such rules are generally regarded as supplementary laws. The President must promulgate bills passed by the National Assembly within 15 days by publication in the Official Gazette, unless vetoed by the State Council. Subordinate statutes are also gazetted. Laws and subordinate statutes generally enter into force 20 days after publication. Treaties concluded and promulgated under the Constitution, and generally recognized rules of international law have the same force and effect as domestic laws. Proposed treaties must be deliberated on by the State Council. The National Assembly has the right to consent to the conclusion and ratification of treaties, including on trade, and the President must ratify them. Korea has an independent judiciary. Judicial power is vested in the Supreme Court, the highest court, five high courts and 13 district courts, which oversee some 100 municipal courts. The President appoints the Chief Justice of the Supreme Court with the consent of the National Assembly for a single term of six years, as well as other justices (on the recommendation of the Chief Justice). A specialized Patent Court and Administrative Court also exist; and the Constitutional Court is responsible for constitutional matters, especially jurisdiction over judgements on the constitutionality of laws, impeachment, dissolution of political parties, competence disputes and constitutional complaints. Reducing public corruption is a high priority. The Anti-Corruption Law passed in July 2001, effective from January 2002, established the Korea Independent Commission Against Corruption (KICAC). It implements anti-corruption policies, evaluates anti-corruption measures taken by public agencies, and recommends institutional improvements to curb corruption. The Government signed the UN Convention Against Corruption in December 2003 and is currently amending relevant legislation for its ratification. Development and Administration of Trade Policy Main trade laws Many of Korea's trade-related laws and regulations were revised under the comprehensive economic and legal reforms introduced mainly following the 1997 Asian financial crisis. Further reforms are aimed at achieving a "fair and transparent market-driven economy". Most attention remains focused on strengthening trade and business laws and regulations to improve the commercial environment and to encourage competition, efficiency and sound corporate governance. The Government also sees a more effective regulatory framework underpinned by transparent institutional arrangements as facilitating investment, especially from overseas. The Ministry of Government Legislation (MOLEG) is responsible for legislative affairs and reviews all draft acts and subordinate statutes to ensure their necessity, constitutionality, and legal relevance, consistency, and clarity. Because treaties constitutionally have the same effect as domestic laws, Korea's multilateral commitments became automatically enforceable domestically when the Government promulgated the ϲʹ Agreement in December 1994. ϲʹ provisions can, in principle, be invoked in domestic courts. This has never happened, however, and there have been no court cases where domestic laws have conflicted with ϲʹ rules. Korea attaches a high priority to making laws transparent and readily accessible, including by foreigners. Many Korean laws are available in English, and are obtainable on the Internet from comprehensive websites maintained by relevant ministries and agencies. The main legislation covering international trade is the Foreign Trade Act of 1996, last amended in 2003 to extend the scope of trade to include the cross-border flow of knowledge-based services, and to introduce ϲʹ-consistent safeguard measures relating to China. The Act establishes the principle of "free and fair trade" in accordance with Korea's trade treaties and generally accepted international rules. Trade restrictions sanctioned by international obligations and as retaliation for a trading partner discriminating against Korean trade or denying Korea its international rights are permitted. Authorities can also restrict trade to protect human, animal and plant life, health and safety, to preserve the environment or to protect domestic resources. The Ministry of Commerce, Industry and Energy (MOCIE) publishes semi-annual regulations (mainly certification requirements) affecting foreign trade in the Consolidated Public Notice on Guidelines of Exports and Imports, last revised in July 2003. According to authorities, these import requirements are consistent with Korea's ϲʹ obligations and are maintained to protect human, plant and animal health and safety, public morals, natural resources or the environment. The Customs Act governs customs matters and related measures. It contains provisions on customs valuation, collection of customs duties (including tariffs, seasonal and adjusted duties), and contingency measures, such as anti-dumping, countervailing, and emergency (safeguard) duties. Legislative amendments in December 2002 (effective from 1 January 2003) provided for Korea's application of transitional emergency safeguard measures on certain Chinese imports as agreed under China's ϲʹ accession, and enhanced regulations covering electronic processing of customs procedures. Korea's main trade-related laws are listed in Table II.1. Table II.1 Main trade-related laws Title Year of issueGeneral legislationSpecial Act on the Implementation of the Agreement Establishing the World Trade Organization1994Foreign Trade Act1986Foreign Exchange Transaction Act1998Designation and Operation of Free Economic Zones Act2002Government Organization Act1948Commercial Act1962Monopoly Regulation and Fair Trade Act1980Government Procurement Act1994Act on Designation and Management of Customs-Free-Zones for Fostering International Logistics Centres1999Act on the Designation, etc. of Free Trade Zones1970Free-trade agreementsKorea-Chile Free Trade Agreement2004Customs proceduresCustoms Act1949Intellectual propertyPatent Act1961Trademark Act1949Computer Programs Protection Act1986Unfair Competition Prevention and Business Secret Protection Act 1961Sector-specificBanking Act1950Securities and Exchange Act1962Telecommunications Business Act1983Electricity Business Act2002Marine Transport Act1983Broadcasting Act2000Ship Act1960Aviation Act1961Foreign investmentForeign Investment Promotion Act 1998Special Tax Treatment Control Act1998Act on Private Investment in Infrastructure1994Source: Korean authorities. Development and implementation of trade policy There has been little overall restructuring of government ministries and agencies since 2000. There are 18 executive ministries. Three further ministries (Planning and Budget, Government Legislation, and Patriots and Veterans Affairs) are under the Prime Minister's responsibility. The bureaucratic structure, including the names of ministries, offices and other public agencies together with their respective functions, is contained in the Government Organization Act of 1948, as amended. Trade policy formulation and implementation involves several ministries. The Ministry of Foreign Affairs and Trade (MOFAT) has primary responsible for international trade negotiations, and formulation and implementation of trade policies. Other ministries are involved according to their spheres of responsibility. MOCIE is responsible for export and import measures as well as for policies on industry, energy, and resources. Other ministries involved in trade policy formulation and implementation include: Finance and Economy, which also incorporates the National Tax Service, Customs Service, and the Public Procurement Service; and those with sector-specific roles, such as Agriculture and Forestry, Information and Communications, Construction and Transportation, and Maritime Affairs and Fisheries. The National Economic Advisory Council (NEAC), established in 1999 under separate legislation in accordance with the Constitution, advises the President (its chairman) on development policies, including domestic and international economic issues affecting national welfare. The Minister of Finance and Economy is one of five ex-officio members. Other commissioned members from the private sector, including academics, serve on various sub-committees. The Sub-committee on Trade and Industry advises on such policies and may launch related research projects. The Government continues to reform public administration and the regulatory framework, and to promote more transparent administrative procedures, including appeal procedures. Korea has undertaken substantial regulatory reform, especially in areas of trade, investment, and business activities, so as to promote a more commercial and competitive environment. The Regulatory Reform Committee (RRC), chaired by the Prime Minister and under the President's Office, plays a key role, and is currently reviewing trade-related regulations, including customs clearance procedures, as a strategic priority of regulatory reform. A large number of duplicative or unnecessary regulations have been eliminated, and existing regulations streamlined or made more effective. Ministries introducing new or modified regulations must submit a Regulatory Impact Analysis (RIA) to the RRC that includes a cost-benefit analysis of the proposed changes and an assessment of their competitive impact. When approved by the RRC, such proposals are submitted to the State Council for deliberation and approval, and then to the National Assembly as government-sponsored bills. In April 2004, the RRC established a Corporate Difficulties Solving centre to help improve the business environment. While no independent statutory body publicly assesses trade or assistance policies from a national welfare perspective, Korea has made trade-related policy formulation more open, fostering greater public debate and broader community input. The Policy Evaluation Committee, assisted by the Office for Government Coordination and under the Prime Minister, evaluates publicly the performance of ministries in setting and implementing policies (Framework Act on Evaluation, January 2001). MOFAT intends to implement legislation to enhance the transparency of administrative procedures on trade policy (similar to the 1996 Administrative Procedures Act). Many ministries, including MOFAT and MOCIE, solicit public views on trade-related policies, including over the Internet. They widely use advisory councils and discussion groups that include academics, commentators, technical experts, and business leaders, to collect views on specific or general policy measures. Most ministries have their own advisory council, with members appointed by the relevant minister. MOFAT's advisory council is the Foreign Policy Consultative Committee. According to the authorities, it provides independent ministerial advice on trade policy issues, when requested. The Government interacts with the private sector, especially through consultations with the business community. MOFAT has operated 16 sectoral Trade Policy and Negotiation Private-Sector Advisory Groups since 1998, covering sectors like agriculture, automobiles, and telecommunications, to receive views on trade policy directions and strategies. It also organizes regular Enlarged Meetings to Promote Trade and Investment to consult with the private sector, including foreign firms, on trade and investment policy. Foreign firms are also represented on the Advisory Council for Foreign Investment, which advises government on foreign investment policy. The Government consults widely with the private sector on bilateral trade deals, usually through joint study groups with trading partners that include government, industry, and academic representatives from both countries, such as was done with Singapore and Japan (there was no joint study group for Chile). Private-sector consultations on multilateral trade negotiations occur through regular meetings of five Subcommittees of the Government-Private Sector Joint Forum on the ϲʹ Doha Development Agenda (covering agriculture, services, non-agricultural products, intellectual property rights, and environment). MOFAT routinely exchanges views and shares economic and trade information with leading business groups, such as the Korea Chamber of Commerce and Industry (KorCham), the Federation of Korean Industries (FKI), and the Korea Federation of Small Businesses. Several public research institutes publish widely on trade-related matters, including on multilateral and bilateral policy issues, such as assessing the impact of bilateral free-trade arrangements on Korea. The government-funded think-tank, the Korea Institute for International Economic Policy (KIEP), advises the Government on all major international economic policy issues affecting Korea. Its public research and work programme covers many aspects of Korean trade policy, such as the impact on the economy of trade liberalization and of proposed free-trade agreements (section (5)(iii)). Another public research institute with a deep interest in Korea's trade-related policies is the Korean Institute for International Economics and Trade (KIET). The Korean Economic Institute (KEI) works to further mutual understanding between Korea and the UnitedStates, and to keep officials informed of U.S. developments in economic and foreign policies. The Korea Economic Research Institute and the Korea Rural Economic Research Institute also publish studies on trade-related issues. The Trade Research Institute, formed in April 2002 and run by the Korea International Trade Association, works closely with the public sector to develop private sector strategies and to promote public debate on Korea's trade policies. Trade Policy Objectives Korea's principal trade policy objective is to build a free and open economy based on market principles, including fair competition and more liberal global trade, to promote international competitiveness and economic growth. Openness and market principles form the main basis for Koreas economic policies. Exports are expected to remain a major engine of economic growth for achieving the Government's mid-term "political" target of doubling average per capita annual income to US$20,000 (by 2010). Export-led economic growth is to be boosted through further trade and investment liberalization aimed at promoting structural reforms to develop efficient Korean industries. Korea's trade and foreign investment base is being strengthened to facilitate its globalization and integration into the world economy. New export opportunities are envisaged, especially in high technology areas, as Korea develops its knowledge-based economy in advanced innovation and strategic technologies, such as information technology, bio-technology, and nano-technology. Key elements of trade policy are to build on Korea's geographical, transport, competitive, and other advantages to develop it as a business, including financial, hub in Northeast Asia. New free economic zones have been created and various incentives offered to attract large-scale foreign investment in major international industrial centres focused on advanced information technology (section (6)). To help meet the Government's growth target, exports are projected to double by 2010 under Korea's "global leadership" trade strategy, and its share of world exports are anticipated to rise to well over 3% to make Korea one of the top eight global exporters. Korea is envisaged to become one of the top four industrial exporting superpowers of not only traditional basic industrial products, such as semi-conductors, ships, automobiles, petrochemicals, digital electronics, steel, and machinery, but also of high technology products and related services. The Government believes that open trade and investment policies will enable the economy to upgrade its production base to specialize more in higher-value-added exports, including services, such as e-business and related trade. The private sector is seen as the main agent for growth. Other policies to expand international trade include expanding export markets and promoting balanced trade with major trading partners, including boosting Korean imports, and taking advantage of multilateral and regional initiatives to increase trading opportunities, especially within Asia. Despite Korea's strong support for trade liberalization and other structural reforms, agricultural trade remains heavily restricted. Agricultural trade liberalization is politically sensitive and has progressed very slowly in Korea (Chapter IV). Korea notified ϲʹ Members that it wished to enter into negotiations on the possible continuation of the special treatment exempting rice and certain rice products from "tariffication" beyond ten years (i.e. after 2004) as negotiated in the Uruguay Round. Largely in response to the Asian financial crisis, Korea initially undertook substantial unilateral investment and other deregulatory "behind-the-border" trade reforms, especially in financial and a few other key services. Most other trade liberalization has been, however, from implementation of its ϲʹ commitments, such as tariff reductions. There are no plans to reduce tariffs unilaterally. Korea remains strongly supportive of further reducing tariffs and freeing trade multilaterally, and to voluntary trade liberalization within APEC (section (5)(i) and (ii)(a)). A major departure in Korea's trade policy has been its increasing willingness to negotiate regional free-trade agreements (FTAs); it has recently concluded its first bilateral FTA and is negotiating more (section(5)(ii)(b) and (iii)). The Government believes that the emerging web of Asian FTAs will boost regional free trade. Along with its FTA efforts, Korea will continue to participate actively in multilateral efforts to promote global openness in the Doha negotiations. Trade Agreements and Arrangements ϲʹ Participation Korea participates actively in the ϲʹ and is committed to the multilateral trading system. It supports a strong rules-based system that secures market access to promote global economic growth and development. Korea accords at least MFN treatment to trading partners, including generally to 23non-ϲʹ Members and to six other countries under bilateral agreements. Korea regards trade with North Korea as intra-Korean commerce in accordance with the 1992 Agreement on Reconciliation, Non-aggression and Exchange and Cooperation. Such trade is therefore exempt from tariffs. Trade with North Korea requires approval from the Minister of Unification on the kind of products traded, the type of transaction, and the settlement method. The two countries are establishing by mutual agreement a special clearing settlement system to settle payments for certain traded goods (Agreement on Clearing Settlement, 2002). Intra-Korean trade has been conducted mainly indirectly, through a foreign intermediary, but direct consultations and contractual arrangements have increased. As an export-dependant country, Korea acknowledges the key role that multilateral liberalization has played in opening foreign markets. It is an original Member of the ϲʹ. Korea is also a signatory and observer of the plurilateral Agreements on Government Procurement and Trade in Civil Aircraft, respectively. It also ratified the Fourth and Fifth protocols to the General Agreement on Trade in Services on Basic Telecommunications and Financial Services, respectively, on 27November 1997 and 27 January 1999. It was also an original Member of the Multilateral Declaration on Trade in Information Technology Products (the Information Technology Agreement). In the period under review, Korea has made many notifications to the ϲʹ (TableII.2). Some are somewhat outdated, however: the latest notifications on agriculture, for instance, were received in June 2002 and mainly cover arrangements in 2000. Similarly, the last notifications on state-trading activities and subsidies were in 1999 and 2001. Korea submits tariff and trade data annually to the ϲʹ Integrated Data Base; the latest data submitted were for 2003 on tariffs and for 2002 on imports. Trade negotiations Korea attaches high priority to the successful conclusion of the Doha Development Agenda (DDA). It has participated actively in the negotiations and has developed detailed positions in all negotiating areas. Korea is keen to ensure that the DDA achieves a balanced outcome between developed and developing Member interests. While committed to agricultural reform, albeit difficult economically and politically, Korea believes that any liberalizing outcome must not be so radical as to undermine Korea's food security and agricultural production viability. Non-trade concerns in agriculture, including its "multifunctionality", must be recognized, and "special and differential" treatment for developing countries strengthened, especially in key staple commodities. Green and blue box exceptions to committed reductions in domestic support must be maintained without limits, and the criteria for green box measures made more flexible to better reflect agriculture's "multifunctionality". Korea is flexible on export subsidies, but believes that reduced commitments should also cover other measures, such as export credits, restrictions, taxes, and exports by state trading enterprises. Table II.2 ϲʹ notifications, 2000 to end-March 2004 AgreementRequirement/contentPeriodicityϲʹ document and date (latest document if recurrent)Agreement on AgricultureArticles 10 and 18.2Tables ES.1 to ES.3 Export subsidiesAnnualG/AG/N/KOR/32, 5 June 2002Article 18.2Table MA.2 Tariffs and other quotasAnnualG/AG/N/KOR/34, 5 June 2002Article 18.2Table MA.1 Administration of tariff quotasAnnualG/AG/N/KOR/33, 5 June 2002Article 18.2Table DS.1 to DS.9 Domestic SupportAnnualG/AG/N/KOR/31, 5 June 2002Articles 5.7 and 18.2Tables MA.3 to MA.5 Special safeguardsAd hocG/AG/N/KOR/35, 5 June 2002Agreement on Implementation of GATT Article VI of the GATT 1994 (Anti-dumping)Article 5.8Time-period for determination of negligible import volumesAd hocG/ADP/N/100/KOR, 13 February 2003Article 16.4Semi-annual reports of anti-dumping actions (taken within the preceding six monthsSemi-annualG/ADP/N/112//KOR, 24 February 2004Article 18.5Laws and regulationsOnce by March 1995, then changesG/ADP/N/1/KOR/5, 25 April 2001Articles 16.5Competent authority to initiate anti-dumping investigationsOnce, then changesG/ADP/N/14/Add.17, 7 October 2003Agreement on Implementation of Article VII of the GATT 1994 (Customs valuation)Article 22.2Changes in laws, regulations and administrationAd hocG/VAL/N/1/KOR/2, 27 April 2001General Agreement on Tariffs and Trade (GATT) 1994Article XXVIII:5Reservation of right to modify schedule of concessions for a three year periodTriennialG/MA/147, 11 March 2003General Agreement on Trade in ServicesArticle III:4 and IV:2Contact and enquiry pointsWithin two years from entry into force of ϲʹ, then changes S/ENQ/78/Rev.5, 2 December 2003Article XXI:1(b)Claim of interest in members' proposed modification of schedules Ad hocS/L/132, 4 August 2003Agreement on Import Licensing ProceduresArticle 7.3Replies to questionnaire on import licensing proceduresAnnual for questionnaireG/LIC/N/3/KOR/3, 14 June 2002Agreement on Government ProcurementArticle XIX:5Government procurement statisticsGPA/76/Add.1, 7 January 2004Article XXIV:6Modifications to Appendices I to IVAd hocGPA/W/250, 17 February 2003Table II.2 (cont'd)Annex 3Threshold values in national currenciesGPA/W/251, 18 February 2003Agreement on SafeguardsArticle 12.1(a) (c)Investigations, findings, and decisions related to safeguard measuresAd hocG/SG/N/11/KOR/2/Suppl.1, 7August2000Article 12.5 Consultations Ad hocG/SG/N/12/KOR/1, 16 May 2002Article 12.5 and Article 7.4Mid-term review of safeguard measuresAd hocG/SG/N/13/KOR/2, 23 July 2001Article 12.6Laws and regulationsOnce by March 1995, then changesG/SG/N/1/KOR/5, 26 October 2001Agreement on the Application of Sanitary and Phytosanitary MeasuresArticle 7 and Annex BLaws, regulations and emergency measures Enquiry pointsAd hoc Ad hocG/SPS/N/KOR/151, 13 January 2004 G/SPS/ENQ/16, 5 December 2003Agreement on Subsidies and Countervailing MeasuresArticle 25.1 to 25.6Annual report on subsidiesAnnualG/SCM/N/71/KOR, 2 August 2001Article 25.11Semi-annual report on countervailing duty actionsSemi-annualG/SCM/N/75/Add.1/Rev.4, 24October2003Article 25.12Competent authority to initiate countervailing investigationsAd hocG/SCM/N/18/Add.17, 7 October 2003Article 32.6Laws and regulationsOnce by March 1995, then changesG/SCM/N/1/KOR/4, 25 April 2001Agreement on Technical Barriers to TradeArticle 10Enquiry pointsOnce, then changesG/TBT/ENQ/23, 8 October 2003Article 10.6Proposed and adopted technical regulationsAd hocG/TBT/N/KOR/68, 29 January 2004Annex 3CAcceptance of code of good practiceAd hocG/TBT/CS/N/139, 30 January 2002Agreement on Textiles and ClothingArticles 2.8(b) and 2.11Products to be integrated in third stageAt least 12 months before coming into effectG/TMB/N/390, 1 March 2001Agreement on Trade-Related Aspects of Intellectual Property RightsArticle 63.2Laws and regulationsOnce, then changesIP/N/1/KOR/T/1, 17 March 2000Article 69Contact pointsOnce, then changesIP/N/3/Rev.7, 19 August 2003Agreement on Trade-Related Investment MeasuresArticle 6.2PublicationsOnce, then changesG/TRIMS/N/2/Rev.8, 19 July 2000Source: ϲʹ Secretariat. On fisheries, Korea believes that the negotiations should focus primarily on harmonizing trade liberalization with the objective of sustainable use of exhaustible fish stocks. Although it is prepared to negotiate effective disciplines on fishing subsidies that encourage over-exploitation, Korea feels the existence of such harmful subsidies must first be established. Korea also rejected the inclusion of fish and fish products in the sectoral negotiations to eliminate tariffs. In Korea's view, elimination of tariffs would encourage over-fishing and resource depletion by exporting countries without proper management schemes, thereby disadvantaging mainly developing economies, especially LDCs. Korea wants to see substantial progress in reducing non-agricultural tariffs through adoption of a formula that would substantially increase market access by effectively addressing high tariffs, including peaks, and escalation, according to the Doha mandate. Its other main interests include: improving anti-dumping rules to prevent the mis-use and over-use of these measures for protectionist purposes; incorporating in the negotiations all four "Singapore issues" (investment, competition policy, transparency in government procurement, and trade facilitation); and addressing the development-related concerns of developing countries, including on special and differential treatment. Korea also hoped for substantial progress in the services negotiations, including enhanced commitments from developing countries, with appropriate recognition granted for autonomous liberalization. Disputes and consultations Korea has made use of the multilateral dispute settlement mechanism to resolve trade disputes. Since its last Review, Korea has been directly involved in 15 cases (Table AII.1): it was respondent in five of the disputes. Panel/appellate body reports have been adopted in four cases, and Korea indicated that it had taken measures to comply on time with the Dispute Settlement Body's (DSB's) findings. In the latest of these cases, on "Measures Affecting Imports of Fresh, Chilled and Frozen Beef", for example, Korea indicated that it had implemented the DSB's recommendations by the set deadline of 10 September 2001. The Panel is still considering the fifth case, brought by the EC against Korean subsidies on commercial ship production under the SCM Agreement ("Measures Affecting Trade in Commercial Vessels"). Korea's ten complainant cases involved mainly anti-dumping and safeguard disputes against the United States, and countervailing and ship subsidy disputes against the EC. Four cases are pending. Panels were established in January 2004 in the two cases involving complaints against the EC and United States countervailing actions on memory chips. On EC commercial vessel subsidies, the Panel for the dispute on Measures Affecting Trade in Commercial Vessels was established in March 2004 covering mainly its Temporary Defensive Mechanism, and Korea requested consultations in February 2004 under the dispute on Aid for Commercial Vessels. Another case, involving the U.S. anti-dumping arrangements, is still being resolved because the United States did not implement the DSB's findings by the set date of 27 December 2003. Korea (and most other co-complainants) has sought authorization to suspend U.S. concessions. The United States has objected to the level of suspension proposed and the matter was referred to arbitration in January 2004. Korea has also reserved its third-party rights in eleven other cases, most of which involve anti-dumping or safeguard measures imposed mainly by the United States and EC. Regional agreements Asia-Pacific Economic Cooperation (APEC) Korea has traditionally given APEC high importance. Its prosperity has benefited greatly from sustained economic growth in the APEC region underpinned by the expansion of trade, investment, and economic cooperation. APEC economies account for some two thirds of Korea's trade and investment. Korea strongly supports APEC's "open regionalism" approach based on "concerted unilateralism" to promote free and open trade (including in services) and investment by 2020 for developing economies (2010 for developed countries). It intends to meet the voluntary target of 2020, and is convinced that further multilateral trade liberalization will contribute significantly to this goal. It also believes that APEC goals will contribute to a stable multilateral trading system and help prevent the formation of exclusive inward-looking trading blocks. Korea continues to participate actively in APEC across the full range of activities, including trade and investment liberalization, trade facilitation, and economic and technical cooperation; it also wishes to deepen relations with other members. Like other APEC economies, Korea is required to submit annually Individual Action Plans (IAPs) that provide a road map of its intended actions in 15 policy areas for realizing APEC's liberalization goals. Korea last revised its IAP in 2003. According to APEC's key principles from the Osaka Action Agenda of comprehensiveness, ϲʹ-consistency, and non-discrimination, trade liberalization should not in principle discriminate between APEC economies or against non-APEC countries. Nevertheless, it appears that trade is becoming more discriminatory in the APEC region as member economies, including Korea, are increasingly entering into or contemplating the formation of preferential trading arrangements. According to the authorities, APEC has endorsed these agreements as contributing to the liberalization of the multilateral trading system provided they comply with ϲʹ rules and disciplines, and Korea was making efforts to ensure such arrangements were ϲʹ-consistent. APEC's strengthened peer review process is aimed at examining more rigorously the progress of member economies in achieving the Bogor targets. Korea was reviewed in August 2003. The independent study prepared as part of that review concluded that Korea had made "impressive overall progress" towards achieving APEC's Bogor goals, especially in the areas of deregulation and regulatory review, investment, competition policy, standards and conformance, customs procedures, and to a lesser extent, intellectual property protection and government procurement. Least progress was found in reducing tariffs, especially in agriculture. ASEAN+3 cooperation Korea attaches high priority to relations with ASEAN as well as with China and Japan. It is increasing efforts to build closer trade and other ties between ASEAN members, China, and Japan. Annual summit meetings of leaders under the ASEAN+3 framework promote such cooperation. Finance ministers also meet annually. Korea's long-term vision is for ASEAN+3 summits to evolve into East Asian Summits that would eventually lead to the formation of an East Asian Community. One of the building blocks would be the formation of the East Asian Free Trade Area (EAFTA). "ASEAN+3" members agreed in November 2002 to study and formulate options to gradually establish an EAFTA. With this in mind, Korea is considering an FTA with ASEAN, and would contemplate negotiating a trilateral FTA between China and Japan. These arrangements have added priority for Korea given the proposed formation of the ASEANChina Free Trade Area within tenyears (i.e. 2010), and the announcement in 2002 that ASEAN and Japan would develop a framework for an ASEANJapan Comprehensive Economic Partnership within ten years. Bangkok agreement (first agreement on trade negotiations among developing member countries of ESCAP) Korea is a party to the Bangkok Agreement, signed in 1975, to which China acceded in 2001. While it provides for liberalization of tariff and non-tariff barriers, the agreement is currently limited to tariff concessions. Members also provide additional special tariff concessions to the two least developed countries, Bangladesh and Lao PDR. A third round of trade negotiations on preferential tariffs, launched in October 2001, is due to be completed in 2004. Korea extends tariff preferences to a limited range of imports from member countries, including additional concessions for Bangladesh and Lao PDR (Chapter III(2)(iii)(e)). Tariff concessions were last modified in July 2002 when Korea reduced preferential rates on 26 tariff items, including wood products and machinery. To be eligible, Korea requires these imports meet certain rules of origin (Chapter III(2)(iii)(e)). The Government supports efforts to revitalize the Bangkok Agreement, including establishment of a Ministerial Council, revision of the text and re-naming it the Asia-Pacific Trade Agreement (APTA). Members have agreed to the revised text, but are still discussing the adoption of common rules of origin. Korea believes that the agreement has increased in importance following China's accession, and will play a more significant role in Korea's regional trade strategy, especially with China and India, providing also the cornerstone for additional free-trade agreements. Asia-Europe Meeting (ASEM) The informal process of dialogue and cooperation among EU States and ten Asian countries, including Korea, addresses political, economic, social, and other issues to help strengthen regional relationships. The Trade Facilitation Action Plan (TFAP) aims to reduce non-tariff barriers, increase transparency, and promote trade opportunities between the two regions. It specifies biennial "concrete goals" in the priority areas of customs, standards and conformity assessment, public procurement, quarantine and SPS, intellectual property, mobility of business people, and other trade activities, such as market access in retail and wholesale distribution. The goals for 2002-04 include new initiatives to provide enhanced paperless customs procedures. The Investment Promotion Action Plan (IPAP) encourages two-way investment by focusing on promotion and policy issues. Regional and bilateral free-trade arrangements negotiated by ASEM members are to be ϲʹ-consistent with and complementary to multilateral rules. The Asia-Europe Business Forum (ABEF) fosters regional cooperation among the private sector. The ASEM Trust Fund finances technical assistance on financial sector restructuring and to address poverty. Korea is promoting cooperation with ASEM member countries, and participates actively in ASEM dialogue and cooperative projects, including the Trans-Eurasia Information Network and the Initiative to Address the Digital Divide. Asia Cooperation Dialogue (ACD) The ACD, launched in June 2002, aims to serve as a "missing link" for all Asian sub-regions to create strategic partnerships and cooperation by drawing upon and combining Asia's diverse strengths so as to position it as a viable partner for other regions. A number of areas of cooperation have been agreed, including information and telecommunications (IT), energy, security, agriculture, transport linkages, small and medium enterprise cooperation, poverty alleviation, tourism, and human resource development. In June 2003, ACD ministers adopted the Chiang Mai Declaration on Asian Bond Market Development, collectively providing political support for such a regional market. ACD membership is open to Asian countries. Bilateral agreements Korea hopes to expand regional integration and to secure foreign markets by negotiating FTAs with major trading partners. It sees this as a practical response to the spread of regionalism throughout the world. The Government had also decided in 1998 to pursue FTAs as a major pillar of trade policy to help open and reform the Korean economy. While Korea views FTAs as complementary to the multilateral system and to promoting global trade liberalization, it has also at times questioned the impact that the proliferation of regional FTAs could have on the "validity" of the ϲʹ. It recently concluded its first bilateral FTA, with Chile, and is currently negotiating two more. (a) Korea-Chile free-trade agreement (KCFTA) KCFTA negotiations commenced in late 1999, and were concluded in October 2002. The agreement, signed in February 2003, became operative on 1 April 2004. The National Assembly ratified the KCFTA in February 2004 after several attempts (due mainly to opposition from the agriculture sector). The KCFTA covers trade in services and goods, subject to a number of exclusions, especially in agriculture. It contains provisions on customs procedures, safeguard measures, anti-dumping and countervailing measures, sanitary and phytosanitary measures, standards-related measures, investment, cross-border trade in services, telecommunications, temporary entry of business persons, competition, government procurement, intellectual property rights, and dispute settlement. Certain services and investment activities are excluded from the agreement via a negative list, which consists of: Annex I reservations (activities subject to non-conforming measures); AnnexII reservations (activities subject to non-conforming measures with the option to introduce new or more restrictive measures); and Annex III reservations (activities subject to non-discriminatory quantitative restrictions). The agreement provided for immediate tariff-free access for a wide range of goods; 87.2% of tariff lines by Korea and 41.4% by Chile. Tariffs on other products, except for excluded products, are to be uniformly phased out over periods of 5, 7, 9, 10 and 16years for Korea, or 5,7, 10 and 13years for Chile. Korean duties subject to the longest phase-in period (16 years) cover 0.1% of tariff lines, such as prepared dried milk and some juice mixes. Korea also permanently excluded from lower tariffs 21agricultural tariff lines covering rice, apples, and pears. Moreover, tariff reductions on a further 373 agricultural tariff lines, such as certain vegetables, grains, livestock, dairy products, fruit, and processed vegetable oils, were temporarily excluded, to be determined after the Doha negotiations. While KCFTA covered industrial products comprehensively, these considerable exclusions substantially undermined the Agreement's impact on liberalizing Korea's trade regime in agriculture where most protection persists. Farm interests heavily opposed the KCFTA even though it excluded many key agricultural products from liberalization. Imports must meet certain rules of origin to receive tariff preferences (ChapterIII(2)(iii)(e)). Korea and Chile jointly notified the KCFTA to the ϲʹ under GATT Article XXIV and GATS Article V in April 2004. FTA negotiations Japan Korea and Japan are to complete an FTA by 2005 (KJFTA). Negotiations commenced in December 2003, after release in October of the Joint Study Group Report that supported its formation. The Government believes it will promote domestic deregulation and trade liberalization and thereby contribute significantly to Korea becoming a north-east Asian business hub. In the Government's view, the KJFTA would be a catalyst for strengthening cooperation in East Asia and act as a "stepping stone" to creating an East Asia free trade area. According to officials, KJFTA will be comprehensive, practical and ϲʹ-compliant. It is being negotiated under seven categories: trade in goods (covering such issues as tariff elimination, rules of origin and trade remedies); non-tariff measures (e.g. trade barriers, business practices, technical barriers to trade and sanitary and phytosanitary requirements); investment/services; other trade issues (government procurement and protection of intellectual property rights); conflict resolution; mutual recognition (mainly of technologies in areas of electronics, electricity and telecommunications); and economic cooperation (e.g. SMEs, trade promotion, and science and technology). A KJFTA would have significant competitive effects on certain Korean industries, especially motor vehicles, machinery, and electronics. Studies suggest that the KJFTA would yield substantial economic benefits to Korea. However, while very useful, these results need to be interpreted cautiously, and may overstate the economic gains relative to non-discriminatory (MFN) liberalization. Singapore Korea launched FTA negotiations with Singapore in January 2004 (KSFTA). The Korea-Singapore FTA Joint Study Group Report, released in October2003, supported its formation. It recommended that the KSFTA should comprehensively cover trade in goods and services, including finance and broadcasting, investment, government procurement, intellectual property rights, and dispute settlement. It should be a "high standard" FTA, both consistent with ϲʹ rules (GATT Article XXIV and GATS Article V) and "ϲʹ-plus" in several sectors. Initial negotiations focused on lifting restrictions in nine categories, including commodity trade, quarantine measures, technology barriers, a mutual recognition agreement, services trade, investment, government procurement, competition, intellectual property rights, cooperation, and conflict resolution. Negotiations are expected to be completed in 2004, and to include finance, telecommunications, technology, human resources development, and broadcasting. Other Korea is looking at possible FTAs with Mexico, Canada, and Members of the European Free Trade Association (EFTA), and in the longer term with China, the United States, and the EU. This is in addition to considering negotiating an FTA with ASEAN members and a trilateral FTA with China and Japan (section (5)(ii)(b)). Negotiation of numerous FTAs is likely to make the Korean trade regime more complex, involving for example different tariffs being applied to the same imports from various sources and the administration of several rules of origin. This is likely to reduce economic efficiency by undermining the transparency of Korea's trade protection in unpredictable ways and introducing economic distortions. Korea believes that the formation of a broad regional grouping like the EAFTA would reduce these concerns. Unilateral and other trade preferences In 2001, Korea extended the coverage of its unilateral scheme (introduced from 1January2000) to provide non-reciprocal preferential duty-free access to selected imports from UN-defined least developed countries (Presidential Decree on Preferential Tariff for Least-Developed Countries). As a result, the number of eligible countries increased from 48 to 49, and the number of tariff items covered rose from 80 to 87, although this reflects mainly classification changes associated with Koreas adoption of HS 2002. Korea has not invoked provisions enabling such preferences to be suspended against imports causing or threatening to cause injury to domestic industries. It is currently studying the possibility of increasing preferential treatment for LDCs. Korea also provides reciprocal tariff preferences on 27 six-digit tariff items to 43 countries under the Global System of Trade Preferences Among Developing Countries (GSTP). In addition, it participates in the GATT Protocol Relating to Trade Negotiations Among Developing Countries (TNDC), and grants concessional tariffs on 12 six-digit tariff lines for 15 countries. Imported goods must meet certain rules of origin to be eligible for tariff preferences and be accompanied by certificates of origin (ChapterIII(2)(iii)(e)). Foreign Investment Regime Recent performance and developments Korea has made substantial efforts since its last Review to encourage FDI by further liberalizing and making more transparent its foreign investment regime. It welcomes FDI as vital to the economy's growth and providing the necessary financial and technological resources for economic restructuring and enhancing Korea's international competitiveness. FDI is seen as a major contributor to export and employment growth; "foreign-capital invested" companies play an increasingly vital role in the economy. FDI rose impressively during the crisis years of 1997 and 1998, largely reflecting the success of the Government's quick policy response. FDI inflows peaked at over US$15billion in both 1999 and 2000, up from US$3.2 billion in 1996. Although falling from US$11.3 billion in 2001 to US$9.1 billion in 2002 and US$6.5billion in 2003, due largely to the deteriorating international investment climate, FDI inflows remain historically high. FDI is targeted by MOCIE to rise to US$8 billion in 2004, assisted by extra incentives and new zones (section(6)(iv)). FDI has been mainly in "greenfield" projects, mergers and acquisitions, including privatizations. Portfolio investment has also risen substantially, buoyed by further liberalization of capital and foreign exchange controls. Foreign share ownership of Korean stocks has increased steadily, to reach 40% of market capitalization at end-2003. Korea also remains an important source of FDI for the rest of the world, even though FDI inflows have substantially exceeded outflows since the crisis. This reflects its liberal regime on outward investment. During 1999-02, FDI outflows totalled US$22.4 billion, and exceeded US$4.8billion in 2003. Legislative framework and procedures The Foreign Investment Promotion Act (FIPA) of 1998 substantially liberalized Korea's investment regime and opened most sectors to FDI. Its principal objective was to attract FDI by: eliminating burdensome regulations and anti-competitive market restrictions; creating a more liberalized, transparent, and favourable business climate for foreign businesses and investors; and expanding tax incentives. The FIPA permits all FDI types, including establishment of new businesses, purchase of shares in existing businesses, mergers and acquisitions, with at least 10% foreign ownership; and loans of fiveyears or longer from foreign parent or affiliated companies. MOCIE has responsibility for FDI inflows, and MOFE for outflows. The Commission on Foreign Direct Investment (CFDI), established under FIPA in 1998, makes all major policy decisions on FDI. Korea continues to abide by OECD Codes of Liberalization of Capital Movements and of Current Invisible Operations, and the National Treatment Instrument. Foreign investors enjoy more favourable tax treatment and selection of business sites than nationals, and are assured national treatment and freedom in performing FDI activities, except as otherwise provided in other laws. Korea's investment regime is applied on an MFN basis. No FDI restrictions are allowed, unless they threaten national security, public order, public health, environmental preservation or social morals, or are restricted by the FIPA or under other legislation, such as the Banking Act, Fisheries Act, Maritime Act and Telecommunications Business Act. Minimum FDI levels required under the FIPA for investment incentives (section (6)(iv)) were raised from W25 million to W50 million per foreign investor in February 2001. Sectoral FDI restrictions under FIPA were relaxed in 2000 and 2001; five fully closed sectors (fishing, inshore and coastal, cattle raising, wholesale meat, and news agencies) were opened partially. As of April 2003, out of a total 1,058 business sectors (based on the Korea Standard Industrial Classification) only two, television and radio broadcasting, were closed to FDI, along with rice and barley growing (TableII.3). Another 27sectors were partially open, subject to foreign equity limits. Foreign ownership, for example, must be less than 50% in fishing, beef cattle farming, power distribution and transmission, and air transport services. Foreign equity is also generally limited to no more than 49% in telecommunications and 33% in cable and satellite broadcasting. Foreign companies can establish local branches subject to notification and registration as a foreign-investment company, maintained for statistical and procedural purposes. Foreign financial institutions are subject to approval requirements under the Banking Act, Insurance Business Act and the Securities and Exchanges Act. MOCIE regularly publishes FDI restrictions in English in the Consolidated Public Notice. In addition to FIPA restrictions, it contains restrictions on: foreigners' capital transactions, including: acquisition of securities, establishment of domestic branches by foreign companies, foreign investment by business sectors, registrations of ships and aircraft, "legally monopolistic" businesses; acquisition of domestic qualifications by foreigners (pilots, lawyers, architects, and public performances); and on foreigners' entry and residence in Korea. Government approval of FDI is not required. Only prior notification by foreign investors is needed, and this can be made at domestic or foreign bank offices in Korea, Invest Korea or at any one of KOTRA's overseas trade centres. Foreign-capital invested companies must also register to be eligible for incentives (section (6)(iv)). MOCIE approval is still required, however, to invest in 85designated Korean defence-related companies. This list of companies covers many major Korean electronic and industrial conglomerates that are also major producers of non-defence products. Table II.3 FDI restricted sectors Sector/business FDI limitationA. ClosedRadio broadcastingWholly closedTelevision broadcastingWholly closedB. Partially closedGrowing of cereal crops and other cropsAllowed except for rice and barley growing Beef cattle farming Less than 50% foreign equityInshore fishingLess than 50% foreign equityCoastal fishingLess than 50% foreign equityPublishing of newspapersLess than 30% foreign equityPublishing of magazines and periodicalsLess than 50% foreign equityProcessing of nuclear fuelAllowed except for the manufacture and supply of nuclear fuel for nuclear power plantsElectric power generationNuclear power generation businesses are excludedElectric power transmissionAllowed provided total foreign equity is less than 50% and that the largest shareholder is Korean Electric power distribution and alesAllowed provided total foreign equity is less than 50% and that the largest shareholder is KoreanMeat wholesalingLess than 50% foreign equityCoastal water passenger transportAllowed for transportation between South and North KoreaCoastal water freight transport Container transportation allowed between South and North Korea. Allowed for other freight transportation provided through a joint venture with Korean shipping company and foreign equity is less than 50%Scheduled air transportLess than 50% foreign equityNon-scheduled air transportLess than 50% foreign equityLeased line serviceNo more than 49% foreign equityWired telephone and other communicationsNo more than 49% foreign equityWireless telephoneNo more than 49% foreign equityOther electric communications No more than 49% foreign equityDomestic bankingAllowed only for commercial and local banking: restrictions apply only to branching by merchant banks and specialized finance companiesInvestment trust companiesPermitted across-the-board in securities investment trust businesses, but only allowed in banking trust industry in limited cases where a general or special-purpose bank engages in management in connection with already established primary business Radioactive waste disposalPermitted except for radioactive waste managementBroadcasting channelsNo more than 33% foreign equityCable broadcasting programme providerNo more than 33% foreign equityCable broadcasting cable TV system operator and other cable operatorNo more than 33%Satellite broadcasting No more than 33% foreign equityNews agency activitiesLess than 25% foreign equitySource: APEC (2003), IAP Study Report Korea 2002. Foreigners, regardless of residence status, can purchase land subject to the same restrictions as Korean nationals. Exclusions are limited to land of military, cultural or environmental significance, and farmland designated for rice and barley. Foreign land purchases must be reported within 60 days. Foreign land ownership has increased steadily since 1998, from 38 million square metres at end 1997 to 146.7 million square metres at end-June 2003 (valued at W20.3 trillion). From 2003, nationals and foreigners receive the same treatment for land expropriated by the State for public works (the Act on Acquisition of and Compensation for Lands to be Used for Public Works, which replaced the Land Expropriations Act). Promotion and facilitation Korea has continued to promote and facilitate FDI. The Korea Trade Investment Promotion Agency (KOTRA), the official investment promotion agency, operates over 100 trade centres worldwide. Its main promotional arm, The Korea Investment Services Centre (KISC) established in 1998 by FIPA, was reorganized and renamed Invest Korea in December 2003. It serves as a "one-stop shop" to help foreign investors complete necessary administrative procedures, and with investment planning, legal and tax matters. The "Cyber Invest KOREA" portal site provides foreign investors with information on investment procedures. The independent Foreign Investment Ombudsman, located within KOTRA and staffed with personnel from Invest Korea, handles specific grievances encountered by foreign investors established in Korea, and in conjunction with Invest Korea, operates an Investment Home Doctor Service that provides one-to-one service. FIPA amendments in March 2001 transferred authority to nominate the Ombudsman's position from MOCIE to the President, thereby strengthening its role. The CFDI was also given responsibility for preparing an annual FDI Environment Improvement Plan, based on plans submitted by all ministries and local governments to improve the FDI environment. This has enabled more effective monitoring of the investment climate, and helped Korea improve its attractiveness to FDI. The Presidential Committee on the Northeast Asian Business Hub was formed to facilitate direct dialogue with the President on matters related to Korea's establishment as a regional economic hub. In addition to devising key strategies, plans, and policy directions, the Committee serves as a forum to enhance coordination among relevant ministries. Restrictions in Seoul and surrounding areas were also relaxed for three years in November 2001 to allow foreign-invested firms to establish new or expanded facilities to produce medicines, machinery for semi-conductors, and liquid display facilities (bringing the number of permitted business lines to 28) in the "growth controlled" zone. Since 2001, companies with at least US$3 million foreign investment have been exempted from the business feasibility evaluation test when applying for assistance to research technological development. A Corporate Grievance Resolution Centre was also established recently under the Office of the Prime Minister to ensure efficacy and expediency in improving the business environment. The Government has opened public sector infrastructure projects to greater private sector participation, including by foreigners, who, according to authorities, have the same access as domestic investors. Legislative revisions to the Act on Private Investment in Infrastructure, 1994, in August2001, increased the types of infrastructure projects open to private investment, and added harbour facilities. Contractual arrangements were also extended from BTO (build-transfer-operate), BOT (build-operate-transfer) and BOO (build-operate-own) contracts to include BLT (build-lease-transfer), ROT (rehabilitate-operate-transfer), and ROO (rehabilitate-own-operate) contracts. An investment guidebook was released in December 2003 in an effort to attract FDI into Korean harbour facilities. Incentives Korea continues to provide a range of mainly tax incentives for FDI. These generally consist of: full and partial corporate income tax concessions for up to a total of ten years; similar concessions on various local taxes (acquisition, property, registration, and land taxes); and full exemptions from customs duties (customs, special excise, and value-added taxes) on imported capital goods for up to three years. They apply to "greenfield" FDI and foreign stock acquisitions in eligible advanced technology investments and industry-supporting service industries; there are no minimum FDI levels for these tax incentives. The number of eligible industries was raised from 578 to 634 in July 2003 (FIPA and the Special Tax Treatment Control Law of 1999). Korea also operates an elaborate system of zones to provide tax and other incentives, such as rent subsidies on state land. Certain FDI conditions for receiving tax incentives when locating in foreign investment zones (FIZs) were also relaxed. The requirement to employ a minimum number of local employees was removed from 2004, and minimum FDI levels lowered from: US$50 million to US$30 million for manufacturing; US$30 million to US$20 million for tourism; and from US$30million to US$10 million for logistic businesses. Smaller-scale FDI in high-technology and manufacturing-assisting service businesses also became eligible for FIZ status in 2003. Since its last Review, Korea has extended its system of zones to provide wider access to such incentives, mainly aimed at trying to attract FDI to offset its recent decline. New zones, called free economic zones (FEZs), were formed to induce FDI through eased regulations, improved living conditions for foreigners, and enhanced tax incentives. These apply to "greenfield" FDI in manufacturing, high-technology, logistics, and tourism activities located in FEZs, subject also to reduced minimum FDI levels from 2004 (Table II.4). The port city of Incheon was designated an FEZ in August 2003, and Busan and Gwangyang ports in October 2003. The FEZ Committee oversees the implementation of FEZs (Presidential Decree of the Free Economic Zone Act, 2002). Tax incentives are to be reduced in 2005; the maximum ten-year corporate tax concession is to be lowered to seven years (100% exemption for five years and 50% for two years). However, the five-year tax exemption for foreign engineers working in Korea was extended until end 2006, and a 17% single-rate income tax system for foreign managers and employees is being considered. A cash grant for "greenfield" FDI was also introduced for investment of over US$10 million in high technology, parts, and materials, and of over US$5 million in R&D facilities. The grant is to be negotiated on a case-by-case basis as a percentage rebate (of around 10%) of the investment amount. The criteria used by the national government to provide financial support to local governments is also being revised in 2004 to enable them to take a pro-active approach to attracting FDI. A five-year plan also commenced in 2003 to improve foreigners' business and living conditions in Korea, such as access to foreign education, immigration, residential and medical facilities. Korea is committed to improving its system of incentives offered to foreign investors, and continues to revise laws and regulations designed to promote FDI and to offer tax and other benefits. The policy emphasis appears to be on increasing the availability of tax incentives to more foreign investors while reducing the extent of certain incentives, including tax holidays. Table II.4 Main FDI tax incentives Tax criteriaTax incentivesa ConditionsaHigh technology businesses (FIPA & Special Tax Treatment Control Law, 1999, as amended) - declared eligible industry by Finance MinistryCorporate income tax: full exemption for first 7 years of profit & 50% reduction for next 3 years Local taxes (acquisition, property, registration & land) full exemption for first 5 years and 50% reduction for next 3 years (local governments can extend for up to 15 years) Customs duties, special excise & value-added taxes: full exemption on imported capital goods (extendable for 3 years with Finance Minister's approval)634 eligible industries, including 111 industry-supporting service businesses - increased from 568 eligible businesses in July 2003Foreign Investment Zone (Foreign Investment Promotion Act, 1998) - designated by regional governments subject to approval by Foreign Investment CommitteeCorporate income tax: full exemption for first 7 years of profit & 50% reduction for next 3 years Local taxes (acquisition, property, registration & land) full exemption for first 5 years and 50% reduction for next 3 years (local governments can extend for up to 15 years) Customs duties, special excise & value-added taxes: full exemption on imported capital goods (extendable for 3 years with Finance Minister's approval)Manufacturing (installing new or additional factory facilities) in newly developed FIZ: - FDI of at least US$50 million & FDI ratio of 50% or more with 1,000 local employees or more Manufacturing in existing industrial complex: - FDI of at least US$30 million & at least 300 local employees Tourism (new FDI notified by end-2003 & completed by end-2005): - hotel/waterfront hotel/international convention - FDI of at least US$20 million - recreation/leisure/entertainment park facility - FDI of at least US$30 million Logistics (composite freight terminal/operation of logistics hub and harbour facilities): - freight transportation/handling/consignment and warehousing/freight terminal facility/freight transportation arrangement/logistics commissioner or agent - FDI of at least US$30 millionFree Economic Zone (Free Economic Zone Act, 2002) - three ports designatedCorporate income tax: full exemption for first 7 years of profit & 50% reduction for next 3 years Local taxes (acquisition, property, registration & land) full exemption for first 5 years and 50% reduction for next 3 years (local governments can extend for up to 15 years) Customs duties, special excise & value-added taxes: full exemption on imported capital goods (extendable for 3 years with Finance Minister's approval) Corporate income tax: full exemption for first 7 years of profit & 50% reduction for next 2 years Local taxes (acquisition, property, registration & land) full exemption for first 5 years and 50% reduction for next 2 years (local governments can extend for up to 15 years) Customs duties, special excise & value-added taxes: full exemption on imported capital goods (extendable for 2 years with Finance Minister's approval)Manufacturing: - FDI of at least US$50 million Hi-tech & manufacturing-assisting services: - FDI of at least US$30 million Logistics: - FDI of at least US$30 million Tourism: - FDI of at least US$20 million Manufacturing: - FDI of at least US$10-50 million Hi-tech & manufacturing-assisting services: - FDI of at least US$10-30 million Logistics: - FDI of at least US$10-30 million Tourism: - FDI of at least US$10-20 milliona As from 2004, the minimum FDI limits on new projects were reduced from US$50 million to US$30 million for manufacturing, from US$30 million to US$20 million for tourism, and from US$30 million to US$10 million for logistic businesses. The minimum requirement for local employees was also removed. A negotiable cash rebate of around 10% of the FDI amount was also introduced in 2004 for investment in high-technology projects exceeding US$10 million and in R&D facilities exceeding US$5 million. It was also announced that the ten-year income tax concession would be reduced to seven years (100% for fiveyears and 50% for two years) from 2005. Source: The Korean authorities. Korea currently has five types of zone to assist investors; FIZs, foreign industrial complexes (FIC), FEZs, free trade zones created since 2000 (Masan, Iksan, and Kunsan), and various customs duty free zones. This would appear to unnecessarily complicate the FDI regime. Rationalizing their use, as recently indicated by the Government, could reduce investor uncertainty. According to the authorities, tax concessions can be decisive factors in attracting FDI among similar countries, with most beneficiaries in Korea indicating that such incentives have facilitated foreign investment. However, these results are probably biased, and they do not take into account whether such investment, if reliant on incentives, is in the national interest. All investment incentives (whether assisting foreign or domestic investors) risk subsidizing efficient investments, which need no such assistance and would have been undertaken anyway (thereby providing windfall gains to investors at taxpayers' expense), or worse, making some inefficient investments profitable. Tax incentives, therefore, may contribute to an inefficient allocation of resources in Korea. The cost effectiveness of tax incentives is also questionable. They can undermine public accountability and fiscal transparency, especially where, as in Korea, there is no detailed information on revenue forgone from various tax incentives or any systematic evaluation of the effectiveness of such incentives. Care is therefore needed to ensure that the financial and efficiency costs of investment incentives do not exceed their stated benefits. International investment agreements Since its previous Review, Korea has signed a number of new bilateral investment agreements, including additional Investment Promotion and Protection Agreements (IPPAs) with 14countries protecting post-establishment FDI. Korea also signed a Bilateral Investment Treaty (BIT) with Japan, operative January 2003, which covers pre-and post-investment protection and investment liberalization, including market access. It facilitates investment between the two countries by: extending MFN and national treatment for pre-establishment FDI; prohibiting mandatory obligations on foreign investors, such as to export a certain share of production or to consume local raw materials; guaranteeing overseas remittances; and allowing foreign investors to use international arbitration courts to resolve disputes. As of April 2004, Korea had concluded BITs with a total of 73economies (including with Japan). Negotiations on a bilateral investment agreement with the United States commenced in 1999, but progress has stalled due to failure to resolve key issues, including Korea's insistence on maintaining "cinema screen quotas" (Chapter IV(6)(ii)(b)). Korea has signed new taxation treaties containing provisions to avoid double taxation with several countries since 2000. As at March 2004, Korea had 76 such treaties (60 in force, threesigned and pending parliamentary approval, and 13 provisionally agreed).  The President appoints the Prime Minister (subject to approval by the National Assembly), and ministers on the recommendation of the Prime Minister.  The Act of Decentralization, enacted in January 2004, provides for greater transfer of authority and financial resources from the Central Government to local governments.  Members of the National Assembly can also introduce bills (Article 52 of the Constitution).  If vetoed, the bill is returned to the National Assembly and re-considered. If passed again by the National Assembly (two-thirds majority of at least half of the members) the bill becomes law within 20days.  The Special Act on the Implementation of the Agreement Establishing the World Trade Organization on 1 January 1995, gazetted on 31 December 1994.  MOFAT has two ministers; the Minister of Foreign Affairs and Trade and the Minister for Trade. While in principle the Minister of Foreign Affairs and Trade is responsible for trade matters, such authority is in practice effectively delegated to the Minister for Trade.  OECD (2000), p.13.  Prime Minister and Acting President, Opening Keynote Address, Asia Societys 14th Asian Corporate Conference Gala Opening Dinner, Seoul, 12 May 2004.  MOCIE, Toward A 2010 Trade Policies, 2003 [Online]. Available at: www.mocie.go.kr/eng/ policies/trade/trade.asp].  MOCIE, Toward A 2010 Trade Policies, 2003 [Online]. Available at: www.mocie.go.kr/eng/ policies/trade/ trade.asp].  ϲʹ document G/AG/W/62 and G/L/668, 20 January 2004. Negotiations covering several trading partners (United States, China, Australia, Thailand, India, Canada, Egypt, Argentina, and Pakistan) commenced in May and are planned for completion by September 2004.  Minister for Trade, Opening a New Era of Growth in the Pacific Region, presented at the 35th International General Meeting of the Pacific Basin Economic Council, Kuala Lumpur, 9 May 2002.  Prime Minister and Acting President, Opening Keynote Address, Asia Societys 14th Asian Corporate Conference Gala Opening Dinner, Seoul, 12 May 2004.  Bilateral agreements extend MFN treatment to Nepal, Cambodia, Kazakhstan, Uzbekistan, and Ukraine. Nepal became a ϲʹ Member in April 2004 and Cambodia has completed its accession to become a Member when ratified.  While North Korea represents a relatively minor share of South Korea's trade, and covers mainly imports of agricultural and fishery products, textile products, minerals, steel and metal products, and commercial exports of textiles and electronic products, South Korea is now North Korea's second-largest trading partner, accounting for a third of its total trade (OECD, 2004a).  ϲʹ document G/MA/IDB/2/Rev.17, 14 October 2003.  ϲʹ documents G/AG/NG/W/98, 9 January 2001, and WT/MIN/903)/ST/15, 10 September 2003 (Statement by Korean Minister for Trade, Ministerial Conference, Cancun, 10-14 September 2003).  ϲʹ document TN/AG/GEN/2, 4 April 2003.  ϲʹ documents TN/MA/W/6/Add.2 and Add.3, 16 June and 15 July 2003.  APEC (2003).  A joint study on the feasibility and economic effects of a Korea-ASEAN FTA, launched in March2004, is to be completed in November 2004. KIEP is also conducting joint research with its Japanese and Chinese counterparts on an FTA with China and Japan.  Other members are Bangladesh, India, Lao People's Democratic Republic, and Sri Lanka.  Korea has finalized the bilateral negotiations for exchanging tariff concessions with all participating members, including China and India.  Chair's Statement, 8th ASEM Senior Officials Meeting on Trade and Investment, 17 July 2002, Bali.  Members are Bahrain, Bangladesh, Brunei, Cambodia, China, India, Indonesia, Japan, Kazakhstan, Republic of Korea, Kuwait, the Lao People's Democratic Republic, Malaysia, Myanmar, Oman, Pakistan, the Philippines, Qatar, Singapore, Sri Lanka, Thailand, and Viet Nam.  A recent study by the Korea Institute for International Economic Policy (KIEP) found that Korea's accelerated trade liberalization would provide greater economic benefits to the economy, and that it should give priority to multilateral trade negotiations and a Korea-Japan FTA or a Korea-ASEAN FTA (Choi, Park, and Lee, 2003).  Statement by Minister of Trade, Ministerial Conference, Cancun, 10-14 September 2003 (ϲʹ document WT/MIN/903)/ST/15, 10 September 2003).  This corresponds to 67% of Korean exports to Chile and to 77% of Chilean exports to Korea. According to the authorities, Korea will liberalize approximately 96.2% of its imports from Chile within ten years under KCFTA.  Korea's ten-year phased tariff cuts on grapes apply only to imports between 1 November and 30April.  Chile permanently excluded 54 tariff items, covering mainly refrigerators, washing machines, sugar, wheat, and oilseeds.  A number of tariff quotas were applied to certain meats, dairy products, fruit, and vegetables. However, the relatively low quota levels applied to imports reduce substantially the liberalizing impact of these arrangements.  ϲʹ documents WT/REG169/N/1 and S/C/N/302 of 19 April 2004, and WT/REG169/1 of 30April2004.  The Group, launched in July 2002, concluded that an FTA would produce positive economic benefits for both countries provided it reflected the fundamental principles of comprehensiveness (covered all sectors); resulted in meaningful and substantial liberalization in all, including agricultural, sectors (by substantially eliminating non-tariff barriers, comprehensively liberalizing services trade and achieving reasonable transitional periods for tariff elimination); and was consistent with the ϲʹ (GATT Article XXIV and GATS Article V).  Minister for Trade, "Korea-Japan Hold Key to Asian Free Trade Area", The Korean Times, 7June2003.  For example, studies by KIEP and the Japanese Institute for Developing Economics (IDE) concluded that the KJFTA would increase Korean long-term welfare over ten years by up to either 7.1% or 11.4%, due primarily to the dynamic effects on trade and foreign direct investment (KIEP, 2000 and IDE, 2000).  Results can be very sensitive to the econometric models used and the values assigned to key parameters, such as for import and export elasticities. Ex ante studies are also prone to overstate the perceived benefits from such arrangements where the agreement negotiated actually ends up less liberalizing than assumed at the outset in the study, due to key sectors being either excluded from the tariff reductions or subject to much slower liberalization. Benefits from FTAs will depend primarily on whether they are, on balance, trade creating or trade diverting. Econometric studies tend to universally show that the economic gains to FTA members from such arrangements are well below those that would be achieved from comprehensive multilateral/unilateral liberalization, which also usually generate larger dynamic gains.  Korea-Singapore FTA Joint Study Group, October 2003, launched in November 2002.  Korea has agreed to launch joint studies with Mexico and EFTA.  ϲʹ document WT/COMTD/N/12/Rev.1, 28 April 2000.  Foreign invested companies accounted for 13% of Korea's total domestic sales, 13.2% of total manufactured exports, and 7.3% of manufacturing employment in 2000. They accounted for the highest share of manufactured exports in medicines (30.5%), oil refining (29.4%), electricity and electronics (17.9%), pulp and paper (14.8%), and machinery (14.6%). The lowest shares were recorded in food (9.9%), ceramics (6.6%), textiles and garments (4.4%), and metals (3.6%). Ministry of Commerce, Industry and Energy (2002).  Inflows during 2001 to 2003 accounted for almost 30% of Korea's total accumulated inward FDI.  MOCIE (2004) and MOCIE Press Release, 28 January 2004, Ministry Sets Foreign Investment Inducement Target at $8 Billion.  The share of "greenfield" FDI fell from 83.1% in 2001 to 68.7% in 2003 while that of mergers and acquisitions increased from 16.9% to 31.3%.  Financial Supervisory Service Press Release, 14 January 2004, Foreign-owned Stocks Account for 40% of Korean Bourse at End of 2003.  MOFE (2003), p. 187.  The legislation also recognizes foreign ownership of below 10% as FDI where the investor enters agreements concerning (a) officer's dispatch or appointment; (b) a technical licence or joint research/development; or (c) the supply and purchase of products /raw materials exceeding one year.  Consists of representatives of various agencies and ministries, such as MOFE and MOCIE, and heads of relevant local and city governments, such as from Seoul and Busan.  MOCIE Press Release, 22 February 2001, MOCIE Increases Minimum Foreign Investment.  The number of partially closed sectors actually increased from 14 to 27 because of the partial opening of closed sectors and the disaggregation of some partially closed sectors.  Notification for establishing a local branch is to be processed within five business days of establishment and approval decided within seven business days. Additional approvals may be required from relevant ministries depending on the industry (MOCIE, 2003, p. 36).  Post notification within 30 days is allowed for stock transfers related to mergers and acquisitions.  Since the Foreigners' Land Acquisition Land was revised in 1998. Foreign land ownership may be denied to nationals of countries that do not allow Koreans to purchase land. However, such reciprocity conditions have not been used.  To acquire other farmland, foreigners, like Koreans, must be directly involved in farming.  Ministry of Construction and Transportation Press Release, 23 August 2003, Foreign-owned Land Reaches 147 million Square Metres at End of June.  MOCIE Press Release, 27 November 2001, Regulations Eased for Foreign-Invested Firms in Seoul.  MOCIE Press Release, 30 August 2002, Gov't to Simplify Financial Support Procedures for Foreign-Invested Firms.  Ministry of Maritime Affairs and Fisheries Press Release, 5 December 2003, Ministry to Publish Investment Reference Material on Harbour Industry.  MOCIE (2003), p. 8.  Prime Minister and Acting President, Opening Keynote Address, Asia Society's 14th Asian Corporate Conference Gala Opening Dinner, Seoul, 12 May 2004.  Masan and Iksan were previously designated as free export zones; free trade zones replaced these in 2000. FICs provide smaller-sized foreign investment companies rent subsidies on state land, for example, up to 75% for manufacturing businesses with a minimum investment of US$10 million.  The Government has agreed to merge free trade zones and customs duty free zones in 2004 so as to avoid confusion by foreign investors and to generate greater benefits (Invest Korea, 2003).  Even in cases where the market is claimed to have failed to finance enough efficient investment due to "externalities" (social benefits from the investment that are not fully reflected in private costs), such as in R&D, it is unclear whether tax incentives can effectively address such "market failure".  Experience of other OECD economies suggests that tax incentives are seldom cost-effective. Most econometric studies show that forgone tax revenues exceed incremental investment induced from tax incentives. Tax holidays are in particular an ineffective incentive, compared to tax credits.  These were Algeria (30 September 2001), Brunei (30 October 2003), Costa Rica (28 August 2002), El Salvador (25 May 2002), Guatemala (17 August 2002), Honduras (19 July 2001), Israel (19 June 2003), Mexico (27 June 2002), Morocco (8 May 2001), Nicaragua (22 June 2001), Oman (10 February 2004), Panama (8 February 2002), Saudi Arabia (19 February 2003), and Trinidad and Tobago (27 November 2003).  These include Albania, Chile, Croatia, Iceland, Iran, Jordan, Laos, Myanmar, Nepal, Sudan, Slovenia, the United Arab Emirates, and Venezuela; the treaties with Chile, Myanmar, and Nepal are currently in force. WT/TPR/S/137 Trade Policy Review Page  PAGE 34 Republic of Korea WT/TPR/S/137 Page  PAGE 35 Page III. 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