RESTRICTEDWORLD  TRADE
ORGANIZATIONWT/TPR/S/73
28 August 2000
(00-3266)
Trade Policy Review Body
TRADE POLICY REVIEW
REPUBLIC OF KOREA
Report by the Secretariat
This report, prepared for the third Trade Policy Review of the Republic of
Korea, has been drawn up by the WTO Secretariat on its own responsibility.
The Secretariat has, as required by the Agreement establishing the Trade Policy
Review Mechanism (Annex 3 of the Marrakesh Agreement Establishing the
World Trade Organization), sought clarification from the Government of the
Republic of Korea on its trade policies and practices.
Any technical questions arising from this report may be addressed to
Mr. S. Stamnas (tel. 739 53 82) or  Mr. M. Daly (tel. 739 50 77).
Document WT/TPR/G/73 contains the policy statement submitted by the
Government of the Republic of Korea
Note: This report is subject to restricted circulation and press embargo until the end of the meeting
of the Trade Policy Review Body on the Republic of Korea.Republic of Korea WT/TPR/S/73
Page iii
CONTENTS
Page
SUMMARY OBSERVATIONS
(1) T HE ECONOMIC ENVIRONMENT vii
(2) T RADE POLICY FRAMEWORK viii
(3) T RADE AND TRADE -RELATED POLICY DEVELOPMENTS ix
(4) S ECTORAL POLICY DEVELOPMENTS xi
(5) P ROSPECTS xii
I. ECONOMIC ENVIRONMENT 1
(1) I NTRODUCTION 1
(2) R ECENT ECONOMIC DEVELOPMENTS 1
(i) Growth, incomes and employment 1
(ii) Prices 5(iii) Fiscal developments 5(iv) Exchange rate and monetary developments 7(v) Balance of payments 9(vi) External liabilities 10
(3) D
EVELOPMENTS IN MERCHANDISE TRADE 11
(i) Composition of trade 12(ii) Direction of trade 14
(4) T
RENDS AND PATTERNS IN FOREIGN INVESTMENT 18
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES 21
(1) O VERVIEW 21
(2) G ENERAL CONSTITUTIONAL AND INSTITUTIONAL FRAMEWORK 21
(3) S TRUCTURE OF TRADE POLICY FORMULATION 22
(i) Executive branches of government 22(ii) Advisory bodies 23
(4) T
RADE POLICY OBJECTIVES 23
(i) General trade policy objectives 23
(ii) Sectoral trade policy objectives 23(iii) The WTO Agenda 24
(5) T
RADE LAWS AND REGULATIONS 25
(6) T RADE AGREEMENTS AND ARRANGEMENTS 27
(i) Multilateral agreements 27
(ii) Preferential, regional and bilateral arrangements 27
(7) T RADE DISPUTES AND CONSULTATIONS 30
(i) Dispute settlement under the GATT/WTO 30(ii) Other 30
(8) F
OREIGN INVESTMENT REGIME 30WT/TPR/S/73 Trade Policy Review
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Page
III. TRADE POLICIES AND PRACTICES BY MEASURE 36
(1) O VERVIEW 36
(2) M EASURES DIRECTLY AFFECTING IMPORTS 37
(i) Registration and documentation requirements 37
(ii) Tariffs 39
(iii) Customs valuation 55
(iv) Other levies and charges 56(v) Import prohibitions, restrictions, and licensing 56(vi) State-trading 61(vii) Government procurement 64
(viii) Local-content requirements 70
(ix) Contingency measures 70(x) Standards and other technical requirements 73(xi) Frugality campaigns 78
(3) M
EASURES DIRECTLY AFFECTING EXPORTS 79
(i) Registration and documentation 79
(ii) Export prohibitions, restrictions, and licensing 79
(iii) Export subsidies 81
(iv) Duty and tax concessions 81
(v) Free-trade export zones 81
(vi) Export finance, guarantees, and insurance 82
(vii) Countertrade 83
(4) M EASURES AFFECTING PRODUCTION AND TRADE 83
(i) Taxation 83
(ii) Production assistance 88
(iii) Competition and consumer policy 95(iv) Intellectual property rights 99
(v) Other measures (environmental) 106
IV. TRADE POLICIES BY SECTOR 109
(1) O VERVIEW 109
(2) A GRICULTURE AND LIVESTOCK 112
(i) Features 112(ii) Main policy issues 113
(iii) Selected agricultural and livestock items 128
(3) M
INING AND ENERGY 132
(i) Mining 132(ii) Energy 132
(4) M
ANUFACTURING 134
(i) Automobiles 138
(ii) Shipbuilding 141(iii) Iron and steel 142(iv) Textiles and clothing 143(v) Pharmaceuticals 144
(5) S
ERVICES 146
(i) Features 146
(ii) Overall commitments under the General Agreement on Trade in Services 148Republic of Korea WT/TPR/S/73
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Page
(iii) Financial services 149
(iv) Communications 157(v) Transport 162(vi) Distribution and e-commerce 165(vii) Construction 167
REFERENCES 169
APPENDIX TABLES 173
CHARTS
I. ECONOMIC ENVIRONMENT
I.1 Exchange rate developments, 1994-99 9
I.2 Trade in goods and non-factor services, 1993-99 12
I.3 Product composition of merchandise trade, 1995 and 1998 13I.4 Merchandise trade by main origin and destination, 1995 and 1998 15I.5 Korea's trade with APEC countries by sector, 1995-98 16I.6 Korea's trade with ASEAN by sector, 1995-98 17I.7 Inflows of foreign direct investment, 1995-99 19
I.8 Stock of Korean overseas investment by destination, 1995-99 20
III. TRADE POLICIES AND PRACTICES BY MEASURE
III.1 Distribution of MFN tariff rates, 1996 and 2000 43
III.2 Applied and bound tariffs on agricultural products, 2000 and 2004 48III.3 Average tariff rates on manufactured products by HS chapter, 2000 and 2004 49III.4 Share of customs duties collection in total import value and indirect tax revenue, 1995-99 50
III.5 Tariff escalation by 2-digit ISIC industry, 1996 and 2000 51
III.6 Government procurement market, 1999 68III.7 Government procurement by origin of foreign suppliers, 1999 69III.8 Anti-dumping cases, 1 January 1996–29 June 1999 72
IV. TRADE POLICIES BY SECTOR
IV.1 Structure of agricultural, livestock and forestry production, 1995 and 1998 113
IV.2 Tariff averages by 2-digit ISIC category, 1996 and 2000 118IV.3 Indices of prices received by farmers, 1995-2000 (April) 127IV.4 Motor vehicle industry developments, 1995-99 140IV.5 Value added, employment and trade in services, 1993-99 147IV.6 Interest rates on loans and deposits of banks, 1996-99 155
TABLES
I. ECONOMIC ENVIRONMENT
I.1 Economic developments, 1993-99 2
I.2 Structure of the economy, 1993-99 4I.3 Balance of payments, 1993-99 10I.4 External liabilities structure, 1994-99 11
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES
II.1 Foreign direct investment (FDI) limitations, 2000 32WT/TPR/S/73 Trade Policy Review
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Page
II.2 Incentives of foreign invested enterprises 33
II.3 Foreign investment zone designation standards 34
III. TRADE POLICIES AND PRACTICES BY MEASURE
III.1 Structure of applied MFN tariffs in Korea 40
III.2 Autonomous tariff quotas, January-June 2000 45
III.3 Adjustment duties, January-December 2000 53
III.4 Import licensing or prior authorization requirements since 1998 58III.5 State involvement in enterprises in Korea, 2000 62III.6 Government procurement 66III.7 Structure of direct and indirect tax revenue, 1994-99 84
III.8 Main indirect taxes, 2000 85
III.9 Main internal tax incentives in force relating to production and trade under the
Special Tax Treatment Control Law (January 1999) 89
III.10 Credit assistance, 1995-1999 92III.11 Subsidies notified under WTO provisions, 1996-99 93III.12 Competition trends, 1996-99 98
III.13 Industrial property rights:  applications, registration and appeals, 1994-98 104
IV. TRADE POLICIES BY SECTOR
IV.1 Support estimates by commodity, 1993-99 116
IV.2 Market-access commitments for selected commodities, 1999 119IV.3 State-trading activities in agriculture, livestock, forestry and fisheries, 1995-97 121IV.4 Developments in domestic support to agriculture and livestock, 1996-98 123
IV.5 Manufacturing in Korea, 1997 135
IV.6 Structure of the financial system, 1996 and 1998 151IV.7 Telecommunications market structure, as of June 2000 159IV.8 The broadcasting market, April 2000 161IV.9 Structural developments in the distribution market 165
APPENDIX TABLES
I. ECONOMIC ENVIRONMENT
AI.1 Measures implemented in the area of corporate governance and restructuring 175
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES
AII.1 Notifications made by Korea under the WTO legal framework, mid-June 2000 176
AII.2 Notifications under the WTO legal framework, due for 2000 183
AII.3 Involvement in the WTO Dispute Settlement Mechanism, 1996-2000 184
III. TRADE POLICIES AND PRACTICES BY MEASURE
AIII.1 Autonomous tariff quotas, 1996-99 189
AIII.2 Tariff escalation and tariff ranges, 1996 and 2000 199AIII.3 Adjustment duties, 1996-99 202AIII.4 Anti-dumping cases by Korea, 1 January 1996-29 June 1999 207
IV. TRADE POLICIES BY SECTOR
AIV.1 Korea's tariff by ISIC category, 1996 and 2000 208
AIV.2 Market access quota utilization, 1995-98 213Republic of Korea WT/TPR/S/73
Page vii
SUMMARY OBSERVATIONS
(1) THE ECONOMIC ENVIRONMENT
1. The principal economic development
since Korea's previous Trade Policy Review in
1996 has undoubtedly been the financial crisis
that erupted in 1997.  This crisis, triggered inpart by the poor performance and high debt
ratios of certain large conglomerates
(chaebols), led initially to a marked
depreciation in Korea's currency (the won), a
sharp fall in real GDP, and a tripling ofunemployment.  The crisis also exposed
long-standing structural weaknesses in the
economy.  In order to address these
weaknesses, the Government has been
undertaking wide-ranging market-basedreforms.  These reforms have been aimed
primarily at the financial, corporate, and
public sectors.  Ongoing efforts are also being
made to increase labour market flexibility and
expand the social safety net.  At the same time,
Korea has, by and large, resisted protectionist
pressures, maintaining instead anoutward-oriented trade and investment
strategy.
2. Market-based reforms, including steps
to liberalize further the foreign investment
regime, have not only fostered a remarkablerecovery of the Korean economy, but reduced
its vulnerability to external shocks and
established a solid basis for sustainable
growth in the future.  Real GDP, which shrank
by 6.7% in 1998, rebounded to grow by 10.7%in 1999.  Inflation, after jumping from 4.5% in
1997 to 7.5% in 1998, dropped to 0.8% in
1999.  The unemployment rate peaked at 8.6%
in February 1999, more than three times its
pre-crisis level, but as a result of the recoveryof production activities it dropped to 4.8% at
the end of 1999.  However, real GDP per
capita and the unemployment rate have yet to
return to their pre-crisis levels.
3. Korea's successful management of the
crisis has combined structural reform and
careful macroeconomic management.  InDecember 1997, Korea shifted from amanaged to a free floating exchange rate
system and since then has pursued exchange
rate stabilization.  After the sharp initial
depreciation of the won, which helped bolster
export volumes by 19% in 1998, the
Central Bank intervened to smoothen thesubsequent appreciation of the currency.
Thus, the won has remained substantially
below its pre-crisis level, which has enhanced
the price-competitiveness of Korea's exports.
As a consequence of the crisis, the currentaccount balance shifted from a deficit to
surplus, albeit declining, largely due to
temporary import contraction and de-stocking.
Disbursements from multilateral institutions
and foreign investment inflows enabled Koreato rebuild quickly its international reserves,
which had been depleted by the crisis, thus
helping to restore confidence in the economy.
External liabilities have fallen gradually,
while their structure has changed markedly as
a result of a considerable rise in public long-
term lending associated with restructuring.
4. Whereas an expansionary fiscal policy
was necessary to mitigate the adverse effects
of the crisis, public finances are now
gradually being brought into balance by
restraining expenditure and raising taxes.  Inthe face of an aging population, and with the
prospects of national unification seemingly
improving, stabilization of public debt
constitutes an important fiscal objective.
5. Liberalization of the investment
regime together with regulatory and other
market-based reforms have contributed to a
considerable expansion in foreign investment;
the European Union (EU), the United States,
Japan, and Malaysia (in that order) were thelargest investors in 1999.  Although Korean
overseas investment by large conglomerates
(the chaebols) and state-owned firms has
temporarily declined in the wake of the crisis,
it is expected to resume its expansion in the
coming years.
6. The composition of merchandise
trade, which is dominated by industrial
products, has changed slightly in response toWT/TPR/S/73 Trade Policy Review
Page viii
the crisis and the subsequent recession.  The
United States, the EU, and Japan have
maintained their positions as Korea's main
trading partners, although the crisis seems to
have diverted certain exports to European
markets;  similarly, while the importance oftrade with countries from the crisis-affected
Asia-Pacific region has slightly declined, it
still represents roughly one third of total
trade.
(2) T
RADE POLICY FRAMEWORK
7. Since its last Review in 1996, Korea
has undertaken reforms in trade and related
policies through the implementation of
commitments undertaken in the context of the
WTO, IMF and OECD as well as bilaterallyagreed arrangements.  In addition to its
Uruguay Round undertakings, multilateral
commitments on automobiles, information
technology items, financial services, and basic
telecommunications have been expanded
and/or strengthened.  As a result, Korea has
become a more open and secure market for itstrading partners, despite the crisis.
8. In the face of the crisis and the
definitive loss of GSP preferential access in
important export markets (notably the EU,
Japan, and Switzerland), the authorities nowappear to view regional and bilateral trade
agreements not just as complementary to
Korea's participation in the multilateral
trading system, enabling a selective and
prompt opening of markets, but also as anappropriate response to the world-wide
expansion of regional arrangements.  Korea
has initiated negotiations on a bilateral
free-trade agreement with Chile, with a view
to securing greater trade and investmentaccess;  similar initiatives are being explored
with Japan and Thailand.  As of January 2000,
Korea grants duty-free access to imports of
80 commodities from 48 least developed
countries.
9. In line with its multilateral trade and
other commitments, including those withinternational financial institutions, and withdomestic political developments, Korea has
undertaken changes in its legislative and
institutional framework.  In particular, while
the number of ministerial positions has been
reduced, as of 1998 the role of the Ministry of
Foreign Affairs has been expanded to coverthe development and coordination of
international trade policies as well as
representation in negotiations in this area;  it
is now the Ministry of Foreign Affairs and
Trade.  Korea has participated actively invirtually all aspects of WTO work (including
the accession of China).  Moreover, in
preparation for the next Round of
negotiations, it has held public hearings in
order to ensure that the negotiation processadequately reflects a broad range of national
views.
10. Korea's legislation in trade and
related areas includes that on tariffs,
concessional entry, import approval,
standards, export restrictions, export
assistance, intellectual property rights,competition, and consumer protection.
Provisions of the WTO Agreements cannot be
superseded by those of domestic legislation
and may be invoked before the courts.  Korea
has also participated in APEC work in thefields of tariffs, customs procedures,
electricity/food standards, government
procurement, competition policy, and
intellectual property rights;  at the OECD it
has undertaken commitments or participatedin activities related to export credits, taxation,
investment, competition policy, and
biotechnology.
11. Korea has met regular GATT/WTO
notification requirements relating to itslegislation and responded to numerous
questions raised by WTO Members in a
number of areas (e.g. agriculture, subsidies,
state-trading, government procurement);
tariff information has been submitted to the
Integrated Data Base.  In addition to
regulatory reforms aimed at removingredundant legislation and simplifying other
laws and regulations, Korea has made every
effort to publish all types of legislationRepublic of Korea WT/TPR/S/73
Page ix
pertaining to trade and investment in English,
and to ensure that it is publicly available
through a web-based computer network;  most
public sector entities now have their own
internet web-sites.  These steps have greatly
increased the transparency of Korea's tradeand investment regime.
(3) T
RADE AND TRADE -RELATED POLICY
DEVELOPMENTS
12. The customs tariff is Korea's main
trade policy instrument, and is an importantsource of revenue (some 6.5% of total taxes).
Tariff rates have been adjusted to accord with
Korea's WTO binding commitments.  In
particular, bindings were improved
considerably with respect to automobiles anditems covered by the Information Technology
Agreement (ITA);  91.7% of tariff lines are
now bound.  Further improvements in bindings
may result from the implementation of
remaining ITA undertakings, ITA-2
negotiations, and APEC's Early Voluntary
Sectoral Liberalization (EVSL) initiative.
13. The average applied MFN tariff is
currently 13.8%, down slightly from 14.4% in
1996.
1  The average applied MFN tariff for
industrial products is 7.5%, while that for
agricultural products is of the order of 50%,reflecting the presence of considerable tariff
"peaks", largely as a result of the
"tariffication" exercise.  At the same time, the
tariff embodies a certain degree of escalation
according at times substantial and highlyvaried levels of border protection to domestic
industry.  Consequently, the customs tariff is a
potential distortion to competition and an
obstacle to the efficient allocation of domestic
resources.  With its multiplicity of rates,involving 125 different types and levels of
duty (96 ad valorem rates, 11 specific rates
and 18 alternate rates), it is also a highly
                                                     
1 In contrast to WTO practice, the Korean
authorities calculate tariff averages by using"in-quota" and excluding "out-of-quota" tariffrates.  The result is a much lower average applied
MFN tariff rate (8.9%) than that computed by the
Secretariat, which used "out-of-quota" tariff rates.complex instrument, although its complexity
has been reduced by virtue of tariff reductions
on industrial items in 1997, which mean that
nearly two thirds of all tariff lines are now
subject to a rate of  8%.  Moreover, applied
tariff rates currently fall short of bound ratesby an average of 6.3 percentage points.  The
consequent, albeit declining, gap between
bound and applied rates provides considerable
scope for the authorities to raise applied MFN
tariff, either by increasing general rates or byoccasionally levying "flexible" tariffs, thereby
imparting a degree of uncertainty to the
applied tariff.  Furthermore, so-called
"autonomous" tariff quotas (mainly for raw
materials and inputs) are used in addition toWTO-related agricultural tariff quotas.
Recourse to non-tariff protection has been
confined mainly to agriculture products and
livestock.
14. Efforts have been made to streamline
customs clearance procedures by, inter alia,
introducing an immediate release system andthe progressive introduction of paperless
clearance through a computer network linking
all customs offices.
15. Import prohibitions on sensitive items
from Japan (under the Import DiversificationSystem), and on fish (length-based restrictions,
seasonal bans) were abolished, and the
coverage of approval requirements for used
goods was reduced;  at present, only beef and
rice are subject to quantitative restrictions.Overall, Korea has reduced its recourse to
anti-dumping actions and provisional
measures in this area;  nevertheless, it has
taken safeguard action (against skimmed milk
powder preparations between March 1997 andMay 2000) and has regularly used
Special Safeguard provisions (for certain
beans, buckwheat, ground nuts, wheat starch
and sweet potato starch).  Efforts have been
made to reduce the impact of technical
standards on trade and to bring them more
into line with international rules;  these effortsinvolve, inter alia, eliminating or easing
unnecessary mandatory requirements (e.g. in
the case of automobiles) reducing theWT/TPR/S/73 Trade Policy Review
Page x
coverage of shelf-life requirements, and
eliminating dual-price marking;  coverage of
the marks of origin requirements has also been
reduced.
16. Since its previous Review Korea has
become a member of the WTO Agreement onGovernment Procurement with implementation
date of 1 January 1997.  The share of open
tendering among different purchase methods
has been reduced, partly as a result of the
crisis.  Government procurement has beenused to support small and medium-sized firms
(SMEs).  Foreign suppliers (largely from the
United States and the EU) have apparently
captured only a small share of the government
procurement market.
17. State involvement in the economy is
being curbed to varying degrees in
agriculture, livestock, mining and energy,
basic telecommunications, and public utilities.
Cash proceeds from privatization efforts have
been low, however, as the divestment process
in certain activities (including public utilities)has been slow or incomplete owing partly to
the adverse impact of the crisis on the
stock-market prices;  in 2000, progress is
expected on the privatization of gas, oil,
heating, telecommunications, banking, andinsurance activities.
18. It would appear that frugality or
anti-import campaigns run by civic groups
have either ceased or been avoided.
19. Export restrictions now affect only a
few items (fish, seafood, sand and gravel).  All
voluntary restraints, except those relating to
exports of textiles and clothing, automotive
parts (to Chinese Taipei) and silk waste (to
Japan), were eliminated as scheduled.
20. Korea suppressed three export-related
subsidies in 1998;  it now maintains
one subsidy for fruit and flowers.  As of
April 1999, a Simplified Fixed Drawback Rate
Schedule, covering more than a third of tariff
items (mostly manufactures), has been in
operation for small and medium-sizedenterprises.  Since 1999, the activities that
may be carried out within free-export
processing zones, which remain reserved for
firms with foreign participation, have been
expanded;  firms in the zones are, inter alia,
fully or partially exempt from payment of dutyand customs clearance procedures.
Countertrade has been envisaged as a means
of improving export competitiveness and
reviving trade ties with regional partners
affected by the crisis.
21. Several forms of financial support
have been strengthened;  such support
includes numerous tax incentives (with expiry
dates set for December 2000 or 2003) whose
effectiveness is dubious.  Apart fromtraditional sectoral recipients of assistance
(e.g. agriculture, livestock), support has been
directed at small and medium-sized
enterprises, research and development, and
firm relocation.  Other forms of support have
included preferential energy pricing for
farmers and manufacturers.
22. Indirect taxation, which accounts for
59% of total tax revenues, remains complex
and luxury-goods oriented;  liquor tax rates on
beer and "soju" have been revised in response
to a ruling by the WTO Dispute SettlementBody.
23. In addition to advance implementation
of the WTO Agreement on Trade-Related
Aspects of Intellectual Property Rights,
protection of such rights has beenstrengthened by the signing of new treaties,
increased international cooperation, and
stricter enforcement.  Competition policy has
also been updated and strengthened to reflect
the policy shift against chaebol dominationand illegal trading among subsidiaries
(including those of public entities);  trade and
foreign investment liberalization has also
contributed to an intensification of competition
in the domestic market.  Consumer protection
has been expanded in several areas (e.g.
electronic commerce, telecommunications,advertisement, child safety).  Furthermore, in
response to growing concern over theRepublic of Korea WT/TPR/S/73
Page xi
environment, measures have been introduced,
inter alia, to support the building of
"sustainable agricultural zones" and reduce
energy consumption.
(4) SECTORAL POLICY DEVELOPMENTS
24. Whereas government assistance for
the politically and security-sensitive
agriculture and livestock sector remains
strong and wide-ranging, mainly involving
border protection for several agricultural
items, border protection for fisheries has beenreduced and is now confined to tariffs.  Since
1996, nominal applied MFN tariff protection
has been reduced slightly from 51.8% to
50.3%, nonetheless, it is still more than six
times the average for manufactured goods.Prohibitive import tariff rates ranging from
106.1% to 926.8% (manioc) are applied
exclusively to 99 agricultural and livestock
items.  While quantitative restrictions have
been eliminated in accordance with
WTO "tariffication" commitments, and are
now confined to beef (until the end of 2000)and rice, and minor regulatory and
institutional reforms are ongoing, several
producers' cooperatives and state-trading
entities have continued to implement
trade-distorting measures.  These measuresinclude the administration of quantitative
restrictions (making it difficult for the annual
quota for beef to be met) and tariff quotas,
exclusive importation rights, mark-ups, price
support, provision of inputs at below-marketprices, provision of soft loans, and marketing
services.  While observing undertakings in the
WTO to reduce AMS, domestic support to the
sector has risen slightly, mainly for rice.
"Green box" assistance has remainedsignificantly higher than support subject to
cuts.  Given the relatively low level of
agricultural productivity and numerous
distortions to competition, there would appear
to be a great deal of scope for efficiency gains
in the sector.
25. While state monopolies (e.g. involving
power transmission and generation) and
concessional tariffs have been maintained,market-oriented reforms in electricity and gas
supply, and greater private sector
participation, have increased competition in
the energy sector.  Mandatory cross-
subsidization (of the coal industry, for
instance) and investments in sectors outside itscore-business, both at home and abroad,
remain a standard practice of the state-owned
electricity supplier.  Privatization is envisaged
in the electricity industry (as from 2002) and
gas (by 2001).
26. Progress in the manufacturing sector,
where a shift towards "knowledge-based
industrial development" has taken place, has
been largely based in consumer electronics
and communications equipment, automotiveproducts, chemicals, machinery and
equipment, and basic metals;  the sector
remains dominated by the chaebols and their
General Trading Companies.  State
involvement in steel is being eliminated, and a
dual pricing system for exports, which was
operated by the state-linked firm in this sector,was suppressed in April 2000.  Despite the use
of adjustment duties and tariff increases on
sensitive items (food products and animal feed,
textiles, clothing, leather articles, including
footwear, and rubber products), applied MFNtariffs are now considerably below the
national average.  The elimination of import
prohibitions on sensitive industrial items from
Japan has intensified competition for certain
motor cars, parts, and consumer electronics.In line with bilateral undertakings, access to
the domestic automobile market is being
improved by reducing tax and standards-
related impediments;  however, despite the
removal of these impediments in order toassist the recovery of sales hit by the
recession, imports' share of the domestic
automobile market remains low.  Positive
developments in the pharmaceuticals industry
include the extension of the national
reimbursement scheme's coverage to
foreign-made drugs and the replacement of the"standard retail price system" by an "openpricing system".WT/TPR/S/73 Trade Policy Review
Page xii
27. In the period under Review
(1996-2000) Korea has undertaken a
remarkable opening of the services sector to
foreign investment (notably financial,
telecommunications, broadcasting, maritime
and air transportation).  Nonetheless, both theState and the chaebols continue to be involved
in several activities (e.g. financial services,
telecommunications, railroads, and land
development).  In the aftermath of the crisis,
financial services have undergonefar-reaching reforms aimed at increasing
competition and rehabilitating the financial
system.  A key element of these reforms
involves the recapitalization of insolvent
financial institutions at an initial costequivalent to 13% of the GDP.  Such rescue
operations have reduced the number of banks
but temporarily increased state involvement in
these institutions.  The share of the top five
chaebols in the non-banking financial sector
(e.g. investment trust companies) has
remained virtually unchanged.Telecommunications services have been
operated by the state-owned firm, public
entities from other sectors, and chaebol
affiliates, thus allowing for cross-subsidization
and "inside trading".  Some of the restrictionson the allocation of advertisement time, the
content of broadcasted television programmes
(including the use of a foreign language) and
motion pictures (which are subject to screen
quotas) have been revised.  Efforts have beenmade to allow more competition and foreign
presence in maritime services, and to
negotiate open skies agreements.  Several
distribution-related structural impediments
have been removed, and the expansion ofelectronic commerce has been encouraged.
28. Korea has commitments under the
General Agreement on Trade in Services
(GATS) in 80 activities within financial,communication, construction, transportation,
and environmental services;  those on
financial services and basic telecoms,
inter alia, improved conditions for foreign
presence, and were promptly ratified.Korea's sole GATS Article II MFN exemption
remains on computerized flight reservationservices.
(5) P
ROSPECTS
29. Notwithstanding the seriousness of the
Asian financial crisis and the severity of the
recession that followed, the Government of
Korea has, by and large, resisted protectionist
pressures, opting instead for far-reaching
market-based reforms.  These reforms havereinforced Korea's already outward-oriented
trade regime and its increasingly liberal
attitude to foreign investment.  These reforms
have helped pave the way not only for the
remarkable recovery of the economy duringthe past year or so, but for strong sustainable
growth in the future.  For example, recent
regulatory reforms in five sectors
(construction, distribution, electricity, road
transportation, and telecommunications),whose full effects have yet to be felt, are
expected to raise GDP by 2.1% at first and by
8.6% in the long run (ten years).
Nevertheless, there is perhaps the danger that
as the recovery gains pace, the Government
might become complacent or, indeed, succumb
to domestic pressures to dilute, or even put off,fundamental reforms.  Although currently well
under way, such reforms are still incomplete
and yet essential for the achievement of a
stable basis for sustainable and equitable
growth of the Korean economy and thus thecountry's future prosperity.
30. While extending and consolidating the
opening of its market at the multilateral level,
Korea appears to be becoming increasinglyinvolved in regional arrangements, notably the
APEC forum, and is developing links with a
grouping consisting of ASEAN, Japan, and
China.  It is also exploring bilateral free-trade
agreements, having eschewed sucharrangements in the past.  It remains to be
seen whether such regional and bilateral
arrangements erode Korea's long-standing
attachment to the  multilateral trading system.