THE THEORY OF FREE TRADE POLICY, ITS BENEFITS ON THE EXAMPLE OF THE REPUBLIC OF KOREA
THE THEORY OF FREE TRADE POLICY, ITS BENEFITS ON THE EXAMPLE OF THE REPUBLIC OF KOREA
Olga Esina
Master Data Specialist, CJSC British American Tobacco-SPb,
Russia, Saint-Petersburg
ABSTRACT
The article analyzes such a free trade agreement (FTA) between countries on the example of the Republic of Korea, determines the chronology of agreements with partners, the number of countries that have concluded agreements with the Republic of Korea, as well as the benefits from the FTA. The key partner countries that currently has an FTA with the Republic of Korea have been identified.
Keywords: FTA, international trade, South Korea, export, import, trade balance.
The development of integration processes between countries is one of the main features of the modern world economy. In the theory of economic integration, in accordance with the approach proposed in 1961 by the American economist B. Balassa, five forms can be distinguished that describe the modern classification of economic integration: 1. Free trade area – implies the abolition of customs duties and quotas in trade between member states. At the same time, each of the participants maintains its own trade regime towards to third countries. 2. Customs union – arises when the participants in the free trade area introduce a common customs tariff and move to a single trade policy towards third countries. 3. Common internal market – a customs union that provides free movement of goods, services, capital and persons. 4. Economic and monetary union – formed on the basis of a common internal market by introducing a common economic policy and a single currency. 5. Political union – assumes the addition of a common foreign and domestic policy to the economic and monetary union, which brings the regional association as close as possible to a confederation or federation [1, p.18-26].
In the context of the globalization of world trade and the global division of the labor market, when certain elements of the final product are produced in different jurisdictions, there is a need for cooperation that is not burdened with unnecessary administrative and fiscal burdens. In this paper, close attention will be paid to the first form of economic integration - the FTA.
Establishing an FTA is a rather deep form of integration. This is not yet a common market, like the EU, but already stable and loyal agreements on relations between countries. FTA to some extent simplify the task of interstate and intercorporate relations, working towards a common goal: the elimination of customs duties and quantitative restrictions in mutual trade, but with the preservation of autonomy in conducting foreign trade policy in relation to non-participating countries. However, most of the current FTAs go much further than the principle of duty-free trade in goods, realizing the harmonization of non-tariff restrictions, the liberalization of trade in services, a common investment policy up to the free movement of capital.
The rules in force in the FTA are governed by an international treaty. At the same time, with third countries that are not related to the free trade agreement, the states determine their own policy. Moreover, the FTA agreement does not mean the absence of borders. Between the countries participating in the FTA customs borders and posts controlling the origin of goods across state borders are maintained. A free trade zone is created both between two and between a large number of participating states.
Thus, the process of economic integration is a progressive movement from a lower form to a higher form of economic interaction. The implementation of integration plans provides member countries with economic benefits, including: 1. Expanding the capacity of the countries' domestic markets by combining disparate national markets into a single one, which stimulates the growth of the association's total GDP; 2. Increase a purchase power of the population in parallel with the growth of average per capita incomes and the reduction in prices for goods; 3. Increase of efficiency and competitiveness of production; 4. «Scale effect» of production from the deepening of specialization; 5. Creation of a more efficient structure of production, taking into account the comparative competitive advantages of each participating country; 6. Increasing investment attractiveness by consolidating markets, free movement of the four factors, increasing productivity and income growth in each state; 7. Accelerating the pace of economic development [2, p.127-129].
About 550 free trade zones and customs unions have been notified to the WTO, and their number continues to grow. The Republic of Korea (further South Korea) is no exception and by 2022 has 18 FTA agreements with all key trading partner countries. The agreement has been signed with such countries as: Chile, India, Turkey, New Zealand, Singapore. Australia, Vietnam, Peru, Canada, Colombia, USA, China, Israel, Indonesia, as well as FTA unions - EU, EFTA, ASEAN, RCEP [3].
The choice in favor of an FTA for South Korea was by no means an easy one and was accompanied by internal political struggles. Many members of the political elite were against further trade liberalization, fearing that it could harm weak sectors of the economy, primarily agriculture. The Korean strategy pursued the goal of concluding bilateral agreements with the largest economies - the US, the EU and China, which could provide the main demand for Korean goods, as well as opportunities for participation in service trade and access to technology. The implementation of the strategy assumed that small countries with more or less complementary interests would be chosen as the first partners in each of the regions in order to avoid serious difficulties in the negotiation process. And only after Korea gained experience as a negotiator, in the second half of the 2000s, negotiations were opened with the US, the EU, and China. It was also assumed that negotiations should be conducted in parallel in order to maximize the number of agreements in a short time.
The main products that are exported to other countries as of 2021 in percentage terms are: electrical machinery and equipment, their parts; sound recording and reproducing apparatus, apparatus for recording and reproducing television images and sound, parts and accessories thereof – 31% ($200 billion); nuclear reactors, boilers, equipment and mechanical devices – 11,7% ($76 billion); land transport, other than railway or tram rolling stock, and their parts and accessories – 10,3% ($67 billion); plastics and products made from them – 6,7% ($43 billion); mineral fuel, oil and products of their distillation; bituminous substances; mineral waxes – 6,2% ($40 billion); ferrous metals – 4,33% ($27 billion); organic chemical compounds – 3,64% ($23 billion) [4].
In order to visually show the success that South Korea has achieved through export/import, comparative analysis of export/import flows over the past three years and calculated their balance has been carried out. The results are presented in the form of two summary figures for all partner countries and groups of an FTA below [5].
Figure 1. Trade flows of an FTA with South Korea, annual data 2020-2022 (unit: US $1million)
In almost 20 years, South Korea has made huge strides in the FTA, thanks to which it has been able to expand access to technology. It is safe to say that there will be a tangible effect from the reduction of tariffs within the framework of the FTA agreement. In general, it can be concluded that all FTA agreements have had a positive effect on Korea's trade with agreement partners, even despite the difficult period since 2020 due to COVID-19 and difficulties in logistical transportation. The highest level of use is observed in agreements with groups of countries from the RCEP, EU and ASEAN alliances, as well as USA, China, Vietnam. As for the lowest level of use, these are the countries - Chile, Peru, Columbia, New Zealand.
Let's consider the figure 2 of the trade balance of South Korea with an FTA countries from 2020-2022 year [5].
Figure 2. The trade balance of an FTA with South Korea, annual data 2020-2022 (unit: US $1million)
From the presented comparative analysis over the past three years with the FTA countries, it can be concluded that South Korea has active trade relations with Vietnam, the USA, China and ASEAN alliance in both directions (export/import). As for the negative balance with the countries of Australia, Chile, Indonesia, EFTA, EU, Peru, this result is due to the fact that South Korea purchases services and products of these countries in a larger volume than provides itself. But, despite this, one can notice a downward trend in the negative balance.
Nowadays, the positive aspect of the presence of a large number of the FTA agreements can be noted. Against the backdrop of uncertainty regarding the appointment of judges for the WTO Court of Appeal, which considers complaints from member countries, FTA agreements allow regulating relations between partners and resolving conflict situations.
In conclusion, South Korean experience in the application of trade policy demonstrates how an FTA can be used not only to expand trade, but also to protect the national market, as well as to transform it. During the period of active trade policy since the mid-1990s, South Korea has significantly improved its position in terms of GDP, foreign trade, access to technology and business environment indicators. As a result, an increase in the level of well-being was been achieved. The combination of multilateral and preferential trade liberalization formats contributed in no small measure to these successes. Even during the active FTA phase, South Korea continued to benefit from its WTO membership. Creating conditions for the distribution of benefits from trade among economic agents of different levels has become a key to improving the effectiveness of trade policy. The state authorities carried out explanatory work on the use of free trade zone regimes for small and medium-sized businesses, and provided support for entering foreign markets. This has made it possible to achieve a high level of use of FTA agreements.
References:
- Hochman, G., Tabakis, C. and Zilberman, D. (2013), “The Impact of International Trade on Institutions and Infrastructure”, Journal of Comparative Economics.
- Samue, Azdak. (2019). International Trade and Its Impact on the Global Economy.
- FTA partner country customs information. Available at: - https://www.customs.go.kr/ftaportalkor/ad/ftaTrtyPsr/psr.do?mi=3528 (accessed 05 January 2023).
- Trend Economy, South Korea. Available at: - https://trendeconomy.ru/data/h2/Korea/TOTAL (accessed 3 January 2023).
- Korean Trade Statistics for Export/Import by Country. Available at: - https://unipass.customs.go.kr/ets/index_eng.do (accessed 3 January 2023).