Republic of Korea WT/TPR/S/73
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IV. TRADE POLICIES BY SECTOR
(1) OVERVIEW
1. Since 1996, Korea's undertakings in the context of the WTO and OECD together with
IMF arrangements related to the financial crisis have  led to an acceleration in the dismantling of trade
and trade-related distortions, including impediments to foreign investment, in practically all sectors of
the Korean economy.  Except in a few sensitive activities, where foreign or private sector investment
is either subject to limitations or still not allowed (Chapter II(8)), structural reforms have expanded
the scope for competition.  But given the short period that has elapsed since their introduction, and the
wide, complex, and interdependent links between major domestic economic agents, the full impact ofmajor structural reforms was not apparent in 1999/2000;  most Korean chaebols (Box IV.1) and
state-owned enterprises with cross-sectoral and overseas presence still appear to be largely untouched
by reforms.
2. The agriculture and livestock sector accounts for a relatively small and declining share of
Korea's GDP.  Moreover, as a consequence of tariff and non-tariff barriers, it plays a minor role inKorea's international trade;  indeed, the degree of self-sufficiency in certain import-restricted and
recently liberalized items (rice, beef, pork, and milk products) has risen.  Nonetheless, the sector
remains a major beneficiary of government support  in many forms.  Although slightly lower than
previously, tariff protection is still more than four times higher than in manufacturing, with tariff
peaks reaching as much as 926.8% (in the case of manioc in 2000).  While quantitative restrictionshave been largely eliminated in accordance with Korea's WTO commitments – they now affect only
beef (until end 2000) and rice – several other items have been subject to safeguard measures;  those
on skimmed milk were in force until May 2000.  The Government has also intervened through
producers' organizations and state-trading en tities, which have continued to implement
trade-restricting measures for certain agricultural and livestock items;  these measures include the
administration of tariff quotas and remaining quantitative restrictions, exclusive rights to import, price
support, provision of inputs at below-market prices, provision of soft loans together with otherfinancial services, and marketing services.  Certain regulatory and institutional reforms have been
undertaken and special efforts are being made in ma rketing activities to the benefit of producers and
consumers;  nevertheless, the type and level of domestic support, which is granted, inter alia,  through
tax incentives, direct or loan subsidies, direct payments, and price support, have not been greatly
affected by these reforms.  While observing its  WTO reduction commitments in agriculture on the
Aggregate Measurement of Support (AMS), Korea's domestic support to the sector has risen slightly,
with attention being focused on price support (mainly in the case of rice);  so-called green box support
has remained much higher than the AMS.
3. Market-oriented reforms in electricity and gas are intended to allow more competition, which
should benefit consumers as well as businesses that use gas and electricity as inputs;  nevertheless,state monopolies and concessional tariffs (depending on the user) have been maintained.  The
state-owned electricity supplier has been involved in mandatory cross-subsidization and investment in
other sectors (outside its core-business), both at home and abroad.  Support for the coal sector has
also continued.WT/TPR/S/73 Trade Policy Review
Page 110
Box IV.1:  The role of chaebols in the economy
Chaebols are corporate conglomerates operating in a wi de range of sectors under common entrepreneurial
and financial control.  For the past 30 years or so, they have been a driving force behind Korea's rapid
industrialization based on strong export-led growth.  Gi ven the scarcity of entrepreneurial talent in the
early stages of economic development, resources became concentrated in the hands of the founders of
these enterprises.  The chaebols' success reflected not only their ability to overcome imperfections in factor
markets, such as those involving labour, capital and technology, but also the benefits from the synergies
and economies of scope that are possible within larg e enterprises.  The chaebols had the added advantage
of close links to the government in a period when a large part of the Korean economy was regulated, a
situation that led many to question the chaebols' dominant position.  In particular, as part of its industrial
policy aimed at promoting heavy industry and chemicals during the 1970s, the Government encouraged the
growth of the chaebols.  The close linkages between the chaebols and the Government as well as banks
(which were nationalized until the mid 1970s) have allegedly impeded access to the Korean market and
distorted competition in other markets.
The chaebols have tended to focus on large-scale manufacturing activities requiring a large amount of
investment; in 1996, the 30 largest were involved in all except one manufacturing industry and had a
combined market share of 63%, thus dominating all major industries.  Such diversification may be
explained not just by the desire to have a broad portfolio of business activities so as to reduce risks,
especially when firms and/or their shareholders do not have access to efficient capital markets, as was the
case until quite recently, but also by government policies. In a fast-growing economy undergoing structural
change, protection of domestic product markets from foreign competition together with barriers to foreign
direct investment presented the chaebols with lucrative business opportunities. Furthermore, government
intervention ensured that failing companies did not go bankrupt, but were instead taken over by other
companies, which were provided with assistance in the form of debt relief and tax concessions, for
example.
The concentration of corporate ownership and the strong influence of the families of the chaebols' founders
and central management on affiliates have long been major issues in Korea.  Given the weak monitoring of
management decisions by financial institutions, this situation increased the risk of abuse of power, which
often results in unwise business decisions and may offset the advantages of ownership management.
Moreover, reluctance on the part of founders of the chaebols to have their control reduced have led them to
eschew equity finance in favour of debt.  (The debt-equity ratio for the top 30 chaebols reached 519% at
the end of 1997.)  Their willingness to accept such high leveraging may also have been the consequence of
the close relationship between the Government and business, which is sometimes described as
"Korea, Inc".  The Government's role as insurer or  underwriter of large investment projects created a
"moral hazard". Chaebols were encouraged to expand their businesses faster and in a more risky manner
than otherwise, and in view of their important role in the economy, the Government was reluctant to allow
them to go bankrupt.  This reluctance led the Government to continue its implicit insurance role and
provide bail-out loans on an ad hoc  basis to chaebols on the verge of bankruptcy.  From the standpoint of
business, tight government control of the economy made it essential for enterprises to be sufficiently large
to exert influence on bureaucrats and politicians so as  to shelter them from domestic and international
competition.  Size, therefore, became an end in itself.
With the chaebols being accused, inter alia , of over-investment and "reckless diversification", a key
objective of government policy since the mid 1980s has been to reduce the concentration of economic
power.  This objective has influenced a wide range of policies, notably privatization, measures to stimulate
private investment in social infrastructure, and the deregulation of entry and ownership of certain
industries.  The need for corporate restructuring and improved governance arising from the crisis has
provided an added impetus to reform of the chaebols.   Accordingly, the Government recently announced a
variety of reforms (Box I.1), whose main objective is to bring business practices into line with best
international practices, thereby enhancing the competitiveness of Korean firms.Republic of Korea WT/TPR/S/73
Page 111
4. Manufacturing accounts for nearly 32% of Korea's GDP as well as a significant majority of
exports of goods (82.5% of exports of goods and services in 1999).  It is the focal point for the
Government's "knowledge-based" industrial development policy, which has been pursued since 1999.
Notwithstanding the crisis, the role of chaebols and their General Trading Companies (whose exportfinance capacities were raised by loosening their minimum debt-equity ratio requirements) have been
strengthened.  Border protection, which is now al most totally confined to tariffs and adjustment
duties, is being reduced through the implementation of WTO commitments;  the applied MFN
average tariff on imports of manufactures is considerably below the overall average of 14.4%.
Nonetheless, applied tariffs have been raised (within the limit of WTO bindings) on sensitive items,notably some food products and animal feed, textiles, clothing, leather articles (including footwear),
and rubber products, ostensibly to facilitate corporate restructuring.  On the other hand, competition
was intensified with the elimination ahead of schedule of import prohibitions on sensitive industrial
items from Japan.  Government support for SMEs has continued through tax incentives (some of
which are now subject to "sunset" clauses), low-interest financing for trade and product development,and low energy prices.  Several tax- and standards-related impediments to trade in automobiles were
or are about to be eliminated;  concurrently, tax incentives were introduced to assist the recovery of
recession-hit domestic sales.  The shipbuilding industry has reinforced its world leadership.  As
regards pharmaceuticals, several measures were taken, including the extension of the Medical
Reimbursement Schedule, to cover foreign-made drugs, price liberalization and allowing the chaebolsto enter the sector.  State involvement and the granting of soft loans affect broadly several other
manufacturing activities;  this involvement, and probably also the depreciation of the won, has
resulted in Korea's exports of certain items (e.g. steel) being a prime target of anti-dumping or
countervailing actions by several countries.
5. Services continue to account for about two thirds of Korea's GDP and a similar proportion of
domestic employment.  GATS scheduled commitments in financial and telecommunication services
were improved (so as to reflect OECD commitments), while the implementation of past and newundertakings has allowed for the remarkable opening of the services sector (notably financial,
telecommunications, broadcasting, maritime and air transportation) to foreign investment.  Financial
services have undergone wide-ranging restructuring, with regulatory (including prudential and
governance rules) and institutional (including supervision) reforms aimed at rehabilitating the
financial system;  nonetheless, deregulation of interest rates is not yet complete, and rescue operationshave increased state involvement in banks, seemingly temporarily, while the top five chaebols still
retain a large part of the non-banking financial sector.  The state-owned telecommunications firm and
public entities from other sectors remain heavily involved in telecommunication services, which are
largely operated by chaebol affiliates, thus allowing for cross-subsidization and inside trading.  While
measures have been taken to prevent the chaebols from dominating broadcasting services, differentoperators will now participate in the same satellite broadcasting firm;  advertisement time allocation is
controlled by a "regulatory" corporation, and foreign television programmes and motion pictures are
subject to quotas.  As regards transportation, several restrictive measures affecting maritime services
were abolished (including the cargo-designated system) and efforts have been made to expand air
routes and revive the state-run railroad services.  Distribution has been deregulated, thus eliminatingmarket access-related structural impediments;  at the same time, the expansion of electronic
commerce has been supported through several measures and Korea has undertaken to refrain from
taxing such commerce.  While construction services have been opened to competition, the state
monopoly in land development has been maintained; public entities are involved in several
construction activities.WT/TPR/S/73 Trade Policy Review
Page 112
(2) AGRICULTURE AND LIVESTOCK
(i) Features
6. Agriculture exerts a strong influence on Korean society and politics despite the fact that the
contribution of the sector (including fisheries) to GDP decreased from 6.2% to 5% between 1995 and1999 (Table I.2)
1;  this is the result of slower growth in labour productivity (compared with that of the
secondary and tertiary sectors), decreasing farmland area, and the aging of the farming population.
The sector has continued to provide work for 12.2% of the active population, however, which
indicates that the sector's labour productivity is well below the national average.  During the period
under review, the sector's share in Korea's internatio nal trade remained relatively small:  its share in
total exports declined from 3.6% (1995) to 3% (1998), while its share of imports dropped from 10.9%
to 10%.2  As a result, between 1996 and 1998, Korea's agricultural trade deficit fell by more than half
to US$5.3 billion.
7. Between 1995 and 1998, Korea's overall food self-sufficiency remained stable at around
30%.3  As a result of, inter alia,  inadequate quality, low/declining productivity, and decreasing
profitability, self-sufficiency in major commoditie s (barley, wheat, maize, chicken) continued to
decline despite the stated policy objectives.  By contrast a rising trend was recorded in
import-restricted or recently liberalized items such as rice (from 93.6% to 104.5%), beef (from 51.2%
to 75.3%), pork (from 96.6% to 104.5%), and milk (from 90.9% to 92.4%)4;  however, in 1999
self-sufficiency rates for all these items (except rice ) declined considerably.  Korea has remained fully
self-sufficient in potatoes, sweet potatoes, and onions.
8. The financial crisis has had a depressing effect on agriculture as input costs have risen owing
to high dependence on imported raw materials (e.g. fuels increased by 17%, fertilizers by 29%, and
pesticides by 36% in 1998) while consumption has declined;  this situation has led to a fall in both
production and price levels for most agricultural products.  Value-added per farmer has increased
owing to the diversion of land from staple crops to more lucrative fruit and vegetables crops.5
Between 1995 and 1997, the land surface utilized for crops (63% food crops, 80% of which involves
rice) and by forests were reduced slightly, while that used for orchards and pasture expanded by more
than 9%.6  Between 1995 and 1998, there were some significant changes in the pattern of production;
the shares of rice and pig production rose, while those of cattle, fruit, and vegetables fell (Chart IV.1).
                                                          
1 National Statistical Office (1999), September, Tables VIII.4 and XII.4.
2 UNSD, Comtrade database, SITC Rev.3 classification.
3 Article by the head of Marketing Policy Division (Mr. Jae-soo Kim) of the MAF, published in
The Korea Herald  [Online], 10 June 1998.  Available at:  http://www.koreaherald.co.kr/ [10 January 2000].
4 MAF online information (Table 16).  Available at:  http://www.maf.go.kr/english/default.html
[16 December 1999].
5 EIU (1998), p. 26.
6 National Statistical Office (1999), September, Tables I.2, II.1 and II.4.Republic of Korea WT/TPR/S/73
Page 113
Per centChart IV.1
Structure of agricultural, livestock and forestry production, 1995 and 1998
Rice
25.4
Other 
agriculture
13.3Vegetables
24.4Other livestock  3.81995
Total: W 26.7 trillion Total: W 30.8 trillionOther agriculture
11.5Forestry
3.6
Fruit
8.8Vegetables
21.91998
Rice
29.9Eggs  2.1
Fruit
11.3Other livestock products  0.2
Ministry of Agriculture & Forestry (1999), Agricultural & Forestry Statistical Yearbook 1999, Table III.1. Source : Milk  3.2
Pig  
5.3
Cattle
7.6Farming
 livestock
22.3
Agriculture
74.4Milk  3.5
Eggs  2.7
Other livestock  4.0
Pig
7.8
Cattle
6.2Other livestock products  0.3Forestry  3.3
Farming
 livestock
24.4
Agriculture
72.0
(ii) Main policy issues
Objectives
9. Since its previous Review, Korea's WTO-related undertakings have contributed to a shift
away from farm assistance to more market-oriented policies intended to improve agricultural
productivity.  At the same time, however, food security has remained a major concern and
self-sufficiency in rice, the traditional staple food, has been a prominent objective.7  Other general
policy objectives include the fostering of the "multi-functionality" of agriculture 8;  raising farmers'
incomes to the level of workers employed in non- agricultural sectors by means of direct payment
rather than price support;  improvement of living conditions and prosperity in rural areas;  supporting
cooperative production and marketing of agricultural commodities among small and medium-sizedfarms;  and increasing value-added of agricultural produce.
9
Regulatory framework
10. Since January 2000, a new Agricultural and Rural Basic Law implementing the
above-mentioned objectives has been in effect.10  As a result of efforts to deregulate the sector, by the
end of 1998 more than half of regulations deemed unnecessary in agriculture had been eliminated;this has allowed the use of certain feed additives (previously regarded as animal pharmaceuticals), the
suppression of the registration requirement for livestock breeders (raising over a certain number of
                                                          
7 OECD (1999b), pp. 13-14.
8 "Multi-functionality" is a term referring to the social and environmental roles played by farming.
9 MAF online information.  Available at:  http://www.maf.go.kr/english/default.html
[16 December 1999].
10 OECD (1999c).WT/TPR/S/73 Trade Policy Review
Page 114
cattle, pigs or poultry), the replacement of the rice-milling licensing requirement by reporting, the
elimination of the requirement for designating grower s of five-year-old ginseng, and reporting of new
entrants in grain buying and/or selling businesses (wholesale, retail and brokerage).11
Institutional changes
11. Although they have no role in policy formulation, which remains under the Ministry of
Agriculture and Forestry (MAF), producer-cooperative federations together with state-owned
enterprises and state organizations continued to implement sectoral policies in areas such as
quota/tariff quota administration, price support, input distribution, soft loans, and marketing services.
Apart from MAF, these entities, whose operatio ns were last notified to the WTO in 199812, include
the National Livestock Cooperatives Federation (NLCF, 146 livestock cooperatives and
47 specialized cooperatives), the Livestock Product s Marketing Organization (LPMO, meat end-users,
state trading of beef), the Agricultural and Fishery Marketing Corporation (AFMC, state-owned
enterprise), the Cheju Citrus Grower's Agricultural Cooperative (CCGAC), Korea Ginseng
Cooperative Federation (KGCF, until 1997 known as  NGCF), and the National Forestry Cooperatives
Federation (NFCF, grouping 144 cooperatives).13  In addition, there is the National Agricultural
Co-operative Federation (NACF), which groups together 1,177 regional cooperatives;  as the NACF
is not considered by the authorities to be a state-tr ading entity, its activities have not been notified to
the WTO.
12. In response to criticism on the increased number and size of agro-related government
agencies and organizations, since April 1998 the MAF has restructured and reshuffled these
institutions;  these actions affected, inter alia,  the AFMC (whose tasks were refocused on the
development of foreign agro-food markets and the collection of information on agricultural exports),
and included plans for consolidating the three ma jor cooperatives (NACF, NLCF, NGCF) into one by
1 July 2000 (Chapter III(4)(ii)).14
Appraisal and outlook
13. Persistent and wide-ranging government intervention as well as slow-moving reforms reflect
the high importance that Korea attaches to agriculture;  while assistance involves mainly border
protection (notably price stabilization measures in cluding government purchase and stockholding), it
also entails, inter alia,  widespread state involvement, tax incentives, and soft loans.15  Recent policy
trends, which to some degree reflect the principles adopted in the 1998 OECD Agricultural
Ministerial meeting, indicate that Korean agricultural policies are set to move towards directpayments and environment-friendly farming, and away from direct market-price support.
16
                                                          
11 MAF online information.  Available at:  http://www.maf.go.kr/english/default.htmlm
[16 December 1999];  and OECD (1999c), pp. 130-131.
12 WTO document G/STR/N/4/KOR,  10 December 1998.
13 OECD (1999b), pp. 46 and 78.
14 MAF online information.  Available at:  http://www.maf.go.kr/english/default.html
[16 December 1999];  and The Korea Herald  [Online], 9 March 1999. Available at:  http://www.koreaherald.
co.kr/ [10 January 2000.].
15 Article by the head of Marketing Policy Division (Mr. Jae-soo Kim) of the Ministry of Agriculture
and Forestry, published in The Korea Herald  [Online], 10 June 1998.  Available at:
http://www.koreaherald.co.kr/ [10 January 2000].
16 OECD (1999c).Republic of Korea WT/TPR/S/73
Page 115
14. Korean agricultural support, as measured by the Producer Subsidy Equivalent (PSE), has
declined from 66% (1997) to 59% (1998) owing to  a significant decrease in price support (which
nevertheless accounts for over 90% of total assistance to producers) as a result of the won's
depreciation;  however, Korea's overall PSE re mains 1.8 times higher than the OECD average.17
Furthermore, in 1998 the average producer nominal assistance coefficient (NAC) stood at 2.44, which
means that the value of gross farm receipts was 144% higher than world market prices.  Similar trends
were recorded in the Consumer Subsidy Equivalent (CSE), which stood at 2.7 times the
OECD average level.  Support through general servi ces to agriculture has increased steadily over the
past years (except for 1998).  In 1998, transfers from taxpayers and consumers to the sector wereestimated at about 5.4% of GDP, somewhat higher than in 1997 (5%).  Table IV.1 indicates PSE and
CSE developments for selected items.
15. In line with its sectoral policy objectives, Korea has indicated that any further reductions in
support and protection need to be gradual and take into account each participant's specificity.
18
Regarding food security, Korea believes that each country should be allowed to maintain a reasonable
level of domestic production rather than rely too heavily on trade.  Korea has been building close
cooperative relationships with partners with a similar position, such as the EU, Japan, Norway, and
Switzerland;  it has expressed this view also in ot her international or regional fora such as APEC,
FAO and the OECD.19
(a) Border measures
Average nominal tariff protection
16. Between 1996 and 2000, Korea's average level of nominal applied tariff protection for the
sector was reduced from 50.5% to 48.4%20;  this is more than four times higher than the average tariff
for imports of manufactured goods (Chart IV.2, Table AIV.1).  As a result of the "tariffication"
process, peak rates were as high as 835.9% (cereals in grain) in 2000.21  In addition to or in parallel
with applied tariffs, Korea has continued to use adjustment duties and autonomous tariff quotas on
imports of certain agricultural and fishery items (Chapter III(2)(ii)(e) and III(2)(ii)( i), Tables AIII.1
and AIII.3);  the latter allowed for duty concessions on imports of inputs (mainly cereals), while an
out-of-quota tariff rate for bananas at least two times  higher than the general rate was eliminated in
July 1999.22
                                                          
17 OECD (1999c), pp. 127-131.
18 Korea's submission to the WTO Committee on Agriculture in September 1998 also contained in
MAF online information.  Available at:  http://www.maf.go.kr/english/default.html [16 December 1999].
19 MAF online information.  Available at:  http://www.maf.go.kr/english/default.html
[16 December 1999]).
20 This tariff average is slightly lower than that  indicated in Chapter III (2)(ii)(f)) due to different
product classification (i.e., the average rate of 50.3% (Chart III.2) is based on HS calculations).
21 Due to ISIC classification definitions, food products and canned preparations (936.7%),
beverages (285%) and malt liquors (285%) are covered in calculations under the manufacturingsector (section (4), Table AIV.1) rather than the primary agricultural sector.
22 This measure, which had been in place to protect producers at Cheju Island, does not seem to have
had any apparent effect on the volume of banana imports, which originate mainly in the Philippines.  In 1998,
banana imports dropped by more than 37% possibly due to the recession-related cut in consumption;  those from
Ecuador (the second supplier) were reduced significantly, while in 1999 they rebounded.WT/TPR/S/73 Trade Policy Review
Page 116
Table IV.1
Support estimates by commodity, 1993-99
(Won billion and per cent)
1993 1994 1995 1996 1997a1998a1999a
Grains other than wheat
and maize
Producer support(won billion).. .. .. .. 158.0 141.0 183.0
Percentage PSE 90.0 94.0 92.0 91.0 93.0 70.0 81.0
Producer NAC 6.0 7.5 6.0 5.2 5.4 3.3 5.2
CSE (won billion) -262.0 -207.0 -241.0 -236.0 -152.0 -135.0 -180.0
PSE (won billion) 288.0 228.0 272.0 274.0 232.0 224.0 259.0
Rice
Producer support
(won billion).. .. .. .. 7,603.0 6,575.0 8,159.0
Percentage PSE 97.0 89.0 97.0 92.0 79.0 71.0 80.0
Producer NAC 10.3 5.7 8.7 5.7 4.9 3.5 4.9
CSE (won billion) -6,667.0 -5,975.0 -7,057.0 -7,012.0 -6,730.0 -6,203.0 -7,950.0
PSE (won billion) 6,476.0 6,416.0 6,905.0 8,304.0 7,603.0 6,575.0 8,159.0
Oilseeds
Producer support
(won billion).. .. .. .. 232.0 224.0 259.0
Percentage PSE 93.0 94.0 99.0 99.0 83.0 80.0 88.0
Producer NAC 7.1 7.2 9.3 8.0 5.7 5.1 8.5
CSE (won billion) -229.0 -222.0 -280.0 -272.0 -244.0 -258.0 -303.0
PSE (won billion) 558.0 567.0 608.0 630.0 595.0 738.0 794.0
Milk
Producer support
(won billion).. .. .. .. 593.0 73.8 794.0
Percentage PSE 76.0 75.0 73.0 71.0 66.0 66.0 70.0
Producer NAC 3.7 3.5 3.2 3.0 2.96 2.9 3.3
CSE (won billion) -554.0 -567.0 -582.0 -684.0 -714.0 -783.0 -898.0
PSE (won billion) 558.0 567.0 608.0 630.0 595.0 738.0 794.0
Beef and veal
Producer support
(won billion).. .. .. .. 1,232.0 1,009.0 1,264.0
Percentage PSE 68.0 72.0 76.0 74.0 61.0 48.0 67.0
Producer NAC 2.9 3.1 3.5 3.2 2.6 1.9 3.1
CSE (won billion) -1,468.0 -1,912.0 -2,417.0 -2,177.0 -1543.0 -998.0 2,487.0
PSE (won billion) 894.0 1,134.0 1,378.0 1,310.0 1,232.0 1,009.0 1,264.0
Pigmeat
Producer support
(won billion).. .. .. .. 669.0 622.0 1,467.0
Percentage PSE 42.0 53.0 53.0 40.0 32.0 27.0 53.0
Producer NAC 1.7 2.1 2.0 1.6 1.5 1.4 2.1
CSE (won billion) -631.0 -927.0 -905.0 -760.0 -578.0 -510.0 -1,339.0
PSE (won billion) 689.0 971.0 968.0 849.0 669.0 622.0 1,467.0
Table IV.1 (cont'd)Republic of Korea WT/TPR/S/73
Page 117
1993 1994 1995 1996 1997a1998a1999a
Poultry
Producer support
(won billion).. .. .. .. 386.0 226.0 471.0
Percentage PSE 52.0 68.0 75.0 75.0 54.0 29.0 55.0
Producer NAC 2.0 2.8 3.3 3.4 2.2 1.4 2.2
CSE (won billion) -239.0 -403.0 -452.0 -495.0 -369.0 -204.0 -471.0
PSE (won billion) 261.0 447.0 505.0 533.0 386.0 226.0 471.0
Eggs
Producer support
(won billion).. .. .. .. 95.0 124.0 72.0
Percentage PSE -3.0 0.0 14.0 3.0 14.0 17.0 10.0
Producer NAC 1.0 1.0 1.2 1.0 1.2 1.2 1.1
CSE (won billion) 24.0 14.0 -57.0 7.0 -73.0 -101.0 -51.0
PSE (won billion) -10.0 1.0 82.0 18.0 95.0 124.0 72.0
Other commodities
Producer support
(won billion).. .. .. .. 8,970.0 7,970.0 ..
Percentage PSE .. .. .. .. 63.0 54.0 80.0
Producer NAC .. .. .. .. 2.7 2.2 5.0
CSE (won billion) .. .. .. .. -8,499.0 -7,238.0 -10,569.0
PSE (won billion) .. .. .. .. 8,860.0 7,580.0 9,906.0
All commodities
Producer support
(won billion).. .. .. .. 20,075.0 17,882.0 ..
Percentage PSE 79.0 77.0 82.0 78.0 65.0 56.0 74.0
Producer NAC 4.0 3.6 4.2 3.5 2.9 2.3 3.9
CSE (won billion) -10,127.0 -10,303.0 -12,080.0 -11,713.0 -18,895.0 -16,432.0 -24,247.0
PSE (won billion) 9,371.0 9,974.0 10,989.0 12,198.0 19,829.0 17,238.0 22,575.0
.. Not available.
a Provisional figures.
Note: NAC – Nominal Assistance Coefficient;  PSE – Producer Subsidy Equivalent;  CSE – Consumer Subsidy Equivalent.
Source: OECD (1999), Table III.42;  OECD (1999), Agricultural Policies in OECD Countries, Monitoring and Evaluation
1999, Table Annex III.5 and III.6;  and information provided by the Korean authorities.
Binding and tariff quota commitments
17. As discussed earlier (Chapter III(2)(ii)(e) and III(2)(ii)(b)), Korea has implemented its
Uruguay Round market-access commitments in agriculture as scheduled (Table IV.2);  these
commitments comprised the staging of the implemen tation of bindings, the elimination of quotas on
37 ten-digit HS items (as from July 1997), as well as the operation of tariff quotas for 62 product
categories, and import quotas for rice and beef (until end 2000).WT/TPR/S/73 Trade Policy Review
Page 118
010203040506070Per centChart IV.2
Tariff averages by 2-digit ISIC category, 1996 and 2000
Source :WTO Secretariat estimates, based on data provided by the Korean authorities.MFN 1996
MFN 2000
Average 1996
(14.4%) Average 2000
(13.8%)
18. During the period under review, the authorities estimate that Korean average quota utilization
was 80%;  in-quota volumes for certain items were allowed to exceed 100%, however, thereby
permitting the lower in-quota rates (rather than the higher "out-of-quota" rates) to be levied
voluntarily on the excess volumes.  Full quota utilization for certain items has not always been
possible, allegedly due to lack of domestic demand (birds' eggs, silkworms, fruit trees, orange juice),shifts in consumer preferences, decrease in domestic prices (potatoes and chestnuts), increased demand
for substitute products that are subject to lower duties (manioc pellets and other starches, milk powder
blend), developments in world market conditions , and transportation difficulties (Table AIV.2).
23
Tariff and import quotas have been allocated through designated agencies for 18 items (including rice
and beef)24, by import licence auction for 6 items (including sesame oil) or through preferential
allocation to traditional importers for 40 items (including maize).  Since 1996, concerns have been
                                                          
23 WTO documents G/AG/R/6, 21 October 1996, G/AG/R/7, 26 November 1996, and G/AG/R/13,
19 December 1997;  USTR (1999);  and European Commission (1999).
24 In 1999 the following associations and/or state-tr ading entities maintained exclusive rights in the
allocation of tariff quotas:  the Agricultural Fisher y Marketing Corp. (AFMC) (green tea, processed cereal
grains);  Korea Animal Improvement Assoc. (KAIA) (breeding livestock (cattle, swine));  Korea Corn
Processors Assoc. (KOCPIA) (maize (processed));  Ko rea Dairy Industries Organization (KDIO) (whey, butter,
lactose);  Korea Feed Ingredient Assoc. (KFIA) (bon e meal, supplementary feed);  Korea Feed Milk Replacer
Assoc. (KFMRA) (mixed feed, supplementary feed, whey);  Korea Feed Millers Assoc. (KFA) and the NationalLivestock Cooperatives Federation (NLCF) (maize);  Korea Paper Manufacturers' Assoc. (KPMA) (maniocstarch);  Korea Poultry Assoc. (KPA) (pure-bred breeding chicks);  the National Agricultural Cooperative Fed.
(NACF) (malting barley, malt, manioc starch, other starches, sweet potato);  and the Livestock Products
Marketing Organization (LPMO) (beef) (WTO document G/STR/Q1/KOR/6, 7 June 1999).Republic of Korea WT/TPR/S/73
Page 119
expressed over, inter alia,  the prohibitive level of certain bound tariffs, the allocation of quotas to (or
administration by) agricultural associations and state-trading agencies with exclusive trading rights (as
in the case of fresh oranges, for example), and the resulting mark-up and quota utilization
(Table AIV.2, sections above and below, Chapter III(2)(ii)(b), III(2)(ii)(e) and III(2)(v)(b)).25
Table IV.2
Market-access commitments for selected commodities, 1999
In-quota (tonnes)
(In-quota tariff rates, %)nTariffs/TEs
(Over-quota tariff rates)
Initial FinalImplementation
periodBase rate Bound rateReduction
rate (%)
Ricea51,307 102,614 1995-1999 Special treatment
5% 5% (not tariffied and not bound)
102,614 205,228 2000-2004
5% 5%
Barleyb14,150 23,582 1995-2004 333% or 299.7% or 10
20% 20% W 401/kg. W 361/kg.
Soybeanc1,032,152 1,032,152 1995-2004 541% or 487% or 10
5% 5% W 1,062/kg. W 956/kg.
Maized6,102,100 6,102,100 1995-2004 365% 328% 10
3% 3%
WheateTariff only since 1990 10% 1.8% 92
Beeff123,000 225,000 1995-2000 44.5% 40% 10
43.6% 41.6%
Porkg21,930 18,275 1995-1997o37% 25% 18.9
25% 25%
Chickenh7,700 6,500 1995-1997o35% 20% 42.9
20% 20%
Skim milk 621 1,034 1995-2004 220% 176% 20
powderi20% 20%
Whole milk 344 573 1995-2004 220% 176% 20
powder 40% 40%
Whey powder 23,000 54,233 1995-2004 99% 49.5% 50
20% 20%
Butter 250 420 1995-2004 99% 89% 10
40% 40%
Orangesj15,000 57,017 1995-2004 99% or 50% or 50
50% 50% W 1,015/kg. W 513/kg.
Red-pepperk4,311 7,185 1995-2004 300% or 270% or 10
50% 50% W 6,900/kg. W 6,210/kg.
Garlic 8,680 14,467 1995-2004 400% or 360% or 10
50% 50% W 2000/kg. W 1,800/kg.
Onions 12,369 20,645 1995-2004 150% or 135% or 10
50% 50% W 200/kg. W 180/kg.
Table IV.2 (cont'd)
                                                          
25 So far questions have been raised by Australia, the EU, the United States, and New Zealand (low
quota-fill rates for birds eggs, sweet potatoes, meat of swine, meat of fowls, orange juice, artificial honey, milk
and cream, chestnuts, etc.) (WTO document G/AG/R/18, 7 May 1999).WT/TPR/S/73 Trade Policy Review
Page 120
In-quota (tonnes)
(In-quota tariff rates, %)nTariffs/TEs
(Over-quota tariff rates)
Initial FinalImplementation
periodBase rate Bound rateReduction
rate (%)
Potatoesl11,286 18,810 1995-2004 338% 304% 10
30% 30% 385% or
Sweet potatoesm11,121 18,535 1995-2004 428% or W 375/kg. 10
20% 20% W 388/kg.
Sesame 6,731 6,731 1995-2004 700% or 639% or 10
40% 50% W 7,400/kg. W 6,630/kg.
Ginseng 34.1 56.8 1995-2004 Red 838.1% 754.3% 10
20% 20% White 247.6% 222.8% 10
a Rice:  not tariffied (special treatment).  In-quota represents minimum access opportunities (on a non-glutinous milled rice ba sis)
in form of import quota.
b Barley:  tariffied (TE on a naked barley basis).  In-quota represents minimum access opportunities (on an unhulled barley basi s).
c Soybeans:  tariffied.  In-quota represents current market access opportunities.d Maize:  tariffied.  In-quota represents current market access opportunities (on a feeding maize basis).
e Wheat:  fully liberalized since 1990.
f Beef:  Initial tariff increased from 20% of bound rate to 43.6% in 1995.  Removal of import restrictions as from 1 January 200 1.
In-quota represents import quota (retail weight equivalent basis).
g Pork:  Initial tariff increased from 25% of bound rate to 35.8% in 1995.  Removal of import restrictions in 1 July 1997.  In-q uota
represents import quota (frozen pork basis).
h Chicken:  Initial tariff increased from 20% of bound rate to 33.5% in 1995.  Removal of import restrictions in 1 July 1997.
In-quota represents import quota (frozen chicken basis).
i SMP (skim milk powder):  Ceiling binding.  Removal of import restrictions in 1 July 1995.  In-quota represents tariff quota.j Oranges:  Ceiling binding.  Removal of import restrictions from 1 July 1997.  In-quota represents import quota (from January
1995 through June 1997) and tariff quota (from July 1997 over the implementation period).
k Red-pepper, garlic, onions:  ceiling bindings.  Removal of import restrictions in 1 July 1995.  In-quota represents tariff quo ta.
l Potato:  Tariffied.  In-quota represents minimum access opportunities (excluding seeds).
m Sweet potato:  Tariffied. In-quota represents minimum access opportunities (on a fresh sweet potato basis).
n Where both ad valorem  tariff and specific tariff are reported whichever is the greater will be applied.
o The final in-quota volumes for pork and chicken represent amounts for January through June in the final year, respectively.
Source: Korea's GATT Schedule, and information provided by the Korean authorities.
Other measures
19. As indicated in Table IV.3, between 1995 and 1997, the seven state entities (out of eight)
involved in agricultural, livestock and forestry trade operations accounted for all or virtually all
Korean imports of a wide range of items, and charged mark-ups of up to 612.8% (green beans in1995);  by contrast, pine nuts, mandarins, and tangerines were subject to negative mark-ups, which,
according to the authorities, reflect Korea's im plementation of the WTO commitment in filling
quotas.
26  The share of state-trading or state-privileged entities has declined gradually in the
importation of beef, soyabeans and onions, but risen for small red beans, buckwheat and groundnuts.
Mark-ups for rice, onions, ginger, citrus items, and ginseng have gradually increased while adeclining trend was followed for soyabeans, sma ll red beans, buckwheat, potatoes, genus capsicum,
natural honey, and pine nuts.
20. Apart from persistent state-trading in agricultural items, recourse to non-tariff and
contingency measures has been confined to a few items.  In line with Korea's WTO commitments on
import prohibitions and quantitative restrictions (see below, and sections (2)(iii)(a) and (b),Chapter III(2)(v)(b)), agricultural import restricti ons have been limited to beef and rice;  between
                                                          
26 WTO documents G/STR/N/2/KOR, 4 Marc h 1997;  G/STR/N/4/KOR, 10 December 1998;
G/STR/N/4/KOR/Corr.1, 1 May 1999.Republic of Korea WT/TPR/S/73
Page 121
1997 and May 2000 safeguards in the form of quantitative restrictions have affected imports of
skimmed milk, and, as of 1996, under special safeguards in the WTO Agreement on Agriculture, have
been utilized in the form of additional duties against above-quota imports of certain agricultural items
whose imports increased sharply (Chapters II(7)(i)) and III(2)(ix)(b)).  As of 1999, an import ban oncertain meat and dairy products from certain EU countries has been enforced, and regulations on
genetically modified food (GM) were under preparat ion (Chapter III(2)(v)(a) and III(2)(x)(c));  the
coverage of shelf-life requirements was reduced.  Export subsidies have been limited to the marketing
of fruit and flowers of small-scale producers (Chapter III(3)(iii)).
Table IV.3
State-trading activities in agriculture, livestock, forestry, and fisheries, 1995-97
State firm/items YearFirm's import
share in total
imports (%)Firm's domestic
purchases share
in total
production (%)Firm's domestic
sales (tonnes)Mark-up (%)a
I.  Ministry of Agriculture and Forestry
(MAF)
Rice 1995 100.0 29.3 1,305,000.0 84.4
1996 100.0 23.3 1,303,000.0 96.4
1997 100.0 22.5 484,000.0 98.6
Unhulled barley 1995 100.0 80.2 14,150.0 ..
1996 100.0 78.2 51,000.0 ..
1997 100.0 61.9 18,700.0 ..
II.  Agricultural and Fishery Marketing
Corporation (AFMC)
Soybeans 1995 81.7 150.4 232,756.0 90.0
1996 79.5 149.0 250,586.0 54.2
1997 79.5 168.1 238,200.0 23.7
Small red beans 1995 91.7 110.0 20,258.0 225.7
1996 94.0 96.5 16,503.0 124.0
1997 98.5 133.7 17,340.0 123.9
Green beans 1995 35.8 37.8 3,326.0 612.8
1996 .. 5.1 135.0 0.0
1997 .. 0.0 0.0 0.0
Buckwheat 1995 30.4 18.2 1,258.0 336.6
1996 76.7 36.0 1,343.0 204.3
1997 72.1 17.7 1,217.0 172.8
Potatoes 1995 0.0 0.0 0.0 0.0
1996 100.0 0.1 667.0 38.9
1997 100.0 0.8 4,869.0 17.0
Genus capsicum 1995 79.9 1.8 3,732.0 181.3
1996 78.9 1.9 4,060.0 141.4
1997 79.6 1.7 0.0 0.0
Garlic 1995 86.7 1.8 2,758.0 142.7
1996 100.0 4.7 5,721.0 60.3
1997 77.0 2.5 9,774.0 121.8
Onions 1995 86.7 5.7 7,315.0 60.5
1996 76.9 7.1 33,442.0 41.1
1997 50.2 1.9 16,142.0 82.9
Ginger 1995 47.1 1.9 974.0 190.2
1996 81.5 1.4 329.0 4.2
1997 22.7 3.9 1,234.0 217.3
Sesamum seeds 1995 99.7 131.9 58,526.0 486.5
1996 99.8 230.7 60,314.0 495.8
1997 95.3 186.0 57,305.0 429.8
Table IV.3 (cont'd)WT/TPR/S/73 Trade Policy Review
Page 122
State firm/items YearFirm's import
share in total
imports (%)Firm's domestic
purchases share
in total
production (%)Firm's domestic
sales (tonnes)Mark-up (%)a
Groundnuts 1995 25.5 29.4 4,996.0 179.1
1996 26.6 35.5 2,223.0 142.5
1997 45.8 35.0 3,795.0 88.8
III.  Livestock Products Marketing
Organization (LPMO)
Beef 1995 75.0 0.0 110,816.0 117.0
1996 59.9 0.0 89,516.0 137.3
1997 49.5 0.0 60,468.0 90.7
IV.  National Livestock Cooperatives
Federation (NLCF)
Natural honey 1995 100.0 0.0 0.0 174.2
1996 100.0 0.0 250.0 66.3
1997 100.0 0.0 174.0 44.8
V.  Cheju Citrus Grower's Agricultural
Cooperative (CCGAC)
Oranges 1995 100.0 2,315.4 13,985.0 120.4
1996 100.0 3,165.3 18,169.0 121.4
1997 100.0 2,162.3 22,531.0 264.2
Mandarins and other tangerines 1995 100.0 0.2 1,247.0 -60.3
1996 100.0 0.3 1,329.0 -45.3
1997 100.0 0.2 1,444.0 18.6
VI.  Korea Ginseng Cooperative Federation
(KGCF)
Ginseng 1995 91.9 0.0 34.0 5.6
1996 11.9 0.5 7.0 4.8
1997 47.0 0.9 39.0 8.7
VII.  National Forestry Cooperatives
Federation (NFCF)
Pine nuts, shelled 1995 100.0 0.0 0.0 118.7
1996 100.0 0.0 0.0 63.4
1997 100.0 0.0 0.0 -1.7
.. Not available.
a Percentage increase/reduction of average domestic sales price to import price.Note: Most recent data available to the Secretariat as at June 2000.
Source: WTO documents G/STR/N/2/KOR, 4 March 1997;  G/STR/N/4/KOR, 10 December 1998;  and
G/STR/N/4/KOR/Corr.1, 1 May 1999.
(b) Domestic support measures
21. Since its last Review, Korea's budgetary outlays for domestic support to agriculture and
livestock activities have risen by about 3%, to  W 7.7 trillion (US$5.5 billion), peaking in 1997
(Table IV.4)27;  this was due to increased support for infrastructure improvement and investment and
for structural adjustment.  Nevertheless, as a consequence of the crisis, a slightly declining trend has
been recorded in their share to GDP, tax revenue, and government spending since 1998.  In the
                                                          
27 As a result of the financial crisis, in 1998 budgetary outlays to agriculture decreased compared with
1997;  this constraint seems to have caused delays to long-term structural adjustment projects as well as
concerns about the efficiency of agricultural investments (OECD, 1999c, pp. 127-131).Republic of Korea WT/TPR/S/73
Page 123
year 2000, government support for agriculture, livestock and fishery was set to increase by about
4.3%.28
Table IV.4
Developments in domestic support to agriculture and livestock, 1996-98(Won billion)
1996 1997 1998
Total domestic support (I+II+III) 7,524.79 8,426.27 7,748.58
Share of total domestic support to GDP 1.8% 1.9% 1.7%
Share of total domestic support to total tax revenue 12.5% 12.8% 10.3%
Share of total domestic support to total government
expenditure12.9% 13.2% 10.3%
I. Aggregate Measurement of Support (AMS) 2,310.99 2,592.27 2,346.38
Total AMS commitment level for period in question 2,160.60 2,028.65 1,951.70
Current total AMSa1,967.36 1,936.95 1,562.77
(a) Product-specific AMSb2,020.55
(1,991.94)2,198.94
(2,138.79)1,820.88
(1,753.07)
Beefb23.59
(22.42)195.27
(194.18)183.06
(181.66)
Pigmeat 8.89 12.04 13.99
Riceb,c1,909.87
(1,909.87)1,884.34
(1,884.34)1,509.77
(1,509.77)
Barleyb,c50.86
(50.86)46.02
(46.02)46.82
(46.82)
Maizeb,c5.62
(5.62)5.67
(5.67)6.18
(6.18)
Malting barley 0.66 0.78 0.75
Other cereal .. 0.83 2.48
Rapeseedb,c1.01
(1.0)0.91
(0.88)0.39
(0.37)
Silk-worm 0.06 0.01 0.01
Soybeanb2.27
(2.17)7.86
(7.70)8.97
(8.27)
Red pepper 0.94 1.60 1.48
Garlic 0.51 1.24 2.91
Apple 0.84 3.10 5.10
Pear 0.33 0.86 1.57
Citrus fruit 0.13 0.14 0.53
Other fruit 0.18 0.87 1.68
Chestnut 2.39 3.23 3.43
Ginseng roots 4.41 8.43 13.52
Potatoes 0.22 0.29 0.40
Other vegetables 5.96 21.31 10.86
Medicinal crops 0.24 0.54 0.61
Flowering plants 0.06 2.28 3.56
Mushrooms 1.50 1.31 2.80
Other agricultural products 0.01 0.01 0.01
Table IV.4 (cont'd)
                                                          
28 Planning and Budget Commission and the Office of National Budget (1998);  EIU (1999), p. 22.WT/TPR/S/73 Trade Policy Review
Page 124
1996 1997 1998
(b) Non-product-specific AMS 290.44d393.33d525.5d
Loan interest subsidy for farming 77.49 128.69 191.10
Loan interest subsidy for livestock farming 15.43 27.28 31.77
Subsidy for farmland improvement association 106.49 109.03 116.14
Input subsidies 55.67 86.57 106.52
Loan programme for agricultural marketing 35.36 41.76 79.97
II. Measures exempt from the reduction
commitment – "green box"5,182.9 5,796.2 5,360.7
(a) General services 3,270.8 3,762.9 3,447.8
1. Research 354.5 351.2 335.5
2. Pest and disease control 37.1 43.5 55.0
3. Training services 43.1 47.3 31.4
4. Extension and advisory services 70.2 71.2 68.5
5. Inspection services 62.1 71.3 65.4
6. Marketing and promotion services 19.8 8.9 14.1
7. Infrastructural services (e.g. improvement of
irrigation, drainage and wholesale agricultural
markets)2,684.0 3,169.5 2,877.9
(b) Public stockholding for food security purposes
(e.g. for rice and barley)108.7 84.3 126.7
(c) Domestic food aid 5.4 7.4 6.7
(d) Decoupled income support 246.5 243.3 191.6
(e) Income insurance and income safety-net
programmes000
(f) Payments for relief from natural disasters 33.1 66.3 63.8
(g) Structural adjustment assistance provided through
producer retirement programmes000
(h) Structural adjustment assistance provided through
resource retirement programmes000
(i) Structural adjustment assistance provided through
investment aids (e.g. production and processing
facilities, machinery to disadvantaged farmers)1,363.1 1,434.6 1,326.3
(j) Environmental programmes 87.1 139.4 130.6
(k) Regional assistance programmes 0 0 0
(l) Other 68.2 58.0 67.2
III. Measures exempt from the reduction
commitment – Special and Differential
Treatment – "Development" programmes30.9 37.8 41.5
(a) Investment subsidies generally available to
agriculture4.8 7.6 12.0
(b) Input subsidies generally available to low-income
or resources – poor producers26.1 30.2 29.5
.. Information not available.
a Current total AMS excludes items under the de minimis  clause.
b Figures in parenthesis indicate the amount corresponding to price support operations.c Level of support not covered under the de minimis clause.
d Level of support covered under the de minimis  clause.
Note: Most recent data available to the Secretariat as at June 2000.
Source: WTO documents G/AG/N/KOR/14, 15 Septembe r 1997;  G/AG/N/KOR/18, 16 September 1998;  and
G/AG/N/KOR/24, 25 August 1999.Republic of Korea WT/TPR/S/73
Page 125
22. Domestic support has been largely aimed at fostering price stabilization, food security,
structural adjustment, and raising the competitiveness/profitability of the sector.  Since 1996, a few
support programmes seem to have been introduced or eliminated.29  For example, a 1994
Comprehensive Rural Development Plan (improvement of infrastructural services) was phased outahead of schedule in 1998 (instead of 2001);  as a result, in 1997, the number of projects and,
consequently, total domestic support under this Plan increased considerably compared with 1996
(Table IV.4).  In order to mitigate the adverse effects of the crisis, several new programmes for
financial assistance (loan interest subsidy and extended repayment period) to debt-ridden small
farmers were introduced.  In July 1995, a farmers' and fishermen's pension programme (now covering
808,000 individuals) was established;  this government-financed programme is not conditioned by
volume of production, prices or production factors.
23. Policy changes have not materially affected the type of instruments (e.g. direct or loan
subsidies, direct payments, price support), priorities in, and allocation of, domestic support;  the level
of AMS support subject to reduction has been kept well below green box outlays.  As indicated earlier
(Chapter III(4)(ii)), the largest part of product-specific AMS-related expenditure (96% in 1998) has
been used for price support operations mainly of rice, and to a lesser extent beef (1996-98), barley,
maize, soybean and rapeseed;  apart from rice and a few other items, the amounts destined for
product-specific assistance have risen considerably for most eligible products, including beef.
Green-box-type support has remained up to 243% (1998) higher than AMS type support;  it is largelydirected at infrastructural services and investment;  decoupled income support dropped gradually.
Subsidies under the Foodgrain Management Programme, the largest subsidy component notified to
the WTO (Table III.11), have been progressively reduced.
24. Korea has adhered to its WTO commitments to reduce domestic support to agriculture, and
has kept its current (1998) AMS level 20% below the agreed level.
Input-related incentives
25. To encourage mechanization in agriculture, since 1986 fuel for agricultural use in Korea has
been tax free (i.e. exempt from VAT, special consumption tax, transport tax, and education tax).
30
Sales of fertilizers at below purchase prices have been carried out by the NACF, which has beencompensated by the Government for the difference.  Although irrigation water has been delivered free
of charge, farmers contribute to the cost of its on-farm distribution except in the areas under the
jurisdiction of Korea Agricultural and Rural Infrastructure Corp. (as of 1 January 2000).
Credit-related support
26. As indicated earlier (Chapter III(4)(ii)), the agriculture sector has continued to benefit from
soft loans (interest rates ranging from zero to 8%, but mainly at 5%);  most of these loans are
medium- and long-term, and a significant share is delivered by agricultural finance institutions
(i.e. the cooperatives federations).
31  Efforts have been made to further alleviate the farmers' financial
burden and to reduce their operational costs by controlling or freezing interest rates and extending the
repayment period (by 12-24 months).32  Under the IMF reform programme, in July 1998 Ministry of
                                                          
29 WTO documents G/AG/R/9, 17 January 1997, and G/AG/R/17, 25 January 1999.
30 OECD (1999b), pp. 58-59.
31 OECD (1999b), p. 57.
32 MAF online information.  Available at:  http://www.maf.go.kr/english/default.html
[16 December 1999].WT/TPR/S/73 Trade Policy Review
Page 126
Finance and Economy (MOFE) decided to restrict the low-interest loans to producers of agricultural,
fishery, and livestock products.
27. Since 1998, reform plans have been under consideration in the agricultural investment and
loan system.  To encourage producer self-reliance and reduce budgetary pressures, the  MAF plans to
convert gradually direct subsidies into government loans.33  At the same time, financial support for
individual farms is to be granted on the basis of an in-depth analysis and evaluation of the longer-term
farming projects.  Efforts are also being ma de to prevent credit mismanagement in the
four cooperative federations (NACF, NLCF, NFCF, KGCF);  in March 1999, the Financial
Supervisory Service (section (5)(iii)(a)) was to bolster its supervisory role over their credit businessand establish prudential regulations by May 2000.
Supply management and price support
28. Domestic price support in Korea has been maintained through government purchases and
public stockholding;  publicly funded purchases have been operated either directly by thegovernment (rice, barley) and/or by cooperatives (e.g. NACF).  Administered prices have been set for
beef (1996-98), rice, barley, maize and soyabean.  Intervention for (price-inelastic) fresh fruit and
vegetables has been operated through the government-financed Buffer Stock Management Fund, with
a view to stabilizing agricultural prices and mainta ining order in the market;  to even out seasonal
fluctuations, the Fund purchases products at market prices when prices are extremely low (i.e. below
"management cost" or during the harvest season) and releases them when their prices soar (i.e. during
the off-season).
34  As shown in Chart IV.3, price stabilization objectives seem to have been met more
successfully than at the time of the previous Review ;  the diverging trend in prices for grains (up to
25.6% increase by 1999) reflected inflationary pressures, while the decline in producers' prices for
livestock was the consequence of growth in the number of cattle bred and of the excessive cattleslaughter caused by the financial crisis.
Marketing
29. Since 1998, MAF has undertaken a thorough reform of the agricultural marketing system,
which the authorities consider to be underdeveloped.  This reform includes the expansion ofagricultural direct marketing (establishment of large-scale periodic farmers' markets in 50 major urban
cities, 760 direct marketing stores within commercial banks, distribution complexes, mobile sales of
livestock products), and changes of existing transaction methods in wholesale markets (scheduled
construction of 32 public wholesale markets
35, introduction of an electronic auction system, and
improvement of current unloading and transporting systems by 2001).36  As of the second half of
1999, participants in the marketing channels from production to consumption may conclude direct
voluntary bilateral transaction contracts (i.e. wit hout the involvement of auction brokers) regulating
the amount of production, distribution, and consumption (primarily of perishable products marketed
in small quantities) with the aim of maintaining reasonable prices.  As a result, by 1999 consumer
                                                          
33 OECD (1999c), pp. 127-131;  and MAF online information.  Available at:  http://www.maf.go.kr/
english/default.html [16 December 1999].
34 The authorities indicated that this programme does not have a price-support effect and purchased
quantities are minimal compared with total production (WTO document G/AG/R/17, 25 January 1999;  and
OECD, 1999b, p. 53).
35 The producers' cooperatives NACF, NLCF, NFCF or specialized marketing companies are to take
charge of the administration of the wholesale markets, thus receiving additional privileges from the authorities.
36 MAF online information.  Available at:  http://www.maf.go.kr/english/default.html
[16 December 1999];  Article by the head of Marketing Policy Division (Mr. Jae-soo Kim) of the Ministry of
Agriculture and Forestry, published in The Korea Herald  [Online], 10 June 1998.  Available
at:  http://www.koreaherald.co.kr/ [10 January 2000];  and OECD (1999c), p. 130.Republic of Korea WT/TPR/S/73
Page 127
prices in traded items had declined by 20-30% and producer prices rose by 10-20% in large markets;
furthermore, the marketing margin rates (i.e. the gap between consumer and producer prices) declined
from 56.5% (1997) to 51.8%.  Budget allocation for these reforms is to be raised to 30% of total
appropriation for agricultural and forestry programmes by 2002, compared with 6.5% in 1998.
80.090.0100.0110.0120.0130.0140.0150.0
1995 1996 1997 1998 1999 20001995=100Chart IV.3
Indices of prices received by farmers, 1995-2000 (April)
Recent indices of prices received by producers of vegetables and fruit were available in separate figures;  in April 
2000, they stood at 114.6 and 84.7, respectively.
National Statistical Office (1999), Major Statistics of Korean Economy 1999.3, Table IX.6, March, Seoul;  and the 
authorities of the Republic of Korea.Note:
 Source :All farm productsGrains
Vegetables and fruitOther
Livestock & poultry
Other
30. In preparation for reunification with North Korea and the integration of agricultural sectors,
assistance in the form of agricultural inputs and materials, contract farming, and joint agricultural
development and investment projects is under consideration.37  Although contract farming on a
commercial basis with North Korea is starting, so far bilateral cooperation has been largely focused
on short-term food aid (to ease food emergencies) and longer-term agricultural rehabilitation projects.
Assistance has been provided both at government al and non-governmental levels.  By 1999, the total
amount of Korea's assistance to North Korea amounted to US$36.3 million, equivalent to 25% of total
financial support provided by the international community.  Future direct aid to North Korea is to be
based on the reciprocity principle, while investment is to be aimed at assisting North Korea's efforts in
earning foreign exchange so as to import food on a commercial basis.
                                                          
37 MAF online information.  Available at:  http://www.maf.go.kr/english/default.html
[16 December 1999].WT/TPR/S/73 Trade Policy Review
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(iii) Selected agricultural and livestock items
(a) Rice
31. Rice sector developments remain pivotal for the future of Korean agriculture, in terms of
economics, food security, disaster prevention, and politics.38  As indicated earlier (section (2)(ii)(a)),
Chapter III(2)(ii)(e) and III(2)(v)(b)), since the 1995 opening of the market (i.e. elimination of the
import ban), rice imports have been subject to quantitative restrictions and a 5% tariff.  Imports and
marketing have been undertaken exclusively by MAF, which directs imported rice for processing
purposes, taking into account domestic demand and supply conditions (rather than directly marketing
it to consumers).39  MAF-imposed mark-ups increased from 84.4% in 1995 to 98.6% in 1997
(Table IV.3).  In line with the WTO Schedule of Commitments, between 1995 and 2004 imports
should rise progressively from 1% to 4% of domestic consumption;  as of the year 2000, the annual
rate of increase of the quota is to double to 0.5%;  between 1995 and 1997, the quota was fully
utilized (Table AIV.2) with rice originating mainly from China, India, and Thailand.40  Korea's special
arrangement on rice (i.e. its non-"tariffication") might be re-negotiated in 2004;  nevertheless, by late1999, the Government indicated its intention to oppose or delay the lifting of import restraints on
rice (and on other key farm products) at the next round of multilateral trade negotiations.
41
32. Since 1997, when the price support system for rice was reformed, the Government has signed
purchase contracts with farmers at the time of sowing, paying 40% of the pre-determined price before
harvest;  farmers may sell either on the open market (reimbursing the advance payment at 7% interest)or to the Government.
42  Despite consecutive bumper crops, since 1998 the Government's purchase
price of rice has been raised to reflect the crisis-related price increases of inputs (i.e. pesticides,
fertilizers, agricultural machinery) while the quantity purchased was reduced so as to meet
AMS reduction commitments.43  Rice stockpiles had grown to 806,000 metric tonnes by the end of
1998, thus meeting the optimum level of 783,000-829,000 tonnes for food security recommended by
the Food and Agriculture Organization (FAO).  In accordance with these recommendations, Korea
maintains its rice stockpile at at least 17-18% of total consumption and, due to frequent variations ofthe harvest, it is difficult to make stockpile forecasts.  To make up for shrinking areas of rice
cultivation, the MAF is to transform idle land and so me industrial land to rice fields with a view to
                                                          
38 National Statistical Office (1999);  OECD (1999b), p. 13;  and Article by the head of Marketing
Policy Division (Mr. Jae-soo Kim) of the Ministry of Agriculture and Forestry, published in The Korea Herald
[Online], 10 June 1998.  Available at:  http://www.koreaherald.co.kr/ [10 January 2000].
39 It seems that there is no intention of allowing imported table rice to be directly marketed to Korean
consumers (USTR, 1999).
40 UNSD, Comtrade database.
41 Statements made by government officials (including the Assistant Minister for Economic Policy
Coordination at the Prime Minister's Office (Mr. Maeng Jung-ju)) at an inter-agency meeting (chaired by thePrime Minister) in preparation for the Seattle Ministerial Meeting, published in The Korea Herald  [Online],
27 November 1999.  Available at:  http://www.koreaherald.co.kr/ [10 January 2000];  and MAF online
information.  Available at:  http://www.maf .go.kr/english/default. html [16 D ecember 1999].
42 The MAF encouraged rice farmers and existing Rice Processing Complexes to expand paddy land
area under farming contracts between the two parties from 91,000 ha in 1997 to 120,000 ha in 1998, thusreducing rice production costs through corporate selection of rice varieties and cooperative farming amongfarmers (MAF online information.  Available at:  http://www.maf.go.kr/english/default.html[16 December 1999]);  and OECD (1999b), pp. 47-49.
43 OECD (1999c), p. 128;  and MAF online information.  Available at:  http://www.maf.go.kr/english/
default.html [16 December 1999].Republic of Korea WT/TPR/S/73
Page 129
expanding cultivated area;  strict control over illegal conversion of rice farmland to other use was
enforced.44
(b) Beef
33. The growth trend in demand for and imports of beef, which turned Korea into one of the
world's three price-setting markets (together with the United States and Japan), was reversed due to a
shift in the domestic consumption pattern and excessive slaughtering caused by the financial crisis.
Nevertheless, between 1996 and 1999, Korea's producti on and consumption of boneless meat grew by
38% and 21.6% respectively.45
34. In line with its WTO Schedule of Commitments (section (2)(ii)(a) and Chapter III (2)(ii)(e)),
since the previous Review, Korea's expansion of import quotas for cattle (milch cows, meat
production cattle, beef)46 has allowed increasingly larger market access (from 147,000 tonnes (1 996)
to 225,000 tonnes (2000)), notwithstanding a tariff of 42% (1999) and 41.6% (2000).  Quotas are to
be replaced by a tariff-only regime set at 41.2% on 1 January 2001, as scheduled, with the tariff rate
being reduced gradually to 40% in 2004.47
35. Beef importation continues to be conducted through the government-linked Livestock
Products Marketing Organisation (LPMO)48, or through the Simultaneous Buy and Sell (SBS) system
(Table IV.3);  the LPMO is an import agency establ ished by law in 1988 as a non-profit independent
entity to ensure price stabilization and, later on, to carry out the smooth implementation of
Uruguay Round commitments.  The LPMO purchases under an open tender system and then sells onthe wholesale market.  The SBS system allows sellers direct access to the domestic distribution chain
(i.e. "supergroups" representing end-users such as hotels and restaurants) and to negotiate prices
otherwise subject to a government determined ma rk-up, which is intended to ensure imported beef
prices do not undercut wholesale market prices.  Under the ROUs-related undertakings (cited above),
                                                          
44 Statement by the Minister of Agriculture and Forestry Kim Sung-hoon published in The Korea
Herald  [Online], 9 September 1998. Available at:  http://www.koreaherald.co.kr/ [10 January 2000];  and MAF
online information.  Available at:  http://www.maf.go.kr/english/default.html [16 December 1999].
45 The 1998 depreciation  provoked a sharp increase in the price of imported feed grains forcing
livestock farmers to abandon farming;  an excessive supply of cattle was thus channelled to slaughterhouses,further accelerating the fall of domestic prices (WTO document G/AG/R/18, 7 May 1999);  OECD document
AGR/CA(98)5/FINAL, The Economic and Policy Aspects of Livestock Versus Feed Grain Imports in Selected
Asian Countries [Online], Paris.  Available at:  http://www.oecd.org//agr/Documents/ abarsg1.doc
[8 October 1999];  The Korea Herald  [Online], 25 December 1998 and 15 March 1999.  Available
at:  http://www.koreaherald.co.kr/ [10 January 2000];  and WTO document G/AG/R/18, 7 May 1999.UNSD, Comtrade database.
46 These items correspond to HS tariff lines 01.02.90.10.00, 01.02.90.20.00, 02.01.10.00.00,
02.01.20.00.00, 02.01.30.00.00, 02.02.10.00 .00, 02.02.20.00.00 and 02.02.30.00.00.
47 Following a 1989 GATT panel ruling, Korea agreed to phase out its balance-of-payments restrictions
on beef.  In 1990 and in July 1993, Korea and the United States concluded Records of Understanding (ROUs)under which the former agreed to annually increase minimum market access, guarantee direct commercialrelations between foreign suppliers and Korean retailers and distributors, allow a growing volume of beef to be
sold through SBS (instead of quasi-governmental agencies), and a ceiling on the mark-up levied on the
duty-paid price of imported beef.  Bilateral meetings have been held quarterly to monitor the implementation ofthese agreements.  Major suppliers such as Australia and New Zealand have also entered into identicalagreements with Korea (USTR, 1999).
48 As indicated earlier (section (2)(ii)), LPMO ho lds exclusive rights to import beef, issue import
recommendations (in order to balance demand and supply), and prevent unauthorized marketing of imported
beef in the local market (MAF online information.  Available at:  http://www.maf.go.kr/english/default.html
[16 December 1999]).WT/TPR/S/73 Trade Policy Review
Page 130
the maximum mark-up level is to fall from 40% (1997) to zero (2000).  At the same time, the share of
imports subject to the SBS system rose from 50% (1997) to 70% (2000), and restrictions on imports
under the SBS system are to be lifted at the end of 2000.  The move to the tariff-only regime and the
resulting non-mandatory involvement of the LPMO in trading activities is expected to bring a
significant increase in the proportion and volume of beef imports directly distributed through the
private sector.49  The United States has been the leading beef exporter to Korea both in the LPMO and
the SBS segment of the market (56.3% in 1999), foll owed by Australia (29.6%), Canada (9.6%), and
New Zealand (4.5%, one fifth of its 1996 share).  Under the current retail sales system, imported beef
may be sold only in officially designated stores (i.e. "imported beef" stores rather than "domesticbeef" stores);  between 1996 and 1998, the number of the imported beef stores declined from 7,569 to
5,498 (27.4%).  In March 1999, at a meeting of the WTO Committee on Agriculture, Korea argued
that its beef distribution system did not affect beef trade
50;  the authorities also indicated to the
Secretariat that the system is aimed at fighting fraud (i.e. selling cheap foreign meat as domestic).  As
from 2001, beef imports are to be liberalized (so that there will no longer be government involvementin the beef trade).  As indicated earlier (Chapter III(2)(x)(c), as of January 2001, further measure
differentiating imported from domestic beef are to be applied requiring Korean-style restaurants to
mark imported beef separately on their menus.
51
36. In line with OECD forecasts on compliance with WTO undertakings to increase imports in
1997, 1998 and 1999, Korea has had difficulties in meeting its annual import quota commitments(Table AIV.2);  in 1998, it fell short of its 187,000 metric tonnes quota by about 23% (42,300 tonnes)
and, in the light of developments in the domestic market for beef, refused to carry forward
42,300 tonnes (the remainder of the 1998 quota) to the 1999 quota, originally set at 206,000 tonnes.
52
Korea's measures affecting imports of fresh, chilled, and frozen beef have been challenged in thecontext of the WTO Dispute Settlement Mechanism (Chapter II).
37. As of July 1998, a Hanwoo (Korean cattle) calf production stabilization programme has been
operated on a provisional basis in 32 cities and counties, and as from 2000 on a nation-wide basis;  itis aimed at maintaining Hanwoo production at an ap propriate level.  Under this programme, livestock
farmers have been compensated for part of the difference between calf breeding cost
(i.e. a stabilization price based on calf production costs, breeding trends, etc.) and the average market
price when the average market price for three-month old and more cattle (bred by farmers who signed
up for and paid their financial contribution to the programme) falls below a certain level;  byJune 2000, the programme covered 107,539 calves and during the period of its provisional
implementation payments reached W 633 million (about US$575,000).
38. In response to oversupply and stock build-ups, which resulted in a drop in cattle and beef
prices, between end 1996 and August 1998 a pri ce support programme was operated temporarily
through purchases of cattle (and in some cases of beef) by the National Livestock CooperativeFederation (NLCF).
53  To reduce production and supply of beef and strengthen price-support effect, in
                                                          
49 WTO document IMA/W/11, 2 June 1997.
50 WTO document G/AG/R/18, 7 May 1999.
51 Bureau of National Affairs, WTO Reporter,  11 July 2000, Washington, D.C.
52 The Korea Herald  [On line], 1 February 1999. Available at:  http://www.koreaherald.co.kr/
[30 September 1999];  and OECD document AGR/CA(98)5/FINAL, The Economic and Policy Aspects of
Livestock Versus Feed Grain Imports in Selected Asian Countries [Online], Paris.  Available at:
htttp//www.oecd.org//agr/Documents/abarsg1.doc [8 October 1999].
53 Under this programme cattle purchases by the NLCF rose by 1,033% between 1996 and 1998 to
112,774 head, while producer prices gradually dropped by 38%.  In 1998, these purchases were aimed at
preventing a crisis-related fall in prices due to a beef consumption decrease (OECD, 1999c, pp. 128-129);Republic of Korea WT/TPR/S/73
Page 131
July 1998 the purchase of bulls over 12-months old was suspended and the purchase of cows of
8-12-months old was introduced.
39. Since 1996, action has been taken to encour age beef consumption through promotion
campaigns, the improvement of sales facilities for domestically produced beef, increased beef purchasesfor the military, and a temporary permit (from September 1998 to February 1999) for farmers to
slaughter cattle for private consumption without paying slaughter taxes.
54
(c) Milk products
40. Between 1996 and 1999, Korea's self-sufficiency in milk remained stable (85%) as production
and total consumption grew steadily at 11.4%55;  however, fluid milk consumption dropped gradually
by an overall rate of 21%.
41. Border protection has been lowered in two stages (January 1995, July 1996) with the
replacement of quantitative restrictions by a tariff quota regime (milk, butter), with in-quota rates
ranging from 20% (above-quota rate at 198% (1999)) to 40% (above-quota at 198%) or, to a lesser
extent, a tariff-only treatment, with rates ranging from 28.5% (breeding eggs) to 38% (cheese, 1999).Nevertheless, the improvements were partly and temporarily eroded by the rapid adoption of
safeguard measures against imports of skimmed powder milk in March 1997;  these measures were
challenged in the context of the WTO dispute settlement mechanism (section (2)(ii)(a), Chapter II and
III(2)(ix)(b)) and were eliminated in May 2000.
56  In 1998, Korea moved from a seven-week shelf-life
requirement for UHT milk to a system where th is requirement is determined by manufacturers
(Chapter III(2)(x)(b)).
42. Since 1999, the Dairy Promotion Association (c onsisting of representatives of producers,
consumers, and processors) has fixed milk prices autonomously, thus replacing the
government-administered pricing system that operated between 1982 and 1998;  the authorities
indicated that the old price system did not involve any support elements.  To facilitate structural
adjustment, in 1998 a system was introduced for the early withdrawal of dairy cows with low milk
capacity.  The system led to a fall of 20% in the nu mber of participants, 26% of the land covered, and
46% of the amount of payments (to US$15.5 million), as well as the slaughtering of 24,085 head.  To
deal with the drop in fluid milk consumption, action was taken through:  a milk consumption
promotion scheme (milk sales at reduced price, increased milk supply at schools and for the military,
TV commercials);  milk donations to North Korea (July 1998);  and the entry into force, in
January 1999, of the Dairy Promotion Act, (estab lishment of the Dairy Promotion Association,
reinforcement of private sector involvement in dairy marketing, introduction of voluntary
                                                                                                                                                                                    
WTO documents G/AG/R/13, 19 December 1997;  G/ AG/R/17, 25 January 1999;  and G/SCM/Q2/KOR/18,
7 April 1999;  and MAF online information.  Available at:  http://www.maf.go.kr/english/default.html
[16 December 1999].
54 OECD (1999c), pp. 128-129;  MAF online information.  Available at:  http://www.maf.go.kr/english/
default.html [16 December 1999];  and Statements by the Minister of Agriculture and Forestry published inThe Korea Herald  [Online], 28 June 1999. Available at:  http://www.koreaherald.co.kr/ [10 January 2000].
55 Data supplied by the Ministry of Agriculture and Forestry.
56 OECD document AGR/CA(98)5/FINAL, The Economic and Policy Aspects of Livestock Versus
Feed Grain Imports in Selected Asian Countries [Online].  Available at:  http://www.oecd.org//agr/Documents/
abarsg1.doc [8 October 1999].WT/TPR/S/73 Trade Policy Review
Page 132
demand/supply stabilization arrangements (among farmers, consumers and others), centralized
collection and public-managed inspection system of raw milk).57
(3) MINING AND ENERGY
(i) Mining
43. Since its previous Review, Korea's corporate restructuring and recession have affected the
performance of the mining sector;  its contribution to GDP declined.  Following the June 1999
discovery of the largest known domestic gold deposit, Korea is expected to become largely self-reliant
in gold production in 2001.58  As a result of declining private demand and government support, the
extraction of anthracite coal was reduced, and import dependence on bituminous coal increased.59
44. Tariff protection in mining has remained stable at 2.8%, well below the overall MFN average
level (Table AIV.1).  The state-owned Korea Mining Promotion Corp. (KMPC) has provided
financial and technical support in extraction and tr ade (Chapter III(2)(vi)).  Government assistance
has been provided through grants and loans for restructuring, regional development, and pollution
control purposes;  support to anthracite coal mining is also provided through price stabilization.Assistance for mining areas and storage activities as well as concessional loans for improvement and
conversion of facilities are being eliminated (Table III.11);  budgetary outlays for these programmes
have progressively declined.
60
(ii) Energy
45. Korea's energy-intensive production structure is sensitive to developments in the energy
sector, where market-oriented reforms are under way.61  Since 1998, Korea has introduced voluntary
energy saving agreements in energy-intensive industries (e.g. steel, cement, chemicals, electricity);
67 companies were covered in 1999 and 567 companies will be included by 2003.62  F u r t h e r m o r e ,
between 1998 and 2002 energy prices (oil, gas, electricity, coal) are being gradually raised (by as
much as double the 1998 level) to the average level of non-oil-producing member countries of the
OECD.
(a) Gas
46. Since 1987, the Korea Gas Corporation (KOGAS), a state-owned monopoly, has supplied gas
under long-term import contracts with Indonesia, Malaysia, and Brunei;  KOGAS supplies 40% of
this gas to the national state-owned electricity producer KEPCO and 60% to city-owned gas suppliers.
As of 2001, imports and exports of liquified natural gas (LNG) are to be subject to notification rather
than government approval, thus allowing direct imports by large-scale gas consumers
                                                          
57 MAF online information.  Available at:  http://www.maf.go.kr/english/default.html
[16 December 1999];  and OECD (1999c), p. 129.
58 Statements of the Director of Resources Development of the MOCIE (Mr. Chang Soon-ho)
published in  The Korea Herald  [Online], 22 June 1999.  Available at:  http://www.koreaherald.co.kr/
[10 January 2000].
59 National Statistical Office (1999), September, Tables III.1, III.8 and XII.3.
60 WTO document G/SCM/N/48/KOR,  20 July 1999.
61 APEC (1999).
62 Towards Global Participation, presentation by the Deputy Director-General for Science and
Environment Affairs (Mr. Raekwon Chung) of the Ministry of Foreign Affairs and Trade,
1999 Forum on Climate Change:  BEYOND BUENOS AI RES, Paris (9-10 March 1999).  Available
at:  http://www.oecd.org//env/cc/forum99.htm [8 October 1999].Republic of Korea WT/TPR/S/73
Page 133
(e.g. Pohang Iron and Steel Corp. (POSCO) (section (4 )(iii)).  KOGAS is to be partly privatized by
2002 and take on ownership and management of existing gas supply pipelines;  KOGAS's importing
and wholesale units are to be split into three subsidiaries in 2001, (two to be sold to private investors
by the end of 2002, and the last one later on).
47. KOGAS has maintained its concessional tariffs for non-residential users;  the authorities note
that demand for residential users is higher in winter season, thus requiring costly additional storage
tanks and pipelines whose construction costs are reflected in higher tariffs.  Utility gas tariffs applied
to industrial and commercial users, respectively, were 34.2% and 6.4% lower than those charged to
residential consumers;  the tariff differential for commercial users has been considerably reducedcompared with 1995.
63
(b) Electricity
48. Power in Korea is largely generated by thermal and nuclear plants.  Between 1995 and 1999
generating capacity grew by about 46%.  However, to meet rising electricity demand, mainly by
industrial and commercial users, 93 new power plants are to be built between 2000 and 2015.
49. As of 1999, private investors may build plants and supply electricity in designated areas and
buildings in Korea.64  As a result, the state-owned KEPCO lost its power generation monopoly rights
in 1999 but retains such rights in transmission and distribution.  The activities of KEPCO, the world's
fifth largest utility entity, reportedly extend to overseas power plants, the information and telecom
sectors (at home and abroad) (section (5)(iv)(a)), and domestic cross-subsidization.65  Since 1999,
KEPCO's privatization process has been under way;  its generation facilities are to be divided into
six independent companies (wholly owned by KEPC O) by grouping 42 non-nuclear power generation
facilities into five firms, and the nuclear power facility into one.  These independent companies are to
be gradually privatized by the end of 2002.66  Other reform plans include a two-way competitive price
bidding market in the wholesale power sector (as from 2003);  the splitting and privatization of the
power distribution system (from 2003 to 2009);  and the elimination of regional monopoly systems by
2009.  After 2009, KEPCO is to remain the sole electricity transmission company in Korea.
50. Since Korea's previous Review, KEPCO has maintained stringently regulated electricity
pricing schemes aimed at boosting industrial growth and competitiveness as well as subsidizing
electricity for low-income families;  these compul sory cross-subsidization operations (cited earlier),
prevented, inter alia,  the state firm from investing in new power generation facilities and contributed
                                                          
63 National Statistical Office (1999), September, Table IV.5.
64 The International Herald Tribune , 3 September 1999;  and The Korea Herald  [Online],
26 November 1998.  Available at:  http://www.koreaherald.co.kr/ [10 January 2000];  Korea Fair Trade
Commission (1998).
65 KEPCO, inter alia,  operates and/or is involved in projects for power plants in China and the
Philippines ( The Korea Herald  [Online], 9 December 1998 and 14 November 1998.  Available
at:  http://www.koreaherald.co.kr/ [10 January 2000]).  It also maintains investment in the U.S.-based
telecommunications firm Nextwave.  In 1998, KEPCO was compelled to subsidize W 1.3 trillion
(US$929 million) of public works an d in 1999 was expected to provide financial support of W 170 billion
(US$143 million) for the coal industry, W 87 billion (US$73 million) for SMEs, W 130 billion(US$109 million) for residential districts near power plants, and W 87.7 billion (US$74 million) for KOGAS's
liquified natural gas industry ( The Korea Herald  [Online], 4 November 1999.  Available
at:  http://www.koreaherald.co.kr/ [10 January 2000]).
66 APEC (1999);  The International Herald Tribune,  3 September 1999;  and The Korea Herald
[Online], 4 November 1999.  Available at:  http://www.koreaherald.co.kr/ [10 January 2000].WT/TPR/S/73 Trade Policy Review
Page 134
to its indebtedness.67  In 1999, tariffs applied to farmers were 57% and 54% lower than those affecting
offices and households;  similarly those charged to manufacturers were 46% and 43% lower.  In
principle, electricity tariffs reflect the cost of production, a fair return on investment and "fairness to
the people".  Four principles apply in setting rates:  the purpose rate (different rates depending on theuse);  the demand-side management rate (different rates at peak time and late night use);  the thrifty
rate (disincentive for non-productive area);  the welfare rate (to stabilize prices of domestic goods and
services and boost industrial activities).
68  A 1999 plan for changing the electricity tariffs scheme
includes:  the reduction of rate differentials, and ta riff increases to reflect the adequate rate of return
by 2002;  and between 2003 and 2009, the introduction of a tariff scheme by voltage level, reflectingthe cost of production and reasonable rate of return, etc., the opening of the retail sale of electricity to
competition (after 2009), and the establishment of a marginal cost pricing scheme based on market
competition principles.  In the context of sectoral reforms, an Electrical Commission may revise the
conditions, process, and fees governing electricity supply;  electricity tariffs may no longer require the
approval of the MOFE, a major factor influencing electricity pricing policy.
69
(4) MANUFACTURING
51. Manufacturing output in Korea involves mainly consumer electronics and communication
equipment, automotive products, chemicals, food and beverages, machinery and equipment, and basic
metals (Table IV.5).  Value-added grew fastest in the industry producing office, accounting and
computing machinery.  On the other hand, it shrank in a few activities, including leather processing,wearing apparel, and furniture manufacturing.  Between 1996 and 1999, the share of manufacturing in
Korean GDP rose from 28.9% to 31.8% while industrial land expanded by more than 13% (1998);  by
contrast, in 1998 the number of firms and workers declined by 4.3% and 8.6% respectively, due to
far-reaching corporate restructuring (which contributed to annual labour productivity growth rates of
more than 13%) caused by the crisis-related recession.
70
52. Manufacturing generates a large part of Korea's foreign trade (more than 98% of total exports
of goods in 1999).71  In 1999, exports were mainly composed of semi-conductors, office machines and
telecommunications equipment, woven textiles, clothing, automotive products, chemicals, ships, iron
and steel, and cathode valves;  imports were dominated by machinery, equipment, and chemicals.
                                                          
67 The Korea Herald  [Online], 4 November 1999. Available at:  http://www.koreaherald.co.kr/
[10 January 2000].  Due, inter alia,  to subsidized electricity tariffs to  major industries, KEPCO's debts have
snowballed since 1995;  in 1999, total debt was W 33.4 trillion (US$28 billion) and dollar-denominated loansborrowed by the state-run utility are expected to total US$10 billion in 2000 ( The Korea Herald  [Online],
15 December 1999.  Available at:  http://www.koreaherald.co.kr/ [10 January 2000]).
68 Korea Electric Power Corp. (1999).
69 MOCIE information published in The Korea Herald  [Online], 18 August 1999. Available at:
http://www.koreaherald.co.kr/ [10 January 2000].
70 Table I.2 of Chapter I;  National Statistical Office (1999), September, Tables I.2, III.2, III.4, VII.7
and XII.4;  and The Korea Herald  [Online], 28 February 1999.  Available at:  http://www.koreaherald.co.kr/
[10 January 2000].
71 UNSD, Comtrade database (SITC Rev.3).Republic of Korea WT/TPR/S/73
Page 135
Table IV.5
Manufacturing in Korea, 1997
(Per cent)
Value added
ISICRev.3Description Structure Change since
1995Structure of
gross outputRatio of value
added to gross
outputShare in total
number of
establishments
150 Manufacture of food products and
beverages7.0 15.6 7.2 40.0 6.7
160 Manufacture of tobacco products 1.7 19.2 1.0 71.8 0.0
170 Manufacture of textiles 4.9 1.3 4.9 41.9 9.7
180 Manufacture of wearing apparel,
dressing and dyeing of fur2.8 -3.1 2.4 49.3 8.9
190 Tanning and dressing of leather;
manufacture of luggage, handbags,
saddlery, harness and footwear1.1 -11.4 1.2 37.5 2.8
200 Manufacture wood and products of
wood, cork (except furniture), straw and
plaiting materials0.7 3.6 0.8 40.5 2.2
210 Manufacture of paper and paper
products2.3 11.8 2.4 40.0 2.9
220 Publishing, printing and reproduction of
recorded media2.5 10.0 1.8 58.2 4.9
230 Manufacture of coke, refined petroleum
products and nuclear fuels4.4 49.4 6.4 28.7 0.1
240 Manufacture of chemicals and chemical
products9.8 19.8 9.6 42.7 2.9
250 Manufacture of rubber and plastic
products3.7 5.2 3.5 43.4 6.3
260 Manufacture of other non-metallic
mineral products4.4 3.8 3.9 47.0 4.5
270 Manufacture of basic metals 6.2 3.1 8.1 32.0 2.2
280 Manufacture of fabricated metal
products, except machinery and
equipment5.0 20.8 4.6 45.1 10.8
290 Manufacture of machinery and
equipment n.e.c.8.2 14.6 8.3 40.7 13.3
300 Manufacture of office, accounting and
computing machinery2.4 160.9 3.1 32.0 0.7
310 Manufacture of electrical machinery and
apparatus n.e.c.3.4 21.6 3.6 39.6 4.8
320 Manufacture of radio, television and
communication equipment and
apparatus12.7 -7.9 10.3 51.2 3.5
330 Manufacture of medical, precision and
optical instruments, watches and clocks1.1 17.5 1.1 42.8 2.1
340 Manufacture of motor vehicles, trailers
and semi-trailers9.8 36.0 10.2 40.3 3.3
350 Manufacture of other transport
equipment4.0 46.2 3.9 42.5 1.1
360 Manufacture of furniture, manufacturing
n.e.c.1.8 -8.0 1.6 46.4 6.0
370 Recycling 0.1 87.9 0.2 33.7 0.3
Source: Data provided by the Korean authorities.WT/TPR/S/73 Trade Policy Review
Page 136
53. Chaebols have continued to dominate manufacturing, and their General Trading Companies
(GTCs), have remained the export arm of the sect or (mainly in electronics, automobiles and ships);
between 1995 and 1999, the share of the seven larges t GTCs in total exports grew from 46.3% to a
record level of 51.2% (US$73.6 billion, a 26.6% increase from the 1995 value).72  In April 1999, in
addition to support for export finance (discussed below), GTCs of the seven largest chaebols benefited
from the relaxation of their minimum debt-equity ra tio requirements from 200% to 400%;  according
to the authorities, this arrangement was made voluntarily/autonomously (i.e. without any government
involvement) in an agreement between the main creditor banks and individual chaebols
(Capital Structure Improvement Plan).73
54. By late-1999, however, there had been a major policy shift towards a comprehensive and
systematic industrial policy based on market-economy principles, support of knowledge-based
industrial development (characterized by easy access to various kinds of information and know-how),
a multi-dimensional dynamic industrial structure, and the promotion of the parts and components
industry.74
55. Since 1996, Korea's average applied MFN tariff (on an ISIC basis) on imports of
manufactures has declined from 12% to 11.6%75, as a consequence of the Uruguay Round, the
Information Technology Agreement, and additional commitments on automobiles (section (4)(i),
Chapter III(2)(ii)(b)).  Tariff changes resulted in  more pronounced tariff escalation for textiles and
leather industries (Chapter III(2)(ii)(h)).  Adjustment duties ranging from 13% (bicycles) to 21%(chip mounter) continued to protect nine industrial items (Chapter III(2(ii)(i)) in 2000;  autonomous
tariff quotas have allowed concessional tariff treatment for imports of inputs (including wood, metal,
yarn, and leather) and parts necessary for domestic industry.  Since the phase-out of the Import
Diversification System, in June 1999, competition on a number of sensitive industrial items
(e.g. certain motor cars, parts, consumer electronics) has intensified (Chapter III(2)(v)(a)).
56. The information and telecommunications industry (IT) is considered a strategic area allowing
a move away from heavy industries experiencing excess supply;  in 1998, Korea was the sixth largest
producer of electronics in the world and responsible  for 4% of world output.  IT items generated one
fourth of Korea's foreign trade;  since 1997, production developments (including import substitution
effects of R&D discussed below have contributed to an increasingly higher trade surplus in
information technology items).  Since Korea's previous Review, there has been a reduction in tariff
protection (for example, on office and computing machinery and electronics (Table AIV.1), and no
other measures have applied in favour of domestic producers.
57. By June 1999, 69 Korean export items had been investigated for dumping or subsidization.
Duties were applied in 16 countries, possibly in partial consequence of the won's depreciation;  these
actions affected largely stainless steel (section (4)(iii)) and electronic goods, in developed countries,
                                                          
72 WTO (1996);  and Council of General Trading Companies data published in The Korea Herald
[Online], 1 July 1999.  Available at:  http://www.koreaherald.co.kr/ [10 January 2000].
73 Information from top officials of the Ministries of Finance and Economy (MOFE) and Commerce,
Industry and Energy (MOCIE), published in  The Korea Herald  [Online], 8 April 1999.  Available at:
http://www.koreaherald.co.kr/ [10 January 2000].
74 Statements of the Minister of Commerce, Industry and Energy (Mr. Chung Duck-Koo) published in
FKI (1999), No. 223, November, p. 16.
75 As indicated earlier (section (2)(ii)(a)), this tariff average is slightly higher than that indicated in
Chapter III(2)(ii)(f)) due to different produ ct classification (i.e. the average rate of 7.5% (Chart III.3) is based on
HS calculations).Republic of Korea WT/TPR/S/73
Page 137
while textiles, paper and tyres were targeted in developing nations.76  As of April 1999, low-interest
short-term financing of trade77, by the state-run Export-Import Bank of Korea has been expanded to
exports of capital goods, software and related items by GTCs of the five largest chaebols78;
previously, this type of support was restricted to SMEs (capital goods up to US$10 million).79  The
authorities note that this expansion in scope of lo w-interest financing is due to the fact that GTCs
specialize in helping to solve the export problems of SMEs, a service for which they (GTCs) usually
collect fees from the beneficiaries.  So far the Export-Import Bank of Korea has not provided
financing under this scheme to the GTCs of the five largest chaebols.
58. As indicated earlier (Chapter III(2)(ii)(j) and III(4)(ii)), the Government announced its
intention to phase-out certain tax incentives (up to 100% exemption) that are used to support
SMEs (until end 2003), relocation (until end 2000 or 2003), and technology and human resources
development (until end 2003);  there has been no indication of plans to phase out other tax incentives
or support through low energy prices (section (3)(ii), Chapter III(4)(ii)).
59. As indicated in the previous Review of Korea, 105 products have benefited from government
financial support under the new-product development in itiative, with import substitution implications.
Import substitution for certain items has been addressed by a "localization" plan, which allows for soft
loans to finance the development and production of new items and improve weak supply of capital
goods.  Import substitution seems to have been one of the objectives of industrial policy for sectors
such as high-tech, pharmaceuticals, and chemicals;  according to private and public sector statements,this strategy has reduced imports by an estimated US$4 billion annually.
80
                                                          
76 Information based on notifications to the WTO;  and The Korea Herald  [Online], 4 November 1998.
Available at:  http://www.koreaherald.co.kr/ [10 January 2000].
77 The authorities indicated that interest rates for sh ort-term export credits are set at a level above the
prevailing market interest rates so that the Export-Import Bank of Korea can cover its funding cost;  reasonable
spread is allowed, to reflect the credit status of the borrowers and the loan period.  Furthermore, the
Export-Import Bank of Korea structures and operates its interest rates in conformity with the relevant provisionsof the WTO Agreement on Subsidies and Countervailing Measures.
78 Export assistance to GTCs was expected to attain US$5 billion (including US$2 billion-US$3 billion
for raw materials import/processing and re-export);  funding for raw material imports was to include
US$1 billion from World Bank loans (a portion of the IMF bailout package) (Statements by the Minister of
Commerce, Industry and Energy (Mr. Park Tae-young) published in The Korea Herald  [Online], 5 May 1998.
Available at:  http://www.koreaherald.co.kr/ [10 January 2000]).
79 Information from top officials of the Ministries of Finance and Economy (MOFE) and Commerce,
Industry and Energy (MOCIE) published in  The Korea Herald  [Online], 8 April 1999.  Available
at:  http://www.koreaherald.co.kr/ [10 January 2000]
80 This seems to be the minimal import reduction effect from developing the digital VHS VCR head
(US$4 billion a year).  Additional substitution benefits may derive from digital TV transmission equipment(W 500 billion (US$422 million) as from 2006);  digital TV sets and other related equipment;  web authoringtools (a third of the price of similar foreign products as from 1997);  masks used for memory chips production(W 160 billion (US$135 million) of estimated import cut in 2000);  chips for digital code division multiple
access (CDMA)-based mobile phones (US$80 million annually);  non-memory chip for vacuum fluorescent
display (US$10 million per year as from 1999);  red lase r diode for digital video disk (DVD) (US$5 million as
from 1999);  laser diode for CD-RW (Rewritable) an d CD-R (Recordable) (US$10 million by the year 2001);
liquid crystal display (LCD) projector (W 20 billion (U S$16.9 million) annually as from 1999);  software
eliminating colour discrepancy of scanner (US$20 million of annual import cut);  commercial system software
(W 200 billion (US$169 million) as from 2003);  drug for cholesterolemia (W 10 billion (US$84 million) of
estimated import cut as from 1997);  polycarbonate factory (US$120 million per year as from 2001) ( The Korea
Herald  [Online], 22 February 1997, 18 June 1997, 12 September 1997, 25 November 1997, 1 June 1998,WT/TPR/S/73 Trade Policy Review
Page 138
(i) Automobiles
60. The Korean automobile industry emerged as the world's fifth leading producer in 1996, by
relying on wide-ranging market access barriers81, improving product quality and after-sales services,
and diversifying export markets;  it dropped to eighth position in 1998 as vehicle output decreasedsharply in the wake of the economic crisis.  Since 1995, passenger car production has increased
slightly, from 2.0 million to 2.16 million units (1999), except for a crisis-related drop in 1998
(Chart IV.4).  Between 1996 and 1998, bus and truck production declined gradually because of the
slow-down of industrial activities and weak construction market after the crisis;  as from 1999, output
rebounded.
61. Dominated by chaebols, the automobile industry has undergone extensive restructuring since
the crisis aimed at transforming it from a five-producer to a "Big Two"-producer system through
takeovers of Ssangyong by Daewoo (January 1998), and of Kia and Asia Motors by Hyundai
(May 1999).
82  Discussions on a takeover of Daewoo by a foreign automaker by the year 2000 raised
concerns over the possible impact on the Korean auto industry's competitiveness/development andraised the prospects of sharp output cuts and massive layoffs.
83  Since 1996, the Korean automobile
firms have also expanded their production activities abroad (e.g. China, India, Iran, Poland, Turkey,
Romania, Morocco, Uzbekistan) through joint ventures.
62. Korean motor vehicle imports reached a peak of 25,148 units in 1996 before declining to
2,985 units in 1998, and recovering to 5,675 units in 1999.  The authorities note that at the time of thecrisis imported vehicles were hit because of their engine capacity (70% of the market consists of small
cars of less than 2,000cc).
84  In 2000, domestic sales of imported cars are expected to more than
double to 13,000 units, as a result of rising demand for cars, fuelled by rising income and public
confidence in the future of the economy.85  By contrast, since 1995, exports of passenger cars have
grown considerably, as a result of Korea's overseas credit rating, and aggressive marketing efforts. 86
Following a crisis-related decline, domestic sales have recovered since 1999, as a result of restoredconfidence to the economy, cuts in automobile-related taxes, sales incentives, and promotion of newmodels.
87
                                                                                                                                                                                    
9 June 1998, 23 June 1998, 16 July 1998, 15 October 1998, 20 October 1 998, 21 September 1999.  Available
at:  http://www.koreaherald.co.kr/ [10 January 2000]).
81 European Commission (1999);  and The Korea Herald  [Online], 16 December 1999.  Available
at:  http://www.koreaherald.co.kr/ [10 January 2000].
82 EIU (1999), p. 35;  Korea Automobile Manufacturers Association (1998).  Available
at:  http://www.kama.or.kr/eng/fra.html [4 February 2000];  and statements by the President of Hyundai
Motor Co. (Mr. Park Byung-jae) published in The Korea Herald  [Online], 8 April 1998.  Available
at:  http://www.koreaherald.co.kr/ [10 January 2000].
83 Statements by Professor Kim Ki-chan of the Catholic University and an official (Mr.Kim So-rim) at
the Korea Automobile Manufacturers Association, published in The Korea Herald  [Online], 29 November 1999,
16 December 1999, 23 December 1999.  Available at:  http://www.koreaherald.co.kr/ [10 January 2000].
84 Data by the Korea Automobile Manufacturers Association (KAMA).  Available
at:  http://www.kama.or.kr/eng/fra.html [4 February 2000].
85 KAMA forecasts published in The Korea Herald  [Online], 16 December 1999.  Available
at:  http://www.koreaherald.co.kr/ [10 January 2000].
86 Data by the Korea Automobile Manufacturers Association (KAMA).  Available
at:  http://www.kama.or.kr/eng/fra.html [4 February 2000];  and Korea Trade-Investment Promotion Agency(1999),Vol. 17 No. 3, May-June, pp. 57-58 and Vol. 17 No. 4, July-August, p. 56.
87 Data by the Korea Automobile Manufacturers Association (KAMA).  Available
at:  http://www.kama.or.kr/eng/fra.html [4 February 2000];  The Korea Herald  [Online], 20 May 1998.Republic of Korea WT/TPR/S/73
Page 139
63. Since Korea's previous Review, average applied tariff protection in the sector has remained
relatively stable at 8.1% (Table AVI.1).  Following the conclusion of an October 1998 Memorandum
of Understanding (MOU) regarding Foreign Motor Vehicles with the United States, Korea has
gradually reduced non-tariff border protection (section(4) and Chapter III(2)(ii)(b))), bound its 8%applied tariff on passenger cars, streamlined internal taxation, and eased regulatory impediments
88;
the authorities consider that a level-playing field is now provided for free and fair competition within
the domestic market.  Nonetheless, imported motor vehicles have been subject to frugality campaigns
(Chapter III(2)(xi)).  According to the authorities, no tax audit has ever been conducted to dissuade
taxpayers from purchasing imported cars, notwithstanding reports to the contrary.89  Indeed, in
May 1997, tax officials were instructed to refrain from any administrative action that might be
interpreted as import restrictive.
64. Since 1999 , the burden of internal taxation on automobiles has been reduced.  As a
consequence of the abolition of the Special Tax for Rural Development and the Education Tax on
Registration Tax, the number of taxes levied on automobiles was reduced from 11 to 9.  Although theSpecial Excise tax and the Automobile tax are levied on all cars, regardless of their origin, imported
cars bear a disproportionate burden of these taxes as both are levied at higher/escalating/progressive
rates depending on the engine capacity.
90  As of January 1999, the Automobile tax
(Chapter III(4)(i)(a)) for all motor vehicles with engine size greater than 2,000cc was unified and
reduced to a maximum of W 220 (US$0.19) per cc;  thus, its progressive tax structure was simplifiedfrom seven to five rates.
91  The annual Registration tax for cars was also reduced.  In addition, a
temporary 30% reduction in the Special Excise Tax introduced in July 1998 was extended until 2005.
In January 1999, heavy taxation on households with two or more cars was abolished.  Sales of
mini-cars with an 800cc engine have been subject to special tax incentives since January 1996
consisting of exemption from the Special Excise Tax and preferential tax rates.  A further measure
involves the compulsory purchase of subway bonds.92
                                                                                                                                                                                    
Available at:  http://www.koreaherald.co.kr/ [10 January 2000];  and Korea Trade-Investment Promotion
Agency (1999), Vol. 17 No. 3, May-June, pp. 57-58 and Vol. 17 No. 4, July-August, p. 56.
88 This MOU, which was designed to expand the scoped of the 1995 MOU, was described as a win-win
settlement bringing about benefits to both sides and has applied on an MFN basis (Korea AutomobileManufacturers Association, 1998).  The conclusion of the 1998 MOU terminated an investigation undersection 301 of the U.S. Trade Act initiated in October 1997 (USTR, 1999).
89 Audits are apparently intended to prevent different forms of tax evasion including illegal leasing
(that is, rental of foreign-made cars, which tend to be relatively expensive, by enterprises for employees'
personal use).
90 These taxes affect disproportionately imported automobiles because foreign automakers export
mainly luxury automobiles to Korea.  According to the Korea Automobile Manufacturers Association, this rateescalation is aimed at equitably distributing the tax burden, raising higher-income households' contribution to
road maintenance costs, curbing energy consumption, and reducing pollution (Korea Automobile Manufacturers
Association, 1998).
91 Korea Automobile Manufacturers Association (1998).
92 In October 1997, Korea abolished discrimination against foreign-made buses or trucks with respect
to the compulsory purchase of subway bonds with an annual compound interest of 6%;  until then, buyers ofimported vehicles were obliged to purchase bonds of an amount about five times higher than that set for local
vehicles ( The Korea Herald  [Online], 6 August 1997. Available at: http://www.koreaherald.co.kr/
[10 January 2000]).WT/TPR/S/73 Trade Policy Review
Page 140
01,0002,0003,0004,0005,0006,0007,0008,000
1995 1996 1997 1998 1999024681012141618
02004006008001,0001,200
1995 1996 1997 1998 1999
05001,0001,5002,0002,500
1995 1996 1997 1998 1999
Separate data for imports of buses and trucks were not available.
Korean Automobile Industry [online].  Available at:  http://www.kama.or.kr/eng/fra/html 
 [4 February 2000];  and the Korean authorities.Chart IV.4
Motor vehicle industry developments, 1995-99
(a) Passenger cars
Thousand units
(b)  Buses
Thousand units
(c)  Trucks
Thousand unitsThousand units
Registered units Production ExportsLeft-hand scale: Right-hand scale:
Imports
Note:
Source:Republic of Korea WT/TPR/S/73
Page 141
65. Since 1996, in order to improve market-access for imported foreign vehicles, automobile
standards and certification procedures have been simplified, thereby eliminating burdensome testing
and documentation requirements (Chapter III(2)(x)(a)).  As of January 1996, a 20,000km durabilitytest and another five safety tests were abolished.  As of February 1999, 38 safety compliance tests
have been exempt for U.S passenger cars and 25 tests for European passenger cars.  The safety
compliance test threshold for motor vehicles is being raised in four stages (1998, April 1999, 2000,
January 2001) from 500 units (1996) to 2,500 units.  As of April 1999, the completion test was
abolished, and document requirements with respect to type approval were simplified.  Under the 1998U.S.-Korea MOU, Korea is to sign the Global Agreement for International Harmonization of
Standards by October 2000 and introduce a self-certification system no later than 2002.  A new
national car crash-testing programme, the New Car Assessment Programme (NCAP), was to be
introduced in December 1999;  this test, which is similar to those in force in the EU, Japan, and the
United States, was expected to boost domestic competition for safer cars but also help sharpen thecompetitive edge of the Korean car industry.
93  In 1998, Korea planned to develop a Mutual
Recognition Agreement on Automotive Regulation with the EU.94
66. In compliance with EU requests, Korean automobile manufactures are to voluntarily reduce
carbon dioxide emissions of passenger cars to a fleet average level of 165-170g/km by 2004, and
140g/km by 2009.
67. As indicated earlier (Chapter III(3)(ii)(c), Chapter II), possibly as a result of a mutually
agreed solution in the context of the WTO dispute settlement mechanism, between August 1996 and
August 1999 exports of passenger vehicles to Brazil benefited from preferential access equivalent to
half the prevailing tariff and tied to investment conditions.95  In 1999, Korean exports under this
treatment were estimated at US$100 million.96  In 1998, when the world markets were alert to the
possible trade effects of the Asian crisis, petitions for anti-dumping investigation affected Korean
automobile exports to the EU, while in Colombia importers agreed to restrain imports voluntarily inorder to avert such investigations.
(ii) Shipbuilding
68. Since 1999, Korea has been the world's leading shipbuilder (second in 1998) and thus a price
leader for many types of ships;  its share in global ship production attained 30%-35% (1999).
97
Shipbuilding, a capital-intensive industry strongly linked to, inter alia,  the cargo handling, steel and
electronics industries, is among the few sectors that emerged virtually unscathed from the recent
recession.  The depreciation of the won (as well as high wage levels in Japan and the bilateral strength
of the yen) helped boost the export competitiveness of Korean shipyards (vis-à-vis China and Japan),
which rely heavily on the building of large-sized ships.  Between 1995 and 1998, the output of the
shipyards, which are dominated by five chaebols (Hyundai, Daewoo, Samsung, Hanjin, and Halla
                                                          
93 The Korea Herald  [Online], 19 October 1999. Available at :  http://www.koreaherald.co.kr/
[10 January 2000].
94 APEC (1999).
95 WTO document WT/TPR/M/21/Add.1, 14 April 1997.
96 The Korea Herald  [Online], 8 September 1999 and 6 May 1998.  Available
at:  http://www.koreaherald.co.kr/ [10 January 2000].
97 In 1997, Korea was followed by Japan (28%) and the EU (17%) ( The Korea Herald  [Online],
20 December 1999.  Available at:  http://www.koreaherald.co.kr/ [10 January 2000]);  Communication of the
European Commission, 1 October 1997;  Dow Jones International News Service , 10 November 1999;  and
El País , 10 November 1999.WT/TPR/S/73 Trade Policy Review
Page 142
account for about 95% of output), grew steadily by more than 17%.98  Between 1995 and 1998, Korea
virtually doubled its trade surplus in ships (US$7.6 billion), as imports fell by 75% and exports grew
by 45%;  in 1998, ships accounted for 6% of Korean exports.99
69. Since 1996, Korea's average applied tariff protection on ships has been reduced from 4.4% to
3.5% (Table AIV.1).  In light of a drop in ship-bound cargo volume (section (5)(v)(a)), in
December 1999, there were plans for setting up a W 500 billion (U S$437.8 million) fund by mid 2000
to help cash-strapped shipping companies purchase vessels;  the fund was to be financed through
contributions from shipping companies, cargo owners, financial institutions and other businesses
affected by the vessel shortage.100  Under a bilateral 1995 Framework Agreement, in line with the
provisions of the suspended OECD Agreement on Shipbuilding (banning subsidies and dumping
practices)101, Korea and the EU agreed not to support thei r shipbuilding industries in a way that would
distort competition.  Korea has denied major trading partners' allegations that it grants subsidies (to
help solve financial problems or avoid bankruptcy) and sells its ships at prices below cost on the
world market.102
(iii) Iron and steel
70. Since 1991, Korea's iron and steel industry, has remained the world's sixth largest in terms of
crude steel production.  It provides the domes tic steel-consuming industries (including civil
engineering and construction, fabrication and metals, automobiles, general machinery, and
shipbuilding), and export markets.  During the period under review, the industry has been generallycharacterized by robust demand, with stable raw material prices, except for 1998 when the industry
went through difficulties of oversupply, depresse d demand, and high raw material prices, under the
influence of the overall economic depression caused by the 1997 financial crisis.  As a result of
restructuring of the industry to cope effectivel y with the crisis, crude steel production in 1999
decreased 3-6% compared with 1997, and the capacity utilization ratio fell from 98.2% (1997) to
84.4% (1999).  In 2000, domestic demand was expected to rise due to increased production activities
in the steel-consuming industries.
71. State involvement in the industry has allegedly contributed to overcapacity in world steel
production;  the resulting bankruptcies (e.g. of Hanbo Steel) contributed to the 1997 financial crisis.
103
The industry remains dominated by the partially state-owned company POSCO (the world’s largest
                                                          
98 Data on steel cargo ships contained in National Statistical Office (1999), September, Table III.8.
99 UNSD, Comtrade database (SITC Rev.3).
100 Information by the Ministry of Maritime Affairs and Fisheries  published in The Korea Herald
[Online], 31 December 1999.  Available at:  http://www.koreaherald.co.kr/ [10 January 2000].
101 This OECD Agreement is aimed at establishing a level playing field in the shipbuilding and repair
industry through:  discipline in government support;  a legal instrument dealing with injurious pricing actions ofshipbuilding companies;  and dispute settlement by an independent international Panel (OECD AgreementRespecting Normal Competitive Conditions in the Commercial Shipbuilding and Repair Industry [Online].Available at:  http://www.oecd.org//dsti/sti/industry/ship/act/WP4.HTM [8 October 1999]).  It was ratified by
Korea and the EU;  in the absence of ratification by the United States, in 1999 OECD countries decided not to
implement this Agreement (European Commission, 1999;  and The Korea Herald  [Online], 7 June 1999.
Available at:  http://www.koreaherald.co.kr/ [10 January 2000]).
102 The EU and the United States have complained about the use of IMF funds, disbursed in the context
of the Asian crisis rescue packages, for supporting the domestic shipbuilding industry(European Commission, 1999;  and The Korea Herald  [Online], 23 October 1998, 20 December 1999.
Available at:  http://www.koreaherald.co.kr/ [10 January 2000]).
103 USTR (1999).Republic of Korea WT/TPR/S/73
Page 143
steel producer), which grew further by mergin g with Kangwon Industries Ltd. in March 2000104;
by 2000, POSCO maintained a monopoly producer status  for stainless steel hot-rolled products and
was responsible for 64.7% of domestic output.105  Restructuring (including mergers and acquisitions
by foreign investors) has been aimed at raising productivity and competitiveness as well as to meetdemands for new steel products (e.g. steel cans and houses).
106  The sale of the remaining 9.84% of
government shares (held by the Korean Development Bank) in POSCO, which also has investments in
11 firms overseas (e.g. POSVEN in Venezuela) and in other sectors within Korea (e.g. telecom) was
expected to take place at the first half of 2000.
72. Between 1995 and 1998, as a result of declining imports (by an overall 57%) and expanding
exports (by 32%) the trade balance in iron and steel evolved from a deficit of US$1.1 billion to a
surplus of US$4.4 billion.107  In 1998, iron and steel generated 5.3% of total exports and accounted for
3% of total imports.
73. Korea's average applied tariff on iron and steel declined from 7% to 6.4% in the period 1996
to 1999 (Table AIV.1).
74. Under a so-called local or dual price syst em, between 1967 and 2000 (April) POSCO supplied
Korean exporters with steel at prices lower than t hose charged by foreign suppliers of steel.  But by
April 1999, domestic prices were brought more into line with international price trends;  this move
was intended, inter alia,  to avoid trade disputes with developed countries (including Japan and the
United States).  In response to Korea's (and POSCO's)108 role, and developments in the world market
for steel, between 1996 and 1999 (June), anti-dumping actions affected Korean steel items in Canada,
the EU, South Africa, Thailand, and the United States;  four out of five countervailing actions against
Korean exports in the United States and the EU concerned steel goods.109  The authorities consider
that as Korean steel has been subject to some of the lowest anti-dumping margin rates imposed by the
United States and that de minimis  margins have been set on most of the countervailing duty cases
(including stainless sheet, stainless plate, and carbon plates) in this market, there is little evidence to
support the claim that Korea subsidizes steel exports.
(iv) Textiles and clothing
75. Korea was the world's fourth largest producer of textiles and clothing in 1998.  Between 1995
and 1999, textiles and clothing output declined sharply due to the economic crisis.110  By 1997, a
similar trend was recorded in the number of establishments and employees;  the sector (including
footwear) remains the second largest provider of employment.
76. In 1999, Korea maintained its position as the world's third largest exporter of textiles while it
ranked ninth in clothing.  Between 1995 and 1998 the trade surplus in textiles and clothing increased,
                                                          
104 POSCO was set to become the world's largest steel producer in 1999 (WTO, 1996).
105 USTR (1999).
106 The Korea Herald  [Online], 26 October 1999. Available at:  http://www.koreaherald.co.kr/
[10 January 2000].
107 UNSD, Comtrade database (SITC Rev.3).
108 By July 1999, POSCO was facing dumping charges in four countries over six of its steel exports to
the United States, Canada, China, and Indonesia;  dumping margins were claimed to range between 4.65% and27% ( The Korea Herald  [Online], 29 July 1999. Available at:  http://www.koreaherald.co.kr/
[10 January 2000]).
109 Information based on notifications to the WTO.
110 National Statistical Office (1999), September, Tables III.2 and III.8.WT/TPR/S/73 Trade Policy Review
Page 144
mainly as a result of declining imports;  in 1998 these items represented 12% of total exports and
accounted for 2.9% of total imports.111
77. As a result of a bindings-consistent rise in tariffs for certain goods, including textiles, knitting
goods, carpets, rugs, cordage, rope, and wearing apparel, since 1996 the average applied tariff onsectoral imports has been increased from 7.8% to 9.9% (Table AIV.1) in response to stiff import
competition from China and South East Asian countries;  however, the peak rate fell from 56.3% to
54.6%.  Under the WTO Agreement on Textiles and Clothing (ATC), Korea has carried out the first
and second phases of integrating the sector into the GATT, so that such integration now represents
about one third of its textile and clothing imports in 1990.  In addition to raw silk(Chapter III(2)(ii)(e)), since July 1997 imports of silk yarn and certain silk fabrics (HS50.07 category)
have been liberalized and subject to tariffs of 13%, 21.5% and 30% (1999).
112  Restraints affect exports
of certain silk products to Japan (Chapter III(3)(ii)(c)).
78. Since its previous Review, Korea's exports of cer tain textiles and clothing items to Canada,
Brazil, Norway, Turkey, and the United States have been restrained through bilateral arrangementsmaintained under the ATC (Chapter III(3)(ii)(b)).  The Ministry of Commerce, Industry and Energy is
entrusted with quota allocation.
(v) Pharmaceuticals
79. As of 1993, domestic output seems to have exceeded demand, thus forcing pharmaceutical
firms to employ aggressive and often, some claim, illegal sales practices.
113  Hitherto, the
pharmaceutical market has remained dominated by domestic firms.  Between 1996 and 1999 the
chaebols' share in total production, imports, and exports remained relatively stable at 4.7%, 1.4% and
24.6% respectively.114
80. Between 1995 and 1998, steady import reduction (partly due to won depreciation) and export
growth led to a declining trade deficit in pharmaceuticals115;  in 1999, imports and exports rebounded
to pre-crisis levels.  Nevertheless, there was concern about the erosion of Korea's share in foreign
markets where more price- and technology-competitive producers from China, India, and otherEast Asian countries operate, as well as dumping, tariff and non-tariff barriers in certain markets.
116
81. Since 1996, the sector's average applied tariff protection has dropped from 7.6% to 5.7%
(Table AIV.1).  Korea has signed only parts of th e GATT zero-for-zero agreement (which eliminates
customs duties on pharmaceuticals and sole-use pharmaceutical intermediates);  consequently,
customs duties of up to 8% (1999) are levied on finished pharmaceutical products (HS30.03 and
                                                          
111 UNSD, Comtrade database (SITC Rev.3).
112 In accordance with the programme of liberaliza tion notified by Korea to the GATT Council in 1994,
restrictions under the terms of Article XVIII(B) of GATT (GATT document L/7449, 29 April 1994, andWTO document G/TMB/R/8, 13 February 1996).
113 According to a civic group survey (the Citizens' Council for Economic Justice) on 70 hospitals and
pharmacies, W 2.1 trillion (US$1.8 billion) or about 30% (1999) of pharmaceutical transactions leave no record
on the books of either sellers or buyers;  reportedly, in 1999 illegal rebates to hospitals or large pharmacies may
have attained W 900 billion (US$759 million), and dealt with the Fair Trade Commission (Chapter III(4)(iii))
(The Korea Herald  [Online], 8 December 1999. Available at:  http://www.koreaherald.co.kr/
[10 January 2000]).
114 Data supplied by the Ministry of Health and Welfare.
115 UNSD, Comtrade database (SITC Rev.3).
116 Data from the Korea Pharmaceutical Traders Association (KPTA) published in The Korea Herald
[Online], 6 November 1997. Available at:  http://www.koreaherald.co.kr/ [10 January 2000].Republic of Korea WT/TPR/S/73
Page 145
HS30.04 tariff headings).117  Until recently non-tariff barriers such as requirements for duplicative
testing, lack of adequate and effective data protection against unfair commercial use and limitations
on manufacturing seem to have curtailed the importation and distribution of foreign pharmaceuticals
(Chapter III(4)(ii) and III(4)(iv)(a)).118  In response, WTO regulatory changes on data and patent
rights protection have been undertaken (to revoke licences of the product whose patent infringement
is proven in the Korean Court system) with the amendment of the Regulation on Facility Standards of
Practice for Pharmacies, Manufacturers, Importers and Distributors of Pharmaceuticals
(December 1999), the Pharmaceutical Affairs Law (January 2000), and the Ministerial Decree of the
Pharmaceutical Affairs Law (March 2000).  A Tool Manufacturing System was introduced to allow amanufacturer to use approved production facilities to produce pharmaceuticals without an additional
approval.  Allegedly, lack of institutional coordi nation between the Ministry of Health and Welfare
(MHW), the Korean Food and Drug Administration (KFDA), and IPR bodies (Chapter III(4)(iv)) has
given rise to patent infringement.  Out of the 62 new pharmaceuticals licensed in 1999, 38 were
produced by foreign pharmaceutical companies present in Korea and 28 were imported.
119
82. The industry has been influenced by the auth orities' commitment to maintain a supply of
medicines through the national Medical Reimbursement Schedule;  as of 1 August 1999,
946 foreign-made pharmaceuticals have been covered by this Schedule and an Actual Transaction
Price System has been enforced as of November 1999, thus satisfying national treatment obligations
and introducing more competition in the market.  Foreign pharmaceuticals must now be listed in theMedical Reimbursement Schedule for them to be reimbursed;  the scope of medical insurance
reimbursement is decided with reference to the medical insurance reimbursement price and "similarly
efficient products" group.  The same standard of appraisal is applied both to domestic and foreign
pharmaceuticals in assessing their reimbursement price;  this price is calculated on the basis of the
Assessment Standard of the Medical Reimbursement Price, and the Minister of Health and Welfare
verifies the price after deliberation of the Medical Insurance Reimbursement Price Review Committee
(MIRPRC).  Medical agents (institutes, hospitals) may now select pharmaceuticals on a quality ratherthan a price basis.  In July 1999 certain foreign firms (e.g. Novartis) had difficulties accepting the
officially set reimbursement prices because in some cases they represented only 65% of current
market prices;  reportedly, this margin does not allow competition for the customary discounts to local
hospitals given by local companies.
120
83. As of March 1999, the "standard retail price system" was replaced by an "open pricing
system" for pharmaceutical goods that has allowed manufacturers and sellers to set their prices freely
with a view to boosting competition in the domestic market121;  under the new system, each
pharmacist decides and marks the actual trading price.  Following the introduction of the new system,
the average retail price of certain pharmaceuticals in large pharmacies increased by 7.5%, while that
                                                          
117 European Commission (1999).
118 US Embassy (1999);  and USTR (1999).  In August 1999, the European Commission opened an
investigation into allegations that Korea unfairly restricts imports of pharmaceuticals through its pricing system,excessive registration requirements for new medicines, the prohibition of contract manufacturing betweenforeign producers and Korean companies, and discrimination against foreign firms on patent terms (Reuters,
8 August 1999).
119 Information by the KFDA published in The Korea Herald  [Online], 30 December 1999.  Available
at:  http://www.koreaherald.co.kr/ [10 January 2000].
120 The Korea Herald  [Online], 22 July 1999. Available at:  http://www.koreaherald.co.kr/
[10 January 2000].
121 Under the standard retail price system a committee affiliated with the Korean Pharmaceutical
Association controlled the prices of medical supplies.  Ministry of Health and Welfare information published in
The Korea Herald  [Online], 6 April 1999.  Available at:  http://www.koreaherald.co.kr/ [10 January 2000].WT/TPR/S/73 Trade Policy Review
Page 146
in small pharmacies dropped by 0.3%122;  the authorities expect further reductions as a result of
intensifying competition.  As of July 1999, a list of pharmaceuticals on sale solely under doctors'
prescription has been partially implemented (to be fully applied in 2005);  62 household
pharmaceutical products (e.g. muscle sprays, insecticides, and disinfectants) may be sold bysupermarkets and convenience stores.
123  As of July 2000, legislation has been in force prohibiting
hospitals and pharmacies from dispensing medications without a prescription.124
(5) SERVICES
(i) Features
84. Services make up the larger part of the Korean economy.  The share of services (including
construction, energy and water supply) in GDP rose slightly from 64% in 1995 to 65% in 1997 and
then declined to 62.8% in 1999 (Table I.2);  between 1995 and 1999, the sector's share in total
employment rose from 64% to 68.6%.  As shown in Chart IV.5, finance, insurance, real estate, and
business services have been by far the leading serv ice activities in Korea;  other important service
activities were commerce (wholesale, retail), hotels and restaurants as well as construction.
85. Since its previous Review, Korea has maintained its position amongst the world's top ten
traders in services (1997);  in transportation services it ranked fifth.125  In 1999, exports of commercial
services represented 14.9% of total exports of goods and non-factor services (Table I.3).126  Despite a
crisis-related decline in 1998, between 1995 and 1999 exports (credits) of non-factor services rose by
12.1% to US$25.6 billion, equivalent to some 17.6% of merchandise exports.  In 1999, imports(debit), largely consisting of transportation, business services, travel and freight, stood at
US$26.6 billion (Chart IV.5).
                                                          
122 Data by the Korean Consumer Protection Institute reflecting developments on retail prices of
19 pharmaceutical items at 69 pharmacies in the five largest cities.
123 The Korea Herald  [Online], 22 December 1998.  Available at:  http://www.koreaherald.co.kr/
[10 January 2000].
124 Due to misuse and/or abuse of pharmaceuticals allowed under the previous distribution system,
Koreans' resistance to antibiotics seems to be among the world's highest (Ministry of Health and Welfareinformation published in The Korea Herald  [Online], 18 September 1999.  Available
at:  http://www.koreaherald.co.kr/ [10 January 2000]);  and The Korea Herald  [Online], 30 December 1999.
Available at:  http://www.koreaherald.co.kr/ [10 January 2000].
125 For this purpose, the EU is counted as a single trading entity;  WTO (1998b), Tables I.7 and IV.85,
pp. 5 and 135.
126 National Statistical Office (1999), September, Table XIII.2.Republic of Korea WT/TPR/S/73
Page 147
050100150200250300350
1993 1994 1995 1996 1997 1998 19995658606264666870
-30-20-100102030
XM XM XM XM XM XM XMChart IV.5
Value added, employment, and trade in services, 1993-99
(a)  Value added and employment
US$ billion, at 1995 prices
(b) Evolution of services, external account balancePer cent
US$ billion
1993 94 95 96 97 98 1999Electricity, gas 
& waterConstruction Transport storage
& communicationCommerce, restaurants & 
hotelsLeft-hand scale: Right-hand scale:
Per cent of total
employment
Per cent of GDP Government Finance, insurance, real 
estate & business Community, social & 
personal servicesNon-profit service
to households
Note:
Source :X=exports, M=imports.   
National Statistical Office (2000),  Monthly Statistics of Korea: 2000.5, Seoul;  and Bank of Korea [online].  
Available at:  http://www.bok.or.kr/index_e.html [ 5 July 2000].Transportation Royalties & licence fees Communication Travel Other business Other WT/TPR/S/73 Trade Policy Review
Page 148
(ii) Overall commitments under the General Agreement on Trade in Services
86. Since its previous Review, in the context of WTO negotiations, Korea's GATS commitments
in financial and telecommunication services were improved and ratified without delay in 1997 and1999, respectively (sections (5)(iii)(c) and (5)(iv)(c))
127;  commitments undertaken upon accession to
the OECD in the area of financial services were reflected in its revised Schedule of Commitments128,
which was last modified for this purpose and certified in September 1999.129  As indicated in Korea's
previous Review, Korea's comprehensive Schedule of Specific Commitments, which is subject to a
variety of general (i.e. horizontal) limitations (e.g. acquisition of domestic firms or corporate bonds),covers 80 activities within the financial (banking, insurance), business, communication (including
telecommunications, audio-visual), construction, distribution, transportation (including maritime, road
and air transport) and environmental services sectors.
130  Foreign acquisition of land is unbound (with
exceptions) (section (5)(vi)), as is access to research and development subsidies.  For a large number
of sectors (e.g. construction, tourism, travel, transport), no bindings apply with regard to the cross-border supply of services, due to lack of technical feasibility, and the presence of natural persons is
generally unbound, except for certain executives, senior managers, and specialists.  Under Article II
of the GATS, Korea has maintained its MFN ex emption for computerized flight reservation
services.
131
87. Korea participated in the WTO negotiations on maritime transport services and offered
improvements on its existing commitments;  in 1996 it indicated, inter alia,  that the contribution of
major nations was essential, and that the lack of offers from certain countries made it hard to overcome
domestic resistance to further improvements in its offer.132  It also communicated its replies to the
questionnaires on government procurement in se rvices (Working Party on GATS Rules) and the
accountancy sector (Working Pa rty on Professional Services).133  Concerning current negotiations on
                                                          
127 Supplements to the Schedule of Specific Commitments contained in WTO documents
GATS/SC/48/Suppl.2, 11 April 1997;  and, GATS/SC/48/Suppl.3/Rev.1, 18 November 1999.  Korea ratified the
Fourth Protocol to the GATS (Basic Telecommunications) on 27 November 1997 (WT/LET/213,30 January 1998) and the Fifth Protocol (Financial Services) on 27 January 1999 (WT/LET/284,2 February 1999).  In 1997, Korea indicated that improvements on its undertakings in financial services consisted
of 34 new commitments based on the full MFN principle, including almost all of its OECD commitments (e.g. theabolition of the economics needs test for the insurance industry) and additional measures (WTO document
S/FIN/M/16, 9 October 1997).
128 The authorities indicated that, prior to its entry in force, their revised Schedule of Commitments
passed through the WTO clarification process (under GATS Article XXI) where no formal objection was raised
with respect to OECD commitments;  this seems to be a highly technical issue for which, apart from informalconcerns, no official (national or international) clear-cut opinion has been pronounced so far.
129 WTO documents S/FIN/M/14,  20 June 1997;  S/FIN/15, 4 A ugust 1997;  S/FIN/M/23, 4 June 1999;
S/FIN/M/24, 24 June 1999;  and S/L/75, 15 Septembe r 1999. The authorities consider that the improved
commitments contained in the revised Schedule must be taken into account in the next round of multilateraltrade negotiations (WTO document S/C/M/33, 15 March 1999).
130 More details on Korea's 1994 GATS commitments is found in WTO (1996).  The following sectors
are excluded from Korea's GATS Schedule:  real esta te business;  postal and courier services;  education;
environmental sanitation;  tourist guide services;  health;  recreational services;  and internal waterway, space,
rail, and pipeline services.  Within the professional services sub-category, no commitments were made for legal,medical, and dental services (WTO, 1996).
131 WTO document GATS/EL/48, 14 April 1994.
132 WTO documents S/NGMTS/9, 8 March 1996;  S/NGMTS/11, 14 May 1996;  S/NGMTS/14,
24 June 1996;  and S/NGMTS/15, 27 June 1996.
133 WTO documents S/WPGR/W/11/Add.13, 10 December 1996;  and S/WPPS/W/7/Add.3,
10 July 1996.Republic of Korea WT/TPR/S/73
Page 149
services, Korea consider that negotiating guidelines a nd procedures should:  include all services sectors
and all modes of supply;  be developed in a balanced manner in line with the progress made in
agricultural negotiations;  and set modalities for th e treatment of autonomous liberalization action
undertaken by Members since the previous round of ne gotiations.  Korea's participation in the services
negotiations is aimed at promoting foreign invest ment and strengthening the competitiveness of its
services sectors.
(iii) Financial services
(a) Banking and finance
88. Korea's accession to the OECD, the 1997 crisis, and the resulting IMF programme prompted
wide-ranging reforms aimed at ensuring that the sector operates on a purely commercial basis rather
than subject to industrial policy or other non-commercial considerations.134  Changes have been
induced by the ongoing transition to a market-drive n system, the proliferation of electronic banking,
the move toward universal banking, the inflow of foreign capital, and increased risk of financial
institutions.135
Structural developments
89. Under a 1998 financial restructuring plan, involving W 64 trillion, the banking and finance
system, which in the past was characterized by lack of transparency in management (particularly of
non-bank financial institutions), discretionary enforcement of prudential rules, and
excessive/pervasive government intervention, has undergone transformation through liquidations, andmergers with and acquisitions by other domestic or foreign companies.
136  By December 1999,
199 financial institutions had been liquidated, 80 had been merged, and 68 had had their licences
suspended.  Nevertheless, rescue aspects of the plan, which included the Government's acquisition of
large equity stakes in a number of insolvent banks, the disposal of non-performing loans (NPLs), and
the recapitalization of weak institutions ("workout" programmes), considerably increased the already
high degree of state-ownership137;  apart from steps to sell two troubled banks (Seoul Bank and Korea
First Bank), no timetable for the unwinding of the State's position in the Korean banking system had
been announced by end 1999.138
                                                          
134 USTR (1999).
135 The Korea Herald  [Online], 20 December 1999.  Available at:  http://www.koreaherald.co.kr/
[10 January 2000];  US Embassy (1999).
136 Ministry of Finance and Economy/Center for Economic Information (1999a), Vol. 21 No. 8,
August, p. 27;  OECD (1999a);  and US Embassy (1999).
137 According to private observers, in 1999 a total of 400 financial institutions and companies were
directly or indirectly taken over by the Government ( The Korea Herald  [Online], 15 December 1999.  Available
at:  http://www.koreaherald.co.kr/ [10 January 2000]).  The Government or state-owned business interestsbecame major shareholders of 10 banks, 8 insurance firms and 2 investment trust companies;  272 companiescame under legal management or composition.  By December 1999, most of the 105 companies placed under
workout programmes were also managed by the Government as the majority of those firms' creditors, or owners,
were state-owned banks.  The state-owned Korea Development Bank (KDB) was managing debt workouts of8 firms. State-owned banks, such as Hanvit, Korea First, Cho Hung, and Korea Exchange Bank, were in chargeof debt workouts for 70 firms (out of a total of 83).  The KDB, which focuses on facility investment,participated in the management of 119 firms (including  top five chaebol-affiliates such as Kia Motors, Daewoo
Motor, and Daewoo Heavy Industry) through debt-equity swaps, workouts or legal management.
138 OECD (1999a);  and The Korea Herald  [Online], 10 and 21 December 1999.  Available
at:  http://www.koreaherald.co.kr/ [10 January 2000].WT/TPR/S/73 Trade Policy Review
Page 150
90. In 1999, a streamlining and tightening of rules for the non-bank financial sector was required
to address, inter alia,  a weak link in the financial system and reduce the growing post-crisis
domination of the sector by the top five chaebols.139  This weak link involved investment trust
corporations (ITCs) that faced a widespread insolvency problem (as in the cases of the nationalizedKorea Investment Trust Co. and Daehan Investment  Trust Co.).  In January 2000, these institutions
received more than W 3 trillion (US$2.5 billion) through MOFE and government-funded banks;  ITCs
with major shareholders other than the State and Daehan are pursuing management rehabilitation and
seeking to restore financial soundness through recapitalization on a voluntary basis.
140  In April 2000,
the authorities were to take regulatory action aimed at preventing chaebols from misusing theirnon-banking financial units as "private safes" and curbing cross-subsidization among
chaebol-affiliated financial institutions.
141  The authorities confirmed that they had no intention of
revising the banking law to allow conglomerates or chaebols to acquire banks by abolishing the
current 4% ownership limit;  in this context, it was emphasized that the chaebols had to lower their
debt-to-equity ratios to below 200% and concentrate on three to four core businesses before makingnew investments.
142
91. The implementation of the W 64 trillion (US$54 billion) programme discussed earlier
(equivalent to 14% of GDP ) raised the levels of capitalization, removed considerable excess capacity,
and resulted in reasonably good balance sheets in the banking sector by 1999.143  In addition, between
1998 and 1999, budgetary outlays for sectoral  restructuring increased by 90.3% to
W 6.8 trillion (US $4.9 billion);  in 2000 outlays were to grow by another 11.3%.144  The number of
banking institutions has fallen as a result of re structuring efforts (Table IV.6);  between 1996 and
1998 the share of banking institutions in loans and discounts rose while their participation in total
banking and non-banking financial institutions assets dropped.  By 2000, there were four state-owned
banks (Hanvit Bank, Chohung Bank, Korea Exchange Bank, Seoul Bank) and one foreign-owned
bank (Korea First Bank).
                                                          
139 By December 1999 the top five chaebols (Hyundai, Samsung, Daewoo, LG, and SK) controlled
more than 50% of the domestic securities and credit card markets.  In the investment trust industry, their market
shares increased from 5.3% (March 1997) to 31% (May 1999), and reached W 92 trillion (April 1999,
US$78 billion) ( The Korea Herald  [Online], 27 December 1999.  Available at:  http://www.koreaherald.co.kr/
[10 January 2000]).  The heavy reliance of corporations on short-term bank debt was among the causes of theKorean financial crisis (excerpts from a paper prepared by Choi Do-soung, Professor of Finance (Seoul National
University) presented at a Ministry of Economy and Finance-World Bank seminar, published in The Korea
Herald  [Online], 19 November 1999. Available at:  http://www.koreaherald.co.kr/ [10 January 2000]).
140 The Korea Herald  [Online], 27 December 1999.  Available at:  http://www.koreaherald.co.kr/
[10 January 2000].  Statements of the chairman of the Financial Supervisory Commission (Mr. Lee Hun-jai)published at The Korea Herald  [Online], 1 April 1999.  Available at:  http://www.koreaherald.co.kr/
[10 January 2000].
141 Information by the Financial Supervisory Commission (FSC) published in The Korea Herald
[Online], 1 July 1999.  Available at:  http://www.koreaherald.co.kr/ [10 January 2000].
142 Article prepared by a senior economist of th e Korea Institute of Finance containing detailed
information on the chaebol industrial sector dominance over the banking and finance sector, published inThe Korea Herald  [Online], 7 July 1999.  Available at:  h ttp://www.koreaherald.co.kr/ [10 January 2000].
Statements by the Minister of Finance and Economy (Mr. Kang Bong-kyun), published in The Korea Herald
[Online], 14 June 1999.  Available at:  http://www.koreaherald.co.kr/ [10 January 2000].
143 OECD (1999a).
144 Planning and Budget Commission and the Office of National Budget (1998).Republic of Korea WT/TPR/S/73
Page 151
Table IV.6
Structure of the financial system, 1996 and 1998
(US$ billion and per cent)
Assets Loans and discounts Number of
establishments 1996 1998 1996 1998
Institutions 1996 1998 US$ % US$ % US$ % US$ %
1. Deposit Money banks 100 90 560.6 39.4 412.4 34.5 248.8 43.9 164.1 47.0
(a) Commercial banks 95 86 424.5 29.8 335.5 28.1 170.7 30.2 125.5 35.9
Nationwide 15 12 328.0 23.0 281.0 23.5 134.7 23.8 106.6 30.5
Local 10 8 65.6 4.6 30.2 2.5 25.7 4.5 11.7 3.3
Foreign branches 70 66 30.7 2.2 24.2 2.0 10.3 1.8 7.2 2.1
(b) Specialized banksa5 4 136.2 9.6 76.9 6.4 78.0 13.8 38.5 11.0
2. Non-bank financial institutions 6,621 6,166 863.2 60.6 781.8 65.5 317.3 56.1 185.1 53.0
(a) Development institutions 3 2 103.8 7.3 119.7 10.0 55.0 9.7 42.5 12.2
Korea Development Bank 1 1 72.7 5.1 89.1 7.5 37.2 6.6 29.7 8.5
Export-Import Bank of
Korea1 1 11.1 0.8 17.4 1.5 8.8 1.6 8.0 2.3
Korea Long-Term Credit
Bank1 0 20.0 1.4 13.1 1.1 9.1 1.6 4.9 1.4
(b) Savings institutions 6,527 6,095 477.3 33.5 388.8 32.6 178.8 31.6 101.3 29.0
Trust banks 49 39 304.8 21.4 264.4 22.1 67.8 12.0 33.4 9.6
Mutual savings & finance
companies234 211 45.1 3.2 22.6 1.9 34.9 6.2 15.7 4.5
Credit unions 1,664 1,592 20.8 1.5 14.9 1.2 13.3 2.3 8.0 2.3
Mutual credit facilitiesb1,765 1,662 65.0 4.6 53.6 4.5 45.8 8.1 33.0 9.5
Community credit
cooperatives2,814 2,590 31.8 2.2 23.7 2.0 17.0 3.0 11.2 3.2
Postal savings 1 1 9.8 0.7 9.7 0.8 0.0 0.0 0.0 0.0
(c) Investment institutions 57 39 176.9 12.4 202.4 16.9 35.4 6.3 15.7 4.5
Merchant banking
corporations30 14 65.2 4.6 41.7 3.5 26.1 4.6 9.2 2.6
Investment trust companies 26 24 102.1 7.2 153.6 12.9 0.0 0.0 0.0 0.0
Korea Securities Finance
Corporation1 1 9.6 0.7 7.0 0.6 9.3 1.6 6.4 1.8
(d) Insurance institutions 34 30 105.2 7.4 70.9 5.9 48.1 8.5 25.7 7.3
Life insurance companies 33 29 99.5 7.0 66.4 5.6 48.1 8.5 25.7 7.3
Postal life insurance 1 1 5.8 0.4 4.5 0.4 0.0 0.0 0.0 0.0
Totalc6,721 6,256 1,423.8 100.0 1,194.2 100.0 566.1 100.0 349.2 100.0
a Includes the Industrial Bank of Korea, Korea Housing Bank (1996 only), National Agricultural Cooperative Federation, National
Federation of Fisheries Cooperatives and National Livestock Cooperatives Federations.
b Covers facilities for the agricultural, livestock, forestry and fishery sector.c Does not include other quasi-non-bank financial institutions such as securities companies, investment advisory companies, cred it
guarantee funds, non-life insurance companies, leasing companies, venture capital companies, and instalment credit companies.
Source: Information provided by the Korean authorities .WT/TPR/S/73 Trade Policy Review
Page 152
Regulatory developments
92. Since its previous Review, Korea has accelerated liberalization and deregulation of the
financial sector145;  the legislation adopted (December 1997, September 1998) is aimed at bringing the
institutional and regulatory framework of the fina ncial system closer to that of OECD countries.
Reforms have allowed, inter alia,  for the formation of firms offering a wider range of financial services;
the establishment of a clearer governance framework;  and the introduction of new products (including
asset-backed securities and mutual funds).
93. In a step intended to improve corporate governance, as of January 2000 merchant banks,
securities and insurance firms with assets exceeding W 2 trillion (US$1.7 billion), and ITCs withdeposits of a similar level have to fill more than a half of their boards of directors with outside
members.  In addition, they are required to establish committees for auditing and risk management.
At the same time, the authorities were considering the possibility of allowing banks, brokerage firms,
and insurance companies to enter into each other's non-core businesses.
146
94. Since 1998, foreign banks have been allowed to establish subsidiaries147, and foreign financial
institutions have been allowed to participate in non-hostile mergers and acquisitions (including those
involving domestic financial institutions) (Chapter III(4)(iii)).148  The economic needs test, a prior
condition for the establishment of foreign bank branches, securities firms, insurance companies, and
investment trust companies, was eliminated in 1992.  Share-ownership limitations for non-residents
were finally phased out in 1998.  By 1999, limits on the operations of branches of foreign banks(based on local capital versus parent bank capital reserves) affected loans to individual customers,
foreign exchange trading, and foreign banks'  capital adequacy and liquidity requirements.
149  T h e
authorities note that these limits are in conformity with the Basle principles (see below).
95. Banks' operations are subject to lending ratios, requiring them to allocate a certain share of
their loan portfolios to Korean companies, other than the top five chaebols, and to SMEs.
Institutional and supervisory reforms
96. Significant reforms of financial institutions have been undertaken since Korea's previous
Review.  In April 1998, sectoral supervisory functions were transferred from MOFE and the
(central) Bank of Korea (BOK) to an independent regulator, the Financial Supervisory
Commission (FSC), which has been entrusted with the enforcement of prudential rules and the
restructuring of financial institutions.  As of 1997, the state-owned Korea Asset Management
Corporation (KAMCO) has been entrusted with the purchase and disposal of "impaired" assets offinancial institutions.  Since the end of 1997 the state-owned Korea Deposit Insurance Corporation
(KDIC) has operated a blanket guarantee system of deposit insurance;  as of January 2001, it is to be
                                                          
145 WTO documents S/FIN/M/14, 20 June 1997 and S/FIN/15, 4 A ugust 1997;  and OECD working
documents issued in June 1999.
146 Information by the FSC, published in The Korea Herald  [Online], 5 January 2000.  Available
at:  http://www.koreaherald.co.kr/ [10 January 2000].
147 Branches have been permitted since 1967.
148 USTR (1999).
149 The Korea Herald  [Online], 22 September 1999. Available at:  http://www.koreaherald.co.kr/
[10 January 2000].Republic of Korea WT/TPR/S/73
Page 153
converted into a limited guarantee system.  As a result, the BOK has focused its attention on monetary
policy formulation and its function as a lender of last resort.150
97. In 1999, the FSC, decided to apply the Basle Committee's (Bank for International
Settlements (BIS))  25 core principles of banking supervision.  The FSC has introducedCAMELS (Capital, Asset quality, Management, Earnings, Liquidity and Sensitivity (to market risk))
criteria, to establish a confidential numerical rating of the financial institutions.
151  A new
"consolidated" supervision system, including the submission by financial groups of a financial
statement showing the entire picture of their operation and financial status, is to be introduced
progressively from 2001.
Capital adequacy and bank-asset requirements
98. Under the IMF arrangement, since June 1999 major Korean banks have been expected to
observe the 8% BIS capital adequacy ratio (rather than 10% recommended by the FSC), a major
yardstick of the financial health of an institution;  for banks not engaged in international business the
ratio is being progressively raised from 4% (M arch 1999) to 8% (December 2000), while for those
engaged in international business it is to rise from 6% to 10%.152  Under a toughened prompt corrective
action mechanism, since 1998 the FSC has been em powered to order banks with capital adequacy
ratios of less than 2% to liquidate or merge with other banks within a predetermined period of time.153
As a result of increased net profits, rise in capital, and the reduction of risky assets in the secondquarter of 1998, by mid 1999 all domestic merchant banks met BIS capital adequacy requirements with
ratios ranging from 8.54% to 14.53%;  the average capital adequacy ratio of local banks reached
10.4%.
99. Forward-looking rules on bank asset-quality have been enforced as from the end of 1999;
banks must set aside provisions for loan losses in excess of the minimum ratio required under each
FSS asset classification category.  The FSS's minimum ratio requirements for loan loss provisions are
0.5% of normal, 2% for precautionary, 20% for substandard, 50% for doubtful, and 100% for
estimated loss credits.  Banks may not make provisions for expected losses from guarantees classifiedas normal and precautionary.  Banks may exceptionally be allowed to classify the loans extended to
borrowers under the workout process (discussed earlier) as, at best, precautionary, and establish
relevant provisions ranging from 2% to 20%, depending on the borrower's reimbursement capacity.
Credit policy and non-performing loans
100. As indicated earlier (sections (2)(ii)(b) and (4) and Chapter III(4)(ii)), the banking sector has
traditionally been used as the instrument of choice for undertaking sectoral policy initiatives based on
the granting of subsidies in the form of preferential lending rates.  Distortions in credit allocation due
to limited risk-analysis, and tightly bound societal relationships (e.g. between chaebols, government
and financial intermediaries) have resulted in  high levels of non-performing loans (NPLs)
154;  as a
                                                          
150 OECD working documents issued in June 1999;  and OECD ( 1999a).
151 OECD working documents issued in June 1999.
152 OECD working documents issued in June 1999;  and The Korea Herald  [Online], 5 January 2000.
Available at:  http://www.koreaherald.co.kr/ [10 January 2000].
153 The Korea Herald  [Online], 27 March 1999.  Available at:  http://www.koreaherald.co.kr/
[10 January 2000].
154 NPLs are categorized as loans in arrears of three months or more, credit extended to entities under
court receivership, composition, or cooperative assi stance loan recipients, according to the FSS criteriaWT/TPR/S/73 Trade Policy Review
Page 154
result of KAMCO's involvement in purchasing thes e loans from ailing financial institutions, and
auctioning them (to foreign and domestic investors), between July and September 1999 the ratio of
NPLs to total lending dropped from 11.3% to 10.1%.155
101. Since 1997, interest rate deregulation (one of the goals of financial sector restructuring) has
been completed for all rates except for those on demand deposits.  While in response to the financial
crisis the BOK raised the call rate to around 30%, to stabilize foreign exchange market, since the
second half of 1998, in consultation with the IMF, it has focused on a downward stabilization of
market interest rates, to assist economic recove ry.  The BOK is empowered to change the maximum
interest rates on deposits and loans of banks, and to set ceilings on bank credits in periods of excessivemonetary expansion.
156  To support their loan-based expansion-oriented management style, Korean
banks have been characterized by low and declining profitability before and after the 1997 crisis.157
Between 1996 and 1999, the interest rate spread of commercial banks widened from 2.3 percentage
points to 3.2 percentage points (Chart IV.6).  This widening was more the result of the unusual
situation in the loan market (i.e. default risks reflecte d in loan rates) after the crisis than the decline in
competition or the increase of inefficiency in the banking sector.
Stock and bond markets
102. Companies hit by the 1997 crisis have been shifting their financing from bank loans to equity,
while savers (prompted by the proliferation of electronic banking and falling interest rates) have
shifted away from bank deposits towards the stock and bond markets.158  As from May 1998, the
Korean stock market has been further opened to foreign investors in line with GATS commitments
(six months ahead of schedule), in order to attract more foreign capital;  aggregate foreign equity
participation ceilings in the stock/bond markets and local securities firms were eliminated.  Between
December 1996 and February 2000, foreign investors' penetration in the Korean stock market
increased from 13% to 23.4%.  Furthermore, in the context of the foreign exchange liberalization plan
(Chapter I(4)), as of April 1999 non-residents have  been allowed to issue won-denominated securities
abroad, a step that the authorities note is in line with OECD benchmarks.  By the end of 2000,non-residents will be permitted to invest in won-denominated domestic deposits with maturities of
                                                                                                                                                                                    
(The Korea Herald  [Online], 10 December 1999.  Available at:  http://www.koreaherald.co.kr/
[10 January 2000]).
155 Borensztein and Jong-Wha Lee (1999);  IMF Working Paper WP/99/20, February, Washington D.C.
Available at:  http://www.imf.org/EXTERNAL/PUBS/CAT/longres.cfm?sk&sk=2893.0 [10 December 1999];OECD (1999a);  and US Embassy (1999).
156 Bank of Korea information [Online].  Available at:  http://www.bok.or.kr/kobank/owa/
act12?i_lp=eng22&i_top=english [15 February 2000];  and statements by the BOK Governor(Mr. Chon Chol-hwan) published in The Korea Herald  [Online], 13 April 1999.  Available
at:  http://www.koreaherald.co.kr/ [10 January 2000].
157 OECD working documents issued in June 1999;  Bank of Korea information published in The Korea
Herald  [Online], 20 October 1999.  Available at:  http://www.koreaherald.co.kr/ [10 January 2000].
158 In 1999, the amount of capital raised through new stock issuance increased by 190% (January to
November period, year-on-year basis), to W 32.16 trillion (US$27 billion);  this led,  inter alia,  to a decrease of
the debt-to-equity ratio of the manufacturing industry from 303% (end 1998) to 247.2 % (end June 1999)(The Korea Herald  [Online], 20 December 1999.  Available at:  http://www.koreaherald.co.kr/
[10 January 2000]).  In October 1999, online stock transactions were W 408.6 trillion (US$345 billion), an
increase of 17.2 times (year-on-year basis), and the weig ht in total stock trading volume recorded a rise of
38.3%.Republic of Korea WT/TPR/S/73
Page 155
less than one year, and residents will be able to invest in foreign-currency-denominated overseas
deposits.159
678910111213141516
1996 1997 1998 1999Chart IV.6                     
Interest rates on loans and deposits of banks, 1996-1999
Per cent per year
Source :     Data provided by the Korean authorities.Average rates on all depositsAverage rates on all  loans
(on a contract basis)
(b) Insurance
103. In 1998, Korea was the second largest insurance market in Asia (after Japan), and the seventh
largest life insurance market in the world (in terms of premium income).  In 1999, there were
45 insurance companies in operation (28 life and 16 non-life insurers, 1 surety insurer, 1 reinsurer)
with large market concentration within the to p five insurance companies (74.2% (life) and
64.6% (non-life)).160  The domestic life-insurance market has become increasingly polarized in recent
years;  two large chaebol-affiliated or par tly owned firms (Samsung Life Insurance Co.,
Kyobo Insurance Co.) increased their market share from 30.5% (1996/97) to 36.6% (1999/00), while
the share of foreign firms grew from 0.4% to 4.6%.  Seven state-invested firms held another 22.5% of
the market.  Opposite trends were observed in the non-life insurance market, where the market share
of chaebol-affiliated firms declined from 51.9% (1996/97) to 30.8% (1999/00), while the presence of
other domestic insurers was considerably reinforced;  the market shares of foreign firms remainedstable at around 0.4%.  In response to concerns over the potential for chaebol groups to use their
                                                          
159 US Embassy (1999).
160 Life insurance companies deal with life insurance, retirement insurance, and personal pensions,
while non-life insurance companies cover shipping, fire, car, and cargo insurance as well as personal pension
insurance (OECD document DAFFE/CLP(98)20, pp. 147-152.  Available at:  http://www.oecd.org//daf/clp/
Roundtables/Insur00.htm [8 October 1999]).WT/TPR/S/73 Trade Policy Review
Page 156
insurance subsidiaries to raise funds for use within the group161, the authorities indicated that
limitations on the asset management of the insura nce companies are strictly enforced and those
affecting chaebol affiliates are far stricter than others.
104. The financial crisis forced the restructuring of the insurance industry, which has been
characterized by low profitability, excess capacity, poor risk management, and inadequate
supervision.162  By December 1999, public funds totalling W 6.5 trillion (US$5.5 billion) had been
injected into restructuring the insurance sector.163  The licences of four life insurance companies were
revoked, two existing surety and fidelity insurance companies were merged on the grounds of
insolvency, and 16 life and non-life insurance companies were put under FSC-supervised workoutprogrammes to enhance their solvency margins though recapitalization, staff reductions, and other
managerial improvements.  Mergers and acquisitions increased the size and operational capabilities of
small and medium-sized insurance firms.  In the wake of the financial crisis, seven life insurance
companies were nationalized and merged, including Korea Life Insurance (17.4% of the market).  By
June 2000, five of these companies had been sold to domestic investors, and another was in theprocess of being sold;  the sale of Korea Life Insurance was postponed in 1999 in order to put it back
on track.
164  Life insurers are to boost their ability to meet a solvency margin ratio to 100% by
March 2004 based on the standards used by the EU.165
105. In the light of OECD and improved GATS financial commitments (section (5)(iii)(c)), access
to Korea's life and non-life insurance markets has been gradually opened, thus allowing entry ofsix foreign life insurance (4 subsidiaries, 2 branches) and three non-life insurers.  As indicated earlier
(section (5)(iii)(a)) the economic needs test for granting establishment licences has been eliminated.
As of April 1998, insurance appraisal and activities ancillary to the management of insurance and
pension funds have been liberalized;  and the insurance brokerage market has been opened to foreign
firms.
166  No restrictions now affect partnering with local insurance firms and the hiring of foreign
insurance professionals.
(c) GATS commitments
106. In 1999, Korea improved its commitments in financial services, reflecting its
OECD commitments in the multilateral context (section (5)(ii)).167  Under its new Schedule of
Specific Commitments, Korea:
- allowed wholly owned or majority-owned subsidiaries of foreign financial institutions
to operate banking, securities, securities investment trust and advisorybusinesses (previously only branches or joint ventures were covered);
                                                          
161 Statement by an official of the MOFE published in The Korea Herald  [Online], 26 October 1999.
Available at:  http://www.koreaherald.co.kr/ [10 January 2000].
162 OECD working documents issued in June 1999.
163 The Korea Herald  [Online], 27 December 1999. Available at:  http://www.koreaherald.co.kr/
[10 January 2000].
164 The Korea Herald  [Online], 4 January 1999. Available at:  http://www.koreaherald.co.kr/
[10 January 2000].
165 In mid 1999, 19 life insurance firms had negative net worth with liabilities larger than assets
(i.e. capital bases completely eroded and accumula ted losses of about W 5 trillion (US$4.3 billion) ( The Korea
Herald  [Online], 27 July 1999.  Available at:  http://www.koreaherald.co.kr/ [10 January 2000]).
166 USTR (1999).
167 WTO document GATS/SC/48/Suppl.3/Rev.1, 18 November 1999;  and WTO (1996).Republic of Korea WT/TPR/S/73
Page 157
- allowed commercial presence of foreign insurance brokerage companies (in addition
to agencies previously permitted), as well as foreign claim settlement and actuarial
companies;
- removed the requirement to rank among the world's top 500 banks in terms of asset
size to be able to open a branch in Korea;  and
- withdrew the requirement to open a representative office of a securities investment
trust company for at least one year before being authorized to open a branch.
107. Apart from these improvements, Korea undertook a standstill commitment for specific
horizontal (i.e. cross-sectoral) undertakings, as of 31 August 1997, related to limitations on marketaccess and national treatment.  It thus maintained unchanged virtually all past horizontal limitations:
cross-border supply of financial services may not be  effected in Korean currency;  management and
operation of assets of a financial institution are restricted, and a financial institution may not own
non-business real estate;  assets owned by branches must be kept within the territory of Korea, and the
capital of the head office is not recognized as the basis for determining the funding and lendingactivities of branches;  interest rates on demand deposits are regulated
168;  and some new financial
products (e.g. derivatives) are subject to a pproval (now to be more widely granted).
108. Sector-specific market-access limitations on commercial presence, which is now bound in all
12 financial service categories (previously unbound for leasing, claim settlement and actuarial
business), affect banking, trust, credit card, securities, investment advisory, credit rating/information,insurance, foreign exchange, deposit, loan and related services;  no national treatment limitations on
foreign commercial presence are scheduled at sector-specific level.  Sector-specific cross-border
supply (except for marine export/import cargo and aviation insurance), consumption abroad, and
presence of natural persons (top executive personnel must reside in Korea) remain unbound for all
categories.
(iv) Communications
(a) Telecommunications
109. Phenomenal growth in Korea's technically advanced telecommunication services, which were
not affected by the crisis, has been largely driven by the fast expansion in the number of cellularphones and the demand for data transmission services  (reflecting growth trends in the information
business).
169  In 1999, telecommunications represented 4.9% of Korean GDP and employed
120,000 persons.
110. State and chaebol involvement in telecom services has expanded in line with product
diversification (Table IV.7).  Apart from Korea Telecom, state companies from other sectors
                                                          
168 The authorities note that previous commitments reflected past financial regulations that restricted
the freedom of financial institutions to set interest rates on deposits and lending, while now there is no limitationor regulation on interest rates except for those on demand deposits.
169 Business outlook for key industrial sectors by the Industry Research Center of the LG Economic
Research Institute published in The Korea Herald [Online], 29 December 1999.  Available
at:  http://www.koreaherald.co.kr/ [10 January 2000];  and World Markets Research Centre (WMRC) online
information last revised in September 1999.  Available at:  http://www.wmrc.com/ [10 October 1999].WT/TPR/S/73 Trade Policy Review
Page 158
(i.e. POSCO and KEPCO170) remain involved in telecommunications, while certain chaebol groups
(e.g. Hyundai, Samsung, LG) are telecom equipment manufacturers and multiple service suppliers.
A 1996 restriction limiting the (chaebol) LG Group's stock ownership of Dacom to 5% was removed
in May 1999 thus paving the way for further chaebol participation in basic telecom services.171
111. Since May 1999, state participation in Korea Telecom has been declining gradually as a
consequence of privatization and is expected to be down to 33.4% by the end of 2000172;  as of
March 1999, foreign investors have been allowed to trade in shares in Korea Telecom on the over-the-
counter (OTC) market.  In recent years, sharp growth in mobile subscriptions and the emergence of
Internet telephony and simple voice resellers have affected Korea Telecom's revenues in its threemain service areas (local, long-distance and international calls).
173  Like other state firms,
Korea Telecom is involved in overseas investment or joint venture projects (e.g. in Japan, Viet Nam,
the Russian Federation);  it is also participating in domestic joint ventures outside its core-business
(software development).  Korea Telecom's practice of favouring domestic equipment suppliers has
been dealt with in bilateral telecommunications agr eements or WTO consultations;  this entity is not
covered by commitments under the WTO Plurilateral Agreement on Government Procurement
(Chapter III(2)(vii)).174  Following consultations in the context of the WTO dispute settlement
mechanism (Chapter II), as of 1997 "Buy Korea" requirements for Dacom have been eliminated and
European suppliers have qualified for procurement by Korea's basic telecom operators.
112. Sectoral policy guidelines have focused on inducing more foreign investment inflows,
restructuring, and enhancing global competitiveness;  these objectives were reflected in a revised
Telecommunications Business Act (1998).175  As a result, resale and Internet phone services (termed
as special telecoms services (STS)) have been authorized.176  Facilities-based service providers with
essential facilities or market shares of 50% or more in a particular service market are subject to
mandatory interconnection requirements.  Facilities-based telecom firms are obliged to make
available for use by other telecom firms their shared networks and relevant information (e.g. technical
standards, interconnection methods, and terms and conditions of use).  All telecommunications firmsother than special or value-added service providers are to contribute to providing universal service,
despite the lack of implementing provisions.
177  The authorities plan to approve mergers and
                                                          
170 In November 1999, a KEPCO subsidiary (Powercom) was given permission to operate a line leasing
business;  the permission was granted under the condition that KEPCO sells off 66% of its stake in the
subsidiary by June 2000 and the remaining 34% by 2002 ( The Korea Herald  [Online], 25 November 1999.
Available at:  http://www.koreaherald.co.kr/ [10 January 2000]).
171 Information by the Ministry of Information and Communication published in The Korea Herald
[Online], 7 May 1999.  Available at:  http://www.koreaherald.co.kr/ [10 January 2000].
172 APEC (1999).
173 Korea Telecom information, published in The Korea Herald  [Online], 20 March 1999.  Available
at:  http://www.koreaherald.co.kr/ [10 January 2000];  and The Korea Herald  [Online], 5, 9 and 13 March 1999,
19 May 1999.  Available at:  http://www.koreaherald.co.kr/ [10 January 2000].
174 WTO documents WT/DS40/1, 20 May 1996;  WT/DS40/2-G/L/202-G/STR/D1/2, 29 October 1997;
European Commission (1999);  and US Embassy (1999).
175 World Markets Research Centre (WMRC) online information last revised in September 1999.
Available at:  http://www.wmrc.com/ [10 October 1999].
176 The resale and Internet phone services include Internet telephony, call-back, voice/wireless resale,
aggregate services, re-billing services, and on-premises telecommunications services (OECD, 1998b).
177 Universal service is defined in the Business Act as "basic telecommunications services to which all
users are entitled, to use in any place at reasonable ra tes". Despite the lack of implementing provisions, some
services have been provided by Korea Telecom for public  interest and social welfare.   The potential scope of
this service may cover access to local service, emerge ncy call, social tariffs for people on low incomes or
physically handicapped, and public payphone service (Ministry of Information and Communication, 1999).Republic of Korea WT/TPR/S/73
Page 159
acquisitions between and among facilities-based service providers unless it undermines fair
competition and user protection.  A mandatory one-time R&D-destined contribution amounting to
3.5%-7% of expected sales for the first five years, which affects the entry of facility-based telecom
operators, is to be abolished by the year 2002.
Table IV.7
Telecommunications market structure, as of June 2000
(a) By type of service
Type of service Carriers Facilities-based service providers
Local 2 KT, Hanaro Telecom (service launched April 1999)
Long-distance 3 KT, Dacom, Onse Telecom
International 3 KT, Dacom, Onse Telecom
Cellular 2 SK Telecom, Shinsegi Telecom
PCS 3 KTF, LG Telecom, Hansol PCS
Radio Paging 13 SK Telecom (nation-wide), twelve local carriers
(b) By major operator
State-participation Chaebol participation Foreign participation
Company
(percent of shares) (percent of shares) (percent of shares)
Korea Telecom 59% (as of July 1999) and
33.4% (as of end 2000).. 19.4%
Dacom (Data Communications
Corporation of Korea)None Samsunga,b (23.91%)
LGa,b (4.87%)11%
Onse Telecom (founded in 1996) None Lotte (9.07%)
Iljin (9.88%)
Kohap (7.25%)
Daewoob (..)None
Hanaro Telecom None Hyundaia,b (7.03%)
Samsunga,b (8.11%)
LGa,b (..)
SK Groupa (..)2.6%
SK Telecom (formerly Korea
Mobile Telecommunications
Corp.)aKorea Telecom 17.9% SK Groupa (81.1%, as of 1997)
Hyundai (..)
Samsunga,b (..)31.6%
Shinsegi POSCO 25.3% SK Telecoma (..) Air Touch (USA) 13.6%
LG Telecom
(established 1996)a,bNone LG Groupa,b (..) British Telecom 24.1%
Hansol M. COM None Hansol Group 34.25% (BCI, AIG)
.. Not available.
a Another group/chaebol affiliate is a special service provider (i.e. voice re-sale in long distance and international calls,
international internet telephony (section(iv)(a)).
b Another group/chaebol affiliate is an equipment manufacturer.
Source: Ministry of Information and Communication (1999);  OECD (1998b);  and World Markets Research Centre
(WMRC) online information last revised in September 1999.  Available at: http://www.wmrc.com/[10 October 1999].WT/TPR/S/73 Trade Policy Review
Page 160
113. Under its 1997 GATS commitments in basic telecommunication services, Korea undertook to
open 12 additional subsectors to foreign participation178, and began implementing these undertakings
two-years ahead of schedule.179  Consequently, since January 1998 the authorized equity level
permitted to foreign service providers in facilities-based services (49% and 33% (forKorea Telecom)), special telecoms services (49% as of 2000, 100% as from 2001), and value-added
services (100%) is being raised.
180  The authorities indicated that no limit on indirect investor
ownership in facilities-based telecoms businesses has ever been in place.
114. Local service rates of Korea Telecom and the mobile phone rate of SK Telecom (the
dominant carriers in their respective service areas) are subject to government authorization and arebased on the rate-of-return principle.  Other operators may freely set their tariffs;  special or
value-added service providers need not make them public.  In June 2000 the authorities examined
when and how to liberalize the local phone service rate of Korea Telecom and SK Telecom's mobile
phone rate.  In light of the universal service policy discussed earlier, cross-subsidization is authorized
to a certain extent, thus allowing for uniform tariffs for local phone calls nationwide (i.e. urban userspay more than the actual cost of services to subsidize rural users).  As of January 2000, a Universal
Service Fund was established to compensate Korea Telecom for the losses occurring from provision
of universal services at "reasonable" rates for everyone;  no other operator is compensated.
(b) Broadcasting and audio-visual
115. Since 1998, regulatory and institutional changes have been implemented;  legislation now
covers analogue direct broadcast satellite (DBS) service.
181  As from 1993, cable television (CATV)
broadcasting has been split into three sectors (programme providers, station or system operators, and
network operators).182  Under the new Broadcasting Act (effective 13 March 2000), which, inter alia,
constitutes the legal basis for satellite broadcasting service, more integration of these different
operators into a single business has been allowed.  Under the new Act chaebols, domestic newspaper
companies, and foreign investors are allowed up to 33% participation in satellite broadcasting
(excluding universal or news programme providers);  a 49% ceiling applies to foreign investors incable transmission network business.  Table IV.8 indicates the structure of the broadcasting market.
Broadcasted advertisements
116. Since Korea's previous Review, the Korean Broadcasting Advertising Corporation
(KOBACO), a "special juridical corporation" with no capital, has maintained its monopoly rights over
the allocation of advertising time for television and radio;  the revision of the law establishing
                                                          
178 These subsectors are:  voice telephone;  packet  and circuit-switched data transmission;  telex;
telegraph;  facsimile;  private leased circuit;  digital cellular;  paging;  personal communication;  trunked radio
system;  and mobile data services (WTO document GATS/SC/48/Suppl.2, 11 April 1997).
179 Korea's GATS commitments on basic telecommunication services provided for the phase-out of
several foreign-ownership-related limitations by January 2001 (WTO document GATS/SC/48/Suppl.2,11 April 1997).  In the light of the financial crisis, faster  liberalization of foreign equity investments in the basic
telecommunications market was expected to step up efforts to induce capital inflows (USTR, 1999).
180 Ministry of Information and Communication (1999);  and World Markets Research Centre (WMRC)
online information last revised in September 1999.  Available at:  http://www.wmrc.com/ [10 October 1999].
181 OECD (1998b).
182 By April 2000 there were 73 CATV stations operated through Korea Telecom and KEPCO
(section (3)(ii)(b)).  Between 1996 and 1999, the number of cable television (CATV) subscribers increased byalmost 90%, a slower pace than in some other Asian countries.  (Ministry of Information and
Communication, 1999);  and World Markets Research Centre (WMRC) online information last revised in
September 1999.  Available at:  http://www.wmrc.com/ [10 October 1999].Republic of Korea WT/TPR/S/73
Page 161
KOBACO and the introduction of competition in the advertising market was under consideration in
June 2000.  The recent economic downturn, which reduced airtime demand, seems to have made
KOBACO offer more flexible airtime packages (including longer than 15 seconds availability) to
meet advertisers’ needs.183
Table IV.8
The broadcasting market, April 2000
Activity Licensed operatorsPrivately owned
companiesaPublic service
organizationsb
Terrestrial TV (National coverage)c303
Terrestrial TV (Local coverage)d28 9 19
Terrestrial radio (National coverage)c303
Terrestrial radio (Local coverage only)d34 26 8
Cable television service 77e77 0
Analogue direct broadcast satellite (DBS) service 0 0 0
Digital DBS servicef303
a Defined as private sector companies holding one or more licences for service provision.
b Including state-owned corporations or institutions holding one or more licences for service provision.c A service by a group of television or radio stations, distribut ing a majority of the same programming, that are licensed on a
national or regional basis but collectively provide nation-wide coverage.  Affiliate companies of the nation-wide broadcast
network are included in this category.
d Defined as a service by a group of television or radio stations that are licensed on a national or regional basis but distribu te the
programming in the local area only.
e By April 2000, most operators had started service.f Three operators are licensed as Development Test Stations.
Source : Korean Broadcasting Commission.
Broadcasted television programmes
117. Since 1990, Korea has limited weekly television (free television) broadcasting time to no
more than 20% for foreign programmes.184  As from January 2002, however, television broadcasters
may broadcast foreign programmes up to 60% of their broadcasting time, as notified to the
Korea Broadcasting Commission (KBC).  As from 1994, CATV channels' airtime has been subject to
quotas of 50% for foreign sports, science, and documentary programmes, and 30% for all other types
of foreign programming, including movies;  an additional requirement for television programming
and advertising in Korean language has prevented direct re-broadcasting of satellite transmission.Under the new Broadcasting Act, revisions were made to specific content requirements applicable to
terrestrial broadcasters, satellite broadcasters, system operators, and programme providers with
respect films (20%-40% for terrestrial, 30%-50% for other broadcasters), animation (30%-50% for
terrestrial, 40%-60% for other broadcasters) or popular songs (20%-40% for terrestrial, 30%-50% for
other broadcasters).  The authorities note that, in the absence of relevant legislation, direct
re-broadcasting of satellite transmission has not been permitted in Korea;  nevertheless, domestic
CATV companies may exceptionally, prior to KBC approval, broadcast satellite transmissions offoreign programming within the limit of three channels.  The KBC may approve foreign language
programming regardless of whether it is translated into Korean.  As of 2001, the current licensing
system for CATV is to be replaced by a simplified registration system.  Under the new Broadcasting
Act, CATV operators re-transmitting programmes from foreign broadcasters need KBC approval.
                                                          
183 USTR (1999).
184 USTR (1999).WT/TPR/S/73 Trade Policy Review
Page 162
Motion pictures
118. Korea has maintained its screen quota against foreign motion pictures;  since 1966 this regime
has required that domestic films be shown in each movie theatre a minimum number of days per year
(146 days with reductions of 20 to 40 days under certain conditions).185  According to the authorities,
the screen quota system is a basic means for maintain ing Korea's cultural identity and it is to remain
in force until the Korean film industry develops up to a certain level.  However, a trading partner is of
the view that the quota is a deterrent to trade and to movie theatre construction as well as to the
expansion of theatrical distribution in Korea.  According to a recent report by the Korea Economic
Research Institute, the elimination of the screen quota would reduce the market share of Korean filmsfrom about 40% to 5%.
186
(c) GATS commitments
119. Korea's GATS scheduled commitments provide full market access and national treatment to
foreign suppliers of motion pictures, video tapes and records (sound recording, production and
distribution) through cross-border supply, consumption abroad or commercial presence.187  Cable
television broadcasting, motion picture projection, and radio and television transmission services are
not covered.
(v) Transport
120. Since 1996, the Korean transportation services market has experienced strong growth, except
in 1998 when it was adversely affected by the recession.188  The transport pattern has remained
unchanged:  road transport dominates the domestic cargo and passenger markets, while international
transport is mainly by water (cargo) or air (passengers).
121. Since Korea's previous Review, several procedural improvements have been introduced;
these include the launching of the Transportation Electronic Data Interchange, which provides
cargo-information (concerning freight transport, storage, loading/unloading, and port entry and
departures) and a logistics information database to facilitate the flow of import/export cargo at
ports.189
122. Korea's GATS commitments in transport cover maritime services (excluding cabotage), air
transport, road transport of containerized freight (excluding cabotage), certain storage, and
warehousing.190  These commitments may have attracted more foreign presence to the sector;  by
March 2000, 41 foreign freight-forwarding firms had registered to provide multi-modal transportation
services in Korea.
(a) Shipping
123. Since 1996, the number of Korean vessels has been declining although vessels leased to
foreign counterparts have increased.  This decline was partly due to the sale of ships, aimed at
                                                          
185 USTR (1999).
186 FKI (1999), No. 221, September, p. 53.
187 WTO document GATS/SC/48, 15 April 1994.
188 National Statistical Office (1999), September, Tables VII.1, VII.2 and VII.3.
189 APEC (1999).
190 WTO document GATS/SC/48, 15 April 1994.Republic of Korea WT/TPR/S/73
Page 163
resolving recession-related cash shortages, as well the return of chartered ships to lenders.191  I n
response to increased fuel oil prices and reductions in imports to Korea, domestic shipping firms
increased freight charges on major routes around the world in 1998 and 1999, thus arousing concern
over Korea's export competitiveness.192
124. To overcome the financing problems of Korean shipping companies, the authorities have
announced plans to create a W 500 billion (US$437.8 million) fund during the second half of 2000 to
help cash-strapped shipping companies purchase vessels193;  the programme (sponsored by Korea
Shipowners Association) was being worked out in  June 2000.  The Shipping Industry Promotion Act,
which promoted the development of the national fleet for the purpose of securing stable transportcapacity, was to be eliminated as of July 1999, thus eliminating the legal basis for direct government
support (including subsidies) to national shipping companies.
194
125. Wide-ranging market liberalization and deregulation efforts have been undertaken in other
shipping areas.195  A revised Maritime Transport Act (effective 16 July 1999) eliminated restrictions
on the ocean-going shipping business.  As of October 1999, domestic cargo transport business haschanged from a licensing system to a filing process.  Chartering of foreign-flag vessels has been
allowed under certain conditions to protect small-scale coastal shipping companies.  These conditions,
which are also applicable to the chartering of ocean-going Korean-flag vessels for sailing temporary
coastal lines, include:  the need for the cargo to  be inappropriate for transportation with domestic
vessels due to its characteristics/specificity;  when timely transport is impossible due to the imbalancein supply and demand of domestic vessels;  or any other "inevitable" reasons.  As of 16 July 1999,
Korea had eliminated the designated cargo reservation system, which reserved transportation of bulk
cargo for national flag vessels;  the authorities note that this elimination is in line with Korea's OECD
accession commitments.
196  As of March 1998, the International Vessel Register System has applied,
allowing flexibility in hiring foreign seafarers and providing tax benefits;  in this context, owners of
domestic vessels registered as "international vessels" are exempt from the payment of certain local
taxes.197  To protect small domestic coastal oil tanker shipping companies, following the elimination
of the cargo system, Korea's five oil refineries were ordered to limit their chartering of foreign tankers
for the transport of oil products in coastal regions.198
                                                          
191 Prior to the economic crisis, cargo volume incr eased by 600,000 tonnes each year and was absorbed
by new vessels.  At the end of 1997, ship-bound cargo volume totaled 11.5 million tonnes, but fell to10 million tonnes by August 1999 (Korea Maritime Institute information, published in The Korea Herald
[Online], 31 December 1999. Available at:  http://www.koreaherald.co.kr/ [10 January 2000].  Information bythe Ministry of Maritime Affairs and Fisheries and the shipping industry, published in The Korea Herald
[Online], 11 March 1998. Available at:  http://www.koreaherald.co.kr/ [10 January 2000].
192 Korea Ship Owners Association information, published in The Korea Herald  [Online],
19 October 1998, 1 June 1999.  Available at:  http://www.koreaherald.co.kr/ [10 January 2000].
193 Ministry of Maritime Affairs and Fisheries information, published in The Korea Herald  [Online],
31 December 1999.  Available at:  http://www.koreaherald.co.kr/ [10 January 2000].
194 OECD (1998c).
195 OECD (1998c).
196 As indicated in the previous TPR Report, in the past, foreigners were only allowed to participate in
ocean-going shipping business in the form of joint ventures within a 50% share.  In 1996, cargo preferencesapplied to seven items:  crude petroleum, iron ore, raw materials for fertilizer, grains, coal, raw materials for
petrochemical products, and liquified gas (WTO, 1996).  OECD (1998c).
197 OECD (1998c).
198 Maritime Affairs and Fisheries Ministry information, published in The Korea Herald  [Online],
12 April 1999.  Available at:  http://www.koreaherald.co.kr/ [10 January 2000].WT/TPR/S/73 Trade Policy Review
Page 164
126. As indicated at the time of Korea's previous Review, Korea's GATS Schedule covers a range
of maritime transport services, including liner shipping, and excludes cabotage.199  Contrasting with
other forms of commercial presence, Korea has not bound its policies affecting the establishment of a
registered company for operating national flag vessels.  For a number of activities, such as cargohandling, cross-border supply is unbound due to lack of technical feasibility.  Regarding the presence
of natural persons, no commitments have been made concerning ship's crews and shore personnel.
(b) Air transportation
127. Korea has undertaken market opening reforms in a number of areas.  Following the latest
revision of the Aviation Act in 1997, foreign investment (previously limited to no more than 50%) inthe aircraft handling business and aircraft leasing with pilot was fully liberalized;  as from February
1998, the limit on foreign ownership (previously 20%) in scheduled and unscheduled air
transportation businesses was raised to 50%.
200
128. Korea expects to resolve airport congestion problems with the completion of the new
Inchon International Airport in early 2001.  In the wake of the recession, there have been plans to sell
some 51% of the Inchon International Airport to investors, (including foreign airlines), by the year
2002.201  The Transportation Electronic Data Interchange was to be fully operational in airport
terminals by October 2000.202  Landing fees and other airport facility charges were raised by about
30% on domestic routes and by 10% on international routes as of March 2000, with a view to
recovering investment and operation costs;  the higher rise on domestic routes reflected an effort to
reduce their gap with international route charges.  The slot operation system at Inchon was beingreviewed during the first half of 2000.
129. In preparation of the opening of Inchon International Airport, efforts have been made to
expand and/or increase flight frequency in air service routes from Seoul to major cities in foreigncountries (Australia;  Germany;  Hong Kong, Ch ina;  Hungary;  India; Japan;  Kazakhstan;
Mongolia;  the Philippines;  Uzbekistan;  Viet Nam);  an Open Skies agreement was signed with the
United States in June 1998.
203
(c) Railways
130. As a result of the focus of past infrastructure investment on the road and aviation sectors,
Korea's railroad industry, which is a state monopoly run by the Korean National Railway (KNR), has
been faced with a shortage of facilities, deteriorating service quality, and persistent operating
deficits.204  Under a 1996 State-Owned Railroad Manage ment Improvement Basic Plan (1997-2001) a
series of measures have been implemented, inter alia,  to cut personnel expenditure, adopt a private
sector management system, promote private sector participation in railroad construction, remove high
cost elements, and participate in complementary businesses (e.g. service stations).  In May 1999, the
                                                          
199 WTO (1996).
200 APEC (1999).
201 Statements by the Commissioner of Planning and Budget Commission (Mr. Jin Nyum), published in
The Korea Herald  [Online], 8 January 1999. Available at:  http://www.koreaherald.co.kr/ [10 January 2000];
and US Embassy (1999).
202 APEC (1999).
203 Ministry of Construction and Transportation information, published in The Korea Herald  [Online],
9 July 1998, 15 August 1998.  Available at:  http://www.koreaherald.co.kr/ [10 January 2000];  andUS Embassy (1999).
204 OECD document DAFFE/CLP(98)1, Competition Policy Roundtables No. 15 [Online].  Available
at:  http://www.oecd.org//daf/clp/Roundtables/railw10.htm [8 October 1999].Republic of Korea WT/TPR/S/73
Page 165
Government decided to undertake the privatization of railroad operations by the year 2001;  railroad
construction is to remain the responsibility of the State.
(vi) Distribution and e-commerce
(a) Distribution
131. Following drastic liberalization and deregulation, as from 1996 intense competition has raised
the output and productivity of Korea's distribution sector, influenced the reduction of retail prices, and
forced restructurization.205  Modern retail forms of distribution (e.g. discount stores, hypermarkets)
(Table IV.9) emerged to meet more diversified needs of consumers with increasing purchasing power,
in particular the increasing middle class, as well as recession-related concerns (discount stores);  since1996, about twenty department stores have gone bankrupt and only a few nationwide chaebol-owned
department stores are expected to remain.
206  The predominant role of big chaebols, which in certain
cases own the retail outlets for the products that they manufacture (e.g. consumer electronics), has
been considered a structural impediment by a major trading partner.207  In the period under Review,
the share of chaebol-owned firms increased from 1.35% (1995) to 1.95% (1998), while sales throughchaebol agents and branches decreased from 80% to 60%.  Foreign firms have entered and/or
expanded their presence in the Korean distribution market;  their share increased from 0.6% in 1995
to 0.41% in 1998.  In June 2000, the Korean distribution market consisted of stores owned by
five foreign firms (Carrefour, Promodes, Costco, Wal-Mart, Tesco) and four domestic companies
(Shinsegae, New Core, Nonghyub, Lotte).
Table IV.9
Structural developments in the distribution market
(per cent)
1995 1996 1997 1998a2000a2003a
Department stores 12.7 14.2 14.7 15.2 16.0 16.9
Supermarkets 3.8 3.8 3.8 3.9 3.9 3.9
Discount stores 0.8 1.3 2.9 4.6 7.9 11.3
Non-store retailing 0.5 0.6 0.7 0.8 0.9 1.2
Conventional markets and other 82.8 80.0 77.9 75.5 71.3 66.7
a Estimates.
Source : Data from the Korea Super Chainstores Association, in Korea Chamber of Commerce and Industry (1998), Doing
Business with Korea  [Online], November.  Available at:  http://www.kcci.or.kr/kccinew/08/dbk1/default.htm
[30 September 1999].
132. Since 1996, sectoral market access has been gradually liberalized, inter alia,  to attracting
foreign investment;  virtually all distribution services (meat wholesale as of January 2000) are nowopen to foreign investors.  The permit system, restricting floor space and the number of stores for
                                                          
205 Following the sector's opening, the negative eff ects of the sector's liberalization (e.g. increase of
imports, property prices, and unemployment), which had raised concerns in the past, turned out to be minimal
(Korea Chamber of Commerce and Industry, 1998).
206 Until 1996, the distribution sector included almo st exclusively domestically owned and operated
firms;  at that time it was mainly composed of 98 department stores (higher-income population), about2,000 conventional markets (low-income population), and numerous small family-owned stores.
207 European Commission (1999).  In response to concerns over discounts offered by wholesalers of
pharmaceuticals, the authorities clarified that the legislation forbids wholesalers from distributing medicines
below the price of initial purchase from manufacturers.WT/TPR/S/73 Trade Policy Review
Page 166
foreign investment, was replaced by a notification system as of January 1996.208  By 1998 there were
plans to abolish the main regulations on the operation of stores larger than 3,000m3 as well as all
remaining barriers.209  Foreign firms are not allowed to distribute products through an exclusive agent
in Korea, but may establish subsidiaries (e.g. agents networks) or utilize existing distributionnetworks (discount stores).
133. Zoning deregulation has also been undertaken to encourage the development of large and
modern retail outlets with a view to promoting discount stores and drive down retail prices
210;  as of
1998, large discount retailers (under 10,000m3 in land size) have been authorized to operate in green
belt areas (section (2)(ii)(b) and Chapter III(4)(v)).
134. Similar registration and approval procedures affect domestic and foreign firms.  In 1998, it
could take around 790 days to prepare, file and receive approval from the Government to operate
large-size retail shops in Korea.211
GATS commitments
135. Despite the elimination of the space- and store-related requirements in 1996, Korea's
GATS commitments on foreign commercial presence remain subject to the economic needs test
limitation, which covers:  wholesale markets with floor space of more than 3,000m2;  large stores with
floor space of more than 3,000m2;  wholesale trade centers;  wholesale trade of used cars;  wholesale
trade of gaseous fuels and related products;  and foreign trade services.212  No national treatment
limitations apply for cross-border supply, consumption abroad, and commercial presence.  Excludeditems and activities cover:  firearms, explosives and swords;  works of art and antiques;  and, the
establishment and operation of, and distribution services at officially designated public wholesale
markets for agricultural, fishery and livestock products.  The authorities note that in the light of
autonomous liberalization in the sector these rese rvations have no impact, in their view, on the
activities of foreign firms in Korea.
(b) Electronic commerce
136. Korea has made efforts to introduce and facilitate e-commerce while encouraging fair
competition and the development of domestic e-commerce markets with minimal state intervention.
213
Its policy has focused on building trust, enhancin g the information infrastructure for e-commerce
(e.g. networks, quality, inexpensive connection), and maximizing/expanding benefits in several areas
(e.g. government procurement, technology development, standardization).214  Developments in this
                                                          
208 WTO document S/C/W/37, 10 June 1998;  and APEC (1999).
209 Korea Chamber of Commerce and Industry (1998).
210 Restrictive zoning and land development laws (section (5)(vii)) as well as a scarcity of land in
Korea reduce the use of land and its availability.  According to a McKinsey report, 0.2% of the total country is
completely free of regulation for building mega-size retail formats such as shopping malls;  in addition, thecomplicated and time-consuming application process for build ing large-scale stores acts as an indirect barrier to
foreign investment (Korea Chamber of Commerce and Industry, 1998).
211 Korea Chamber of Commerce and Industry (1998).
212 WTO documents GATS/SC/48, 15 April 1994, and S/C/W/37, 10 June 1998.
213 OECD (1999d).
214 OECD (1999d).Republic of Korea WT/TPR/S/73
Page 167
area are related to those in telecoms.  The domestic e-commerce market has expanded rapidly to a
considerable multiple of its 1998 level.215
137. No barriers affect e-commerce directly.  Following a November 1998 Joint Statement on
Electronic Commerce, signed with the United States, Korea undertook not to impose customs dutieson the flow of information by electronic means.
216  Since 1999, several forms of support have been
provided to promote Internet use through supply of personal computers to economically
disadvantaged persons at the "affordable price" of W 1 million (US$844), sale of software at post
offices in rural areas, and a flat rate for connection to online services and training programmes;
between October 1999 and March 2000, 11 manufacturers supplied 300,000 PCs that meet this pricetarget.
217
138. Since 1997, Korea has actively participated in OECD work in this area.  At the WTO General
Council and the Committee on Trade and Development, in 1998, it indicated the need to address
connected issues such as market access, intellectual property rights, customs valuation, and
Article XX exceptions.218  In line with domestic policy considerations, Korea supported a duty-free
and less restrictive environment for global Internet transactions.
(vii) Construction
139. Korea's construction market was the ninth largest in the world in 1999 and may register the
world's highest growth of 12% per year until 2003.219  Its share in total GDP (10.1%-11.6%)
considerably exceeds the average level of most industrialized economies.220  Korean construction and
engineering companies operating overseas (mainly chaebol-affiliated or state-linked) ranked eighth in
terms of in terms of international revenue in 1998.221
140. The domestic construction market has depended largely on the operations of the state-owned
land bank, Korea Land Development Corporation or Korea Land Corporation (KOLAND), a land
development monopoly until January 1999;  under th e Urban Development Act, as of January 2000
the private sector has also been allowed to pa rticipate in land development operations.  KOLAND is
entrusted with implementing government policy objectives such as an increase in the supply of
                                                          
215 Forecasts by the Korea Natio nal Computerization Agency and a United States economic
agency (WEFA) contained in OECD (1999d).  According to other sources, between 1996 and 1999, the size ofKorea's e-commerce market grew by an overall rate of 470% to W 67.2 billion (US$56.7 million);  in the
year 2000 a nnual growth was expected to attain 121% (Ministry of Finance and Economy/Center for Economic
Information (1999d), pp. 28-31;  and FKI (1999), No. 221, September, p. 14).
216 The EU and Japan have also signed such bilateral statements with the United States (USTR, 1999).
217 Ministry of Finance and Economy/Center for Economic Information (1999d), pp. 28-31;  and
FKI (1999), No. 221, September, p. 14.
218 WTO documents WT/COMTD/M/19, 24 March 1998, and WT/GC/M/28, 8 May 1998.
219 Data from the Korea Trade-Investment Promotion Agency (quoting from a number of foreign
sources, including Standard and Poor's DRI) published in  The Korea Herald  [Online], 18 December 1999.
Available at:  http://www.koreaherald.co.kr/ [10 January 2000].
220 WTO document S/C/W/38, 8 June 1998;  and National Statistical Office (1999), September,
Tables in section V and Table XII.4.
221 Ranking by the United States monthly Engineering News-Record  published in The Korea Herald
[Online], 26 August 1999. Available at:  http://www.koreaherald.co.kr/ [10 January 2000];   EIU (1999), p. 26;and FKI (1999), No. 220, July/August, p. 37.  In addition to the affiliate of state-owned steel company
POSCO (section (4)(iv)), the following chaebol firms were included:  Daelim Engineering Co.;  SK Engineering
and Construction Co.;  Samsung Engineering Co.;  and Ssangyong Engineering & Construction Co.WT/TPR/S/73 Trade Policy Review
Page 168
affordable housing (100% of housing supply ratio by the year 2002)222, the decentralization of the
population, the strengthening of industry competitiveness, and balanced regional development.
KOLAND has a monopoly in land supply and the authorities do not intend to open this activity to
competition;  it also undertakes the construction of Korean plants abroad (e.g. China,Russian Federation).
223  KOLAND's activities, projects and customers benefit from subsidized interest
rates, tax exemptions or 50% reductions (e.g. in the registration and real estate acquisition tax, transfer
and property tax, capital gains tax, development-related taxes (Chapter III(4)(i)) and direct funding by
the Government.  Although its market share dropped considerably in the period 1995-97, KOLAND,
has remained the single largest market player in residential and industrial land sites.
141. Since 1962, the state-owned Korea National Housing Corporation (KNHC) has been
entrusted with the construction of housing and public facilities, land development, urban renewal, and
the production of construction materials.224  In line with the above-mentioned housing objectives,
constructed housing units may be put up for sale (soft loans available) or rent, or provided free to lowincome workers.
142. Since 1996, Korea's construction and engineering markets have been opened gradually to
foreign competition, as called for under its GATS commitments.  The construction business permit
system has been replaced by a registration system and procedural simplifications introduced.  Foreign
companies are required to deposit US$800,000 as a credit guarantee with the Korean ConstructionMutual Aid Association in order to obtain a construction licence;  this deposit is to become voluntaryfor general construction in July 2000 and for special construction July 2001.
225
143. In accordance with commitments under the WTO Agreement on Government Procurement, as
from 1997, Korea has liberalized part of its public construction sector to foreign contractors.  As
indicated earlier (Chapter II(7)(i), Chapter III(2)(vii)), in 1999/2000 government procurement
practices in the construction of the Inchon International Airport were challenged in the context of the
WTO dispute settlement mechanism;  they were found to be not subject to the provisions of the
WTO GPA.226
                                                          
222 Despite a 92.4 % housing rate nationwide, as at December 1998, large cities seem to suffer from
housing shortages, with a housing rate of 70% to 80%.  Statements by the Minister of Construction and
Transportation (Mr. Lee Kun-choon) published in The Korea Herald  [Online], 21 August 1999.  Available
at:  http://www.koreaherald.co.kr/ [10 January 2000].
223 KOLAND information online.  Available at:  http://www.koland.co.kr/english/index.htm
[6 January 2000].]
224 KNHC information online.  Available at:  http://www.knhc.co.kr/eng/index.htm [6 January 2000].
225 APEC (1999).
226 WTO document WT/DS163/6, 31 January 2000.Republic of Korea WT/TPR/S/73
Page 169
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