Republic of Korea WT/TPR/S/137 
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I. ECONOMIC ENVIRONMENT 
(1) MAIN ECONOMIC DEVELOPMENTS  
1. Since its previous Review in 2000, the Korean  economy has continued to expand, albeit with 
some volatility.  Growth was strongest in 2002 (7%), but weakened in the first half of 2003 to 2.9% 
year-on-year.1  Since late 2003, the economy has again been recovering, supported mainly by buoyant 
exports, with domestic demand remaining weak.  Av ailable data on productivity trends, including 
total factor productivity (TFP), which is a key indi cator of Korea's efficiency and international 
competitiveness, indicate wide variations between s ectors, with relatively low productivity in services 
and agriculture compared with manufacturing.2  During the 1990s, annual TFP growth averaged 
around 2%, contributing to less than one-third of economic growth.3  Structural, including trade and 
deregulatory, reforms to boost competition, especially  in agriculture and services, would improve TFP 
and  make an important contribution to sustained growth.4 
2. Following economic reforms in response to the As ian financial crisis in 1997, the Korean 
economy grew in real terms by 3.8% a nd 7.0% in 2001 and 2002 (Table I.1).5  As a result, GDP per 
capita has been restored to its pre-crisis level;  it now exceeds US$12,000.  The recovery in 2002 was 
led by strong domestic demand, notably private cons umption, which grew by 7.9%, and residential 
construction.  The authorities estimate a more mo dest GDP growth of 3.1% in 2003, reflecting 
declines in both consumption and the growth of fi xed investment.  The decline in consumption may 
also reflect a slowdown in the growth of househol d borrowing, which had previously grown rapidly 
against the background of a boom in credit card use.  The Korean economy started recovering in late 
2003, mainly led by external demand.  Since the first quarter of 2000, seasonally adjusted 
unemployment in Korea has fallen, reaching 3.4% in the fourth quarter of 2003.  Nominal wages in 
manufacturing increased by 6.3% in 2001 and by 12.0%  in 2002, followed by a 9.2% rise in 2003;  
inflation has remained largely within the official  medium-term target range (i.e. between 2.5% and 
3.5%), with consumer prices increasing by 2.7% in 2002 and by 3.6% in 2003. 
                                                      
1 Figures concerning national accounts are from data according to re-based national accounts (i.e. the 
1993 SNA), provided by the Korean authorities. 
2 Total factor productivity (TFP) reflects the efficiency with which factors of production are used and is 
therefore a key determinant of an economy's performance.  TFP should be distinguished from labour productivity, which is the amount of output per employee (or preferably per hour worked).  Among the main 
determinants of improvements in labour productivity are investment, which raises the amount of capital that 
labour has to work with, and TFP growth.  One of the mo st important sources of TFP growth in the long run is 
technological progress.  For Korea, the intended introduction of a five-day working week under legislation 
enacted in September 2003, means that economic growth will become increasingly dependent on TFP gains 
(OECD, 2004a).   
3 OECD (2004a).  
4 The need for structural reforms to improve efficiency and international competitiveness was also 
highlighted by a recent report on world competitive rankings, which suggested Korea had slipped in 2004 to 
become the least competitive country among leading Asian economies (International Institute for Management 
Development, World Competitivene ss Ratings for 2004 ).  This low ranking was due mainly to concerns over 
labour relations, consistency and efficiency of econom ic policies, and the quality of university education 
(JoongAng Daily,  "Editorial", 6 May 2004, p. 7).  
5 On 23 August 2001, Korea completed early repayment of the full amount of loans (an 
SDR 15.5 billion stand-by credit arrangement ag reed in December 1997) from the IMF.  WT/TPR/S/137 Trade Policy Review 
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Table I.1 
Selected macroeconom ic indicators, 2000-03  
 2000 2001 2002 2003a 
National accounts     
Real GDP (2000 market price) 8.5 3.8 7.0 3.1 
Private consumption 8.4 4.9 7.9 -1.4 
Government consumption 1.6 4.9 6.0 3.7 
Gross fixed capital formation 12.2 -0.2 6.6 3.6 
Exports of goods and non-factor services 19.1 -2.7 13.3 15.7 
Imports of goods and non-factor services 20.1 -4.2 15.2 9.7 
Unemployment rate (%) 4.1 3.8 3.1 3.4 
Prices and interest rates (Per cent) 
Inflation (CPI, percentage  change) 2.2 4.1 2.7 3.6 
Loans and discounts rate (period average) 8.55 7.70 6.70 6.24 
Savings deposit rate (period average) 7.01 5.43 4.73 4.15 
Money credit (end period) (Percentage change) 
Money supply (M2)b 5.2 8.1 14.0 3.0 
Credit to private sector (end period) -1.4 9.6 16.8 2.3 
Exchange rate     
Won per US$ 1,130.6 1,290.8 1,251.2 1,191.9 
Real effective exchange rate index  
(percentage change) 8.1 -5.0 3.9 -1.3 
 (Per cent of GDP, unless otherwise indicated) 
Fiscal policy     
Current fiscal balance 8.2 6.6 7.4 4.8 
Current revenue 23.2 22.9 23.0 23.7 
Tax revenue 16.1 15.4 15.2 15.9 
Current expenditure 15.1 16.3 15.5 18.9 
Total revenue 23.5 23.1 23.2 23.9 
Total expenditure 18.9 20.4 19.8 23.1 
Net lending 3.4 1.6 0.1 -0.4 
Overall balance  1.1 1.2 3.3 1.1 
(excluding social security) -1.0 -1.3 0.7 -1.6 
Saving and investment     
Gross national saving 33.7 31.7 31.3 32.6  
Gross domestic investment 33.9 31.5 30.3 31.7  
Saving-investment gap -0.2 0.2 1.0 0.9  
External sector     
Current account balance  2.4 1.7 1.0 2.0 
Net merchandise trade  3.3 2.8 2.7 3.7 
Value of exports 34.4 31.4 29.9 32.7 
Value of imports 31.1 28.6 27.2 29.0 
Services balance -0.6 -0.8 -1.5 -1.3 
Capital account -0.1 -0.2 -0.2 -0.2 
Financial account  2.5 -0.6 1.3 -2.4 
Direct investment 0.8 0.2 0.0 0.0 
Balance of payments  4.6 1.6 2.2 4.3 
Terms of trade, 2000=100 100.0 95.5 95.0 89.0 
Merchandise exports (percentage change)c 21.2 -14.0 7.9 20.9 
   Table I.1 (cont'd) Republic of Korea WT/TPR/S/137 
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 2000 2001 2002 2003a 
Merchandise imports (percentage change)c 36.2 -13.4 7.7 18.1 
Service exports (percentage change) 15.1 -4.8 -2.3 15.2 
Service imports (percentage change) 22.8 -1.4 11.1 10.2 
Gross official reserves (U S$ billion) 96. 2 102.8 121.4 155.4 
in months of imports 7.2 8.7 7.6 10.4 
Total external debt (US$ billion;   end period) 148.5 130.8 144.6 159.8 
Debt service ratiod 12.6 13.7 9.9 8.0 
a Estimates. 
b M1 + periodical time deposits and instalment savings + marketab le instruments + yield-based di vidend instruments + financial 
debentures + other. 
 M1 = Currency in circulation + demand depos its and savings deposits  with transferability. 
c Based on BOP data. 
d Debt service on medium- and long-term debt in  percent of exports of goods and services. 
Note: Data are based on the 1993 SNA.  
Source:  Information provided by the Korean authorities.  
3. The Government's fiscal stance was slightly e xpansionary in 2003;  its medium-term target 
for fiscal consolidation is to achieve fiscal balanc e social (excluding social security) by 2007.  The 
Bank of Korea has maintained a moderately expa nsionary monetary policy since 2002, reducing the 
target overnight call rate in July 2003 to 3.75% (a historic low), where it has remained. 
4. The Government has continued to undertake stru ctural reforms, notably of the financial and 
corporate sectors.  Financial reform has made much progress in the banking sector, while further 
restructuring is required in the non-banking sector, such as investment trust companies and credit card companies.  Corporate restructuring is well advanc ed, helped by improvements in bankruptcy laws as 
well as in accounting and disclosure requirements.  Korea's efforts to improve the domestic economic 
environment and to develop a more competitive eco nomy, supported by the rules-based multilateral 
trading system and based on foreign investment, have been major factors in restoring confidence.  The 
Government has, by and large, resisted protec tionist pressures, maintaining outward-oriented non-
agricultural trade and investment policies;  sectoral FDI restrictions were relaxed in 2000 and 2001. 
5. With gross national saving exceeding gross domes tic investment, the current account balance 
has continued to record surpluses, albeit declin ing, international reserves have continued to 
accumulate, and external liabilities have been reduced .  Korea's current account surplus in 2001 stood 
at about US$8.2 billion (or 1.7% of GDP) reflecting a decline in the merchandi se trade surplus and an 
increase in the services deficit;  in 2002, a redu ced current account surplus (1.0% of GDP) reflected 
the recovery of the domestic demand, which led to an increase in imports of services.  By the end of 
2003, Korea's foreign exchange reserves had risen to  US$155 billion, a level equivalent to more than 
ten months of merchandise imports.  Following a peak  in 1999, the level of total external liabilities 
gradually dropped until 2001;  it ro se again in 2002 and 2 003, although the debt service ratio has been 
decreasing since 2002. 
6. Foreign trade is still dominated by certain ma nufactured items;  the United States, Japan, and 
the EU have continued to be Korea's main tradi ng partners, while China's share in Korea's trade, 
especially exports, has been rising.   After peaking in 1999, foreign investment inflows have declined;  
Korean overseas investment dropped against the background of the recen t slowdown in domestic 
recovery and increased external uncertainty.   
7. The share of services in Korea's GDP rose from 65.3% in 2000 to 69.7% in 2003;  its 
employment share also increased from 69.0% to 72.1% (Table I.2).  In contrast, the share of WT/TPR/S/137 Trade Policy Review 
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agriculture, forestry and fishing in Korea's GDP has decreased steadily, from 4.9% in 2000 to 3.6% in 
2003;  manufacturing has also declined (29.4% to 26.6% ).  Employment shares in agriculture, forestry 
and fishing and manufacturing have also fallen. 
Table I.2 
Basic economic and social indicators, 2000-03  
 2000 2001 2002 2003a 
Real GDP (won billion, 2000 prices) 578,664.5 600,865.9 642,748.1 662,474.4 
Real GDP (US$ billion, 2000 prices) 511.8 465.5 513.7 555.8 
Nominal GDP (won billion) 578,66 4.5 622,122.6 684, 263.5 721,345.9 
Nominal GDP (US$ billi on) 511.8 482.0 546.9  605.2 
GDP per capita (US$) 10,888 10,181 11,480 12,628 
Share in GDP at current market pricesb     
Agriculture, forestry and fishing 4.9 4.5 4.1 3.6 
Mining and quarrying 0.4 0.4 0.3 0.3 
Manufacturing 29.4 27.6 26.9 26.6 
Services 65.3 67.5 68.7 69.7 
Construction 8.4 8.6 8.6 9.6 
Electricity, gas and water 2.6 2.7 2.6 2.7 
Wholesale, retail trade, restau rants and hotels 10.8 10.8 10.4 9.8 
Transport, storage and communication 7.0 7.5 7.5 7.5 
Financial intermediation 6.9 7.7 9.1 9.1 
Real estate, renting and busin ess activities 13. 2 12.7 12.8 12.8 
Public administration and defence:  compulsory 
social security 5.7 5.9 5.9 6.1 
Education 5.0 5.2 5.4 5.6 
Health and social work 2.4 3.0 2.9 3.0 
Other services 3.3 3.4 3.5 3.5 
Share of sector in total employment     
Agriculture, forestry and fishing 10.6 10.0 9.3 8.8 
Mining 0.1 0.1 0.1 0.1 
Manufacturing 20.3 19.8 19.1 19.0 
Services 69.0 70.1 71.5 72.1 
Construction 7.5 7.3 7.9 8.2 
Wholesale and retail trade, restaurants and 
hotels 27.2 27.2 27.1 26.4 
Electricity, transport, storage and finance 9.8 9.9 9.7 9.8 
Business, personal, public and other 24.6 25.7 26.8 27.7 
a Preliminary. 
b Figures may not add to 100% due to rounding.  
Source:  Information provided by the Korean authorities.  
(2) MACROECONOMIC POLICIES  
(i) Fiscal policy 
8. During the period under review, Korea maintained  a slight deficit (except in 2002) in its 
consolidated central government budget, excluding the su rplus in social security;  the deficit in 2001 
was equivalent to some 1.3% of GDP, and 1.6% in 2003.  Fiscal policy in 2002 was aimed at promoting investment, particularly in research a nd development (R&D), information technology, and 
human capital as well as "pro-competitive" reform of the social security system.  The 2003 budget in Republic of Korea WT/TPR/S/137 
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turn focused on fiscal consolidation with a view to  meeting the Government's medium-term objective, 
which is to balance the consolidated central gove rnment budget, excluding so cial security, by 2007.6  
The issuance of government bonds, which had started after the financial crisis, was to cease in 2003;  
the authorities, however, issued bonds worth W 3 tr illion to help finance the supplementary budget, 
which was mainly aimed at rehabilitating agricu lture following typhoon damage.  The authorities 
intend to limit bond issues to W 1.25 trillion in 2004.  At the same time, steps are being taken to enhance the equity of the tax system and to reduce distortions by broadening  the tax base (such as 
rationalizing the use of tax concessions ), and lowering tax rates.   
9. Over the longer term, in view of the aging population (and its impact on the budget, most 
notably through the cost of providing public pensi ons) and the substantial costs of eventual economic 
integration with North Korea, restoring fiscal  balance remains an important objective.   
(ii) Monetary and exchange rate policy  
10. Monetary policy has been generally expansi onary since 2000, except when the "policy" 
interest rate (target overnight call rate) was raised  by 25 points in May 2002 to 4.25%;  the policy rate 
was subsequently reduced to 4.0% in May 2003 and to 3.75% in July 2003.  The inflation-targeting 
framework, which was introduced in 1998, has been re tained.  In 2003, Korea's annual inflation target 
was 3±1%, while its mid-term targ et was set at 2.5% to 3.5%. 
11. Korea has a floating exchange rate, allowing the won to be determined by supply and 
demand.
7  In 2001, the nominal exchange rate of the won fell by 12.4% against the U.S. dollar.  The 
Korean currency resumed appreciating in 2002, rising by 3.2% (year-on-year) in the fourth quarter of 
2003.  The real effective exchange rate of the won depreciated by 5.0% in 2001, followed by an 
appreciation in 2002 and a slight depreciation in 2003.  Both the nominal exchange rate per U.S. 
dollar and the real effective exchange of the won have remained significantly below their pre-crisis 
levels.  Since 1 January 2001, some regulations  on foreign exchange transactions have been 
liberalized.8  
12. The authorities maintain that exchange rate intervention is only made to smooth currency 
fluctuations.  However, intervention seems to have  increased in 2003 aimed at  offsetting pressures for 
the won to appreciate, thereby contributing to ex port growth and increasing Korean competitiveness 
at home by keeping imports more expensive.9  Korea's favourable external reserve position and 
current account surplus would seem to provide an o pportune time to substantially reduce tariffs and 
                                                      
6 Fiscal consolidation for 2003 was subsequently relaxed with some front-loading of projects and the 
introduction of supplementary budgets.  
7 Since April 1999, procedures for current account transactions by corporations and financial 
institutions have been streamlined, and the regulation of  capital account transactions  changed from a positive list 
to a negative list system (Foreign Ex change Transaction Act (FETA)).   
8 As from 1 January 2001, central bank permission is no longer needed for the exportation of won in 
excess of the equivalent of US$10,000;  corporations and individuals can hold deposits abroad up to 
US$5 million (and US$50,000 pe r year) by notifying the authorities;  and non-resident accounts (deposits and 
trust accounts) of less than a one-year maturity can be established without requiring permission.  Export proceeds exceeding US$50,000 must be repatriated except in specific cases (e.g. general trading companies, 
proceeds from construction and service businesses).  Since 1 July 2002, certain measures, such as the further 
liberalization of the export of won have been intro duced in accordance with amendments to the Foreign 
Exchange Transaction Act and central bank regulations. 
9 The OECD has noted that the nominal exchange rate  of the won relative to Korea's 41 major trading 
partners depreciated by 6% in 2003 at a time of la rge accumulation of foreign exchange reserves (OECD, 
2004a). WT/TPR/S/137 Trade Policy Review 
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further liberalize trade, which would tend to reduce pressures for the won to appreciate while also 
promoting a more efficient and competitive economy. 
(iii) Structural policies 
(a) Financial system 
13. During the period under review, Korea restructured  the banking sector relatively quickly, 
assisted by large injections of public funds.  The share of non-performing loans (those classified as 
substandard or below) held by banks decreased from 8.0% of their total loans outstanding in 2000 to 
2.6% in December 2003 (up slightly from 2.3% in 2002).  The Government has re-privatized several 
banks following substantial state equity  injections in response to the Asian financial crisis;  more than 
W 160 trillion of public funds have been used for fina ncial sector restructuring, especially for banks.  
While restructuring in the banking sector has made much progress, it is less advanced for non-banking 
institutions (e.g. investment trust and credit card companies), which comprise almost half of the 
financial sector, and where substantial non-performi ng loans still exist.  The recent near collapse of 
the largest credit card company, LG Card, and th e need for a rescue plan among major creditors, 
including many banks and the state-owned Korea Development Bank, has highlighted the need for 
further non-bank restructuring.10  Consumer credit and household i ndebtedness, largely financed by 
escalating credit card use, have posed special prudentia l concerns given the subsequent rise in default 
rates.  This rise in consumer spending and resulti ng indebtedness may be attributed partly to the 
introduction of tax incentives to encourage cred it card use as an anti-tax-evasion measure.   
(b) Corporate restructuring 
14. Although incomplete, corporate restructuring, including that of many chaebols, has 
progressed since the crisis.  A number of distressed fi rms have been re-habilitated, or closed if non-
viable.11  Average debt to equity ratios in manufactur ing fell to 99% in 2003 (compared with nearly 
400% prior to the crisis), and the proportion of fi rms with insufficient profit to cover interest 
repayments to 26.3% in 2002 (28.6% in 2001).  Se venteen of the top 30 chaebols in 1997 have either 
gone bankrupt or entered workout programmes, and others had major subsidiaries spun off.  Average 
debt to equity ratios of remaining chaebols also fell substantially, to 116%  in 2003 (compared with 
500% prior to the crisis).  Foreign ownership of  listed companies increased from 10% in 1998, when 
the ceiling on overseas equity was abolished, to 42% in 2003;  it approaches 50% for the top ten 
chaebols.12 
15. A new corporate governance framework has greatly assisted restructuring.  In particular, the 
rights of minority shareholders have been enhanced and the role of boards of directors, including of 
outside appointees, increased.  Managers have been made more accountable to shareholders and their 
legal responsibility, along with controlling shareholde rs, increased.  Bankruptcy laws have also been 
improved to make procedures more attractive to cr editors by, for example,  providing separate and 
shorter tracks for rehabilitation, "composition",  and liquidation.  "Pre-packaged bankruptcy", allowing 
a 'fast track' mechanism where all parties agree, was introduced in 2001.  Further bankruptcy reforms 
are intended to consolidate existing laws into a single piece of legislation, and allow quicker and more 
efficient corporate restructuring by striking an appr opriate balance between the interests of creditors 
and debtors.   
                                                      
10 Restoring financial health of credit card companies is considered one of priorities for strengthening 
Korea's financial sector (see for example, IMF, 2004).   
11 OECD (2004a).   
12 OECD (2004a). Republic of Korea WT/TPR/S/137 
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16. Corporate transparency has been enhanced through improved disclosure and other 
requirements.  Large business groups are required to file combined financial statements.  Accounting 
disclosure and auditing requirements have also been strengthened in line with international standards, 
combined with increased enforcement by the Fina ncial Supervisory Service (and its Securities and 
Futures Commission).  More stringent  auditing requirements have been introduced following the 
accounting fraud surrounding the collapse of the tradi ng unit (SK Global) of the fourth largest chaebol 
(SK Group) in 2003.  These requirements increased the role, responsibility, and independence of 
external auditors, and required company ma nagers to certify financial reports.   
17. Despite major gains, further corporate restructuri ng is required.  Debt of financially distressed 
companies is equivalent to nearly 16% of GDP in 2003.13  The SK Global scandal also suggested that 
while Korea's legal, auditing, and corporate gove rnance framework is appr oaching best practice, 
corporate governance, especially related to chaebols, remains a concern.  In particular, enforcement, 
along with disclosure and audit requireme nts, may need to be strengthened.14  The authorities intend 
to allow class action suits against large firms in  2005 (those with assets of no less than W 2 trillion), 
initially for securities-related cases involving false di sclosure, "window-dressing" of financial reports 
and unfair trading (including stock price manipulation) .  Class actions will be extended to firms listed 
on both KSE and the KOSDAQ in 2007.   
18. The Korean Fair Trade Commission is also becoming more active in overseeing corporate 
conduct, including ownership structures and inter-cor porate dealings involving major chaebols.  The 
Monopoly Regulation and Fair Trade Act is to be m odified to bolster disclosure obligations of both 
listed and unlisted companies, and to improve regulat ion of total equity investments in affiliated and 
non-affiliated companies by conglomerates, including exempting from such controls those with good 
governance structures.  Legislation is also being changed to encourage conglomerates to transform 
themselves into more transparent holding company structures.    
(c) Small and medium-sized enterprises (SMEs) 
19. A major aspect of the economy's restructuring has been the expanded role of SMEs, which 
have benefited greatly from government policy and support.  SMEs accounted for 86% of 
employment in 2002 (74% in 1997) and about one third of bank credit (one fifth in 1997);  they receive government assistance, including from a large number (81) of programmes funded by various (12) ministries.
15  In 2003, funding amounted to W 5.5 trillion (0.8% of GDP).  Credit guarantees are 
also provided to SMEs through various state deve lopment and credit guarantee funds (estimated at 
W 42 trillion in 2002).  SMEs are also exempt from co mpetition legislation, and certain cartel-type or 
collusive behaviour is permitted.  
(d) Labour market 
20. With Korea's industrial structure changing rapi dly from standard manufacturing to high-tech 
manufacturing and services, a more flexible labour market would contribute significantly to economic 
                                                      
13 OECD (2004a). 
14 OECD (2004a).  An FSS investigation found the SK Group to have violated the Securities 
Transaction Law by not disclosing in its financial st atements a derivative trans action between two SK Group 
companies. The chairmen of SK Group and SK Global were subsequently i ndicted on charges of breaching their 
fiduciary duty, insider trading and of producing misleading financial statements. 
15 Most funds are administered by the Small and Medium Business Administration (18 programmes 
with total outlays of W 3.1 billion in 2003), MOCI E (23 programmes worth W 1 billion), (Ministry of 
Agriculture and Forestry (3 programmes worth W 0.1 billion), and Ministry of Information and Communication (8 programmes worth W 0.5 billion) (OECD, 2004a). WT/TPR/S/137 Trade Policy Review 
Page 8 
 
 
growth.  In this respect, concerns remain over the co-existence of a high degree of protection for 
regular workers, and an increasing share of non-regul ar workers, who can be dismissed more easily 
than regular workers.  Against this background, the Government established an expert committee in 
March 2003 to develop the legal and institutional foundations for a more  effective labour market.  It 
issued a "Reform Proposal for Industr ial Relations", in 2003, aimed at, inter alia , improving labour 
market flexibility and promoting more harmonious industrial relations, including improved labour-management practices;  it also submitted a "Roa dmap for Industrial Rela tions Reform" to the 
Tripartite Commission in September 2003.  While rele vant legislation was delayed, it is due to be 
enacted in 2004.  At the same time, the Government  took steps to strengthen the social safety net by 
increasing coverage of the employment insurance and the industrial accident compensation system. 
21. Employment dismissal laws remain rigid and constrain industrial r estructuring and labour 
flexibility.  Collective dismissals are allowed.  Ho wever, conditions, such as  having exhausted "all 
means" to avoid dismissals, having a minimum of two months discussions with workers, and 
notifying the Government, make such dismissals diffi cult in practice.  Improved vocational retraining 
and education would also enhance labour mobility a nd better meet skill requirements of employers.  
The quality of university education also appears to be adversely affecting productivity and 
efficiency.
16 
(e) Pension reform 
22. With the rapid aging of Korea's population, th e National Pension Fund is expected to face 
financial strains.17  Against this background, the author ities have introduced various measures, 
including an annual rise (one percentage point per year) in the contribution rate of the self-employed 
from 2000 to 2005.  In 2003, the Government prop osed to increase premiums starting in 2010 by 
1.38 percentage points every five years until they reach 15.9% in 2030, and to reduce benefits from 
60% to 50% of salary.  However, this legislation has not yet  been passed by the Parliament. 
(3) DEVELOPMENTS IN MERCHANDISE TRADE  
23. The ratio to GDP of Korea's exports of goods  and services declined from 40.8% in 2000 to 
35.3% in 2002;  the ratio to GDP of imports al so declined from 37.7% to 33.9% during the same 
period.  In 2002, Korea was the world's seventh largest exporter (counting the EU as one) and eighth 
largest importer of goods. 
(i) Composition of trade 
24. Between 2000-02, Korea's merchandise trade shifted further to manufactured products, 
apparently to those entailing higher technology.  Ch emicals, non-electrical mach inery, other electrical 
machines, automotive products, and other transport e quipment increased their share in total exports, 
while the share of office machines and telecommunication equipment, the largest component, declined from 34.1% in 2000 to 32.4% in 2002 (Chart I. 1, Table AI.1).  In the same period, the shares 
of agriculture, chemicals, iron and steel, other se mi-manufactures, clothing, and other consumer goods 
in total imports increased.  The share of manufactur ing in imports also increased during the period, 
while that of mining decreased (Table AI.2). 
                                                     
 
16 JoongAng Daily , "Editorial", 6 May 2004, p. 7. 
17 Korea's national pension scheme was established in 1988.  The current premium rates are 9%.  
According to the OECD, the current scheme would have large deficits beginning in 2030 that would exhaust the 
Fund by 2047 (OECD, 2004a).  The population of Korea is aging substantially faster than in other OECD countries;  the share exceeding 65  years of age is projected to do uble to 14% between 2000 and 2019. Republic of Korea WT/TPR/S/137 
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Chart I.1
Product composition of merchandise trade, 2000 and 2002
2000 2002
(a)    Exports (f.o.b.)
Total: US$172.3 billion
(b)    Im ports (c.i.f.)
Total: US$160.5 billion Total: US$152.1 billion
Source:   UNSD, Comtrade database (SITC Rev.3).Chemicals
8.0
Agriculture
8.0
Other mining
5.5
Non-electrical
 machinery
8.5Other semi-
manufactures
3.2Other
 consumer
 goods
6.5
Iron & steel
3.3Fuels
23.7
Chemicals
8.4Total: US$162.5 billionIron & steel 
3.9Mining 
6.7Agriculture
2.5Other consumer goods
                      4.0 Mining  5.4Agriculture
2.4
Other electrical 
machines
4.6Non-electrical 
machinery
6.5Other transport
equipment  
7.1
Automotive 
products
10.7
Agriculture 
8.9Other
 consumer
 goods  
 7.2
Fuels
21.3
Mining
26.8
Iron & steel
3.6Other mining  
5.5
Other semi-
manufactures
4.3Chemicals
9.3Iron & steel  3.5
Manufactures
61.2Mining
29.2Other semi-
manufactures
5.3
Non-electrical 
machinery
5.6Other 
transport
equip.   5.7Textiles & clothing
10.3
Automotive 
products
8.8
Other electrical
 machines
4.0
Office machines & telecommunication 
equipment
34.1Other
0.9
Other consumer
goods  4.3
Manufactures
89.9Manufactures
91.6Chemicals
8.5
Other semi-
manuf.  5.2
Office machines & telecommunication 
equipment
32.4Textiles & clothing
9.1Other
0.6
Other electrical 
machines  4.6Transport equip. 2.5
Non-electrical machinery
8.2Other electrical machines
5.2
Office 
machines & 
telecom. equip.
21.2Textiles & clothing  2.9Other
1.6
Office machines 
& telecom. equipment.
18.4Transport equipment. 3.3Textiles & clothing  3.6Other
1.3
Manufactures
63.0 Per cent
 WT/TPR/S/137 Trade Policy Review 
Page 10 
 
 
(ii) Direction of trade 
25. The pattern of export destinations has shifted fu rther to East Asia since 2000.  Reflecting the 
disparity in economic conditions between regions, the share of total exports destined for China 
increased notably, while the sh are destined for the United States and Japan slightly 
decreased (Chart I.2, Table AI.3).  In 2003, Chin a apparently became Korea's largest export market 
against the background of China's rapid economic gr owth.  As regards imports, the share of goods 
supplied by East Asia increased notably.  During the same period, the share of total imports and 
exports of Association of Southeast Asian Nations (ASEAN) shrank slightly18;  the APEC's share of 
total imports increased, from 68.8% in 2000 to 69.5% in 2002, while that of total exports declined 
slightly (Table AI.4).   
(4) TRENDS AND PATTERNS IN FOREIGN INVESTMENT  
26. After reaching a historic peak of US$1.55 b illion in 1999, FDI inflows (on a notification 
basis) declined to US$0.65 billion in 2003  (Chart I.3).  Inward FDI as a percentage of GDP declined 
from 3.5% in 1999 to 1.1% in 2003.  By 2003, cumulative FDI inflows (1962-03) stood at US$91.1 billion, of which US$42.1 billion (46% of to tal) entered Korea between 2000 and 2003.  The 
pattern of the FDI inflows has changed markedly;  whereas in 2000 they were  concentrated almost 
equally in manufacturing and services, by 2003 the sh are of manufacturing had declined.  Investment 
has originated largely from the EU, the United St ates, Japan, and Malaysia.  Korea was ranked 17
th in 
the UNCTAD's Inward FDI potential indices for th e period 1999-01, while its performance index was 
ranked 92nd, suggesting that Korea could improve its attractiveness to inward FDI.19 
27. Korean overseas investment increased in 2001 but  remained almost unchanged in 2002;  it 
was curtailed in 2003 against a background of a slowdown in domestic recovery and increased 
external uncertainties.  China was the largest recipient of Korean investment in 2002 and 2003;  the 
shares of the United States and the EU have been declining since 2001 (Chart I.4).   
  
                                                     
 
18 ASEAN members are Brunei Darussalam, Indonesi a, Laos, Malaysia, Myanmar, the Philippines, 
Singapore, Thailand, and Viet Nam. 
19 The Inward FDI Potential Indices are calculated ba sed on several quantifiabl e factors (e.g. real GDP 
growth, GDP per capita, total exports, telephone lines, energy use, education, and R&D expenditure) that are 
expected to affect an economy's attr activeness to foreign investors.  The Inward FDI Performance Index ranks 
countries according to the FDI they receive relative to thei r economic size (UN, 2003). Republic of Korea WT/TPR/S/137 
 Page 11 
 
 
Chart I.2
Merchandise trade by main orig in and destination, 2000 and 2002
2000 2002
(a)    Exports (f.o.b.)
Total: US$172.3 billion
(b)    Im ports (c.i.f.)
Total: US$160.5 billion Total: US$152.1 billion
Source:   UNSD, Comtrade database (SITC Rev.3).Other East Asia
11.7
Other 
Europe
2.8
China
8.0
Oceania  4.3
Other East Asia
15.1Other Middle East
9.8
Japan
19.8Total: US$162.5 billionMiddle East  3.9Other Europe  2.9
Africa  1.9Other America
6.8
Africa  2.4
Chinese Taipei
4.1China
14.6
Oceania  2.2
South Asia   1.7
Other
 Europe
3.1
Other America
3.6Other Middle East
8.4
Africa  1.4
Japan
19.6
Other East Asia
15.4China
11.4Other Europe
3.1
East Asia
42.9Japan
11.9China
10.7United States
21.9
Oceania  2.0
South Asia
1.6Hong Kong, China
6.2EU15
13.6Other 
America
6.8
East Asia
45.2East Asia
45.7Middle East
4.3
Japan
9.3
Hong Kong, China
6.2United States
20.3EU15
13.4
United States
18.2Other America
3.4
Oceania  4.5United States
15.2
Africa  2.0EU15
9.8
South Asia  1.1EU15
11.3
East Asia
46.4Other 0.2
Chinese
 Taipei
4.7Other East Asia
11.5Other   0.1
Saudi Arabia
6.0
South Asia  
0.8M. East
13.3M. East
15.8Saudi Arabia
5.0
 WT/TPR/S/137 Trade Policy Review 
Page 12 
 
 
02,0004,0006,0008,00010,00012,00014,00016,000
1999 2000 2001 2002 2003
02,0004,0006,0008,00010,00012,00014,00016,000
1999 2000 2001 2002 2003Chart I.3
Inflows of foreign direct investment, 1999-03
(a)  By origin
US$ million
(b) By sector
Ministry of Commerce, Industry and Energy. Source :US$ million
Manufacturing
Services
OtherUnited States EU(15)
Other Other AsiaSingaporeJapan
ChinaMalaysia
 Republic of Korea WT/TPR/S/137 
 Page 13 
 
 
01,0002,0003,0004,0005,0006,0007,000
1999 2000 2001 2002 2003
Source :    The Export-Import Bank of Korea .Chart I.4                   
Outflows of foreign direct investment by destination, 1999-03
US$ million
United States
OtherJapan European Union
Hong Kong, ChinaChina
India Singaporea
a                 January to November only.
 
(5) OUTLOOK  
28. The economic priority for 2004 is to create jobs by boosting investment.20  The economy was 
forecast to grow by some 5.5% in 2004, with in flation (CPI) and unemployment at about 3%.  The 
current account surplus is expected to decline to about US$6 billion, with the expected recovery of 
domestic demand and appreciation of the won.  The fiscal deficit (excluding social security funds) is 
estimated to be 0.6% of GDP in 2004.  Korea’s future economic performance will depend to a large 
extent  on external factors, such as the pace of re covery in the world economy, and especially on 
China's continued rapid expansion, which through ri sing exports, has been a major source of Korea's 
recent economic growth.  Of greatest importance, ho wever, to Korea's longer-term growth prospects 
will be its own efforts to implement structural a nd other economic reforms to curb the widening mis-
match between domestic a nd export demand as a source of sustainable growth.  This will require 
Korea to further liberalize or deregulate trade and trade-related policies, including in sensitive sectors, 
to reform labour markets (particularly industrial re lations), and further strengt hening of the financial, 
especially non-bank, sector. 
                                                      
20 Ministry of Finance and Economy (2004).