RESTRICTED
WORLD TRADE WT/TPR/S/19
28August 1996
ORGANIZATION(96-3393)
TRADE POLICY REVIEW
REPUBLIC OFKOREA
Report bytheSecretariat
Thisreport, prepared forthesecond Trade Policy Review ofKorea, hasbeendrawn
upbytheWTO Secretariat onitsownresponsibility. TheSecretariat has,asrequired
bytheAgreement Establishing theTrade Policy Review Mechanism (Annex 3ofthe
MarrakeshAgreementEstablishingtheWorldTradeOrganization),soughtclarification
from theGovernment ofKorea onitstrade policies andpractices.
Document WT/TPR/G/19 contains thepolicy statement submitted bytheGovernment
ofKorea.
Note: Thisreport issubject torestricted circulation andpress embargo untiltheendofthemeeting
oftheTrade Policy Review Body onKorea.Republic ofKorea WT/TPR/S/19
Page iii
CONTENTS
Page
SUMMARY OBSERVATIONS ix
(1) External Liberalization andInternal Reform ix
(2) Trade Policy Trends ix
(3) Sectoral Policy Developments x
(i) Agriculture xi
(ii) Industry xi
(iii) Services xi
(4) Trade Policies andForeign Trading Partners xii
I. ECONOMIC GROWTH AND STRUCTURAL CHANGE 1
(1) Domestic Economic Environment 1
(2) External Economic Links 4
(i) Balance-of-payments andexchange ratedevelopments 4
(ii) Commodity andcountry patterns oftrade 6
(iii) Trends inforeign direct investment 10
(3) Outlook 11
Annex I.1Capital Account andForeign Exchange Liberalization Measures 12
II. TRADE POLICY OBJECTIVES AND INITIATIVES 15
(1) General Policy Direction 15
(2) Multilateral Policies 18
(3) Regional andPreferential Arrangements 20
(4) Other Initiatives 21
Annex II.1 Institutional Changes inTrade-related Policy Areas 22
Annex II.2 Trade Disputes andConsultations, January 1992 -July1996 24
(1) Cases under GATT andWTO Provisions 24
(2) Other Fora 25WT/TPR/S/19
Page ivTrade Policy Review
Page
III. POLICY DEVELOPMENTS AFFECTING TRADE AND INVESTMENT 26
(1) Main Features 26
(2) Tariffs andTrade-related Taxes andCharges 27
(i) Border taxation 27
(ii) Internal taxation 35
(3) Other Policies Directly Affecting Trade 37
(i) Customs procedures 37
(ii) Licensing requirements 38
(iii) Trade controls, prohibitions andsanctions 39
(iv) Trade defence mechanisms 41
(v) Origin criteria andrelated requirements 43
(vi) Local content provisions 43
(vii) Export andimport facilitation andpromotion policies 44
(4) Policies Influencing Investment, Growth andTrade 45
(i) Standards, technical regulations andsimilar measures 45
(ii) Government procurement 47
(iii) Financial assistance toindustry 49
(iv) Support forresearch anddevelopment 53
(v) Competition policy 54
(vi) Intellectual property rights 57
Annex III.1 Foreign Direct Investment Policies 61
Annex Table III.1 Maximum allowable foreign equity ratios inrestricted business, 1996 62
Annex Table III.2 Liberalization schedule forforeign direct investment, 1995-2000 64
Annex Table III.3 Liberalization ofinvestment measures, 1995-97 65
Annex Table III.4 Listofrestricted businesses after theyear2000 66
IV. SECTORAL POLICY PATTERNS AND TRENDS 67
(1) Overview 67
(2) Agriculture, Forestry andFisheries 67
(i) Structural developments 67
(ii) Policy orientation 72
(iii) Uruguay Round implementation programme 73
(iv) Administration oftariff quotas 75
(v) Supply management andprice stabilization policies 76Republic ofKorea WT/TPR/S/19
Page v
Page
(3) Industry 78
(i) Overview 78
(ii) Textiles, clothing andfootwear 79
(iii) Parmaceuticals 81
(iv) Petroleum refining andpetrochemicals 81
(v) Ironandsteel production 81
(vi) Machinery, electrical andelectronic goods 82
(vii) Motor vehicles 83
(viii) Shipbuilding 86
(4) Services 87
(i) Overview 87
(ii) Construction 89
(iii) Transport 90
(iv) Financial services 93
(v) Telecommunications 98
REFERENCES 101
APPENDIX TABLES 103WT/TPR/S/19
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CHARTS
Page
I. ECONOMIC GROWTH AND STRUCTURAL CHANGE
I.1 Exchange ratedevelopments, 1990-96 6
I.2 Merchandise trade bysector, 1990 and1995 7
I.3 Merchandise trade bypartner, 1990 and1995 8
I.4 Intra-industry trade byregion, 1985-94 9
I.5 Foreign direct investment (FDI) flows, 1990-95 11
II. TRADE POLICY OBJECTIVES AND INITIATIVES
Annex Chart II.1 Decision-making process intrade-related policy areas 23
III. POLICY DEVELOPMENTS AFFECTING TRADE AND INVESTMENT
III.1 Range ofapplied tariffs, 1996 27
III.2 Tariffs onagricultural products, 1996-2004 29
III.3 Tariffs onmanufactured products, 1996-2004 30
III.4 Liquor taxrates, 1996 36
III.5 Procedure forgranting patents 59
IV. SECTORAL POLICY PATTERNS AND TRENDS
IV.1 Structure ofagricultural production, 1990 and1994 70
IV.2 Indices ofprices received byfarmers, 1990-95 77Republic ofKorea WT/TPR/S/19
Page vii
TABLES
Page
I. ECONOMIC GROWTH AND STRUCTURAL CHANGE
I.1 Production structure, 1990-95 1
I.2 Economic developments, 1992-96 2
I.3 Foreign trade andbalance ofpayments, 1992-96 5
Annex Table I.1Foreign exchange reform plan, 1995-99 12
II. TRADE POLICY OBJECTIVES AND INITIATIVES
II.1 Government agenda fortrade-related economic reform 16
II.2 Principal notifications inthecontext ofimplementing WTO Agreements, July1996 19
III. POLICY DEVELOPMENTS AFFECTING TRADE AND INVESTMENT
III.1 Adjustment duties, January toJune 1996 32
III.2 Tariff quotas, January toJune 1996 33
III.3 Estimated taxrevenue bymain revenue categories, FY1996 36
III.4 Changes since 1992 inimport-related technical andprocedural requirements 39
III.5 Anti-dumping cases, 1992-95 41
III.6 Government procurement bytheOffice ofSupply, 1990-95 49
III.7 Policy-based lending, 1980-95 50
III.8 Subsidies notified under WTO provisions, 1992-95 52
III.9 Public support forindustrial research anddevelopment, 1991-96 53
III.10 Activities oftheKorea FairTrade Commission, 1992-95 55
III.11 Applications andregistrations ofindustrial property rights, 1985-94 60
Annex Table III.1 Maximum allowable foreign equity ratios inrestricted businesses, 1996 62
Annex Table III.2 Liberalization schedule forforeign direct investment, 1995-2000 64
Annex Table III.3 Liberalization ofinvestment measures, 1995-97 65
Annex Table III.4 Listofrestricted business after theyear2000 66
IV. SECTORAL POLICY PATTERNS AND TRENDS
IV.1 Differences between domestic andinternational prices formajor products, 1992-95 68
IV.2 Self-sufficiency levels inagriculture, 1992-95 71
IV.3 Fiscal expenditure foragriculture, forestry andfishery bymajor categories, 1992-96 72
IV.4 Exports andimports bygeneral trading companies (GTCs), 1985-95 78
IV.5 Trade inmotor vehicles, 1985-94 84
IV.6 Automobile taxation, 1996 85
IV.7 Structure oftheservices sector, 1990-94 88
IV.8 Maritime transport (Korean fleet), 1993-95 90
IV.9 Deposits andbond issues byfinancial institutions, 1980-95 94
IV.10 Domestic banks abroad andforeign banks inKorea, December 1995 97WT/TPR/S/19
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APPENDIX TABLES
Page
AI.1 Schedule forinterest ratederegulation, 1991-97 105
AI.2 Outward foreign direct investment bysector, 1990-95 105
AI.3 Outward foreign direct investment bycountry, 1990-95 106
AI.4 Inward foreign direct investment bysector, 1995 107
AI.5 Inward foreign direct investment bycountry, 1995 107
AII.1 Major trade-related laws andregulations 108
AIII.1 Tariff escalation andtariff ranges, 1996 109
AIII.2 Current andminimum access commitments under theWTO Agreement onAgriculture,
1995-2004 112
AIII.3 Excise taxes, 1992-96 117
AIII.4 Summary oftheConsolidated Public Notice forImports andExports, 1996 118
AIII.5 Items covered bytheImport Diversification Programme, June 1996 123
AIII.6 Countervailing andanti-dumping actions affecting Korean exports,
January 1992 -December 1995 128
AIII.7 Summary ofderegulation measures byGovernment activity 130
AIII.8 Improvement ofsanitary inspection procedures forimported food products, April 1995 131
AIII.9 Import substitution programme (105 products), 1996 132
AIII.10 State-trading enterprises andtheir associated import levels, 1992-94 133
AIV.1 Imports under current andminium access commitments, 1995 135
AIV.2 Annual procurement andrelease levels foragricultural commodities, 1992-95 140
AIV.3 Manufacturing output andvalue added, 1990-94 141
AIV.4 Employment inmanufacturing, value added peremployee andwages peremployee, 1990-94 142
AIV.5 Quantitative restraints imposed onKorean textile exports, 1995-97 143Republic ofKorea WT/TPR/S/19
Page ix
SUMMARY OBSERVATIONS
1. Since itsinitial Trade Policy Review in
1992, theRepublic ofKorea hascontinued to
beoneoftheworld 'smostdynamic economies.
Relatively moderate growth in1992 and1993
wasfollowed bystrong expansion, exceeding
9percentin1995. Thestimulus came from
both buoyant exports, inthewake ofthe
appreciating Japanese yen,andstrong domestic
investment forequipment.
(1) External Liberalization andInternal
Reform
2. Trade liberalization andacommitment
toWTOprinciples havebeenintegral toKorea 's
economic policies inthe1990s. Based onpre-
announced programmes, tariffs have been
reduced andquantitative restrictions abolished
across virtually allsectors. Applied tariffs
currently average lessthan10percent(some
7percentinmanufacturing),some
15percentage points below their1982 levels.
3. External liberalization has been
accompanied byinternal deregulation. The
Government 'sFive-Year Plan foraNew
Economy (1993-97) calls forreduced State
control, including theabolition ofunnecessary
regulations and restrictions, increased
transparency oftrade-related policies, andthe
alignment ofdomestic with international
regulations. ThePlanisfocused onstructural
adjustment andcompetitiveness inagriculture;
technology enhancement insmall andmedium-
sized enterprises (SMEs); accelerated
adjustment ofdeclining industries; and
expansion ofhighvalue-added export sectors.
4. Gradualliberalizationofinwardforeign
direct investment (FDI) isintended toimprove
domestic efficiency andmeetforeign requests.
Since 1993, theGovernment hassimplified
investmentprocedures,establisheda"one-stop"
service system, provided taxexemptions and
favourablefinancing,andcreatednewindustrialestates forforeign investors. Inward FDIhas
beenoutstripped byoutflows inrecent years, in
parttodevelop newoutlets andescape domestic
costpressure.
5. Financial liberalization isinspired and
required bytheneeds ofKorea 'srapidly
growing economy. There aresome indications
thatcapitalshortagehastendedtofuelpressures
for sector-specific soft loans, delayed
adjustmentsindeclininglabour-intensivesectors,
andretarded Korea 'sshiftontoamorecapital-
andtechnology-intensive development path.
Opening will beatadeliberate rate,
accompanied bydisciplined macroeconomic
management, toavoid abrupt currency
appreciation anditsadverse effects onexport
competitiveness.
(2) Trade Policy Trends
6. Korea 'sundertakings intheUruguay
Round included tariff reductions, concessions
intheagricultural sector, commitments inmany
servicessectors,andaccessiontotheAgreement
onGovernment Procurement. Final bound
tariffs willaverage 8.3percent(trade-weighted
basis) andarebeing phased inoveraten-year
period, until 2004, inlinewithdeveloping-
country provisions. Allrateshavebeenbound
forfarm items, asrequired under theWTO
Agreement, while theleveloftariffbindings for
industrial products wasincreased from 10to
90percent.Thisimpliesgainsinpredictability
andsecurity ofaccess, although therelevant
rates areinmost cases higher than those
currently applied.
7. Korea iscommitted tophasing out,or
bringing intoconformity withWTO provisions,
arange ofimport restraints previously
maintained forbalance-of-payments reasons.
Non-automatic licensing requirements were
eliminated on220agricultural andfisheries
products between 1992 andJuly1996, and
73additional items aretobeliberalized in
July1997. Thedateforliberalization ofeightWT/TPR/S/19
Page xTrade Policy Review
categories ofbeefandcattle wasextended inthe
Uruguay Round context toJanuary 2001,
compensated byincreased quota levels and
relatively lowfinal tariffs. Restrictions on
certain Japanese products, maintained under
theImportDiversificationProgramme,arebeing
phased outwithaviewtotheirfullelimination
by1999. Thecurrent, comprehensive system
oftrade licensing, generally automatic, istobe
replaced in1997byasystem limiting licensing
requirements tohealth, security andsimilar
criteria.
8. Korea doesnotgrant anysubsidies in
theform ofdirect payments toindustry;
assistance isextended primarily viataxbreaks
andconcessional interest rates. Available
evidence suggests thatmost financial support
isdestined foragriculture andcoalmining.
Under theWTO Agreement onSubsidies and
Countervailing Measures, Korea plans tophase
outallprohibited subsidies by2002, invoking
developing-country status.
9. Korea hasacted toremove technical
trade barriers, focusing inparticular onthe
import anddistribution chain. Anexpedited
inspection andclearance system forfresh fruit
and vegetables was introduced, and
Government-mandated shelf-life indications for
some 200 products were replaced by
manufacturer-determined indications. In
contrast tothese trends, neworigin labelling
requirements havebeenintroduced, mainly on
farmproducts, withaviewtobetter informing
consumers atatime ofsteady import
liberalization.
10. Anoverhaul ofcompetition lawsince
1992hasbeencomplementedbyinstitutionaland
organizational improvements inpolicy
implementation. Thereforms areintended to
contribute toamore balanced economic
structure interms ofcompany size,andreduce
barriers fornewentrants. However, while
conducive tolong-term economic resilience,
there maybenoimmediate gains aslarge
industrial conglomerates arewellrepresented
indynamic andinnovative industries. Tradingcompanies related tosuch conglomerates
handled over46percentofKorea 'sexports in
1995, upfrom38percentin1990 (including
SMEsupplies).
11. Korea isamember oftheWorld
Intellectual Property Organization (WIPO), and
hassignedavarietyofinternationalconventions
governing theprotection ofintellectual property
rights. Recent legislative revisions included
virtually allareas ofprotection, fromcopyrights
topatents andtrademarks. Theauthorities feel
thatmostoftheUruguay Round implementation
measures arenowinplace, inanattempt, by
theirownassessment, tocomply asclosely as
possible withdeveloped-country requirements
under theWTO Agreement onTrade-Related
Aspects ofIntellectual Property Rights (TRIPS).
Inaddition, Korea iscommitted under a
bilateral agreement with theEUtoswift
implementation ofTRIPS provisions.
(3) Sectoral Policy Developments
12. Astheshift from light-industry to
technology-intensivemanufactureshas
continued, Korea 'smerchandise exports are
increasingly focused onelectrical andelectronic
products,motorvehicles,and
telecommunicationsequipment.UruguayRound
tariffreductions arelikely tofurther accelerate
current export trends, while agricultural and
lightindustrial products maygainontheimport
side. TheUnited States remains Korea 'ssingle
largest export market, although declining in
importance, followed byJapan and the
European Union.
13. Arecent increase intrade deficits, in
thewake ofstrong economic expansion, is
attributable mainly tostructural factors. Some
ofKorea 'sprincipal industries, including motor
vehicles and electronics, rely heavily on
imported components andcapital goods. The
deficits haveproved politically sensitive, despite
their relatively modest share ofGDP, the
underlying momentum ofthemanufacturing
sector, andthestrength ofinward capital flows.
InJune1996 theGovernment thusannouncedRepublic ofKorea WT/TPR/S/19
Page xi
anumber ofmeasures topromote exports (e.g.
increased ceilings foradvance export payments,
reduced import duties oncertain rawinputs and
expanded funding forexport insurance).
(i) Agriculture
14. Despitesignificantsubsidization,support
forKorean agriculture relies predominantly on
border protection. Domestic prices mayexceed
their world market equivalents byseveral
hundred percent,peaking atover700percent
forsoybeans in1995; andthere havebeenno
signs ofdecline. Ongoing reforms havebeen
driven mainly byexternal requirements, rather
than efficiency considerations orconsumer
welfare.
15. Complying withWTO commitments to
tariffy quantitative import restrictions, tariff
quotas wereimplemented in1995for67groups
ofagricultural products. Inlieuoffixing tariffs
forrice,Koreaundertooktoexpanditsminimum
access commitment; riceimports willrisefrom
1to4percentofdomestic consumption over
a10-year period. Tariff quota administration
hastypically been delegated toState-trading
entities andassociations previously responsible
forprice stabilization andother interventions,
implying potential conflicts ofinterest.
(ii) Industry
16. Given itsrelatively narrow focus,
Korea 'sexport basket issomewhat vulnerable
toproduct-specific market and policy
developments;semi-conductorsandautomobiles
alone represent nearly 25percentoftotal
merchandise exports. Recent government
initiatives wereintended topromote thecapital
goods industry, where thebilateral deficits with
Japan arehighest; aBlueprint ofMay1995
envisages improvements inexport financing,
formation ofsales consortia, andnewtax
credits.
17. Ongrounds ofpublic interest, Korea
hascontinued tomaintain licensing restrictions
onnewentrants intheoilrefining, petroleumretailingandpowergenerationindustries.Apart
frompower generation, therestrictions areto
bereplaced byasimple registration system.
18. Strong emphasis isplaced onthe
development ofsmall and medium-sized
enterprises (SMEs). Measures include tax
breaks andreduced-interest loans forstarting
newbusinesses inrural areas. SMEs also
receive byfarthelargest share ofdomestic
funds forexport financing; totalSME-related
funding in1996 isestimated atW1.5trillion.
While arange ofactivities, mainly inthelocal
economy, have previously been reserved for
SMEs, thereservations arebeing phased out
progressively.
(iii) Services
19. Korea 'sservices sector currently
accounts forabout 60percentofGDP. Under
theGeneral Agreement onTrade inServices,
Korea hasassumed commitments inover
80sectors, followed byadditional offers inthe
extended negotiations onfinancial services,
basic telecommunications and maritime
transport. However, significant portions ofthe
transport, communications, financial and
business services industries arestillrestricted
forforeign investors.
20. Telecommunications and financial
services have been among themost dynamic
segments inrecent years, benefiting from
demandtrends,productandprocessinnovation,
andgradualpolicyreform.Liberalizationmoves
intelecommunications have been partly
synchronized withinternational developments,
including current WTO negotiations. External
opening ofvirtually allbasic telecom services
isscheduled for1998, following domestic
liberalization andderegulation.
21. Recentgrowthofthefinancialsectorhas
relied inparticular onsavings institutions,
insurance companies andinvestment houses.
TheGovernment seeks topromote segments
which havebeenretarded byprevious controls,
suchasthelong-term bond market. AgeneralWT/TPR/S/19
Page xiiTrade Policy Review
limitation onforeign shareholdings, currently
15percentacross allsectors, istobereviewed
withthepossibility ofcomplete elimination in
1998-99. Korea 'saccession totheOECD,
which theauthorities wish toachieve by
autumn 1997, mayhelp topromote further
liberalization.
(4) Trade Policies andForeign Trading
Partners
22. Korea 'seconomic strength relies on
industrial specialization, andtheresulting
economiesofscale,understableexternaltrading
conditions. Agriculture andsignificant services
sectors haveremained largely insulated from
international competition, creating economic
distortions athome andpolitical frictions
abroad. While theauthorities arecommitted
tocontinuedinvestmentandtradeliberalization,
theirgeneral approach hasremained somewhat
reactive insensitive areas, responding
predominantly toexternal policy developments.
Itisnoteworthy, however, that the
implementationofliberalizationandderegulation
programmes hasbeen consistent, without
significant slippages.23. Recent statements indicate agradual
change inpolicy perception, implying botha
more assertive rôleininternational economic
foraandamoredynamic approach todomestic
reform. Thestrengthening ofcompetition policy
isanimportant signal, indicating confidence in
theoperation ofmarket forces andtheirimpact
on resource allocation. Accelerated
liberalization under WTO provisions would be
thenatural complement and,atthesame time,
match thepolitical responsibilities ensuing from
Korea 'sstrong andstillgrowing rôleinworld
trade.