FTA gives timely fillip to trade

Air purifiers and handbags among exports benefitting from China-South Korea tariff agreement amid global slowdown

In the last few months, despite a slowdown in global trade, South Korea's exports of air purifiers to China have almost quadrupled while exports of leather bags have doubled.

A MAKEUP ARTIST gets a model ready for a show in Seoul. South Korean exports of some products to China registered strong growth in the first quarter of this year, including makeup, which went up 94 percent. AFP

Analysts say the rise in exports of these particular products bodes well for the future of trade between the two countries — a future made stronger by the free trade agreement (FTA) between China and South Korea which launched on Dec 20 last year.

"Some Korean consumer goods exported to China are showing double or triple digit growth. Those goods' share of total exports is quite small but Korea is aiming to export those products (which) will benefit from the FTA," said Chung Jin Woo, a manager at the Korea Trade-Investment Promotion Agency (KOTRA).

In the first quarter of the year, air-purifying products have seen an increase in trade of 365 percent; leather bags are up 110 percent; makeup products, 94 percent; shampoos, 85 percent; and skin care laser devices, 43 percent.

The products that have seen large increases are quite specific and may not necessarily say much about the broader direction of trade, but they do represent something of a silver lining in a rather cloudy outlook.

Overall, South Korean exports have been sliding this year, just months after the signing of the much-anticipated FTA.

While the deal is expected to boost bilateral trade between the two countries in the medium and long term, it has run up against drops in global demand for consumer products and commodities that have led to global weakness.

South Korean exports have been on a downward trend since January 2015. Exports slid 11.2 percent year-on-year in April to $41.05 billion. Imports fell to $32.21 billion, dropping 14.9 percent, faster than in March.

South Korea finished April with a trade surplus of $8.84 billion, slightly down from the $9.86 billion recorded the month before. This also marks 18 consecutive months that trade figures have dropped in the country.

One factor driving the FTA was the desire to boost South Korea's slowing economy by facilitating trade on $300 billion worth of goods and services.

"Based on our estimations, the China-Korea FTA could lead to a 0.8 percent per annum increase in exports to China," said SeungYoup Lee, an associate economist at CLSA, an independent brokerage and investment firm.

Lee added the FTA will boost South Korea's exports to China, but the full impact will be gradual as tariffs are lifted or reduced over time.

According to Chung of KOTRA, the two countries are planning to establish an industrial complex based on the FTA. "We are expecting it to attract more foreign capital and facilitate the manufacturing industry of both countries."

The trade pact covers 17 different areas of trade. Under the deal, Seoul will eliminate tariffs on 79 percent of all imported Chinese products during the first decade, while Beijing will do the same on 71 percent of all South Korean goods.

Over the next two decades, more than 91 percent of tariffs will be removed on both sides. Seoul estimates that South Korean companies will reduce tariff costs by up to $5.44 billion per year.

The deal may boost the long-term prospects for trade between two of the largest economies in Asia.

However, the benefits that the FTA should generate are being hit by slowdowns in the broader economy, with increases in trade dwarfed by the slowing import demand from China.

Lee said: "A lot of the slowdown in Korea's exports to China is not Korea specific. If we look at China's imports they have recorded year-on-year declines in 2015."

China's own imports dropped 10.9 percent year-on-year in April while exports fell 1.8 percent. The drops in April followed a one-month rebound, underlining the long-term challenges of a downward trend.

The trade figures in April represented a trade surplus for China of $46 billion compared to $34 billion in the same month a year earlier, according to China's General Administration of Customs.

Chung from KOTRA said South Korea's exports to China have recently shown signs of slowing down.

"The trend is mainly driven by China's economic downturn, decreasing foreign demand and an exodus of Korean companies' production bases in China," Chung said.

"The major causes of the lower exports are, first, the higher proportion of intermediary goods among export goods to China and, second, the import substitution effect resulting from China's industrial structure reform."

Some South Korean companies jumped on several of the more practical provisions of the FTA, such as the ability to clear customs in just 48 hours and exemptions from having to certify the origin of some shipments.

Efforts to leverage the FTA to improve the bottom line are evident in the increases of trade in products such as air purifiers and handbags. It is unclear, however, what the ultimate impact of the deal will be on trade between the two countries as a whole.

"Although the FTA is expected to have a positive effect on the trading activities between the two countries, it is too early to measure the impact of the FTA on the trade figures," said Chung.

The China-South Korea FTA is only one part of a changing dynamic of trade across the region, a dynamic that is steadily moving toward much greater openness.

A three-way trade deal is also under negotiation between China, South Korea and Japan. Just last month, the three East Asian countries held the tenth round of negotiations toward that deal.

Meeting at a recent summit, leaders from all three countries — Japan's Prime Minister Shinzo Abe, South Korean President Park Geun-hye and China's Premier Li Keqiang — agreed to make "further efforts towards the acceleration of the trilateral FTA negotiations" and to reach a "comprehensive, high-level and mutually beneficial" agreement, according to a joint statement.

Lee from CLSA said: "Unless global trade growth in general picks up again, the trilateral trade deal wouldn't be the decisive factor in stimulating the East Asian countries' economies.

"For Korea particularly, it would only lower tariffs to Japan because they already have an FTA in place with China. While it is a positive, it is not a game changer."

A trilateral trade deal between these three countries could be another avenue for freer trade. The combined GDP of the three countries is about 20 percent of the world's total and about 70 percent of Asia's.

A deal of that size could prove to be another avenue to boost trade regionally and overcome the effects of the global slowdown.

All three countries are also involved in a variety of trade deals, such as the 16-member Regional Comprehensive Economic Partnership led by China, which includes the 10 members of the Association of the Southeast Asian Nations, India, Australia and New Zealand.

The 16 countries account for over a quarter of the world's economy, with a combined GDP of more than $75 trillion.