RESTRICTED  WORLD  TRADE  
ORGANIZATION  WT/TPR/S/137 
18 August 2004  
 
(04-3435) 
Trade Policy Review Body  
   
 
  
 
TRADE POLICY REVIEW 
 
REPUBLIC OF KOREA 
 
Report by the Secretariat 
 
  
 
This report, prepared for the fourth Trade Policy Review of the Republic of 
Korea, has been drawn up by the WTO Secretariat on its own responsibility.  
The Secretariat has, as required by th e Agreement establishing the Trade Policy 
Review Mechanism (Annex 3 of the Ma rrakesh Agreement Establishing the 
World Trade Organization), sought clarification from the Government of the 
Republic of Korea on its trade policies and practices. 
 
Any technical questions arising from this report may be addressed to 
Mr. Masahiro Hayafuji (tel:  022 739 5873) and Mr. Michael Daly 
(tel:  022 739 5077). 
 
Document WT/TPR/G/137 contains the policy statement submitted by the 
Government of the Republic of Korea. 
 
 
 
Note: This report is subject to restricted circul ation and press embargo until the end of the meeting 
of the Trade Policy Review Body on the Republic of Korea. Republic of Korea WT/TPR/S/137 
 Page iii 
 
 
CONTENTS 
 
    P a g e  
SUMMARY OBSERVATIONS vii 
 (1) M AIN ECONOMIC DEVELOPMENTS  vii 
 (2) T RADE AND FOREIGN INVESTMENT REGIME  viii 
 (3) T RADE POLICIES AND PRACTICES  ix 
 (4) T RADE POLICIES BY SECTOR  xi 
 (5) O UTLOOK  xii 
I. ECONOMIC ENVIRONMENT 1 
 (1) M AIN ECONOMIC DEVELOPMENTS  1 
 (2) M ACROECONOMIC POLICIES  4 
 (i) Fiscal policy 4 
 (ii) Monetary and exchange rate policy 5  (iii) Structural policies 6 
 (3) D
EVELOPMENTS IN MERCHANDISE TRADE  8 
 (i) Composition of trade 8  (ii) Direction of trade 10 
 (4) T
RENDS AND PATTERNS IN FOREIGN INVESTMENT  10 
 (5) O UTLOOK  13 
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES 14 
 (1) O VERVIEW  14 
 (2) G ENERAL CONSTITUTIONAL AND INSTITUTIONAL FRAMEWORK  15 
 (3) D EVELOPMENT AND ADMINISTRATION OF TRADE POLICY  16 
 (i) Main trade laws 16  (ii) Development and implementation of trade policy 17 
 (4) T
RADE POLICY OBJECTIVES  19 
 (5) T RADE AGREEMENTS AND ARRANGEMENTS  21 
 (i) WTO 21 
 (ii) Regional agreements 24 
 (iii) Bilateral agreements 27  (iv) Unilateral and other trade preferences 29 
 (6) F
OREIGN INVESTMENT REGIME  30 
 (i) Recent performance and developments 30  (ii) Legislative framework and procedures 30 
 (iii) Promotion and facilitation 33 
 (iv) Incentives 34  (v) International investment agreements 36 
III. TRADE POLICIES AND PRACTICES BY MEASURE 38 
 (1) O
VERVIEW  38 
 (2) M EASURES DIRECTLY AFFECTING IMPORTS  39 
 (i) Customs procedures 39  (ii) Customs valuation 41 WT/TPR/S/137 Trade Policy Review 
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   P a g e  
 
 (iii) Tariffs 42 
 (iv) Tariff quotas 51 
 (v) Other levies and charges 52  (vi) Import licensing, quotas and prohibitions 53 
 (vii) State trading 54 
 (viii) Contingency measures 54  (ix) Standards and other technical requirements 57 
 (x) Government procurement 63 
 (3) M
EASURES DIRECTLY AFFECTING EXPORTS  66 
 (i) Registration, documentation, and clearance 66 
 (ii) Export prohibitions, restrictions, and licensing 66  (iii) Export subsidies 66 
 (iv) Duty and tax concessions 67 
 (v) Export finance, guarantees, and insurance 67  (vi) Export promotion and marketing 67 
 (4) M
EASURES AFFECTING PRODUCTION AND TRADE  68 
 (i) Taxation 68  (ii) Financial assistance 70 
 (iii) State-owned enterprises and privatization 73 
 (iv) Competition and consumer policy 74  (v) Intellectual property rights 77 
IV. TRADE POLICIES BY SECTOR 82 
 (1) I
NTRODUCTION  82 
 (2) A GRICULTURE  83 
 (i) Overview 83 
 (ii) Policy developments 84  (iii) Selected activities 88 
 (3) F
ISHING   90 
 (4) P OLICY DEVELOPMENTS IN THE ENERGY SECTOR  90 
 (i) Petroleum and petroleum products 91 
 (ii) Other energy 91 
 (5) P OLICY DEVELOPMENTS IN THE MANUFACTURING SECTOR  94 
 (i) Textiles and clothing 95 
 (ii) Motor vehicles 95 
 (6) S ERVICES  96 
 (i) Financial services 97 
 (ii) Communications 103  (iii) Transportation 108 
REFERENCES   113 
APPENDIX TABLES  117 
 
 
 Republic of Korea WT/TPR/S/137 
 Page v 
 
 
CHARTS 
   P a g e  
I. ECONOMIC ENVIRONMENT 
 I.1 Product composition of merchandise trade, 2000 and 2002 9 
I.2 Merchandise trade by main origin and destination, 2000 and 2002 11 
I.3 Inflows of foreign direct investment, 1999-03 12 I.4 Outflows of foreign direct investment by destination, 1999-03 13 
 
III. TRADE POLICIES AND PRACTICES BY MEASURE  
III.1 Average (unweighted) applied MFN tariff rates, by HS section, 2000 and 2004  44 
III.2 Distribution of MFN tariff rates, 2000 and 2004  45 III.3 MFN tariff escalation by 2-digit ISIC industry, 2000 and 2004  47 
 
  
TABLES 
 
I. ECONOMIC ENVIRONMENT 
 I.1 Selected macroeconomi c indicators, 2000-03 2 
I.2 Basic economic and soci al indicators, 2000-03 4 
 II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES 
 
II.1 Main trade-related laws 17 II.2 WTO notifications, 2000 to end-March 2004 22 
II.3 FDI restricted sectors 32 
II.4 Main FDI tax incentives 35  
III. TRADE POLICIES AND PRACTICES BY MEASURE 
 III.1 Structure of Korean MFN tariffs, 1996 to 2004  43 
III.2 State trading entities and products 54 
III.3 Outstanding anti-dumping measures, 2003 55 III.4 Progress in meeting original privatization plan of 1998 74 
 
IV. TRADE POLICIES BY SECTOR 
 
IV.1 Share of GDP by sector, 2000-03  83 IV.2 Agricultural support by commodity, 1986-88 and 2000-03 85 
IV.3 Direct payments to agriculture, 1986-88 and 2001-03 87 
IV.4 Use of public funds for financial sector restructuring, as at end-September 2003 98 IV.5 Substandard and below loans (SBLs) by selected type of financial institution, 2000  
 to end-September 2003 99 
IV.6 Government and foreign ownership of commercial banks, end 2003 100 IV.7 Facilities-based telecommunications liberalization 104 
IV.8 Foreign investment in major ports 110 WT/TPR/S/137 Trade Policy Review 
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APPENDIX TABLES 
   P a g e  
 
I. ECONOMIC ENVIRONMENT  
AI.1 Exports by product groups, 1998-02 119 
AI.2 Imports by product groups, 1998-02 120 AI.3 Exports by destination, 1998-02 121 
AI.4 Imports by origin, 1998-02 122 
 II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES 
 
AII.1 Involvement in the WTO dispute settlement  mechanism, 2000 to end-March 2004  123 
 
III. TRADE POLICIES AND PRACTICES BY MEASURE 
 AIII.1 MFN tariff averages by HS chapter, 2000 and 2004  125 
AIII.2 Non- ad valorem  (alternate) MFN tariffs, 2004  130 
AIII.3 MFN applied tariff escalation and tariff ranges, 2000 and 2004  132 
AIII.4 Adjustment duties, 2004  134 
AIII.5 Tariff quotas on agricultural products, 2004  135 AIII.6 Fill ratios for agricultural tariff rate quotas, 2003 140 
AIII.7 Major changes to management of agricultural tariff rate quotas since 2000  142 
AIII.8 Autonomous tariff quotas, 2004 144 AIII.9 Anti-dumping action, 2000-03 148 
AIII.10 Quarantine prohibitions on imports of plants and plant products 150 
AIII.11 Domestic agricultural support notified to the WTO, 2000 152 AIII.12 Sanctions and surcharges imposed by the KFTC, 1999-03 154 
 
IV. TRADE POLICIES BY SECTOR  
AIV.1 Number of financial institutions, 1997-03 156 
AIV.2 Investment in port developments 157  
 Republic of Korea WT/TPR/S/137 
 Page vii 
 
 
SUMMARY OBSERVATIONS 
1. Since its previous Trade Policy 
Review in 2000, Korea's impressive economic growth restored its GDP per capita 
(US$12,000) to pre-Asian financial crisis 
levels by 2003.  The current recovery since mid-2003 has been fuelled mainly by buoyant growth in industrial exports, which has compensated for the  weakness in domestic 
demand, the main source of growth during the 
earlier part of the period under review.   
2. Despite the significant improvement in 
economic performance,  Korea faces several 
related economic challenges.  In particular, there are downside risks to the sustainability 
of the present recovery.  Sluggish domestic 
demand has resulted in possible over-reliance on exports as the main source of current growth, thus making the economy vulnerable to a slowdown in export growth, particularly 
to China, which has been the major driving 
force behind the recent rise in exports.  Further structural reforms, including trade and investment liberalization, would contribute to a robust recovery by strengthening competition and thereby 
boosting productivity, especially in agriculture 
and services, where productivity is significantly lower than in manufacturing, by far the most open sector of the economy.  Improved industrial relations, and further 
corporate and financial sector restructuring 
would also contribute to a sustained recovery.  Confronted by these economic challenges, the Government has renewed its reform efforts. 
(1) M
AIN ECONOMIC DEVELOPMENTS  
3. Following economic reforms in 
response to the Asian financial crisis in 1997, the Korean economy grew in real terms by 3.8% and 7.0%, respectively, in 2001 and 2002.  The recovery in 2002 was led by strong domestic demand, notably private 
consumption, which grew by 7.9%, and 
residential construction.  As a consequence of the economic downturn in the early part of the year, reflecting declines in both consumption and the growth of fixed investment, GDP growth was in the order of 3.1% in 2003, but 
based on continued export expansion is set to recover to over 5% in 2004.  The decline in consumption in 2003 may also reflect a 
slowdown in the growth of household 
borrowing, which had previously grown rapidly against the background of a boom in credit card use.  The Korean economy started recovering in late 2003, however, led mainly 
by external demand.  Since the first quarter of 
2000, the unemployment rate in Korea has fallen, reaching 3.4% in the fourth quarter of 2003. Inflation has remained largely within the official medium-term target range, with consumer prices increasing by 2.7% in 2002 
and by 3.6% in 2003. 
4. The Government's fiscal stance was 
slightly expansionary in 2003; its medium-term target for fiscal consolidation is to achieve fiscal balance (excluding social 
security) by 2007.  The Bank of Korea has 
maintained a moderately expansionary monetary policy since 2002, reducing the target overnight call rate in July 2003 to 3.75% (a historic low), where it has remained. 
5. The Government has continued to 
undertake structural reforms, notably of the 
financial and corporate sectors.  Its efforts to improve the domestic economic environment and to develop a more competitive economy, 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 protectionist pressures, maintaining outward-oriented non-
agricultural trade and investment policies. 
6. With gross national saving exceeding 
gross domestic investment, the current account balance has continued to record surpluses, 
albeit declining; 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 merchandise trade surplus and an increase in the services deficit;  in 2002, a 
reduced current account  surplus (1.0% of WT/TPR/S/137 Trade Policy Review 
Page viii 
 
 
GDP) reflected the recovery of 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 rose again in 2002 and 2003, 
although the debt service ratio has been 
decreasing since 2002. 
7. Korea is a major global trader; it was 
the world's eighth and seventh largest merchandise importer and exporter, respectively (counting the EU as one) in 2002.  
The share to GDP of imports of goods and 
services declined from 37.7% to 35.6% between 2000 and 2002;  the share to GDP of exports also declined, from 40.8% to 38.2%.  Korea's high dependence on industrial exports 
increased from 90% of total merchandise 
exports in 2000 to 92% in 2002.  Manufactured and mining products account for most imports, about 63% and 27%, respectively, in 2002, followed by agriculture (9%).  The United States, Japan, and the EU 
have continued to be Korea's main trading 
partners, while China's sh are in Korea's trade, 
especially exports, has been rising.    
8. After peaking in 1999, foreign 
investment inflows have declined;  Korean 
overseas investment also dropped against the 
background of the recent slowdown in domestic recovery and increased external uncertainty.   
(2) T
RADE AND FOREIGN INVESTMENT 
 R EGIME  
9. Since its previous Review in 2000, 
Korea has continued to liberalize its trade and investment policies to promote structural reform and thereby improve the economy's efficiency.  While there have been no 
significant changes in the general legal or 
institutional framework, nor in the way in which trade policy is formulated or implemented, trade and business laws have been strengthened and transparency improved as part of the Government's goal of achieving 
a "fair and transparent market-driven economy".  Regulatory reform, driven by the Regulatory Reform Committee, remains a high 
priority;  improved customs procedures were 
selected as a trade-related strategic goal in 2003.   
10. Trade policy formulation and 
implementation is primarily the responsibility 
of the Ministry of Foreign Affairs and Trade 
(MOFAT).  The Ministry of Commerce, Industry and Energy (MOCIE) regulates imports and exports.  The principal trade policy objective is to build a "free and open economy" based on market principles to 
promote structural reform and efficiency.  
Raising exports is seen as a major growth engine for meeting the political target of doubling average per capita annual income to US$20,000 (by 2010).  Korea's "global 
leadership" trade and investment strategy in 
key sectors, such as motor vehicles, steel, and IT industries, is aimed at enhancing the economy’s efficiency and achieving economic, including export-led, growth.  Expanding high-technology industries and higher-value-
added exports, and making Korea a Northeast 
Asia business and financial hub are high priorities.  Advisory councils independently advise ministries, including MOFAT, and several government-funded institutions, 
including the Korean Institute for 
International Economic Policy, conduct relevant government research and analysis.  The outcome is greater transparency and consequent public scrutiny of trade policies.  
11. Korea participates actively in the 
multilateral trading system, especially to support stronger rules.  It took part in the extended GATS negotiations on financial services and basic telecommunications, and is a member and observer, respectively, of the 
plurilateral Agreements on Government 
Procurement and Trade in Civil Aircraft.  It resolves trade disagreements using in particular the WTO dispute settlement system. 
12. A major departure from Korea's 
previous trade policy has been its increasing Republic of Korea WT/TPR/S/137 
 Page ix 
 
 
willingness to negotiate regional free-trade 
agreements.  The Asian financial crisis was an important factor in altering its past opposition to preferential trade agreements.  Korea sees 
these agreements as a means of liberalizing its 
trade and investment regimes to revitalize the economy, and to secure foreign markets and promote regional integration in response to the trend of growing regionalism.  Korea's 
first such agreement, with Chile, effective 
1 April 2004, covered industrial and certain agricultural products comprehensively.  However, rice and a number of other significant farm commodities were excluded, some permanently, thereby reducing the 
agreement’s liberalizing impact on 
agriculture, where high protection persists.  Korea is also negotiating free-trade agreements with Singapore and Japan, due to conclude in 2004 and by end-2005, 
respectively.  It has also launched a joint study 
on an FTA with ASEAN, and agreed to conduct similar studies with Mexico and EFTA.  Korea's longer term goals include a trilateral agreement with China and Japan, and the formation of an East Asian Free Trade 
Area (EAFTA) among "ASEAN+3" members. 
13. Korea's relatively liberal foreign 
direct investment (FDI) regime has benefited the economy.  Foreign firms play an increasingly important role and are seen as an 
essential source of export and employment 
growth.  All forms of FDI, including establishment, stock acquisitions, mergers (including hostile) and long-term loans, are allowed.  Sectoral restrictions on FDI have 
been relaxed.  Only radio and television 
broadcasting, plus rice and barley growing, are wholly closed to FDI.  Several, mainly 
infrastructure, sectors are partially closed and have foreign equity limits.  At the same time, Korea provides tax and other incentives in an 
effort to attract FDI, including in advanced 
technology activities, and in manufacturing, logistics, and tourism activities located in various types of designated zones.  Investment incentives are being extended, including 
through the creation of three Free Economic 
Zones (FEZs) in 2003 (Incheon, Busan, and Gwangyang ports).  A negotiable cash rebate was also introduced for foreign investors in 
2004.  On the other hand, income tax holidays are to be reduced from ten to seven years from 2005, as incentives become available to more 
foreign investors. 
(3) T
RADE POLICIES AND PRACTICES  
14. Since 2000, the general thrust of 
Korea’s trade and investment policies has been greater liberaliza tion, including the 
further opening of its economy to international 
trade and foreign investment.  This has exerted additional competitive pressure on domestic producers to improve productivity, and contributed to a more efficient allocation of Korea's resources.  Nevertheless, some 
protectionist measures continue to shield 
domestic producers, especially farmers, from foreign competition. 
15. The tariff is Korea's main instrument 
of trade policy.  It is also a significant source 
of tax revenue.  The Korean tariff remains a 
relatively complex instrument and as such constitutes a potential distortion to competition and an obstacle to the efficient allocation of resources.  The applied MFN rate averaged 12.8% in 2004;  falling slightly, 
from 13.8% in 2000, owing to implementation 
of WTO commitments.  No unilateral tariff cuts occurred during the period under review.  High tariffs, averaging 52.2% in 2004 (compared to 54.8% in 2000), apply to 
agriculture (WTO definition);  out-of-quota 
tariffs, often exceeding 200%, apply to many other commodities.  By contrast, industrial tariffs (WTO definition)  averaged 6.7% in 
2004 (7.5% in 2000).  The multiplicity of tariff 
rate bands (often involving small rate 
differences and decimal points) adds to the tariff's complexity.  Almost all tariffs are ad valorem, contributing significantly to tariff transparency.  On the other hand, alternate specific rates (mainly as out-of-quota duties) 
tend to conceal relatively high ad valorem 
equivalents, which vary between the same commodities (depending upon quality) and over time, providing greatest protection when world prices are lowest.  These non-ad 
valorem duties undermine tariff  transparency, WT/TPR/S/137 Trade Policy Review 
Page x 
 
 
and predictability.  Other measures (e.g. 
"autonomous" tariff quotas, usage tariffs, and duty concessions) that selectively reduce tariffs on inputs, often according to end-use, 
also contribute to tariff complexity and 
uncertainty.  Although 91% of tariff rates are bound, the predictability of the tariff is eroded by the considerable leeway to raise applied tariffs provided by the substantial gap between 
applied and bound MFN rates.  Korea has 
used this gap to apply higher "adjustment duties" as "flexible tariffs" on several products. 
16. Limited tariff preferences, restricted 
generally to certain manufactured goods from 
several developing countries, and all LDCs, 
means that Korea applies MFN rates on almost all (95%) imports.  However, the relevance of MFN rates to Korea's trade may have begun to erode with the recent granting 
of widespread preferential duties to Chilean 
imports, based on substantial and varied rules of origin.  This trend looks set to continue, with other FTAs in the pipeline, such as those with Singapore and Japan.   In 2004, imports from Chile were subject to average 
(unweighted) tariffs of 6.9%, just over half of 
Korea's average MFN rate.  Most reductions occurred on industrial goods;  the average agricultural tariff (WTO definition) on imports from Chile only fell to 49.8%, reflecting 
minimal liberalization at least to date of farm 
products under the Korea–Chile FTA.   
17. Whereas tariff quotas for beef were 
replaced by a tariff (currently 40%) from January 2001, rice imports are still subject to 
quantitative restriction.  State-trading 
enterprises and producer associations still administer tariff quotas affecting many agricultural imports, although greater auctioning of import entitlements has introduced greater market discipline in quota 
management.  Import licensing and 
prohibitions apply mainly for health, safety or security reasons.  Korea has harmonized many voluntary standards and mandatory technical regulations with international norms to 
improve transparency and reduce unnecessary 
obstacles to trade, and continues revising food codes and related regulations in line with 
international requirements.  However, significant differences, including in conformity testing, inspection, and acceptance of overseas 
results, seemingly remain, mainly for 
pharmaceuticals, cosmetics, and possibly food.  Quarantine arrangements, especially for fruit, and SPS requirements also appear relatively strict, despite Korea's continuing efforts to 
comply with international norms.   
18. Anti-dumping provisions have 
protected a number of industries from competitive imports.  General safeguard measures have been used only for garlic since the last Review.  While sector-specific 
safeguards on textiles have never been used, 
those on agricultural products are used frequently.  
19. A member of the WTO Government 
Procurement Agreement, Korea has largely 
computerized its government procurement 
system, including operating the e-Procurement System since September 2002.  This has increased transparency and access by foreign suppliers.  However, certain procurement is not covered by Korea's multilateral 
commitments;  for example, procurement from 
SMEs where private (non-competitive) tendering prevails.  Although no domestic price preferences apply, government procurement is still seemingly used as an 
instrument of economic policy, including 
regional and industrial development.  Procurement has become  more decentralized. 
20. A range of financial measures are 
intended to support trade and production, 
including R&D investment.  These include tax 
incentives and provision of credit and equity, including venture capital, largely channelled through various government-operated funds and state-owned financial institutions.  SMEs are major beneficiaries, especially those 
engaged in information technology activities.  
Direct export subsidies to reduce marketing costs apply to several agricultural goods, and the sector also benefits from substantial domestic financial support under the WTO 
Green Box or the de minimis provisions. Republic of Korea WT/TPR/S/137 
 Page xi 
 
 
21. Corporate restructuring is well 
advanced, helped by a strengthened corporate governance framework, including improvements in bankruptcy laws as well as in 
accounting and disclosure requirements. 
22. Although privatization is behind 
schedule, there has been considerable progress, and the Government remains committed to further divestment, including to 
foreign interests.  Application and 
enforcement of Korea's extensive competition policy has been strengthened, including extra-territorially, against cartels and other anti-competitive behaviour.  Conglomerates ("chaebols") are subject to special regulation, 
including ceilings on shareholdings in other 
domestic firms.  Certain collusion by SMEs remains exempt from competition legislation.   
23. Korea has continued to strengthen 
protection of intellectual property through 
extensions of its comprehensive legislation in 
line with international developments, and enhanced enforcement.  It is currently acceding to the WIPO Copyright Treaty, which was expected to take effect on 24 June 2004.  
(4) T
RADE POLICIES BY SECTOR  
24. Korea is a dualistic economy as 
regards protection.  Relatively low manufacturing protection, except for a few pockets of moderate protection (e.g. textiles, 
clothing, and footwear), contrasts with high 
levels of protection and low market orientation in agriculture, the most distorted sector.  Korea's net agricultural support exceeds the sector's GDP contribution (3.6% in 2003), and 
is among the highest in the OECD.  The 
average Producer Support Estimate (PSE) for agriculture was 60% in 2003 (equivalent to additional farm incomes of W 20.2 trillion), and was highest for rice (74%) and oilseeds (89%).  Most assistance involves market price 
support from trade barriers and price 
stabilization schemes.  These distort agricultural trade and production, and force Korean consumers to pay much higher prices (on average well over double world levels in 2002, or three times higher for rice).  MFN 
tariffs averaged 52.2% on agricultural products in 2004 (more than seven times higher than on non-agricultural goods). 
25. Agricultural protection also 
undermines Korea's economic efficiency and tends to penalize efficient exporters, including manufacturers.  Although self-sufficiency goals and other "non-trade" concerns 
underpin agricultural protection, the resulting 
higher food prices are borne disproportionately by poor consumers.  The 
measures used are an economically inefficient and costly means of achieving food security, and have contributed to surplus production of 
key commodities, like rice and dairy products. 
26. Manufacturing accounted for a 
substantial, albeit declining, 26.6% share of Korea's GDP in 2003.  The sector is heavily outward oriented, generating almost all of 
Korea's merchandise exports.  Information 
and communications equipment (mobile phones, PC equipment, and semi-conductors) comprise Korea's single largest export category. 
27. Services accounted for 69.7% of GDP 
in 2003 (up from 65.3% in 2000).  Korea is 
continuing to de-regulate and privatize the key energy markets of natural gas and non-nuclear electricity, albeit slowly.  State monopolies are being relaxed, and majority 
state-owned enterprises (Korea Gas 
Corporation (KOGAS) and Korea Electric Power Corporation (KEPCO)) structurally unbundled to facilitate further privatization and market orientation, based on third-party 
access and sectoral regulation to safeguard 
competition.  However, delays persist, and final arrangements, including the regulators' independence, remain unc lear as plans change 
and many crucial details remain obscure.  Restrictive caps still apply to foreign equity 
(30% for KOGAS, 40% for KEPCO, 30% for 
KEPCO's five subsidiary power generation companies, and 50% for power distribution and transmission generally).  Prices are regulated based on rate of return (on assets) 
criteria, which encourages inefficiency.  WT/TPR/S/137 Trade Policy Review 
Page xii 
 
 
Significant cross-subsidies between users, 
although being reduced, also create inefficiencies.  
28. A major policy priority and 
achievement has been the rehabilitation of the 
financial sector.  It has been considerably restructured, especially in banking, where policy reforms have been focused since the Asian financial crisis.  Government-led 
financial restructuring, involving public funds 
of W 161 trillion (one quarter of current GDP) has re-capitalized institutions, mainly banks, and cleaned up loan portfolios.  Non-performing loans (NPLs) have fallen in the sector, from 10.4% at end 2000 to 3.6% at end 
2003.  However, while relatively low for banks 
(under 3%), NPLs are much higher for non-banks (averaging 6.4% at end 2003), reflecting significant but uneven and incomplete progress in non-bank 
restructuring.  Privatization is well advanced, 
especially of banks, where state ownership has fallen to about 20%, almost pre-crisis levels (compared with 60% at end 1998).  Full foreign equity is allowed in banks, subject to special permission;  it has risen, on average, 
from under 10% at end-1998 to 30% at end-
September 2003.  The financial sector has returned to profitabi lity, although recent 
exposures to household credit on real estate and credit cards have reduced it, and required 
the Financial Supervisory Commission to 
strengthen prudential measures further.  Further restructuring of the non-bank sector, notably investment trust companies and credit card companies, would strengthen the 
financial sector. 
29. The telecommunications market has 
been de-regulated and fully privatized;  the State's remaining share in Korea Telecom (KT) was sold in May 2002.  Foreign equity is unrestricted in most services, but is capped at 
49% for KT and other basic 
telecommunications providers.  Weaknesses in the regulatory regime have hampered effective competition in basic telecommunications.  These weaknesses include:  the apparent non-
independence of the regulator (the Korea 
Communications Commission);  possibly inappropriate use of the fully distributed cost 
method (FDC) for setting access prices;  and requiring approval instead of a price cap regime to regulate key prices[, including in the 
competitive mobile mark et.  The Government 
is addressing these issues, and plans, for example, to introduce a marginal cost-based measure for access pricing (long run average incremental cost, or LRAIC) in 2004.  
Licensing restrictions for new entrants in 
basic telecommunications could perhaps be further eased, including introduction of a class licensing system. 
30. Greater private sector involvement is 
occurring in transport, especially in port 
development.  The highly indebted and 
inefficient state-owned rail monopoly, Korail, is also being restructured and its services unbundled to facilitate greater competition and eventual privatization.  Cabotage 
restrictions apply to air and sea transport. 
(5) O
UTLOOK  
31. Renewed economic growth of 5.5% is 
forecast in 2004, while inflation and unemployment are both expected to fall to 3%.  The Government's economic priorities in 2004 
are to boost investment and enhance job 
opportunities.   
32. Korea's future economic performance 
will depend to a large extent on external factors, such as the pace of recovery in the 
world economy, and especially on China's 
continued expansion, which through rising exports, has been a major source of Korea's recent economic growth.  Of greatest importance, however, to Korea's longer-term 
growth prospects will be its own efforts to 
implement structural and other economic reforms to curb the widening mis-match between domestic and export demand as a source of sustained growth.  Sustained growth is also likely to require further liberalization 
or deregulation of trade and trade-related 
policies, including in sensitive sectors, reform of labour markets (particularly industrial relations), and further strengthening of the financial, especially non-bank, sector.