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Strategy for the Successful Conclusion of the
Table of Contents
This project was completed to fulfill a requirement for a Master’s Degree in Commercial Diplomacy from the Monterey Institute of International Studies (MIIS).
For the purpose of this project, I assume the role of a trade official for the Republic of South Korea Ministry of Foreign Affairs and Trade (MOFAT, hereafter). My specific task is to develop a comprehensive strategy to successfully complete the South Korea-Chile Free Trade Agreement (FTA) negotiation. The negotiation has stalled at the final phase, mainly due to mounting opposition from the South Korean agricultural community.
MOFAT is responsible for developing and coordinating South Korea’s international trade, commodity, and direct investment policy, and directing negotiations with other countries on such matters. Since 1998, MOFAT has led the South Korea-Chile FTA negotiations.
I chose this subject because a South Korea-Chile FTA, if concluded, will mark South Korea’s first ever free trade agreement, and thus will carry significant implications for their trade policy. I hope that my project can help conclude a South Korea-Chile FTA by providing MOFAT with strategies to build domestic consensus on opening the agricultural market. The timeframe for this report is the short-term (years 2002–2003).
I thank my project advisor Professor Geza Feketekuty for his guidance. I also thank Professor William Arrocha and Bill Monning for their input and enthusiasm throughout the entire study at the MISS.
In 1998, the South Korean government, with the ultimate goal of building an open trading country, decided to pursue free trade agreements (FTAs) with major trade partners. The main objective, to overcome the structural weakness of the South Korean economy, sharpened after the 1997 financial crisis. The crisis prompted South Korea to adapt to the changing economic environment, i.e., the recent trend of growing regional integration in the world economy.
Since its decision to open the economy, the government has been negotiating its first FTA with Chile. After four rounds of negotiations, the process stalled due to a wide difference on tariff concession schedules, particularly regarding exception items of agricultural products. South Korea insists that sensitive fruits like grapes, apples, and pears retain tariffs, while Chile calls for South Korea to abolish tariffs on all Chilean products, including agricultural goods, within 10 years of signing an FTA.
The bilateral trade pact is expected to have a positive economic effect for South Korea. It is likely to boost exports by $660 million and improve South Korea’s welfare by $960 million, while creating new export opportunities in Latin American markets. Chile’s open trade policy and its experience in concluding FTAs with other countries would provide invaluable experience to South Korea, not only in its attempts to further liberalize its own economy, but also in its pursuit of FTAs with larger economies such as Japan and the US.
Despite potential economic benefits, the agricultural sector poses obstacles to the conclusion of the South Korea-Chile FTA. Though the agreement’s impact on South Korea’s agricultural sector is likely to be small due to seasonal growing differences between the two countries, agricultural groups, in conjunction with other NGOs, have waged a fierce campaign against the agreement. In addition, negative public opinion towards trade liberalization and presidential election politics are working against the successful conclusion of the FTA deal.
To maximize the effect of a South Korea-Chile FTA, the South Korean government should attempt to conclude the FTA with Chile as soon as possible. In order to overcome the domestic opposition, MOFAT must develop a domestic strategy to mitigate farmers concerns and a negotiation strategy to resolve differences on the agricultural concession schedule with Chile.
To these ends, the following strategy is recommended:
In his annual report to the President on the 2002 diplomatic agenda, Minister for Foreign Affairs and Trade Choi Sung-hong made it clear that a top diplomatic priority for the year would be MOFAT’s pursuit of an early conclusion to the free trade agreement with Chile. Launched in 1998, the South Korea-Chile FTA negotiation stalled in 2000 at the fourth round of talks. The main sticking point is the discrepancy on tariff concessions, particularly regarding agricultural products.
To successfully conclude the agreement, MOFAT must overcome major challenges on the domestic front. First, the agricultural community is posing fierce opposition to the South Korea-Chile FTA out of fear that the increase of cheap Chilean fruit imports will severely hurt the local fruit industry and therefore destroy the domestic agricultural sector. Second, a presidential election is approaching in December, and politicians do not wish to lose farmers’ votes. It is thus politically difficult for the government to achieve Parliament ratification this year. Third, without adequate understanding of the benefits of free trade to the South Korean national economy, public opinion remains largely negative toward the government’s new FTA policy.
To overcome domestic challenges and make the negotiation a success, MOFAT must build domestic consensus among stakeholders on opening the agricultural market and compensating farmers affected by the FTA. The biggest problem during the last two years of negotiations has been the lack of consensus among domestic interest groups, government agencies and politicians. This has from the outset greatly restrained flexibility and strength at the negotiating table. Given the political sensitivity surrounding the agricultural sector during this election year, MOFAT, in conjunction with other government agencies, should take extra effort to promote free trade among the general public prior to the height of the presidential campaign in November/December. If presidential candidates pledge to thwart the negotiation by taking sides with farmers, the chances for successful conclusion of the South Korea-Chile FTA are slim.
This report presents a strategy for domestic consensus on agriculture for the South Korea-Chile negotiation. Domestic consensus will pave the way for parliamentary ratification and make possible a negotiation strategy to mitigate domestic farmers’ concerns and resolve differences on the agricultural concession schedule with Chile. This report provides background information on the South Korea-Chile FTA initiative and the current state of the FTA negotiations. It addresses the South Korea-Chile FTA in terms of economic benefits, commercial effects on the local fruit industry, and the domestic politics surrounding the agricultural sector.
In 1998, the South Korean government, with the ultimate goal of building an open trading nation, reversed its previous opposition to regional trade blocks and decided to pursue free trade agreements (FTAs) with major trade partners. The main objectives were to overcome the structural weaknesses of an economy crippled from a financial crisis, and to maximize the economic benefits of market expansion and foreign investment. The reversal of policy reflected concern for being left out from the growing regional integration of the world economy.
The government’s decision took into consideration the following factors:
? Accelerating restructuring and opening of the South
? The spread of Regional Trade Agreements (RTAs) in
Table 1: Number of regional trade agreements notified to GATT/WTO
Source; WTO Secretariat (2001)
The spread of regionalism has been accompanied by drastic increases in intra-regional trade, inter-regional trade, and total world trade. According to IMF trade statistics, the share of world trade within the framework of regional agreements grew steadily from 22.5% in 1959 to 66.3% in 1997. The increase in intra-regional and inter-regional trade signals the importance of regional economies in the world.
The European Union now has 29 regional and bilateral free trade or special customs agreements, and is in the process of negotiating with 12 additional countries. NAFTA members are entering into FTAA negotiations, which aimed to link North and South American regions under one trade region. Japan has completed a free trade agreement with Singapore and is exploring options with ASEAN countries, Canada, Mexico, and Chile. And China, a WTO newcomer, is pursuing an FTA with the ASEAN countries. The Untied States recently signed an US-Jordan FTA agreement and US-Vietnam bilateral trade agreement, and is also negotiating FTAs with Chile and Singapore. The US is discussing a ‘Pacific 5’ formula involving Singapore, Chile, New Zealand and Australia, and is negotiating Free Trade Areas of Americas.
All told, there are 130 regional free trade and customs agreements in the world; South Korea belongs to none, leaving South Korean exporters at a disadvantage in world markets. The government has recognized the necessity of joining a regional block to secure stable export and investment markets and to defend South Korean exporters against the discriminatory effects of other regional groups. In addition, if the potential FTA partner is already a member of another FTA, it would be easier for South Korea to gain access and diversify its exports to a larger regional market.
? Strengthening Political and Economic Ties
In November 1998, the Inter-Ministerial Trade Policy Coordination Committee (ITPCC) formally announced that South Korea would first seek a FTA with Chile, then would explore the economic feasibility of FTAs with such other trading partners as the US, Japan, New Zealand and Thailand. In December 1998, the government formed a special task force on a South Korea-Chile FTA. The task force consisted of five working groups, covering market access, trade rules, services, intellectual property and legal procedures.
South Korea has since been conducting a joint feasibility study of FTAs with Japan, New Zealand and Thailand at the level of private institutes. South Korea is also engaging in ongoing informal talks on the formation of ASEAN+3 (i.e., South Korea, Japan and China), which could counterbalance other major regional economic blocs such as NAFTA and the EU.
2. South Korea-Chile Free Trade Agreement
1) Chile as South Korea’s first FTA partner
South Korea chose Chile as its first FTA partner because of high complementarities in trade structure and the potential to learn from Chile’s plentiful experience in negotiating regional trade agreements. Chile, in turn, chose South Korea for its influence with neighboring Asian countries, and for its growth potential given reforms in several sectors, including the financial sector. The South Korean government specifically chose Chile as its first FTA partner for the following reasons:
Table 2: Chile’s Trade Agreements
2) Preliminary Negotiations
South Korea and Chile reached an agreement to establish an FTA at the bilateral summit talks of the APEC leaders’ meeting in November 1998. A South Korea-Chile FTA Joint Committee Meeting was held in Chile to discuss the specific negotiation procedures. In April 1999, the two governments initiated the first high-level meeting for FTA negotiations. The main goal of this meeting was to discuss in depth the current economic situation of the two countries and major issues related to an FTA on the basis of the previously exchanged questionnaire. The second meeting was held in June 1999 in Santiago, Chile.
The two countries, after extensive exchange of information within FTA coverage, designed the Framework Agreement. Based on the draft of the Framework Agreement proposed by the South Korean government, both sides agreed on three basic principles of a South Korea-Chile FTA: 1) a comprehensive FTA, 2) liberalization in all areas, and 3) transparency. The scope of coverage includes seven specific subjects: goods, services, investment, IPR, government procurement, competition policy, and other legal matters such as dispute settlement. After two successful high-level meetings, the heads of state declared an official launch of South Korea-Chile FTA negotiations at the APEC summit meeting in September 1999.
3) FTA Negotiations and Current Status
Currently, the South Korea-Chile FTA is negotiated through 5 groups, each with representatives from 15 government agencies (e.g., MOFAT, the Ministry of Finance and Economy, the Ministry of Commerce, Industry and Energy, the Ministry of Agriculture and Fishery, etc.). For its part, the Chilean negotiation team is led by the Ministry of Foreign Affairs.
? 1st round of negotiation (December 14-17,1999)
? 2nd round of negotiation (February 29-March 3, 2000)
? 3rd round of negotiation (May 16-17, 2000)
In June 2000, Chile presented a revised tariff concession schedule of products. The schedule suggested that upon implementation of the agreement, 40% of products would get immediate duty free access, the tariff for 27% of products will be phased out within 5 years, the tariff for 32% of products would be phased out within 10 years, and 1% of products would receive special treatment.
The agricultural tariff schedules South Korea presented were as follows: 15% of Chilean agricultural products would get immediate duty-free access, tariffs for 31% of products would be phased out within five years, tariffs for 12.7% of products would be phased out within 10 years, tariffs for 1.5% of products would be phased out over the 5-year-period after 5 years of suspension, tariffs for 4.5% of products would be phased out within 15 years, and 1.3% of products, including rice, would be excluded from the concession schedule. Furthermore, such sensitive fresh fruit products as apple, pears, and grapes would be excluded, or the tariff elimination schedule would be put off until after related WTO agricultural negotiations.
? 4th round of negotiation (December 12-15, 2000)
To break the deadlock, the two countries agreed to hold a high-level meting in June 2001 to revise and adjust their respective tariff concession schedule. Both sides reconfirmed their political will to continue the FTA negotiation at the bilateral foreign ministers’ meeting during the APEC Summit in October 2001.
? Current state of the negotiations
At present, while offering immediate duty free access for all Chilean manufactured goods except copper cathodes (of which tariffs will be phased out by 10 year period), South Korea insists that such sensitive fruits as grapes, apples and pears retain their tariffs. Chile remains unchanged in its position on no exceptions, calling for South Korea to abolish tariffs on all Chilean products, including agricultural goods, within 10 years of signing an FTA. If not, Chile insists that it will exclude such manufacturing sectors as textiles, foot wear, washing machines and refrigerators vital South Korean exports.
It should be noted that 80 percent of agreements have already been reached in such areas as competition, trade rules and dispute settlement. The sticking point for the conclusion of South Korea-Chile FTA is South Korea’s agricultural concession schedule. Narrowing positions on fresh fruits like apples, pears and grapes, at the core of contention, will be the key to a successful outcome.
South Korea-Chile Economic Relations
1) Overview of the Chilean Economy
Chile is endowed with rich mineral resources near the sea, which have turned it into the world’s leading copper and iodine producer, and a growing source of gold and non-metallic minerals. It abandoned import substitution in favor of free-market policies in the mid-1970s, more than a decade before the rest of Latin America. This unleashed competition and productivity growth and permitted an expansion of the traditional export industries of mining and fishing. The free market fostered the development of new sectors, such as cellulose, fruit, salmon, wines and methanol production, and a variety of services, including tourism. Chile’s strong and increasingly diversified export sector has been its main engine of economic growth over the past two decades.
Between 1991 and 1997, Chile recorded real GDP growth of about 8 percent per year. The economy slowed during the financial crisis and a severe drought in 1999 caused negative economic growth for the first time in over 15 years. By the end of 1999, exports and economic activity picked up the pace. Chile recorded 5.4% GDP growth in 2000.
Chile’s key industries today are copper, other minerals, foodstuffs, fish processing, iron and steel, wood, transport equipment, cement and textiles. Its main export items are copper, fish, fruits, paper/pulp and chemicals. Copper accounts for 42 percent of exports, other minerals (gold, iron, nitrate, titanium, and others) approximately 20 percent, fresh fruit 10 percent, fish and fish products 7 percent, and pulp and paper 6 percent. Chile’s main trading partners are the United States (which takes 22 percent of exports and provides 20 percent of imports), Japan (9 and 10 percent), Germany (10 and 8 percent), and Brazil (7 and 8 percent).
Chile’s single import tariff rate was cut from 9% in 2000 to 8% in 2001 and is scheduled to fall further, to 7% in 2002 and 6% in 2003.
2) South Korea-Chile Bilateral Trade
In 2000, South Korea-Chile bilateral trade totaled $1.5 billion. South Korean exports to Chile in 2000 totaled $592 million, while imports totaled $902 million. South Korea is Chile’s 6th largest export market in the world, and Chile is South Korea’s second largest trading partner in Latin America. Since the mid 1990s, the bilateral trade volume has remained between $1.1-1.6 billion annually. South Korea has run a constant trade deficit with Chile of about $0.3-0.5 billion. Chile is the only country in Latin America to which South Korea is indebted. Exports from Chile to South Korea grew at 12.7% from 1991 to 1999, while Chile’s global exports grew at 7.3%.
Table 3: South Korea’s trade balance with Chile (Unit: US $ millions)
The economic size of Chile is relatively small, and trade volume between the two countries is a small percentage of South Korea’s total trade. South Korea’s exports to Chile accounted for around 0.3-0.5% of South Korea’s total exports of US $175.8bn in 2000. Imports from Chile were less than 0.8% of South Korea’s total imports of US $159.2bn in 2000. South Korea paid an average tariff for exports to Chile of 8.9%, while Chile paid an average tariff of 3.6% in 2000.
South Korea’s primary exports to Chile include transportation vehicles, laundry machines, polyethylene, and such electronic products as refrigerators, televisions, and microwave ovens. South Korea’s primary imports from Chile include copper, copper ore and concentrates, iron ore and concentrates, methanol and other refined copper. (See Table 4: South Korea-Chile Bilateral Trade 2000)
Table 4: 2000 South Korea -Chile Bilateral Trade (Unit; millions, %)
Source: MOFAT, 2001
Chile’s land area is 756,946 square km, 7% of which is arable. Agriculture and forestry accounts for about 7% of GDP (1999). Most Chilean agriculture production is modern and efficient, achieving high yields. Among sectors that have expanded rapidly are fruit, poultry, pork and dairy processing, pasta manufacturing and wine and snack food production. Chile’s agricultural sector (including forestry and fisheries products) now accounts for over 35% of total exports.
Chile is the largest fruit exporter in the world. Major crops include apples, table grapes, pears, apricots, plums, peaches, oranges and avocados, etc. (See Table 5: Leading Chilean Fresh Fruit and Vegetable Exports to the World, 1995-1999). The Chilean fruit industry utilizes the most advanced technologies, production techniques, genetics, marketing and business strategies to produce and sell high quality fruit on the world market.
About 50% of Chile’s fruit production is exported, with the US accounting for about 40% of its fruit exports, followed by Europe, Latin America and the Far/Middle East. In 1999, the export of agricultural products totaled about US $1.5 billion worth of dollars, with fresh fruits like grapes, apples and kiwis totaling about US $1.1 billion. Grapes, in particular, accounted for about 40% of the total Chilean agricultural exports.
Table 5: Leading Chilean Fresh Fruit Exports to the World, 1995-1999 (US$ millions)
Prochile based on Central Bank of
With the population shifting to urban areas, and the
continued growth of the manufacturing and services sectors, the agricultural
sector declined from 45 percent of South Korea’s GDP in 1964 to just
5.4 percent in 1999. South Korea imports about 70 percent of its agriculture,
and that percentage is expected to increase over time. In 1998, South
Korea’s 1.4 million farming households produced $26.6 billion in output
with rice accounting for nearly one-third of this production. Table
6 presents the major output of South Korean agriculture.