Republic ofKorea WT/TPR/S/19
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IV. SECTORAL POLICY PATTERNS AND TRENDS
(1) Overview
1. Since theinitial Trade Policy Review in1992, thepolicy environment haschanged significantly
formany economic operators inKorea. Insensitive areas suchasagriculture, thedirection andpace
ofchange have been influenced strongly byexternal factors, including international negotiating
requirements andbroader foreign policy considerations, rather thandomestic efficiency objectives.
Inthepolitical process, suchobjectives havelongbeendwarfed bytheextraordinary performance of
Korea 'smanufacturing industries (electronics, steel,shipbuilding andmotor vehicles) andcountervailing
non-economic considerations related tosecurity, cultural heritage andthelike. Bycontrast,
efficiency-driven changes appear tohavedrawn lessresistance inmodern sectors suchasfinancial and
telecommunications services which, providing general business inputs, tendtohaveamore immediate
impact onoverall economic expansion.1Actual implementation ofliberalization measures and
programmes,usuallyannouncedyearsinadvance,hasbeenremarkablyconsistent,withoutanysignificant
delays orreversals.
2. Trade policies overthepasttwodecades havealsobeeninfluenced byserious concerns, both
onadomestic economic andabilateral political basis, overthecountry 'schronic trade andcurrent
account deficits. Asalready indicated, these concerns aremost strongly expressed intheImport
Diversification Programme affecting selected imports from Japan, theLocalization Programmes to
encouragedomesticproductionofmachineryandothercapitalequipment,andrenewedexportpromotion
efforts fuelled byagrowing trade deficit intherecent past.
3. Government efforts toaddress thecurrent account deficit, aswellastheunderlying domestic
structural issues, alsounderpin the1993-97 Five-Year PlanforaNewEconomy. Asnoted inChapter II,
thePlancallsfortheabolition ofunnecessary regulations stifling economic activities aswellasfor
enhanced export capabilities inparticular inhighvalue-added, technically advanced products. Other
export-related objectives include thedevelopment ofbranded domestic products, thestrengthening of
overseas distribution networks, promotion ofoutward direct investment, andencouragement ofjoint
ventures withforeign firms.
(2) Agriculture, Forestry andFisheries
(i) Structural developments
4. Korean agriculture relies heavily onsmall-scale farming, withanaverage farmsizeofabout
1.3hectares. Sectoral productivity isverylow. Even ifvalued atKorea 'shighdomestic prices, the
share ofagriculture intotaldomestic production (6.6percentofGDP in1995) isabout halfitsshare
inemployment (12.5 percent).2Owing tosignificant off-farm income, however, including transfers
from urban workers, theaverage income offarmhouseholds isclose totheaverage forKorea asa
1Atthecorporate level, theFederation ofKorean Industries (FKI) hascalled forderegulation andrelated
measures tohelpreduce highdomestic costs. During theFKI'sannual meeting inFebruary 1996, itsChairman
urged theGovernment "tohelprectify thehigh-cost industrial structure, which hinders Korea 'sinternational
competitiveness", through reforming thefinancial sector, reducing interest rates toindustrial countries 'level
andlowering logistics costs (Korea Herald, 16February 1996).
2OECD (1994), pp.26-27. Measures toexpand thescale offarming dateback atleast tothe1989
Comprehensive Master PlanforRural Development (KIEP, 1996, p.150). Todate, success hasbeenminimal.WT/TPR/S/19
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whole. Theshifttohigher-value-added products, suchaslivestock andfruit, isalsoregarded generally
ashaving apositive impact onincomes.
5. SupportforKoreanfarminghastraditionallybeenbasedonborderprotection,shieldingdomestic
marketsalmostcompletelyfromexternaldevelopments.3Pricegapsbetweendomesticandworldmarkets
mayamount toseveral 100percent,peaking atover700percentforsoybeans in1995, andhaveshown
nosigns ofdecline inrecent years (Table IV.1).4Producer Subsidy Equivalents (PSE) areestimated
toexceed those foranyOECD country, including Switzerland andJapan.5
Table IV.1
Differences between domestic andinternational prices formajor products, 1992-95
A.Cereals andpotatoesa
(W/tonne)
1992 1993 1994 1995
Rice Domestic price 1,313,982 1,387,965 1,504,871 1,502,422
World price 383,990 386,951 465,524 389,620
Differential (%) 242 259 223 286
Barley Domestic price 642,225 672,916 699,629 707,131
World price 124,275 120,375 119,149 136,262
Differential (%) 417 459 487 419
Soybeans Domestic price 1,198,459 1,347,240 1,443,703 1,712,090
World price 202,067 215,682 225,647 208,704
Differential (%) 493 525 540 720
Maize Domestic price 468,469 469,002 465,559 462,979
World price 100,994 91,396 95,512 106,599
Differential (%) 364 413 387 343
Potatoes Domestic price 504,533 354,933 434,667 529,333
World price ... ... ... ...
Differential (%) ... ... ... ...
Sweet potatoes Domestic price 293,600 327,733 410,133 409,600
World price ... ... ... ...
Differential (%) ... ... ... ...
Table IV.1 (cont'd)
3Information onindividual policy instruments affecting thesector (including applied tariffs, adjustment duties,
licensing requirements andsanitary/phytosanitary procedures) ispresented inChapter III.Agricultural trade
disputes areincluded inAnnex II.2.
4Pigmeat andonions aretheonlyproducts where domestic prices were below theirworld market equivalents.
Theresults forpigmeat maybedistorted duetothelowvolume ofimports and/or thestatistical conventions
applied. Korea usesJapanese import prices forpork(onacarcass basis) asitsreference fortheworld market
price ofpigmeat. Onacut-meat basis, however, Korea 'sdomestic price isabove theimport price ofpigmeat
from Denmark andtheUnited States.
5OECD (1994), p.68.ThePSEmeasures income transfers toproducers resulting from thefullrange of
agricultural policies, covering fiscal transfers aswellastheprice impact ofborder protection. Theimpact on
consumers isdiscussed inGATT (1992), Vol. I,p.148.Republic ofKorea WT/TPR/S/19
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B.Livestockb
(W/carcass kg.,W/liquid kg.)
1992 1993 1994 1995
Beef Domestic price 7,634 6,811 7,244 7,887
World price 2,137 1,955 2,077 1,927
Differential (%) 257 248 249 309
Pigmeat Domestic price 2,048 2,148 2,381 2,297
World pricec3,051 3,506 3,918 2,987
Differential (%) -33 -39 -39 -23
Poultry meat Domestic price 1,869 1,987 2,408 2,244
World price 1,569 1,446 1,710 1,587
Differential (%) 19 37 41 41
Milk Domestic price 417 427 427 427
World price 210 261 222 ...
Differential (%) 99 64 92 ...
C.Special crops andfruitc
(W/kg.)
1992 1993 1994 1995
Peanuts Domestic price 3,232 3,047 3,672 3,100
World price 494 539 553 566
Differential (%) 554 556 564 548
Redpeppers Domestic price 7,455 6,288 5,492 8,038
World price 1,392 1,469 978 2,061
Differential (%) 436 328 462 290
Garlic Domestic price 746 1,280 2,922 1,559
Whole price ... 444 544 863
Differential (%) ... 188 437 81
Onions Domestic price 253 303 743 377
World price ... 484 355 474
Differential (%) ... -37 109 -20
Apples Domestic price 1,480 1,241 1,721 1,798
World price 509 491 ... ...
Differential (%) 191 153 250c206d
Pears Domestic price 1,868 1,998 2,325 2,373
World price 434 394 ... ...
Differential (%) 330 407 490c502d
Oranges Domestic price 1,051 899 1,252 1,764
World price 429 444 ... ...
Differential (%) 145 102 182c297d
... Notavailable.
a Domestic price indicates producer prices, world prices areonac.i.f. basis.
b Draft dataforPSEcalculations.
c Based onJapanese import prices forporkonacarcass basis.
d Based on1993 world market prices.
Source: Government ofKorea.WT/TPR/S/19
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6. Given Korea 'sreliance ontrade measures forfarmprotection, theensuing costs areborne
predominantly byconsumers, witharegressive effect onlower-income families. However, price
subsidies areintended toeasesucheffects andsmooth outsharp market fluctuations. Thesubsidies,
inturn,imply asignificant drain onpublic coffers, which isfurther amplified byvarious government
programmes fortraining, investment support andthelike.Thebudget fortheMinistry ofAgriculture,
Forestry andFisheries amounted tonearly 14percentoftotalgovernment expenditure in1995.6
7. Riceoutput hasshrunk since theearly 1990s asashare ofdomestic agricultural production,
while fruitandvegetable production hasexpanded (Chart IV.1). Despite thedecline inproduction,
self-sufficiency inthericesector hasremained highasconsumption hasbeenonadownward trend.
While theself-sufficiency levelforgrain products asawhole declined from about 34to28percent
between 1992and1995, ithasremained considerably higher formostlivestock products (Table IV.2)
6OECD (1994), pp.67-71.Republic ofKorea WT/TPR/S/19
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Table IV.2
Self-sufficiency levels inagriculture, 1992-95
A.Crops self-sufficiency
(Percent)
Total Rice Barley Wheat Maize Soybeans Other
cerealsOther
1992 34.1 97.5 82.6 0.02 1.2 12.2 103.4 13.1
1993 33.8 96.8 74.9 0.03 1.4 13.8 99.6 12.9
1994 (estimated) 27.7 87.8 48.3 0.03 1.4 12.6 93.6 11.0
1995 (forecast) 28.5 96.3 57.9 0.5 0.9 10.6 97.4 9.5
B.Livestock self-sufficiencya
(Tonnes, percent)
1992 1993 1994 1995
Beef Consumption 324,130 332,854 385,444 429,510
Domestic production 142,253 185,179 210,391 220,083
Imports 181,877 147,675 175,053 209,427
Self-sufficiency (%) 44 56 55 51
Pork Consumer 749,940 786,173 810,569 848,346
Domestic production 747,505 786,173 787,019 801,269
Imports 2,435 0 23,550 47,077
Exports 10,887 14,524 14,281 18,392
Self-sufficiency (%) 101 102 99 97
Chicken Consumption 330,671 343,951 349,427 382,857
Domestic production 330,671 343,951 349,427 374,857
Imports 0 0 0 8,000
Self-sufficiency (%) 100 100 100 98
Milk Consumption 1,920,443 1,983,673 2,078,347 2,143,841
Domestic production 1,850,743 1,843,963 1,947,318 2,013,615
Imports 69,700 139,710 131,029 195,876
Self-sufficiency (%) 96 93 94 94
a Meat dataisonacarcass weight basis, milkdataisonafluidmilkbasis.
Source: Government ofKorea.
8. Korean farmpolicies havebeencriticized foralackoflonger-term orientation. According
toobservers, interventions weredriven mainly byshort-term exigencies, including price-stabilization
targets, andfailed tofocus onstructural adjustments andimprovements inrural living conditions.7
However, demographic change mayprove adecisive adjustment factor: theKorean farmpopulation
7KIEP (1996), p.153.WT/TPR/S/19
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isdeclining andrapidly aging. Within onegeneration, itisestimated tofallfromitscurrent levelof
11.6percenttoabout 6percentoftotalpopulation.8
(ii) Policy orientation
9. Theprimary objectives ofKorea 'sagricultural policy aretoensure an"adequate" degree of
foodsecurity andparity inurban andfarmincomes. Actual policy formulation andimplementation
liesinthehands ofthePresidential Commission onRural Reconstruction (composed ofacademics and
representatives from farmorganizations, consumer organizations, etc.)andtheAgricultural Policy
Council, inco-ordination withatotalof14ministries.9Major budget-related initiatives foragriculture
arelisted inTable IV.3.10
Table IV.3
Fiscal expenditure foragriculture, forestry andfishery bymajor category, 1992-96
(Wbillion)
1992 1993 1994 1995 1996
Investment andloans 1,761 2,270 2,893 3,701 4,551
Improvement oftheAgricultural Infrastructure ... 911 1,019 1,434 1,935
Farm Mechanization ... 328 337 402 442
Improvement ofProduction andMarketing Facilities ... 507 604 924 1,040
Development ofTechnology andInformation ... 16 36 40 80
Manpower Development ... 197 304 424 428
Development ofRural Income Sources ... 151 348 334 478
Improvement ofRural Living Conditions ... 104 131 142 149
Fishery andForestry Restructuring ... 54 115 0 0
Reduction offarmers 'debtandincome support 597 652 565 555 777
Repaying government debt 49 671 355 792 1,048
Government purchase andmanagement ofgrain 300 440 1,389 1,912 784
Othersa139 113 123 117 165
Total 2,846 4,146 5,324 7,077 7,325
... Notavailable.
a Includes small investment projects andbasic expenses.
Source: Government ofKorea.
8OECD (1994), p.26.In1992, thefarm population was13percentofthetotalpopulation; 40.3percent
ofthefarm population was50years oldorolder (43.5 percentin1994); and37.5 percent(40.2 percent)
offarm households relied onpart-time work (KIEP, 1996, pp.154-155).
9TheMinistry ofAgriculture, Forestry andFisheries isalsoinvolved inexport promotion, e.gforporkexports
toJapan andgeneral agricultural exports totheUnited States andtheEuropean Union.
10According tothepublication "The FY1995 Korean Budget inBrief," theSpecial Account forAgricultural
Structural Adjustment wassetatW4.5trillion andtheAccount forRural Development TaxManagement at
W1.5trillion.Republic ofKorea WT/TPR/S/19
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10. TheSeventh Five-Year Economic andSocial Development Plan(1992-1996) anticipated
adjustments totheagricultural andfishery import systems andtosubsidy programmes expected toresult
from theUruguay Round. Various initiatives were aimed atimproving productivity through
modernization andmechanization. ThePlancovered measures toachieve economies ofscalebyrelaxing
limits onfarmsize11;expand jobtraining andemployment programmes forthose wanting toleave
farming orwork part-time; diversify ruraleconomic structures; provide special retirement andother
social welfare programmes; andimprove rural living conditions. Total public investments of
W42trillion weretobemade over10years toimplement ruralstructural improvement programmes
(thetime-frame wassubsequently shortened), withfunding assisted bytheSpecial Account forRural
Structural Improvement. TheSpecial Account wasestablished in1992, andisfinanced through customs
duties onagricultural imports, value-added taxes onanimal feedandlivestock equipment, andother
taxes andlevies.12
11. Objectives andmeasures promulgated intheFive-Year Economic andSocial Plan were
subsequently complemented bytheNewAgricultural Policy of1993.13Inturn,thelatter wasreplaced
in1994bytheAgriculture andFisheries Development Planinorder tofurther accommodate thenew
WTO framework. The1994 Planseeks toincrease competitiveness inriceproduction bylowering
costs viaincreased farming scale, etc.; encourage specialization inlivestock production; promote
mechanization andautomation inhorticulture; create export processing facilities nearproduction sites;
andadvance general systemic reforms, including ofrural landusage andmarket distribution.
12. AnewFarm andFishery Structural Improvement Project isintended toassist major agricultural
sectors, including ricefarming, horticulture andlivestock, bymeans ofdirect income payments and
acommodity loanprogramme forricefarmers.14
(iii) Uruguay Round implementation programme
13. Thefarm sector asawhole does notyetappear wellprepared tomeet thechallenge of
liberalization, given itslong-entrenched structural inefficiencies. Income losses attributable totheWTO
Agreement areestimated toreach US$4 billion by2005, contrasting withanetgainofUS$28 billion
11Funds areprovided tohelp"core farmers" toexpand their farms withtheobjective ofachieving alevel
of5-10hectares. Within atotalof2.1million hectares ofpriority farmland designated asAgricultural Promotion
Districts, theprevious 3hectare limit onfarmland ownership wastobeincreased to20hectares. Outside the
Districts, theprevious limit would remain, toprevent landspeculation.
12MajorelementsoftheSpecialAccountincludetheAgricultureandFisheriesDevelopmentFund;Agricultural
andFisheries Marketing andPrice Stabilization Fund; andLivestock Promotion Fund.
13TheNew Agricultural Policy called forachange from output-expanding andprice-supporting policies to
restructuring policies, forreforms inthefarmland system andfortheindependent operation oftheNational
Agricultural, Fishery andLivestock Cooperative Federations inseparating credit allocations.
14TheImprovement Project aswellasinvestment projects tobefunded byaSpecial Agricultural Taxwere
referred tointheDeputy Prime Minister 's1996 New Year'sAddress. Under the1996 Government Budget,the
Special Agricultural TaxforAgricultural Rural Development wasexpected toaccount for2.5percentoftotal
revenue.WT/TPR/S/19
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fortheeconomy asawhole.15While itisdifficult togauge theimpact oftheRound across individual
farmactivities, theareaofgreatest concern appears tobelivestock production.16
14. TheUruguay Round implementation process included revisions toeight laws, notably the
Foodgrain Management ActandtheLivestock Farming Act,aswellassignificant changes tothetariff
régime.17Asnoted inChapter III,Korea istophase inUruguay Round-related tariff reductions and
tariffication commitments overa10-year period, i.e.by2004. Tariff quotas apply to67products or
product groupings, andinclude many restrictions previously imposed onbalance-of-payments grounds.18
Minimum access provisions apply toimports ofrice,barley, potatoes andsweet potatoes. Domestic
support toagricultural producers, asmeasured bytheAggregate Measure ofSupport (AMS), isto
fallfrom about W2.2trillion in1995 to1.5trillion in2004.19
15. Korea 'straditional import banonricewaslifted in1995, following anintense andhighly
controversialinternalpolicydebate.However,asKoreabenefitsfromdevelopingcountrystatus,imports
arescheduled toincrease from nomore than51,300 tonnes (1percentofdomestic consumption) to
arelatively modest 205,228 tonnes by2004(4percent). Thein-quota tariffratewassetat5percent.20
Forbeef,thedateforabolition ofquantitative restrictions wasextended from1997to2001inexchange
forincreased quota levels andarelatively lowfinaltariff rate. Beefimports aretoexpand from
123,000 tonnes in1995 to225,000 tonnes bytheyear2000.21Therelevant dutywassetat43.6per
centin1995, upfrom20percentunder previous restrictions, andistofallto41.6percentin2000.
InJanuary 2001, thetariff forunlimited import quantities willbe41.4percent,falling to40percent
by2004.
16. Thetariffquotaforfreshoranges,anothersensitiveagriculturalproduct,wassetat15,000tonnes
in1995, rising to20,000 tonnes in1996 and25,000 tonnes in1997.22Subsequent expansions areat
15Economic Bulletin, January 1994, pp.8-11. The1992-96 Five-Year Economic andSocial Development
Plan, which stated thatKorea 'sagro-fishery sector didnotseem tobefullyprepared forrapid trade liberalization,
referred, inter alia,tothesector 's"traditional small-scale andbackward market structure".
16Sung-Hoon Kim(1995), p.244.
17Theother sixlaws subject torevision were theSericulture Law, Seed Industry Law, Forestry Law,
AgriculturalandFisheriesMarketingandPriceStabilizationAct,FeedGrainManagementAct,andAgrochemicals
Management Act.
18Actual tariffication (i.e.theapplication ofatariff ratetoabove-quota imports) involves asmaller group
ofproducts, excluding items stillunder balance-of-payment provisions. Forthephase-out ofKorea 'sBOP
restraints, seeChapter III(3)(ii).
19GATT (1994). TheAMS includes market price support andother production-related support measures.
Given thisspecific focus, Korea 'sAMS-based commitments form onlyasmall partoftotalagriculture-related
expenditures (Table IV.3).
20There isnoabove-quota rate.
21Dairy cowandbeefcattle imports -other thanforbreeding purposes (HS0102.10 -1000 and-2000) -are
tobeliberalized in2001, asaresult ofconsultations withtrading partners. Notariff quotas have been set.
22Consumer demand forimported oranges dropped sharply after apesticide scare inMay 1995, following
thetelevision presentation ofavideo from aJapanese consumer group (Korea Herald, 21February 1996).Republic ofKorea WT/TPR/S/19
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anannual rateof12.5percent,allowing for57,017 tonnes by2004. In-quota imports facea50per
centtariffrate,while above-quota imports aresubject toaninitial rateof84.3percentupontheabolition
ofquantitative restrictions inJuly1997, falling to50percentby2004. Fororange juice, theinitial
import quota wassetat50,000 tonnes, rising to55,000 tonnes for1996 and,prior toitsabolition,
to30,000 tonnes forthefirstsixmonths in1997. The50percenttariff onin-quota imports istobe
replaced bya58.2percentinitial tariff rateaftertheJuly1997 liberalization. Thisrateistofall
gradually to54percentby2004.
17. Forrice,barley, potatoes, beans andanumber ofother products, Korea hasreserved itsright
toapply animport mark-up inaddition tothein-quota tariff (Table AIII.2). Theimport mark-up on
beefwillbeeliminated in2001. Inaddition, atotalof118tariff linesattheHS10-digit level are
subject tothespecial agricultural safeguard clause ("SSG").
(iv) Administration oftariff quotas
18. Korea utilizes three different procedures forquota administration. Imports of18products,
including rice,barley, soybeans, beef, oranges andsesamum, areeffected andsoldinthedomestic
market solely bydesignated State-trading agencies forthepurpose ofensuring "market order". For
39products, tariff quota entitlements aredistributed onafirst-come-first-served basis (ifthere isno
historical import performance) oronpastimport performance. Fortheremaining 10products, including
pork, chicken andmilkpowder, anauction system isemployed toensure efficient quota management.23
Actual import levels andapplied tariff ratesforimports under Korea 'scurrent andminimum access
commitments for1995 aredetailed inTable AIV.1.24
19. Tariff quota administration hastypically beendelegated tothesame State-trading entities,
agricultural associations andmarketing organizations previously responsible forpricestabilization and
other market intervention programmes. Forexample, thequota allocations forbeefaremade onbehalf
oftheMAFF bytheLivestock Products Marketing Organization (LPMO), aState-trading enterprise
mandated "tostabilize domestic beefmarkets inthefaceofdiverging domestic andimport prices."
Swine andfowlallocations areeffected bytheNational Livestock Cooperatives Federation (NLCF),
while those formilkpowder aremade bytheKorea Dairy Industry Association (KDIA). Allocations
forfresh oranges andorange juicearemade bytheCheju Citrus Growers 'Cooperative (CCGC) and
theAgricultural andFishery Marketing Corporation (AFMC).25
20. TheSimultaneous BuySell(SBS) system, setupin1993, allows formore direct salesbetween
beefexporters andend-users. Thismayhelptoavoid interest conflicts thatcould otherwise arisefrom
theabove State-trading andother entities administering thein-quota imports. Korea intends toexpand
imports under theSBSsystem from 30percentofthebeefquota in1995 to70percentby2000.26
23Auction procedures forlivestock products, milk powder, condensed milk andhoney aredetailed inthe
"Livestock Quota Auctioning Guideline" oftheLivestock Products Marketing Organization (LPMO).
24Actual import levels in1994 formajor agricultural products were: rice: 12,000 tonnes; barley: none;
maize: 5.7million tonnes; potatoes: 250tonnes; andsweet potatoes: 20tonnes.
25WTO document G/AG/N/KOR/1, 31May1995. TheNational Livestock Cooperatives Federation was
designated toallocate thetariff quota fornatural honey asbee-keeping isclassified inKorea under thelivestock
industry.
26USTR (1995).WT/TPR/S/19
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According totheauthorities, thefullbeefquota hasnotbeenallocated immediately totheSBSsystem,
asthedomestic beefmarketing system would otherwise face"serious disturbance".
(v) Supply management andprice stabilization policies
21. Sheltered behind tariff quotas andtheremaining BOP-related measures, Korea maintains a
number ofprice stabilization schemes foragricultural products.27Themajor stabilization schemes
currently inplace aretheFoodgrain Management Programme (formerly theFoodgrain Procurement
Programme); theLivestock Price Support Programme; theBuffer Stock Management Programme
(previously theAgricultural Price Stabilization Programme); andtheSericulture Price Stabilization
andPromotion Programme.28Reflecting Uruguay Round commitments intheareaofinternal support,
however, thegovernment funds involved aregradually being reduced across anumber ofareas. For
example, thegovernment purchase price forricehasbeenfrozen, andtheamount budgeted forrice
purchases declined from W1.66trillion to1.52trillion between 1994 and1995.29This, however,
hasapparently notbeenfullyreflected intheprices received byfarmers in1995 (Chart IV.2).
22. TheFoodgrain Management Programme, financed viatheGrain Management Fund (aSpecial
Account under thebudget), represents byfarthelargest share ofKorea 'sagricultural subsidies notified
totheWTO,totallingW1.8trillionin1994(TableIII.8).UndertheProgramme,governmentpurchases
during theharvest season serve tosmooth temporary pricefluctuations andpropupproducer incomes.
Thestocks arereleased ontothemarket atother times oftheyear.30Procurement andrelease levels
forrice,barley andsoybeans declined between 1992and1995; however, thefallinprocurement levels
wasfarstronger (Table AIV.2).
23. Korea 'ssupport mechanism forricehasbeenincreasingly difficult tomaintain financially and,
in1992, theGovernment decided itwould nolonger purchase lower-quality "Tongil" rice.31According
tothe1993-97 Five-Year PlanfortheNewEconomy, savings inthecontext ofthericepurchasing
programme -obtained bygradually reducing purchasing volume andpricedifferentials between market
andgovernment prices -aretobeusedforsupporting structural adjustment intheagricultural and
fishery industries.32
27The1992 Secretariat Report stated thatmaize wassupported byaprice stabilization scheme andimport
quotas; price stabilization schemes were alsopresent forbeef, porkandchicken; milk; pulses, soybeans and
sesame. InKorea 'sSupporting Tables toitsUruguay Round tariff schedule, rice,barley, soybeans, maize and
rapeseed arelisted under price support measures; milk, grapes andsilkworms areincluded under non-exempt
direct payments (AGST/KOR, Tables 6and7).
28Details ofthese programmes areprovided inGATT (1992), pp.136-137. Korea notified theBuffer Stock
ManagementProgramme totheWTOasameasureexemptfromthereductioncommitmentforagriculturalsupport.
29Since 1992, ricehasbeentheonlyagricultural product purchased andreleased directly bytheGovernment.
30Theprevious Secretariat Report noted thatriceandbarley purchase prices were wellabove sales release
prices, withlosses averaging 0.3percentofGDP annually (GATT, 1992, Vol. I,p.150).
31OECD 1994, pp.69-70.
32Thepublication "The FY1995 Korean Budget inBrief" stated thataGrain Bond Disposal Fund raised
W1.1trillion, buthadoperating expenditures ofW5.7trillion. Nodetails ofthisFund were available.Republic ofKorea WT/TPR/S/19
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24. Korea 'sagricultural commitments under theWTO arenotexpected todirectly affect theBuffer
Stock Management Scheme, which isadministered through government purchasing schemes and
State-trading entities (Chapter III(4)(v)(e) andTable AIII.10). While theBuffer Stock Management
Scheme potentially covers awider range ofproducts, onlyredpeppers, garlic andonions havebeen
under procurement inrecent years (Table AIV.2).
25. There appears tobenodirect support forlivestock production under theLivestock PriceSupport
Programme, onlymarketing loans.33Thesubsidy element, calculated asthedifference between the
marketing loanrates(3-5percent)andavailable commercial rates(about 11percent), declined from
W1.6billion toW0.7billion between 1992and1995. Under theSericulture Price Stabilization and
Promotion Programme, theprimary support element hasbeenthebounty forcocoon marketing. It
hasdeclined sharply since 1992, fromW4.2billion toW534million in1995, asaresult ofasteep
fallindomestic production. Over thesame period, totalexpenditure under theProgramme fellfrom
W4.8billion toW923million.
33Indirect price support, provided through tariff quotas andtheremaining BOP-related measures, hasbeen
sufficient tomaintain Korean meat prices wayabove world levels (Table IV.1).WT/TPR/S/19
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(3) Industry
(i) Overview
26. Thetelevision andcommunications equipment industry remains Korea 'slargest manufacturing
sector interms ofgross output andvalue-added, followed bychemicals andchemical products.34
Reflecting differences infactor intensity andproductivity, thehighest levelofvalue added peremployee
isfound inthetobacco andrefined petroleum products sectors, contrasting withapparel andleather
(Tables AIV.3 andAIV.4). Value added generally expanded significantly faster thangross output
between 1990 and1994, which maybeattributable, among other factors, toKorean manufacturers
diversifying intohigher-quality market segments, expanding domestic production ofinputs, and
intensifying internal supply links.
27. Since the1992 Trade Policy Review, Korea 'strade inmanufactured goods hascontinued to
expand rapidly, withexports alone accounting for26percentofGDP in1995. Theexport basket,
however, remains narrowly focused, withonlytwoproducts, semiconductors andautomobiles, together
accounting fornearly 25percentofthetotal(Chapter I).Asaconsequence, Korea 'sindustry is
relatively vulnerable toproduct-specific market andpolicy developments such aswere seen in
semiconductors inearly1996. Theshifttohigher-technology exports might havecontributed tofurther
increasing therôleofgeneral trading companies inexport marketing. Theshare ofexports, including
SME exports, channelled through suchcompanies increased from 38percentin1990 to46percent
in1995 (Table IV.4).
Table IV.4
Exports andimports bygeneral trading companies (GTCs), 1985-95
(US$ million)
1985 1990 1995
Exports Imports Exports Imports Exports Imports
Samsung Co.Ltd. 3,018 1,107 6,281 3,096 16,515 6,606
Hyundai Corporation 3,977 1,898 5,783 3,453 13,797 4,831
Daiwoo Corporation 3,009 532 4,749 845 10,746 4,714
LG(Lucky-Goldstar) Corporation 1,445 341 2,914 673 6,999 4,496
Ssang-yong Corporation 1,264 396 1,706 516 3,766 2,578
Sunkyong Corporation 930 989 1,619 913 3,396 1,205
Hyosung Corporation 901 218 1,502 396 2,737 570
Korea International Trading Ltd. 136 75 240 140 103 71
Total ofabove 14,680 5,556 24,794 10,032 58,059 25,071
GTCs asapercentage oftotaltrade 48.4 17.8 38.1 14.3 46.4 18.5
Source: Government ofKorea.
28. Smallandmedium-sizedenterprisesaccountfornearly70percentofmanufacturingemployment
andcontribute about 40percentofmerchandise exports. SMEs arestrongly represented in"light"
34Themost recent ISIC dataforKorea dates back to1991. Noconcordance between KSIC andISIC was
available from theKorean authorities.Republic ofKorea WT/TPR/S/19
Page 79
industries, whose production growth (5.7percentin1995) hastended totrail"heavy" industries
(13.6 percent). Support policies fortheseenterprises havegenerally focused ontaxbreaks, low-interest
loans andprohibiting large firms from entering specific business sectors; more recent initiatives,
however, haveemphasized market-oriented measures andtechnical assistance. In1995, forexample,
thenumber ofbusinesses reserved forSMEs wasreduced bynearly 100toabout 140; theywillbe
further reduced to88by1997. Overthepastthreeyears, theGovernment hasalsopermitted theentry
ofabout 50,000 foreign "trainees" inorder tohelpSMEs overcome labour scarcity andeasewage
pressure.35Total funding tosupport SMEs in1996isestimated atW1.5trillion, ofwhich thelargest
portion comes from theKorea Development Bank viatheFund forTechnology Development and
Structural Improvement.
29. Expressing concern overariseinthecountry 'strade deficit, theGovernment announced a
number ofmeasures inJune1996 topromote Korean exports.36These include raising thepermitted
limit foradvance export payments from 10to15percentofthevalue oftheexports (from
40to50percentforshipbuilders), reducing import duties oncertain rawmaterials inorder tolower
production costs, andincreasing funding forexport insurance.37Plans havealsobeenmade toraise
tariffs onsome lightindustrial products, through useofadjustment duties.
(ii) Textiles, clothing andfootwear
(a) Textiles andclothing
30. Korea istheworld 'sfourth-largest producer oftextiles andclothing. While growth forecasts
aregenerally positive, some subsectors seem tobefacing strong adjustment pressure.38According
totheSpinners andWeavers Association ofKorea, forexample, thenumber ofspindles inoperation
declinedfrom3millionin1994to2.8millionin1995duetoreducedprofitabilityasaresultofincreased
competition, mainly fromChina, andhigher rawmaterial costs. Producers areincreasingly moving
off-shore, notably toChina andSouth-east Asiatoescape wage pressure andlabour shortage.
31. Since 1966, productivity enhancement loans havebeenoffered viatheKorea Federation of
Textile Industries forthedevelopment ofnewtextile materials andtechnology andinvestment in
pollution-control equipment. Theloans carry maturities offivetoeight years andaninterest rateof
7percent. MOTIE hasdeveloped proposals foralong-range planforthetextiles industry, calling
fordomestic production of"high-function textiles" toincrease from 20to50percentofdomestic
35Economic Bulletin, May 96,pp.29-40.
36Forthefirstfourmonths of1996, Korea 'strade deficit increased toUS$3.9 billion from theprevious year's
level ofabout US$3.2 billion (balance-of-payments basis). Asashare ofGDP, however, theGovernment
anticipates thatthelevel willdiffer little from the1percentrecorded in1995.
37Korea Herald, 8June1996. Export financing andgovernment financial assistance toindustry aredetailed
inChapter III(4)(iii) andTable III.8.
38Textilesandclothing,togetheraccountingforabout17percentoftotalmanufacturingemployment,continue
torankasKorea 'ssecond-largest export category. However, reflecting flagging clothing exports, their share
intotal merchandise exports fellfrom about 18to11percentbetween 1990 and1995 (Chapter I).WT/TPR/S/19
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demand.39Main elements oftheplaninclude restructuring production systems, developing newfabrics
andfinishing techniques, increasing overseas investment, promoting domestic-branded goods, and
infrastructural consolidation forthetextiles industry.
32. Thesector doesnotrelyonintensive border protection. Average applied tariffs formosttextile
andapparel categories aresimilar totheaverage formanufacturing asawhole (Chart III.4). However,
asthefinalbound ratesnegotiated intheUruguay Round areinmostcases several times higher than
currently applied rates, there isconsiderable room forupward adjustment.
33. Reformsinthedistributionsector(ChapterIII(4)(v)(d))maycontributetointensifyingcompetition
athome, while thephasing outoftheMFA quota régime isabout toredefine theinternational playing
field. Thelonger-term effects oftheWTO Agreement arepredicted tobesignificant, withKorean
exporters facing serious competition inmainmarkets towards theendoftheten-year transition period.40
Atpresent,Koreansuppliesoftextilesandclothingarerestricted,undertheWTOAgreement,inCanada,
theEuropean Union, Norway andtheUnited States (Table AIV.5).41
(b) Footwear
34. Footwear hadtraditionally beenamong Korea 'stopexports. However, while ranking fifth
asrecently as1991, itisnolonger placed among theleading 10products (Chapter I).Reflecting
declining pricecompetitiveness vis-à-vis other developing-country producers, overall exports fellfrom
US$3.8 billion in1991toUS$1.4 billion in1995. TheUnited States andJapan remain Korea 'slargest
markets,withtheproductmixshiftingtomorespecialized,higher-value-addedproductssuchasclimbing
shoes. Exports ofshoeparts aregrowing rapidly tosupply assembly operations abroad, mainly in
China, Indonesia andVietNam.42
35. Applied tariffs onfootwear currently average 8percent; theUruguay Round finalbound rates
are13percent(Chart III.3). Following theconclusion of"optimization measures" under theFootwear
RationalizationProgrammeinFebruary1995,licensingrequirementsfornewbusinesseswereeliminated
(Chapter III(4)(v)(c)).43
39Korea Business Review, December 1995, p.49.TheSecretariat 's1992 TPRreport noted thattheKorean
Government hadsupported structural adjustment measures since 1986, primarily below-market loans toreplace
oldequipment. According totheKorea Trade-Investment Promotion Agency (KOTRA), theapparel industry
willbegiven support until theyear2000 (Korea Trade andInvestment, March-April 1995, p.37).
40KIET (1996), p.36.
41TheSecretariat 's1992 TPR report noted thatexport restraints applied tonearly 90percentofsix-digit
tariff lines (p.168). Following theexpiry oftheformer Multifibre Arrangement (MFA) attheendof1994,
allbilateralagreemen tsinplaceon31Decemb er1994werecarriedoverintothenewWTOAgreemen tonTextiles
andClothing, withsome improvements inannual growth rates.
42Korea Trade andInvestment, various issues.
43Major elements ofthe1992 Footwear Rationalization Programme were capacity reductions, capacity
registrations tolimit expansion, redeployment ofemployees from ailing companies, andpromotion ofdesign
andKorean-specific trademarks.Republic ofKorea WT/TPR/S/19
Page 81
(iii) Pharmaceuticals
36. Apart from theintroduction oftheWorld Health Organization 'sguidelines forGood
Manufacturing Practice (GMP) inMay1994, regulations inthesector havebeenvirtually unchanged
since1992.44Forbothdomesticandimportedpharmaceuticals,documentationmustbesubmittedproving
thatGMP requirements havebeenobserved. Pharmaceutical prices inKorea areregulated bythe
Ministry ofHealth andWelfare, under theState-run health system thereimbursement level for
pharmaceuticals is55percent. Withdomestic production amounting toUS$7 billion, imports worth
US$208 million compared withexports ofUS$76 million in1995. Applied tariffs currently average
about 7percent, while theUruguay Round finalrates aresetatover15percent(Chart III.3).
Government financial support fortheindustry in1994totalled W2.8billion, according totheKorean
Pharmaceutical Manufacturers Association.45Themain focus wasonR&D activities inareas such
asmolecular design andsynthesis, toxic evaluation ofnewdrugs, anddevelopment ofmedicaments
from natural substances ofplant oranimal origin.
(iv) Petroleum refining andpetrochemicals
37. Asnoted inChapter III,newmarket entries andcapacity expansions intheoilrefining and
petroleum retailing industries aresubject tolicensing restrictions. Petroleum prices arealsosubject
topricecontrols(ChapterIII(4)(v)(c)).MOTIEcurrentlypermitsnewinvestmentsinpetroleumrefining
upto130percentofprojected domestic demand, andallows amaximum of50percentforeign equity
participation. From January 1997, petroleum imports andexports (with theexception ofliquified
petroleum gas),domestic oilprices andentry intotheretailing industry istobederegulated. Foreign
direct investment andentry intotherefining industry arescheduled tobeliberalized inJanuary 1999.46
38. From March 1992 untiltheendof1995, Korea applied an"investment guidance" system to
thepetrochemical industry inorder toprevent overcapacity and"ensure adequate investment". Lending
institutions wererequired toconsider theGovernment 'sviews when making loandecisions. In1995
petrochemical production expanded byabout 23percentinthefaceofa5percentincrease indomestic
demand anda18percentincrease inexports.
39. While theguidance system wasabolished in1996, capacity expansions arenowreferred to
anindustry council composed ofthepresidents oftheeight major petrochemical firms, allofwhich
areprivately owned. Recently announced expansion plans, involving increased naphtha-cracking
capability, havegenerated fears ofareturn totheoversupply situation oftheearly 1990s.47
(v) Ironandsteelproduction
40. Korea istheworld 'ssixth-largest steelmaking country withatotalproduction capacity ofnearly
37million tonnes in1996. Ofthis,over60percentisaccounted forbyPohang IronandSteel Co.
44Details ofKorea 'slicensing andother measures regarding pharmaceutical imports arepresented in
GATT (1992), pp.91-93.
45Korea Herald, 13April 1996.
46Expansion plans bytheindustry areexpected toliftrefining capacity to2.4million barrels daily, upfrom
thecurrent level of1.8million barrels (Korea Herald, 5June 1996).
47According toKorea Herald, 28May 1996.WT/TPR/S/19
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(POSCO), which isabout 20percentgovernment owned. In1995, Korea recorded thehighest output
rise,atnearly 9percent, among thetenleading steelmakers. While output growth isexpected to
moderate toabout 7percentin1996, observers have predicted investment toincrease bynearly
50percentover1995 inlinewithindustry plans toexpand capacity by4.4million tonnes.48Asa
result, POSCO issettobecome theworld 'ssingle largest steelproducer by1999. According tothe
authorities,Koreahasnotprovidedanyassistancetothecapacityexpansionscurrentlyunderwaythrough
measures suchassoftloans ortaxbreaks.
41. Despite itslarge domestic production capacity, Korea isrunning atrade deficit insteel. In
thewake ofcurrency appreciation andasurge inlow-cost imports ofH-beams andhot-rolled coils,
thedeficit rosetoUS$1.27 billion forthefirstfourmonths of1996, compared toUS$682 million for
thewhole of1995.49Notwithstanding theentry onstream ofadditional domestic stainless steeland
other plants, theannual deficit for1996 asawhole ispredicted byKorea IronandSteel Association
torisetoabout US$1.4 billion.50Although Korean steelmakers, including POSCO, haverequested
theGovernment tointervene inpriceformation (e.g.inMay1996)51,theauthorities statethatnosuch
steps havebeentaken since February 1994.
(vi) Machinery, electrical andelectronic goods
(a) Machinery
42. Reflecting thesupply patterns ofcoresegments ofKorean manufacturing, imports ofcapital
goods from Japan havesurged inthewake oftherecent economic boom, from US$15.1 billion in
1993toUS$25.3 billion in1995. Given Korea 'straditional reliance onsuchimports, machinery and
related products arewellrepresented intheImport Diversification Programme (Table AIII.3) which,
forvarious reasons, iscurrently being phased out.Certain import prohibitions under theProgramme
hadalready beenwaived inthepastwithaview toencouraging inward foreign direct investment.
Since July1995, companies operating inForeign Investment Zones have been allowed toimport
equipment andparts required forproduction and,inMarch 1996, theGovernment announced that
restrictions would bewaived forforeign-affiliated companies, regardless oftheirlocation, ifthesupplies
areusedforspecified business purposes.
43. While foreign exchange loans hadinitially beenreserved forpurchases ofmachinery abroad,
theGovernment announced inMay1996thatUS$2.5 billion would bereleased foracquisition orlease
48Korea Herald, 11and14February 1996.
49Exports in1995 declined by4.5percent, to9.5million tonnes, while imports increased by3.7percent
to8.6million tonnes. For1996, theKorea IronandSteel Association predicted thatexports would grow by
5.7percentandimports would decline by1.6percent.
50Applied ironandsteel tariffs currently average about 7percent, theyaretofalltoabout 1percentasa
result oftheUruguay Round negotiations (Chart III.3).
51Korea Herald, 24May 1996.Republic ofKorea WT/TPR/S/19
Page 83
ofKorean-made machinery.52Deferred-payment export financing for1996wassetatW3.4trillion,
ofwhich W1.8trillion isforindustrial equipment and1.4trillion forother machinery.
44. Theauthorities consider thatKorea 'ssupport policies formachinery andotherindustries facing
serious tradeimbalances arewithin thelimits oftheWTO Agreement onSubsidies andCountervailing
Measures. ByJune1996, Korea hadnotified onesubsidy programme formachinery producers under
theWTO Agreement, theAssistance Programme toPromote theSpread ofDomestically Produced
Mini-computers (seealsoChapter III(4)(iii)).
(b) Electrical andelectronic products53
45. Expanding itsshipments byover40percentin1995 toUS$44 billion, theelectrical and
electronics industry accounted forabout 35percentofKorea 'stotalexports (Chapter I).Theindustry 's
overall momentum relied mainly onitssemiconductor branch, whose exports grew by70percentto
reach US$22 billion. In1996, however, semiconductor production isexpected tosuffer fromrapidly
falling world market prices andtheWon'sappreciation vis-à-vis theYen.
46. Increased overseas production byKorean companies wasseenasamajor factor behind the
38percentgrowth inimports ofhousehold electrical andelectronics goods in1995. Reforms
implementedinJanuary1996inKorea'sdistributionsector(ChapterIII(4)(v)(d))areexpectedtofacilitate
further import expansion.
47. Topromotethedomesticinformationtechnologyindustry,Koreaeliminatedthedutyonimported
software inJanuary 1996. Other trade-related liberalization measures include thewaiving inApril 1996
ofmodel-approval requirements for31electrical appliances, including street lamp switches andtape
recorders (Table III.4).54
(vii) Motor vehicles
48. Korea 'sautomobile industry hascontinued toexpand rapidly since theearly1990s, becoming
theworld 'sfifth-largest by1995.55By2000 domestic production isforecast toriseto4.5-5 million
cars, withabout halfdestined forexport, compared toproduction of2.3million anda31percent
export ratio in1994 (Table IV.5).56Since 1994, theSamsung group hasbeen preparing for
diversification intoautomobiles, withproduction expected tocommence in1998.57Domestic industrial
52Theforeign currency loans arepayable over10years, andcarry arelatively lowrateofinterest (Libor
plus0.5-1.5 percent). Coverage isupto70percentofpurchases forlarge companies and100percentfor
SMEs.
53Policies affecting thetelecommunications equipment sector aredealt withinsection (4)(v) below.
54Korea Economic Weekly, 8April 1996. Import-related technical requirements aresummarized in
Table AIII.4.
55Subsequently, theEUended mostofKorea 'sGSPbenefits forautomobiles, inJanuary 1996, asdidCanada.
56Korea 'sexports ofautoparts toJapan andother countries arealsoexpanding, most notably those connected
withvarious technology transfer arrangements.
57Repudiating indications inpress reports (Korea Business Review, November 1995), theGovernment stated
thatSamsung didnotrequire formal government permission toenter thecarindustry.WT/TPR/S/19
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expansionhasbeenaccompaniedbyinvestmentinoverseasproductionandassemblyoperations,primarily
inEastern Europe.
Table IV.5
Trade inmotor vehicles, 1985-94
(Thousand units andpercent)
Production Imports Exports Consumption Export ratio Import penetration
(thousand units) (percent)
1985 378 0.9 123 246 33 0.37
1986 602 0.6 306 288 51 0.21
1987 980 0.8 546 420 56 0.19
1988 1,084 2.7 576 523 53 0.52
1989 1,129 5.4 356 763 32 0.71
1990 1,322 13.3 347 954 26 1.39
1991 1,498 12.8 390 1,104 26 1.16
1992 1,730 9.8 456 1,268 26 0.77
1993 2,050 8.7 639 1,436 31 0.61
1994 2,262 15.0 692 1,556 31 0.96
Source: OECD, Government ofKorea.
49. Although Korea 'smostpromising export markets areindeveloping countries, theauthorities
areanxious toensure continued unrestricted access tomain OECD markets, including inWestern
Europe.58Toimprove trade relations, Korea hasstreamlined itsownimport régime. Theapplied
tariffonvehicles wasbrought down from17percentin1992to8percentin199659;theannual vehicle
tax,which isbased onengine sizewassubstantially reduced; andspecial excise taxonvehicles with
engines over2,000 ccwascutfrom 25to20percent(Table IV.6). Import salesincreased byover
70percentin1995, toover8,900 units, attributed primarily tothereduction inexcise taxes and
increased marketing efforts. However, imports ofmostJapanese carmodels continue tobeprohibited
under theImport Diversification Programme.60
50. Regulatory changes, resulting primarily fromconsultations heldinSeptember 1995 withthe
United States, include thefollowing: reduction oftheacquisition taxonluxury carsfrom15percent
to2percent; abolition offoreign investment restrictions affecting sizeandnumber ofshowrooms;
liberalization ofradio andtelevision advertising time; lifting offoreign ownership restrictions for
domestic financing companies (currently limited to49percent)fromJanuary 1997; modification of
theapproval process forvehicle standards (seebelow); opening access totheSeoul autoshow for
foreign companies; andelimination oftherequirement thattaxpayers report foreign carownership
58Asian Wall Street Journal, 4March 1996.
59In1986, when imports were firstpermitted, tariffs were setat60percent. Final bound rates negotiated
intheUruguay Round average 35percent, withapeakof80percentinthecaseofmotor vehicles. (Chart III.3).
60Import restrictions onfivecategories ofJapanese carswere removed in1996. Importers arealsomoving
toexpand imports ofU.S.-assembled Japanese-branded cars(Korea Herald, 26January 1996).Republic ofKorea WT/TPR/S/19
Page 85
ontaxforms. Thedecrease oftheacquisition taxandtheopening ofinternational financial opportunities
mayequally stimulate thestagnant domestic automobile market.61
Table IV.6
Automobile taxation, 1996
Taxcategory Criteria Rate
Tariff Passenger cars 8%
Special Excise Tax Passenger carsover2,000cc 20%
1,500cc-2,000cc 15%
1,500cc orless 10%
Value-added tax Allvehicles 10%
Acquisition Tax Allvehicles 2%
Registration Tax Passenger cars 5%
Commercial cars 3%
License Tax(fee) Carsvalued overW70million W45,000
Over 1,600cc W36,000
More than1,400cc W27,000
Lessthan1,400cc W18,000
Annual Vehicle Tax Over 3,000cc W370/cc
2,500cc-3,000cc 310/cc
2,000cc-2,500cc 250/cc
1,500cc-2,000cc 220/cc
1,000cc-1,500cc 160/cc
800cc-1,000cc 120/cc
800cc orless 100/cc
Education Tax Allvehicles 30%ofSpecial Excise Tax
20%ofRegistration Tax
30%ofAnnual Vehicle tax
Special TaxforAgriculture andFishery Allvehicles 10%
Public Bond Allvehicles Varies according tosales price and
engine size
Source: Government ofKorea.
51. Technical requirements areanimportant component ofthe1995 agreement. Ifstandards for
"safety testitems" inmajor producer countries suchastheEUortheUnited States meet orexceed
61Korea Business Review, November 1995. Asaresult oftheagreement withtheUnited States, Korean
manufacturers arereportedly rushing todevelop large-engine models (over 2,500 cc).WT/TPR/S/19
Page 86Trade Policy Review
Korean standards, certificates ofconformity issued bythemanufacturer (United States) orthecompetent
authorities, combined with summary data, aredeemed tosatisfy therelevant documentation
requirements.62Theminimum import level forsafety compliance testing wasraised from 100to
500units inJanuary 1996, andwillbefurther increased to1,000 units byJanuary 1998.
(viii) Shipbuilding
52. Korea hasbeentheworld 'ssecond-largest shipbuilder since 1992.63Between 1989and1993,
theGovernment maintained aninvestment banonnewshipbuilding capacity aspartofanindustry
rationalization programme.64State support provided totheindustry under theprogramme included
a10-year, W150billion loanbytheKorean Development Bank; delayed payment ofanearlier loan
ofW250billion; andtaxbenefits forthetakeover ofailing shipbuilders byanother company.65In
addition, overW400billion wasinvested bytheparent company ofoneoftheshipbuilding firms
concerned.
53. Theindustry 'sorder books arewellfilled atpresent. Outstanding orders exceed 13.8million
tonnes, ensuring fullemployment ofcurrent capacity foratleasttwoyears. Industry plans toexpand
capacity to9million tonnes by2000havetaken shape.66According totheauthorities, nodirect public
assistance hasbeenprovided inthiscontext. In1996, theGovernment guaranteed US$1.8 billion in
bare-boat charter hirepurchase (BBCHP) loans andUS$200 million inother foreign currency funding
tofinance theconstruction ofnewvessels and,toalimited extent, thepurchase ofsecond-hand ships.
Theloans include thefinancing ofthree liquified natural gas(LNG) carriers and,according tothe
authorities, aregranted atmarket rateswithin theframework oftheOECD guidelines67;there isno
formal requirement forpurchases ofdomestically builtships.
54. TheOECD Agreement onRespecting Normal Competitive Conditions intheCommercial
Shipbuilding andRepair Industry wasscheduled tocome intoeffect inKorea inJuly1996. The
Agreement provides fortheelimination ofalmost alldirect andindirect subsidies, introduces aPricing
62Currently, U.S. andEUcarimports areconsidered tomeet these requirements for,respectively, 28and
23items. Theauthorities intend toaccept a"qualified manufacturer 'scertificate ofconformity" andasummary
ofdatafrom 1997.
63In1993, Korea moved ahead ofJapan tobecome thelargest shipbuilder, interms ofneworders, before
slipping tosecond place for1994 and1995.
64TheRationalizationProgramforDaewooShipbuildingandHeavyMachineryLtd.andtheKoreaShipbuilding
Engineering Corp.
65Liketheoutstanding loanofW250billion, thenewloanwastoberepaid over10years withagrace period
of7years. Theauthorities state thattheactual taxbenefits were insignificant.
66Inaddition, withaview tobroadening anddiversifying their production base, Daewoo, Hyundai, Halla
andSamsung haverecently sought toacquire yards abroad (Daewoo inRomania, India, Malaysia andVietNam)
orconclude jointventures withforeign partners (e.g. Samsung inChina). Theauthorities haverepudiated press
reports suggesting thatKorea 'sfivelargest shipyards recently agreed onacommon research anddevelopment
programme. SeeNachrichten fürAußenhandel, 22February 1996.
67Applied tariffs inregard toships, boats, etc.currently average about 4percentascompared toUruguay
Round final rates of13percent.Republic ofKorea WT/TPR/S/19
Page 87
Code toprevent dumping, andestablishes abinding dispute settlement mechanism.68Korea 's
implementation lawfortheAgreement, passed inDecember 1995, contains thePricing Code andthe
prohibition ofsupport measures.
(4) Services
(i) Overview
55. Mirroring itsrôleinmerchandise trade, Korea ranks amongst theworld 'stoptentraders in
services.69Balance-of-payment statistics indicate anetdeficit innon-factor services trade, withthe
surplus infreight services more than offset bydeficits intransportation andtravel services
(Chapter I(2)(ii)). Overall, Korea 'sservices sectors haveexpanded their share inproduction and
employment inrecent years. Among thelarger segments, banking andcommunications services have
grown significantly, contrasting withpublic administration, aheterogenous group ofother services,
andthetrading sector (Table IV.7).70
56. State involvement insome services sectors suchastelecommunications andbroadcasting is
significant, while other"sensitive" sectors haveremained reserved fordomestic operators. Major public
equity participation includes theGovernment 's80percentholding ofKorea Telecom and100percent
ownership ofKorea Broadcasting Services, inaddition toState control oftherailroad andpostal
industries.Significantportionsofthetransport,communications,finance,insuranceandbusinessservices
sectors arecurrently closed toforeign direct investment (FDI). Overall, however, theshare ofservices
ininward FDIhasrisensharply inrecent years, fromabout 30percentin1992 toabout 50percent
in1995 (Chapter I(2)(iii)). Ofthepermitted areas, investment infinance andtourism accounted for
about 9and19percent, respectively, ofcumulative realized FDIatend-1994.
57. Recent policy initiatives include regulatory improvements indistribution andfinancial services
andamore open policy towards foreign direct investment. According totheauthorities, thebasic
policy approach istoparticipate ininternational services negotiations withaviewtoliberalizing the
sector gradually, aligning national withinternational standards andpractices, andresponding tothe
concerns oftrading partners. Inaddition totheWTO negotiations, Korea 'sservices régime hasrecently
beenreviewed inthecontext ofthecountry 'senvisaged accession totheOECD.
58. Korea 'sSchedule ofSpecific Commitments under theGeneral Agreement onTrade inServices
covers 80service activities, incorporating many oftheliberalization measures undertaken since the
1980s. Theinclusions aresubject, however, toavariety ofgeneral (i.e.horizontal) limitations. Under
commercial presence, Korea hasscheduled limitations ontheacquisition ofdomestic companies;
individual foreign investors mayholdupto3percentofanexisting company 'sstock, withtotalforeign
investment nottoexceed 15percent(10percentinthecaseofthePohang IronandSteel Company
68In1989, theShipbuilders Council ofAmerica brought asuit,under Section 301oftheU.S. Trade Act,
againstKorea,Japan,GermanyandNorway,allegingsubsidizationoftheirshipbuildingindustries.Thisprompted
theOECD negotiations leading totheAgreement (Economic Bulletin, August 1994, p.9).
69In1994, Korea wastheworld 'ssixthservices importer andseventh largest exporter ofcommercial services
(withtheEuropeanUnioncountedasasingleentity);thiscomparestorankingsofseventhandeighth,respectively,
formerchandise imports andexports (WTO, 1995a).
70Theexpansion ofimportant segments, including distribution andpersonal business services, hassuffered
from traditional, inefficient management systems, according totheauthorities.WT/TPR/S/19
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andtheKorea Electric Power Corporation).71Theacquisition ofdomestic corporate bonds isrestricted,
andtheminimumFDIlevelperinvestmentissetatW50million.Foreignacquisitionoflandisunbound
(with exceptions), asisaccess toresearch anddevelopment subsidies. Theestablishment ofcorporate
branches, andinfinancial services ofrepresentative offices, must beapproved under theForeign
Exchange Management Act.Forasignificant number ofsectors, Korea hasassumed nobindings with
regard tothecross-border supply ofservices. Thisincludes most construction, tourism andtravel
services (hotels andrestaurants) aswellastransport activities (most maritime auxiliary services, some
airtransport andauxiliary services), duetolackoftechnical feasibility. Thepresence ofnatural persons
isgenerally unbound; exceptions include certain executives, senior managers andspecialists. The
onlym.f.n. exemption applies tocomputerized flight reservation systems.
Table IV.7
Structure oftheservices sector, 1990-95
(Percentage ofGDP at1990 prices)
1990 1992 1994 1995a
Services (including construction) 61.6 62.3 63.2 63.2
Electricity, water andgassupply 2.2 2.2 2.4 2.4
Electricity 2.0 2.0 2.0 2.0
Water supply 0.2 0.2 0.2 0.3
Gasmanufacture anddistribution 0.1 0.2 0.2 0.2
Transportation andcommunications 6.7 7.1 7.5 7.9
Transportation 4.6 4.7 4.6 4.6
Communications 2.0 2.4 2.9 3.3
Construction 11.5 11.5 11.4 11.4
Trade 10.9 10.8 10.7 10.7
Banking andother financial institutions 4.5 5.4 6.6 6.0
Insurance andrealestate 4.2 3.9 3.8 4.2
Ownership ofdwellings 3.5 3.7 3.8 3.7
Public administration 4.1 3.9 3.5 3.3
Other services 14.0 13.8 13.5 13.5
Education 4.2 4.0 3.9 3.7
Medical andhealth 1.5 1.5 1.5 1.5
Recreation andentertainment 0.8 0.9 1.0 1.0
Hotels 0.5 0.5 0.5 0.5
Restaurants 1.2 1.3 1.3 1.3
Personnel services 1.0 1.0 1.0 0.9
Other 4.8 4.8 4.2 4.6
a Preliminary.
Source: Government ofKorea.
59. Korea didnotinclude thefollowing sectors orsubsectors initsGATS Schedule: realestate
business; postal andcourier services; education; environmental sanitation; tourist guide services;
71TheSchedule states these limits would beraised in1996-97 (seesection (iv)).Republic ofKorea WT/TPR/S/19
Page 89
health; recreational services; andinternal waterway, space, railandpipeline services. Within the
professional services subcategory, nocommitments weremade forlegal, medical anddental services.72
(ii) Construction
60. Construction isoneofthemajor sectors oftheKorean economy, interms ofbothdomestic
production (Table IV.7) andinternational trade. Thedomestic market reached W60trillion (about
US$77 billion) in1995, andoverseas contracts werevalued atUS$8.5 billion.73For1996, spending
onpublic construction projects alone isexpected toamount toW24trillion, while totalspending under
theGovernment 's10-year Social Overhead Capital (SOC) planisestimated atoverUS$85 billion
(Chapter I).
61. Under theGATS, Korea hasscheduled commitments under thecategories "general construction
work" and"special construction work", reflecting domestic licensing practices. Possession ofaKorean
licence for"general construction", forwhich acommercial presence (i.e.abranch orlocalsubsidiary)
ismandatory,isthemainrequirementcurrentlygoverningaccesstothismarketsegment.Whilebranches
ofgeneral construction companies (i.e.large-scale enterprises) were permitted from January 1996;
forspecial construction companies, branches willbeaccepted onlyfrom January 1998. Under a
compulsory subcontract system, general construction companies arerequired tosubcontract atleast
30percentofthecontract value tospecial construction companies. Cross-border supply ofmost
construction services isunbound duetoanalleged lackoftechnical feasibility. Inaddition tocomplying
withaminimum capital requirement ofW500million, construction entities mustemploy atleastfour
domestically qualified engineers; foreign qualifications aretobeaccepted laterin1996.
62. Atotalof24jointventure companies havebeenestablished sincetheKorean market waspartly
opened in1994, withadditional foreign firms expected toenterinthenearfuture.74Korea 'smembership
intheWTO Agreement onGovernment Procurement, entering intoeffect inJanuary 1997, isexpected
toimprove procurement opportunities forforeign companies (Chapter III(4)(ii)).75
72AlthoughnotincludedinitsGATSSchedule,Koreaopened11medicalsectorsin1995toforeignparticipation,
according totheauthorities.
73FarEastern Economic Review, 11April 1996, p.54.
74Until January 1996, inward foreign investment inthegeneral construction sector waspossible onlythrough
establishment ofajoint venture withalocal licence holder (KIEP, 1996, p.78). Atotalof25construction
contractors and62engineering firms wereoperating inKorea attheendofMay1996. Ofthese 87firms, 26have
opened representative offices, and44ofthe51subsidiaries established were joint ventures.
75Under theEnforcement Decree ofthe"Act Relating toContracts towhich theState isaParty", asrevised
in1995, apre-qualification system wasintroduced for22public-sector projects valued inexcess ofW10billion.
Under the1995 revisions totheconstruction-related Technology Management Act,allpublic works inexcess
ofW5billion require supervision andcertification byagovernment-registered surveying company (FarEastern
Economic Review, 11April 1996, p.54).WT/TPR/S/19
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(iii) Transport
(a) Maritime transport
63. Virtually allofKorea 'strade iscarried byseaand,in1995, atotalof405million tonnes
1.5percentin1995, andtonnage grewbyabout 6percent(Table IV.8). Inturn,theshare ofKorean
flagvessels inthecountry 'sseaborne tradehasbeendeclining steadily toabout 23.5percentin1995.76
Non-conference carriers, ofwhich Hanjin isthelargest trans-Pacific container line,accounted forover
85percentofcargo shipments onthose vessels in1993.
Table IV.8
Maritime transport (Korean fleet), 1993-95
1993 1994 1995
Passenger transport (1,000 persons)
Total 8,286 8,280 9,097
Ocean-going 296 411 395
Coastal 7,990 7,969 8,702
Cargo transport (million tonnes)
Total 413 472 534
Ocean-going 317 354 405
Coastal 96 118 129
National carrier freight earnings
(US$ million)
Total 4,314 5,069 6,615
Ocean-going 2,414 2,611 2,975
Coastal 1,900 2,458 3,640
Total Orecarriers Container ships Oiltankers Carcarriers Others
Korean fleetbyvessel type
(thousand gross tonnes)11,647 3,929 2,202 1,340 805 3,453
Source: Government ofKorea.
64. Inthemid-1980 's,theShipping Industry Rationalization Policy wasintroduced tocope
withthesteepmarket decline following thesecond oilcrisis. Under theRationalization Policy, market
entry wasrestricted andthenumber ofdomestic shipping companies reduced from115to34through
mergers orcessation ofbusiness.77Towards 1990, however, apolicy ofderegulation followed. Foreign
carriers were allowed toestablish Korean branches in1989, andin1993 wholly owned foreign
76KIEP (1996), p.137. Under Korean regulations aBareBoatCharter withHire-Purchase option (BBC/HP)
isincluded among national flagships, withequal rights andobligations. AsofDecember 1994, theKorean fleet
wascomposed of454national flagand108foreign flagvessels over1,000 GRT, totalling 9.9and5.8million
deadweight tonnes, respectively.
77KIEP (1996), pp.137-143.Republic ofKorea WT/TPR/S/19
Page 91
investments werepermitted inauxiliary shipping services suchasfreight forwarding.78In1995awaiver
system forlinershipping wasabolished, allowing fullaccess tothedomestic market byforeign carriers,
andby1998thecurrent cargo reservation system istobeeliminated. Theprevious licensing system
forocean-going vessels wasreplaced witharegistration system in1996.79None ofKorea 'smaritime
transport companies isState-owned.
65. Cargo preferences currently apply toseven items: crude petroleum, ironore,rawmaterials
forfertilizer, grains, coal,rawmaterials forpetrochemical products, andliquified gas.80These items
must inprinciple betransported byKorean flagvessels. Theactual shares, however, ranged from
1.2percentforLNG toabout 82percentforironorein1993, resulting inanoverall average ofabout
onethird. By1994, thisaverage hadfallen toonequarter.81Waivers from thecargo preference
regulation maybeobtained inthefollowing cases: when thebidding rateofthenational flagvessel
exceeds thelowest bidding rateoftheforeign flagvessel bymore than10percent; when Korean
flagvessels cannot transport thecargo duetoalackoftransport capacity; when itisimpossible or
verydifficult tohavethecargo transported byKorean vessels duetospecial circumstances; andwhen
transportation byKorean vessels isrestricted because oflegislation inthetrading country concerned.82
66. TheKorea Maritime andPortAdministration (KMPA) isthemain authority regulating
international maritime transport.83Allcontracts inregard tointernational linerconferences mustbe
notified totheKMPA. Korean carriers participating insuchconferences arenormally exempt from
domestic anti-trust measures.
67. Inoneinstance, aKorean shipping company (Hyundai) wasmade subject toregressive duties
byatrading partner, theEuropean Union, alleging unfair pricing practices. Onintroduction ofthe
duties, inJanuary 1989, thecompany withdrew from theroute concerned.84(Korea maintains
comparable trade remedy instruments inthemaritime transport services sector.85)
78InSeptember andNovember 1991, theKorean branches oftwoU.S.-owned carriers, Sea-Land andAPL
obtained permission toundertake freight forwarding for rail transport (WTO document
S/NGMTS/W/2/Add.7/Supp.1, 24March 1995).
79Onemotivation fordomestic liberalization wasevidently theanticipation ofmarket openings resulting from
theUruguay Round services negotiations (KIEP, 1996, pp.138, 143).
80Theoriginal 11items onthelistwere reduced toeight inJune 1993 with theremoval ofgovernment
procurementgoods,refrigeratedgoodsandcemen t,followedbysteelproductsinApril1994(KIEP,1996,p.138).
IntheNegotiations onMaritime Transport Services, Korea offered tolimitthepreferences tothree commodities
after 1996 (iron ore,coalandliquified gas).
81KIEP (1996), p.145.
82WTO document S/NGMTS/W/2/Add.7, 1February 1995.
83Applicable regulations include theShipping Law, Shipping Industry Promotion Law, Seamen 'sLawand
Vessel 'sLaw.
84WTO (1995b).
85Retaliatory measures maybeauthorized intheevent thataforeign vessel operator isdeemed tohave
committedactshinderingthedevelopmentofKorea'smarinetransportation,ortohavedisruptedorderlyconditions
ontrade routes.WT/TPR/S/19
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68. Korea 'sGATS Schedule covers arange ofmaritime transport services, including linershipping,
andexcludes cabotage. Contrasting withother forms ofcommercial presence, Korea hasnotbound
itspolicies affecting theestablishment ofaregistered company foroperating national flagvessels.
Foranumber ofactivities, suchascargo handling, cross-border supply isunbound duetolackof
technical feasibility. Regarding thepresence ofnatural persons, nocommitments havebeenmade
concerning ship'screws andshore personnel.
(b) Airtransport
69. Over thepastfiveyears Korea 'saircarriers havegrown about twice asrapidly, interms of
passengers andfreight carried, astheworld aviation industry asawhole. Nearly 14million passengers
and1.2million tonnes offreight weretransported onscheduled international flights in1995byKorean
AirandAsiana Airlines, thecountry 'stwoflagcarriers.86Korean Aircurrently ranks among thetop
fiveandtop20firms worldwide interms ofairfreight andpassenger transport, respectively. Inaddition,
36foreign airlines currently provide services toKorea, ofwhich 11areinvolved incode-sharing
arrangements withtheKorean carriers.87Theeconomic importance accorded totheindustry isreflected
inthe"Guideline forStrengthening ourNational Carrier 'sCompetitiveness," established bythe
Government in1994.
70. Scheduled airline services androute distribution aremanaged through alicensing system.88
TheMinistry ofConstruction andTransportation (MOCT) approves international passenger andcargo
tariffs filedbytheairlines, based onthereference ratessetbytheInternational AirTransport Authority
(IATA).89TheMOCT alsohasresponsibility forallocating flight destinations andfrequency, as
determined through bilateral agreements, aswellasforapproving aircraft procurement. Slotallocation
inregard toincoming andoutgoing international flights isco-ordinated byKorean Airwithout
discrimination, according totheauthorities, onthebasisofguidelines issued bytheMOCT. Nospecial
privileges aregranted toKorean Airexcept that,asinanumber ofothercountries, Korean civilservants
areobliged tousenational carriers forofficial travel overseas. Korea 'sbilateral aviation agreements
arebeing revised toinclude Asiana Airlines asadesignated carrier.
86In1969, Korean National Airlines wasprivatized asKorean AirLines. Asiana Airlines wasestablished
asaprivate enterprise in1988, andallowed toflyinternational routes from 1990. Korea 'smain airport, Kimpo,
wasAsia'sbusiest in1994, with28million passengers.
87Themarket share offoreign carriers operating inKorea, measured interms ofpassengers carried, peaked
at53percentin1990. By1995, theshare hadfallen toabout 43percent(Korea Herald, 14February 1996).
Airlines inKorea arepermitted toestablish code-sharing andother types ofcommercial agreements withother
airlines, inaccordance withthecountry 's70bilateral airservice agreements.
88Regulations governing thesector arespecified intheAviation Act,andrefer tothestandards andpractices
setbytheChicago Convention onInternational Civil Aviation. TheConvention provides aglobal framework
defining, among other things, sovereignty, nationality ofaircraft, equal opportunities andequal treatment for
allparticipants,andmandatoryprovisionofnavigationservices.TheConventiondoesnotspecifyprincipletraffic
rights("freedomsoftheair"),whichhavesubsequentlybeenregulatedunderbilateralagreemen ts.Theygenerally
contain nationality clauses andprovisions oncapacity-sharing.
89In1992, approval procedures forratechanges were eliminated infavour ofareporting system fordomestic
routes.Republic ofKorea WT/TPR/S/19
Page 93
(iv) Financial services
71. Korea 'sfinancial institutions fallintotwomain categories, deposit money banks (including
commercial banks) andnon-bank financial institutions (NBFI).90Thesector asawhole hasgrown
rapidly inrecent years, withthegreatly increased rôleoftheNBFIs asthemost predominant
characteristic (Table IV.9). Anumber ofkeymarkets have, nevertheless, remained underdeveloped
including thelong-term bondmarket. Thisislargely attributed toprevious regulatory restrictions and
other government interventions intended toconcentrate domestic resources indesignated industries.91
While theproblem ofnon-performing assets hadlongbeenconsidered amajor hinderance tofinancial
sector liberalization,92according totheauthorities, theratioofnon-performing assets tototalloans
declined from2.1percentin1990to0.9percentby1995. Thiswasassisted greatly bylargewrite-offs
in1994.93
72. In1993,theGovernmentpresentedathree-stagefinancialreformandcapitalmarketliberalization
planfortheyears 1993 to1997.94Thiswasfollowed in1994 byaforeign-exchange reform plan
covering theyears 1995 to1999. Keyelements ofthefinancial sector planaretheliberalization of
interest ratesonmostloans anddeposits by1996(except ondemand deposits); theeasing ofrestrictions
onanumber offinancial instruments (e.g.commercial paper andcertificates ofdeposit); measures
tofacilitateforeigndirectinvestmentandeaserestrictionsonportfolioinvestment;andincreasedreliance
onmarket-based monetary control measures. Over90percentofthescheduled reforms havealready
beenimplemented, according totheauthorities. Remaining restrictions, apartfromlimits onforeign
share ownership, especially concern foreign access totheKorean bond market anddirect foreign
borrowing byKorean firms.95
73. Foreigners werefirstpermitted toinvest directly intheKorean stock market inJanuary 1992.
InDecember 1994, thelimitontotalforeign share ownership inalisted company wasraised from
10to12percent, andfurther increased to15percentinJuly1995.96Forgeneral corporations, the
ceiling wasincreased to18percentinApril 1996; fordesignated public sector utilities, itrosefrom
10to12percent; andthelimitforindividual investors wasraised from 3to4percent. Further
increases -to20percentforgeneral corporations, 15percentfordesignated public sector utilities
and5percentforindividuals -areenvisaged forthesecond halfof1996, subject tomacroeconomic
conditions. From 1997 to1999, theinvestment ceiling isexpected toberaised inequal increments
to29percent, before consideration isgiven in2000 toitscomplete abolition.
90NBFIsincludedevelopmentinstitutions,savingsinstitutions,insurancecompaniesandinvestmentcompanies.
91KIEP (1996), p.26.Traditionally, thefinancial sector hasplayed akeyrôleinKorea 'sinterventionist
economic system through theuseofpreferential credit allocations.
92IlSakong (1993), p.213.
93Commercial andprovincial banks arerequired tosetaside fullprovisions forbadloans bytheendof1998.
94Details ofcurrent government-related policy loans arepresented inChapter III(4)(iii) andTable III.8, while
thefinancial liberalization measures between 1980 and1992 aresummarized inGATT (1992), pp.56-57.
95Anoverview ofinterest rate, foreign exchange andcapital account reforms isgiven inChapter I.The
authorities have stated thattheliberalization ofdemand deposits willbeconsidered after 1997.
96Onereason forownership limits, according totheauthorities, isthatstock investments byforeigners could
induce instability inthedomestic economy duetoabrupt flows offoreign capital, including speculative funds.WT/TPR/S/19
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Table IV.9
Deposits andbond issues byfinancial institutions, 1980-95
1980 1985 1990 1993 1994 1995a
Deposits (%) 100.0 100.0 100.0 100.0 100.0 100.0
(Wbillion) (16,523) (53,327) (181,347) (333,222) (407572) (491,661)
Deposit money banks 64.2 49.4 37.6 34.2 34.5 33.5
Non-bank financial institutions 35.8 50.6 62.4 65.8 65.5 66.5
Insurance andpension funds 10.3 18.0 19.1 17.3 15.8 15.8
Development institutionsb0.9 0.5 0.7 0.5 0.4 0.4
Savings institutionsc15.8 20.8 34.3 40.6 41.9 43.6
Investment institutionsd6.4 6.9 5.2 3.5 3.8 3.2
Securities institutions 0.1 0.2 2.0 2.5 2.3 2.2
Official funds 2.4 5.2 2.5 1.5 1.4 1.3
Bond issues 100.0 100.0 100.0 100.0 100.0 100.0
(Wbillion) (2,572) (10,131) (35,558) (82,707) (98,668) (115,677)
Deposit money banks 16.0 3.4 4.8 5.3 5.4 7.5
Non-bank financial institutions 84.0 96.6 95.2 94.7 94.6 92.5
Insurance andpension funds 0 0 0 0 0 0
Development institutionsb15.3 15.3 17.1 25.0 25.7 26.5
Savings institutionsc0 0 0 0 0 0
Investment institutionsd26.8 57.0 67.1 60.3 59.7 57.0
Securities institutions 0 0.6 0.1 0 0 0
Official funds 41.9 23.8 10.9 9.4 9.2 9.0
a Preliminary.
b Includes theKorea Development Bank, theExport-Import Bank ofKorea, andtheKorea Long-Term Credit Bank.
c Mutual savings andfinance companies, credit unions, mutual credits, postal savings andtrustaccounts ofbanks.
d Merchant banks, investment finance companies andinvestment trustcompanies.
Source: Government ofKorea.
74. Under theGATS, Korea hasscheduled avariety oflimitations onmarket access andnational
treatment forthefinancial services sector asawhole. Forexample, cross-border supply offinancial
services maynotbeeffected inKorean currency; management andoperation ofassets ofafinancial
institution arerestricted, andafinancial institution maynotownnon-business realestate; assets owned
bybranches must bekeptwithin theterritory ofKorea, andthecapital ofthehead office isnot
recognized asthebasis fordetermining thefunding andlending activities ofbranches; interest rates
oncertainloansareregulated;andsomenewfinancialproducts(e.g.derivatives)aresubjecttoapproval.
Inaddition, cross-border supply, consumption abroad andpresence ofnatural persons (except asnoted
under thehorizontal commitments) areunbound forall12financial services categories; andcommercial
presence isunbound fortheleasing, claim settlement andactuarial business categories.97
97Liberalization measures specified inKorea 'sGATS Schedule included theexpansion in1994-95 ofthe
maximum limitofforeign equity participation forsecurities investment trustservices andforinvestment advisory
services. Aspartofnewcommitments under theSecond Protocol, Korea removed areciprocity-based m.f.n.
exemption affecting market entry andprovision offinancial services intheevent offuture liberalization measures.Republic ofKorea WT/TPR/S/19
Page 95
(a) Insurance
75. Korea istheworld 'ssixth-largest insurance market. Theindustry iscomposed of33life
insurance and17non-life insurance companies. Premiums received during fiscal year 1994
(i.e.April 1993-March 1994) totalled W36trillion, andtotalindustry assets atend-March 1995stood
atW67trillion. Foreign participation currently exists intheformofthreelifeinsurance subsidiaries,
seven lifeinsurance jointventures, twolifeinsurance branches andthreenon-life insurance branches.
Their premium share wasabout 6percentinthelifeinsurance sector andlessthan1percentinthe
non-life insurance sector.
76. TheKorean insurance sector ischaracterized byrelatively strong business concentration and
afocus onshort-term products. Inthelifeinsurance segment, forexample, thetopsixcompanies
account forover70percentofthemarket. Only 30percentofthelifeinsurance contracts arefor
terms oflonger thantwoyears, andnearly 90percentoflifeinsurance premiums areconnected with
savings-oriented products. In1994, theGovernment recommended that13companies increase their
capital reserves, andmandated additional capital increases in1995forseven companies. Inthenon-life
sector, losses inautomobile insurance havetotalled US$2.5billion overthepastfouryears, attributed
primarily togovernment ratecontrols during aperiod ofrapid increase inthenumber oftraffic
accidents.98
77. TheMinistry ofFinance andEconomy (MOFE) andtheInsurance Supervisory Board (ISB)
arethemain regulatory agencies inKorea 'sinsurance sector. MOFE isresponsible forestablishing
major policy guidelines andex-ante supervision suchaslicensing approvals, while theISBfocuses
onex-post supervision including thearbitration ofdisputes between policyholders andinsurers. An
Insurance Council, including theVice-Minister ofMOFE andtheISBPresident, hasbeenestablished
todeliberate onthecreation andmodification ofinsurance policies andsystems.
78. Under current prudential requirements, theminimum equity capital required isW10billion
forlifeinsurance companies andW30billion fornon-life companies. Their portfolio composition
isregulatedundertheInsuranceLawandtheRegulationonAssetManagementofanInsuranceCompany;
maximum foreign investment exposure, including foreign securities, islimited to10percentoftotal
assets. Thesame company cannot generally offerlifeandnon-life policies. Insurance companies are
prohibited from offering banking services.
79. TheInsurance Market Liberalization Programme, together withotherplansannounced between
1992and1995, ushered inaperiod ofgradual liberalization inthesector. Thisincluded thederegulation
ofpremium ratesandreinsurance conditions; theextension ofnational treatment toforeign insurers
andtheliberalization ofcross-border transactions incargo andaviation insurance; theelimination
oflicence renewal requirements forforeign-owned branches; andtheabolition ofannual limits on
thenumber ofnewsalesoffices. Further measures, scheduled forJanuary 1997, include theelimination
ofan"economic needs test"(seebelow); andtheopening ofcross-border transactions foralltypes
oflifeinsurance aswellasforanumber ofnon-life insurance categories (long-term accident insurance,
travel insurance andhullinsurance).99
98Korea Business Review, February 1996, pp.25-26.
99Korea Business Review, February 1996, pp.25-26.WT/TPR/S/19
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80. According totheauthorities, therearenocartels ormonopolies operating inKorea 'sinsurance
sector, norarethere arrangements among companies tospecify structure andlevelofpremiums or
limitcompetition fornewclients. Alldomestic economic operators arefreetocontract theirpreferred
insurance company, andinsurance conditions donotdiscriminate against imported goods andservices.
81. According toKorea 'sinitial GATS Schedule, theestablishment ofacommercial presence in
major insurance sectors iscurrently based upon an"economic needs test." Under thetest,which is
tobeabolished inJanuary 1997, theauthorities consider thesituation ofthedomestic insurance market
before issuing alicence. Forthelifeandnon-life sectors, theSchedule states thattherecruitment and
employment ofinsurance personnel isrestricted, andthatthetopexecutives ofeachestablishment must
reside inKorea. Inthelifeinsurance sector, multiple foreign shareholding injointventures isnot
allowed. Inthenon-life sector, thequotation ofratesfromabroad isgenerally subject torestrictions
(except foraviation, comprehensive property carandsome other insurance categories)100;only
representative offices andbranches offoreign companies arepermitted; andforeign equity participation
ispossible onlyinexisting domestic insurance companies. However, subsidiaries andjointventures
involving foreign non-life insurance companies willbeallowed from thebeginning of1997.
82. Under theSecond Protocol, Korea agreed toallow cross-border salesofmarine import cargo
andaviation insurance; remove thelimitation onthenumber ofsalesoffices thatcanbeestablished
annually bylifeandnon-life insurance companies; andpermit dualagency inlifeinsurance inaddition
tonon-life insurance.
(b) Banking
83. Korea 'scommercial banking sector iscomposed of15nationwide banks, 10localbanks and
71foreign bankbranches (Table IV.10).101Fivespecialized banks, mostpartially government-owned,
areexpected toprovide funds toparticular sectors where commercial banklending alone isdeemed
insufficient: theIndustrial Bank ofKorea; theKorea Housing Bank; andthebanking sections of
theNational Agricultural Cooperative Federation, theNational Livestock Cooperatives Federation and
theNational Federation ofFisheries Cooperatives. Overall, theauthorities consider theKorean banking
sector tobeverycompetitive andovercrowded; bankprofitability hasdeclined since 1991. TheBank
ofKorea 'sOffice ofBank Supervision announced in1992thatallcommercial banks would berequired
toattain the8percentcapital adequacy ratiooftheBankofInternational Settlements (BIS) byend-1995.
Thiswasachieved, except inthecaseofonebankwhich hadrecently beenconverted fromaspecialized
toanationwide bank.
100Restrictions onthequotation ofratesinhull,long-term non-life, workers 'accident compensation, cargo,
surety andfidelity insurance were removed inApril 1996.
101Thenumber offoreign bank branches peaked at74in1993. Local incorporation offoreign-owned banks
willbeallowed from December 1998.Republic ofKorea WT/TPR/S/19
Page 97
Table IV.10
Domestic banks abroad andforeign banks inKorea, December 1995
Korean banks abroad Foreign banks inKorea
Subsidiary Branch Rep. office Sub-total Branch Rep.office Sub-total
United States 7 26 14 47 25 3 28
Japan 0 21 7 28 15 9 24
United Kingdom 5 7 7 19 3 1 4
France 0 1 2 3 9 1 10
Germany 6 2 2 10 1 3 4
Singapore 3 6 1 10 4 0 4
Hong Kong 12 6 10 28 2 0 2
Canada 3 0 1 4 4 0 4
Australia 2 0 2 4 2 0 2
Netherlands 0 1 0 1 2 0 2
Other countries 14 13 28 55 4 8 12
Total 52 83 74 209 71 25 96
Note: According totheOffice ofBank Supervision, domestic banks areexpected toopen37newoverseas branches andoffices in1996;
commercial banks intend toestablish ninelocally incorporated subsidiaries, 14branches and14representative offices. In1995,
theOffice ofBank Supervision allowed theestablishment of26overseas branches.
Source: Korean Business Review, May1996.
84. UndertheGeneralBankingAct,commercialbanksarepermittedtoengageinlong-termfinancing
aswellascommercial banking.102Subject tospecial authorization, theymayalsoconduct non-bank
businesses, including securities businesses suchasthelead-underwriting ofgovernment andpublic
bonds. (Several banks havesecurities companies assubsidiaries.) Theauthorities statethatforeign
branches havethesame access tofunds anddeposits asdomestic banks.103Also, according tothe
authorities, therearenomonopoly banking activities andnoobligations ondomestic economic entities
tousespecified banks forparticular operations andtransactions. Inthecontext ofprudential
requirements, nolegalorinstitutional distinctions aremade between domestic banks, jointbanks or
branches offoreign banks. There arenogeographic areas ofthecountry where banks aresubject to
differing levels ofregulation orsupervision.
85. Foreign banks arecurrently allowed toenter thedomestic market through jointventures with
localcompanies orbysetting upabranch office. TheGovernment hasannounced thatforeign banks
andsecurities firms mayestablish subsidiaries fromDecember 1998, while investment trustcompanies
willbeallowed toparticipate injoint-ventures from December 1996 andestablish subsidiaries from
December 1998. Allnewentrants arerequired toobtain approval from theMonetary Board, viaa
recommendation oftheSuperintendent ofBanks. Application ofaneconomic needs test,ofthetype
102Asaresult ofliberalization inthe1980's,universal banking hasbeen introduced onalimited basis
(KIEP, 1996, p.50).In1991, fiveinvestment andshort-term finance companies were converted intosecurities
firms, andthree additional companies were converted (viamerger) intotwonewbanks.
103Some trading partners have, however, voiced concern about perceived discriminatory effects resulting
from therequirement tocapitalize eachbranch separately andfrom using local branch capital fordetermining
funding andlending limits (U.S. Department oftheTreasury, 1994).WT/TPR/S/19
Page 98Trade Policy Review
currently required intheinsurance sector, waseliminated in1994 intheUruguay Round context.
Korea isnotinvolved inanynegotiations concerning mutual recognition ofbankapprovals and,thus,
onfacilitating cross-border branching andthesupply ofservices.
86. Under commercial presence, Korea 'sinitial GATS Schedule states thatonlybranches and
representative offices oftheworld 'stop500banks, interms ofassets, arepermitted. Theissuance
ofdebenturesisprohibited,andstrictregulationsapplytoforeignexchangepositions.Specificlimitations
areplaced ondeposit andrelated services, loanandrelated services, foreign exchange services, and
trustservices. Under loanandrelated services, forexample, foreign currency loans aresubject to
ceiling levels andrestrictions onuses, andmandatory lending regulations apply inrespect ofsmall
andmedium-sized enterprises. Anumber ofliberalization measures arescheduled for1996-97: all
deposit rates, except ondemand deposits andtheirequivalents, willbederegulated; foreign financial
institutions willbeallowed equity participation inexisting domestic banks; theminimum denomination
forcertificates ofdeposits willbelowered andthematurity expanded; andthemandatory purchasing
ratioforMonetary Stabilization Bonds, applicable totrusts, willbelowered.
87. TheSecond Protocol embraces these liberalization measures. Inaddition, Korea removed the
requirementonbanksandsecuritycompaniestoopenrepresentativeofficesbeforeestablishingbranches,
andreduced thelimitof8percentonanindividual person 'sequity ownership ofabankto4percent.
(v) Telecommunications
88. Korea 'stelecommunications sector isanimportant prerequisite for,andbeneficiary of,the
country 'soverall economic momentum. Thus, notsurprisingly, themarkets foradvanced
telecommunications equipment andservices arebothintheprocess ofrapid expansion. Domestic
observers expect equipment salestogrow atanannual rateofover16percentoverthecoming years;
andKorea Telecom estimates thatitsnewpersonal communications service (PCS), tobewidely
introduced in1998, willattract some 3million users by2000. (PCSs arelikely togradually replace
digital mobile phones.) Theintroduction ofthenewsystems isforecast toinvolve investment ofover
W5trillion.
89. TheGovernment isseeking topromote technical adjustment through generous support for
industrial research anddevelopment and,ontheother hand, gradual deregulation andliberalization
oftheservices market. Ontheequipment side, development funds ofW147billion -ofwhich
W42billion arenon-repayable -have beenreserved fordomestic producers untilend-1998. An
additional W65billion ofpublic loans areavailable toequipment producers focusing onnewservices;
W40billion aredesigned forsmall firms developing essential components. Thedevelopment of
PCS-related technologies indomestic research institutes, including theKorea Electronic Technology
Research Institute, isfunded withW42billion.
90. The1995 "Blueprint forEnhancing Competitiveness oftheTelecommunications Market",
formulated bytheMinistry ofInformation andCommunications (MIC), emphasizes competition,
liberalization andderegulation asbasic regulatory principles.104Inafirstphase, theMICwastoissue
additional licences in1995forproviders ofbasictelecommunications services, including international
voice telephony, leased lines, personal communications services (PCS), trunked radio systems (TRS),
104TheGovernment firstinitiated therestructuring ofKorea 'stelecommunications markets in1990, replacing
theformer monopoly withduopolies forinternational andlongdistance voice telephony, cellular telephony and
radio paging, while value-added services were fully liberalized.Republic ofKorea WT/TPR/S/19
Page 99
cordless telephone (CT-2), mobile dataandradio paging services.105Asecond phase in1996, involved
revision oftheTelecommunications Business Lawwiththeresult thatlicensing requests ofnewmarket
entrants inanyservices segment could beinitiated atanytime. Further objectives oftheBlueprint
include thestreamlining andpossible privatization ofKorea Telecom; requirements forinterconnection
andaccounting separation bynetwork-based services providers; andthestrengthening ofcompetition
regulation.
91. Bycontrast, theBlueprint hasleftuntouched thecurrent monopoly status oftheState-owned
Korea Telecom forlocalvoice telephony, telexandtelegraph services.106Inaddition, thescope for
foreign equity participation hasremained strictly limited inmany areas. While, under thecurrent
Telecommunications Business Law, noforeign participation ispermitted inlocal, longdistance and
international telephone companies (voice telephony), foreigners mayholduptoone-third ofthevoting
stock ofcompanies operating leased line, cellular phone andmobile dataservices, personal
communications services, cordless telephone andTRSservices. Foreigners arenotallowed toestablish
radiostations,exceptforsomelimitedlandmobilestationsifreciprocityisgranted.107Call-backservices
arecurrently illegal inKorea, while theuseofinternational calling cards ispermitted.
92. TheKorean Communications Commission (KCC), theregulator inthesector, reviews theissue
oflicences forbasic telecommunications services, andprocesses notifications ofvalue-added services
providers. TheKCC iscomposed ofeight members appointed bythePresident attherequest ofthe
Minister ofInformation andCommunication.108TheKCC'srôleincludes theestablishment andreview
oftelecommunications policies andtheresolution ofdisputes between service providers andusers.
TheTelecommunications Technology Association (TTA), aprivate-sector body,setsanddisseminates
telecommunications equipment standards; anyinterested party mayparticipate including non-resident
members offoreign enterprises. Three types ofmandatory standards arecurrently inplace109;approval
criteria aresummarized inBoxIV.1.
105InJune1996, theGovernment granted 27newlicences todomestic firms, among 53applications inthe
seven fields listed above.
106ByJuly1996, 20percentofKorea Telecom hadbeen soldtothepublic, withanother 14percenttobe
soldduring theremainder of1996 andafurther 15percentin1997.
107WTO document S/NGMTS/W/2/Add.7, 1February 1995.
108Decisions oftheKCC maybeappealed, firsttotheKCC itself andlatertotheHigh Court ofJustice through
litigation.
109WTO document S/NGMTS/W/2/Add.7, 1February 1995.WT/TPR/S/19
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BoxIV.1 Approval criteria fortelecommunications equipment
Theprinciple approval criteria fortelecommunications equipment aretheprevention oftechnical harm to
thepublic network (noharm tothespectrum forwireless equipment) andofphysical harm tonetwork
personnel andusers. Manufacture, importation andsales ofequipment notcertified asconforming to
current requirements areprohibited fortechnical andsafety reasons.
Conformity testing fortelecommunications equipment iscurrently limited tolaboratories designated under
theTelecommunications Basic LawandtheRadio Waves Law. Nearly allofthedesignated laboratories
aregovernment orcorporate affiliated. Testing iscompleted within 30business days, andissuance ofa
type-approval certificate requires 20business days; totalcostranges between W75,000 andW250,000.
Amutual recognition agreement fortestresults wasconcluded withtheUnited States in1992; without
such anagreement, foreign testresults andconformity certificates arenotaccepted. Inmid-1996,
negotiations onamutual recognition agreement were under waywith Canada. Self-certification by
manufacturers isnotrecognized.
93. Korea hasbilateral value-added network (VAN) agreements withtheUnited States, Japan and
Australia, governing theprovision ofdatatransmission services byvalue-added service providers.
Reflecting theattractiveness ofKorea 's'rapidly growing telecommunications sector, various trading
partners, especially theEuropean Union andtheUnited States, haveintensified requests forbetter access
inrecent years. InMay1995, forexample, theEuropean Union filedarequest forconsultations in
theWTO, complaining thatprocurement practices discriminated against foreign suppliers andthatthe
Korean Government hadfavoured U.S.suppliers viabilateral agreements (Annex II.2).110
94. Korea'sGATSScheduleofcommitmentscoversvariousadvancedtelecommunicationsservices.
Participating inthenegotiations onBasic Telecommunications, Korea didnotinclude voice telephone
services, packet andcircuit-switched datatransmission services, telex services, telegraph services,
facsimile services andprivate leased circuit services.111Fortheservices covered, suchaselectronic
mailandvoice mail, themainlimitation applies tothepresence ofnatural persons. Korea hasoffered
intheNegotiations onBasic Telecommunications toopen12additional sectors toforeign participation
in1998.112Foreign equity ownership would beallowed upto20percentforKorea Telecom and
33percentforotherfacilities-basedoperators.Fullcompetitionwouldbepermittedforthenon-facilities
based provision (resale) ofalltelecommunications services, except forlocalvoice transmission which
would beliberalized in2001.113
110Korea andtheUnited States signed three records ofunderstanding (ROUs) intheearly 1990s. According
totheauthorities, anROU ofFebruary 1992 provides forliberalization ofvalue-added services andabolition
ofinvestmentlimits,incrementalliberalizationoftheuseofleasedlines,transparencyinstandardizationoftelecom
equipment, clarification oftype-approval criteria, prohibition ofdiscrimination ingovernment procurement, and
periodic meetings toreview implementation.
111Postal andcourier services were alsonotincluded.
112Thesectors are.regular telephone services, packet andcircuit-switched datatransmission services, telex
services, telegraph services, facsimile services, private leased circuit services, digital cellular, paging, personal
communicationservices,trunkedradiosystem,wirelessdatatransmissionandsatellitetelecommunicationservices.
Thenumber ofservice providers would belimited onlybyspectrum availability.
113Forlocal voice communications between closely related parties, e.g.acorporate headquarters and
subsidiaries, the1998 dateisapplicable.Republic ofKorea WT/TPR/S/19
Page 101
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