Republic of Korea WT/TPR/S/268/Rev.1 
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  I. ECONOMIC ENVIRONMENT 
(1) OVERVIEW  
1. Korea's economy has rebounded from the global fina ncial crisis that erupted around the time 
of its previous Review in 2008.  The crisis cause d, among other things, a sharp fall in international 
trade, including Korea's exports, traditionally one of its principal sources of growth.  Korea's exports 
contracted in 2009, but rebounded by 14.7% in 2010 a nd steadied at 9.5% in 2011 (Table I.1).  As a 
consequence, Korea is now the world's seventh largest exporter, up from 12th in 2008.1  Imports 
showed a similar collapse in growth in 2009 and subsequent rebound.   
2. Real GDP growth tracked the sa me pattern of recovery in 2010 as exports, and steadied at 
3.6% in 2011 (Table I.1).  This quick recovery was, by and large, achieved without resorting to 
restrictive trade measures;  on the contrary, with th e lack of progress in multilateral trade negotiations, 
Korea has instead opened its market further to inte rnational trade.  It recently concluded major 
bilateral free-trade agreements (FTAs), with the Un ited States and the Europ ean Union, and remains 
among the most open economies in the world, except perhaps in the case of inward foreign direct 
investment (FDI).  Recovery was due to the re vival of trade world-wide, especially strong demand 
from China, together with supportive macroeconomi c and financial policies.  These policies included 
the largest fiscal stimulus (as a share of GDP) among the 26 OECD countries2, as well as 
accommodative monetary policy and a sharp depreciati on of the exchange rate of the won during the 
latter part of 2008.  Subsequent measures to modera te the volatility of capital inflows have slowed the 
appreciation of the won, so that its real eff ective exchange rate (REER) remains 11% below its 
2000-07 average.3  Despite its impressive rebound from the global financial crisis, Korea's economy 
remains vulnerable to shocks through international tr ade, particularly its h eavy reliance on exports of 
manufactures for growth, and financial linkages. 
3. Korea's economy is characterized by a number of interrelated imbalances, some of which are 
policy-induced.  First, growth has been driven much more by exports than by domestic demand, 
which has been restrained recently by very high levels of household debt (163.7% of income and 
89.2% of GDP in 2011).  Second, government polici es (including tariffs, tax incentives, and reduced 
energy prices4) have favoured manufacturing over services, which tend to be much less tradeable than 
manufactures.  Third, policies aimed at enhancing the international competitiveness of exports of 
manufactures, produced mainly by large business conglomerates5, many of which are 
family-controlled ( chaebol ), have contributed to a large a nd widening gap in labour productivity6, and 
thus wages, between the manufacturing and servi ces sectors, thereby exacerbating income inequality.7  
Fourth, policies (or perhaps lack thereof as regard s those aimed at combating private anti-competitive 
                                                      
1 OECD (2010b). 
2 OECD (2010b). 
3 IMF (2011). 
4 See Chapter IV(4)(2) and Jones (2009). 
5 According to the Korea Trade Sta tistics Service, Korea's ten largest chaebol  accounted for 35.7% of 
Korea's exports in 2011.  However, another source indicates that Korea's six largest chaebol  account for more 
than 70% of Korea's exports ("South Ko rea's small businesses fight for surviv al", 17 August 2011.  Viewed at:  
www.bbc.co.uk/news/business-14554015?print=true).  The discrepancy may be because conglomerates' exports contain intermediate inputs supplied by small and medium-sized enterprises (SMEs). 
6 The gap is the largest in the OECD area, where productivity in manufacturing and services is roughly 
the same (Jones, 2009). 
7 In a recent meeting with heads of about a dozen chaebol , Korea's President reportedly called for big 
business to pay attention to social inequalities (http://english.yonhapnews.co.kr/business/2012/01/20/ 
0502000000AEN20120120000200315.HTML). WT/TPR/S/268/Rev.1 Trade Policy Review 
Page 2 
  
  practices) have also enabled large business conglom erates to dominate the domestic market to the 
detriment of small and medium-sized enterprises (SMEs), which are potentially an important source of innovation, but lack access to finance and new technology.  Fifth, Korea's strong growth has 
exacerbated environmental problems, notably the emission of greenhouse gases
8, which is arguably 
associated more with manufacturing than services.   Sixth, in the longer term, the emerging 
demographic imbalance involving a sharp increase in  the ratio of retirees relative to employees will 
not only tend to reduce growth, by reducing the dom estic supply of labour, but also put pressure on 
pensions and the provision of healthcare and other services for the elderly.  In order to ensure 
equitable and sustainable growth, these imbalances n eed to be redressed by appropriate policies to 
alleviate these and other structural challenges.9 
4. During the period under review (2008-12), the Go vernment took policy initiatives to address 
some of these imbalances.  In particular, its strategy to develop services envisages creating a more level playing field between manufacturing and certain services, by increasing tax incentives
10 and 
other support (including government credit guarantees11) for services instead of reducing incentives 
for manufacturing (Chapters III(4)(i), IV(5) and IV(6 )).  The authorities also envisage deregulation 
and improving the investment environment in the ser vices sector so as to foster competition, including 
from abroad.12  Furthermore, labour-market policies are being focused on increasing investment in 
labour-intensive activities, notably services, and th ereby raising labour prod uctivity, strengthening the 
social safety net, and increasing participation of th e elderly and females in the labour force.  The 
authorities do not target large business conglomerates' anti-competitive practices per se13;  they do, 
however, encourage them to support their SME su ppliers through preferential loans, joint R&D 
projects, and sharing profits (Chapter III(4)).  Mo reover, in 2009, the Government introduced the 
National Strategy for Green Growth involving incenti ves to improve energy efficiency and increase 
the competitiveness of alternative energy sources (Chapter IV(4) and (5)).  While plans for the 
privatization of state-owned enterprises (SOEs) ha ve been drawn up under the auspices of the SOE 
Privatization Committee, it would appear that little  progress has been made in implementing these 
plans, although the authorities maintain that the priv atization process is, by and large, being properly 
implemented as originally planned, and preparatory work is currently under way (Chapters III(4)(iii)). 
(2) RECENT ECONOMIC PERFORMANCE14  
5. During the period under review (2008-11), Korea's real GDP growth dropped from 5.1% in 
2007 to 2.3% in 2008 and to 0.3% in 2009, mainly  because of the collapse in export growth from 
                                                      
8 Greenhouse gas emissions almost doubled between 1990 and 2005, making Korea one of the fastest-
growing sources of emissions in the OECD area.  Korea also has one of the highest levels of energy intensity among OECD countries, reflecting its relatively high reliance on energy-intensive industries (OECD, 2010b).  
This is undoubtedly partly because Korea's electricity rates are the lo west among OECD Member countries, 
according to a recent report by the International Energy Agency. 
9 Another major challenge is the increased duality  of Korea's labour market, where the share of 
non-regular workers has risen to over one third of employees (OECD, 2010b). 
10 IMF (2011). 
11 OECD (2010b). 
12 IMF (2011). 
13 There is no particular policy that targets larg e conglomerates, except taxation of unfair insider 
trading between a parent (holding) company and subsidiaries, a policy common to most OECD countries. 
14 According to the 2012 World Bank's Ease of Doing Business  report, Korea ranked 8th among 
183 countries in 2012, up from 15th in 2011 and 22nd in 2008 (Chapter II(7)).  As regards, international 
competitiveness, the IMD ranked Korea 22nd among 59 economies in 2011, compared to 23rd in 2010 and 31st in 
2008 (IMD, 2012).  The Heritage Foundation's Index of Economic Freedom ranked Korea 31st (out of 
179 countries) in 2012, the same as in 2008 (out of  157 countries) (Heritage Foundation, 2012 and 2008). Republic of Korea WT/TPR/S/268/Rev.1 
 Page 3 
 
 
  12.6% in 2007 to -1.2% in 2009 (Table I.1).  Labo ur productivity growth, the main determinant of 
wages and thus living standards, also suffered a sharp slowdown from 6.9% in 2007 to 1.2% in 2008.  
However, as a result of the rebound in export grow th to 14.7% in 2010 and 9.5% in 2011 together 
with robust domestic demand,  real GDP growth quickly recovered to 6.3% in 2010, before falling 
back to 3.6% in 2011.   Labour productivity growth also recovered quickly to 2.9% in 2009 and 
jumped to 12.1% in 2010 (6.4% in 2011) owing to  the rapid recovery in  exports and facilities 
investment, which increased to 14.7% and 25.7%, respectively, in 2010, from 6.6% and -1.0% in 
2008.  By contrast, growth in total factor prod uctivity (TFP), a more accurate measure of economic 
efficiency and thus international competitiveness,  was 0.03% in 2008 and -1.34% in 2009 (according 
to data provided by the Korea Productivity Center).15  Manufacturing recorded TFP growth of 0.08% 
in 2008 and -0.76% in 2009, while TFP growth of ser vices was -0.03% in 2008 and -2.64% in 2009.  
In the absence of improved TFP, growth accounting implies that increased labour productivity owing 
to increased investment is offset by a deterioration in capital productivity. 
Table I.1 
Selected macroeconomic  indicators, 2007-11 
2007 2008 2009 2010 2011 
National accounts  (Percentage change, unle ss otherwise indicated)  
Real GDP (at 2005 prices) 5.1  2.3  0.3  6.3  3.6  
   Consumption 5.1  2.0  1.2  4.1  2.2  
        Private consumption 5.1  1.3  -0.0  4.4  2.3  
        Government consumption 5.4  4.3  5.6  2.9  2.1  
   Gross fixed capital formation 4.2  -1.9  -1.0  5.8  -1.1  
   Exports of goods and non-factor services 12.6  6.6  -1.2  14.7  9.5  
   Imports of goods and non-factor services 11.7  4.4  -8.0  17.3  6.5  
          XGS/GDP (%) (at current market price) 41.9  53.0  49.7  52.3  56.2  
          MGS/GDP (%) (at current market price) 40.4  54.2  46.0  49.7  54.1  
Unemployment rate (%) 3.2  3.2  3.6  3.7  3.4  
Productivity  (Percentage change)  
Labour productivity 6.9  1.2  2.9  12.1  6.4  
Total factor productivity 0.7  0.0  -1.3   ..   ..  
Prices and interest rates (Per cent) 
Inflation (CPI, %age change) 2.5  4.7  2.8  3.0  4.0  
Loans and discounts rate 6.55  7.17  5.65  5.51  5.76  
Savings deposit rate 5.07  5.71  3.26  3.19  3.69  
Exchange rate 
Won/US$ (annual average) 929.2  1,102.6  1,276.8  1,156.3  1,108.0  
Real effective exchange rate (%age cha nge) -1.1  -19.9  -12.4  11.4   ..  
 (Per cent of GDP, unless otherwise indicated)  
Consolidated fiscal balance 3.8  1.2  -1.7  1.4   ..  
Consolidated revenue 25.0  24.4  23.5  23.1   ..  
   Tax revenue 19.6  19.5  18.6   ..   ..  
Consolidated expenditure and net lending 21.2  23.3  25.2  21.7   ..  
Central government total debt  29.7  29.0  32.6  31.9  32.6 
Table I.1 (cont'd)  
                                                      
15 Total factor productivity (TFP) re flects the efficiency with which f actors of production are used and 
is therefore a key determinant of an economy's performance.  It should be distinguished from labour 
productivity, which is the amount of output per employee (or 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, which refl ects scale economies and technological progress.  The latter is one of the 
most important sources of TFP growth in the long run. WT/TPR/S/268/Rev.1 Trade Policy Review 
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  2007 2008 2009 2010 2011 
Saving and investment  
Gross national savings 31.5  31.6  30.2  32.0  31.7  
Gross domestic investment 29.4  31.2  26.3  29.2   ..  
Savings-investment gap 2.1  0.4  3.9  2.8   ..  
External sector 
Current account balance  2.1  0.3  3.9  2.9  2.4  
Net merchandise trade  3.5  0.6  4.5  4.0  2.8  
   Merchandise exports 37.1  46.7  42.9  45.5  49.5  
   Merchandise imports 33.6  46.1  38.4  41.5  46.7  
Services balance -1.1  -0.6  -0.8  -0.9  -0.4  
Capital account -0.2  0.0  0.0  -0.0  0.0  
Financial account -2.0  -0.1  -4.2  -2.7  -2.9  
     Direct investment -1.7  -1.8  -1.8  -2.2  -1.4  
Balance of payments  1.4  -6.1  8.2  2.7  1.2  
Terms of trade 91.1  78.5  86.3  86.0  78.8  
Merchandise exports (%age change in US$) 15.8  11.6  -17.6  28.8  19.7  
Merchandise imports (%age change in US$) 15.5  21.9  -25.4  31.5  23.8  
Service exports (%age change) 28.4  24.2  -18.8  18.6  8.8  
Service imports (%age change) 21.1  13.4  -16.8  19.6  3.6  
International reserves (US$ billion, e nd-period) 262.2  201.2  270.0  291.6  306.4  
      in months of imports of goods and services 7.2  4.6  8.1  6.8  5.9  
Total external debt (US$ billion;  en d-period) 333.4  317.4  345.7  359.4  398.4  
      of which short term 160.2  149.9  149.2  139.8  136.1  
Debt service ratioa 6.9  7.9  7.8  6.8   ..  
.. Not available. 
a Debt service on medium and long-term debt in  per cent of exports of goods and services. 
Source : Korea National Statistical Office, Monthly Statistics of Korea  (various issues);  Bank of Korea,  Monthly Statistical 
Bulletin 2012.1 , and online information.  Viewed at:  http://www.bok.or.kr/contents/total/eng/board 
View.action?menuNaviId=634&boa rdBean.brdid=10742&boardBean.menuid=634&boardBean.rnum=1 
[02/04/2012];  IMF Country Report No. 11/246, August;  and data provided by the authorities. 
6. Between 2008 and 2011, manufacturing's shar e of GDP increased from 27.9% to 31.2%, 
while its share of employment remained virtually unchanged at 16.9% (in 2011).  Labour productivity 
in manufacturing is more than double that of services, whose share of GDP fell from 60.8% to 58.1%, but whose share of employment rose from 66.2% to 68.2% (Table I.2).  The widening gap in labour 
productivity between manufacturing and services is due  to the latter's relatively lower levels of 
investment (including in information and communi cations technology and R&D) and total factor 
productivity, which reflects scale economies and te chnological progress.  Services' relatively poor 
productivity performance
16 is due partly to the lack of competition in the sector, owing to, inter alia , 
state-ownership in some subsectors, and excessive regulation, including restrictions on foreign direct 
investment (Chapters II and IV(6)), which is usua lly the main mode of cross-border delivery for 
services17;  and to the predominance of SMEs, which do not achieve scale economies.  Despite annual 
                                                      
16 In 2009, Korea's service productivity was US$28,001 and ranked 31 out of 32 OECD countries 
(Ministry of Strategy and Finance, 2011). 
17 Commercial presence (mode 3), which involves FDI, is the dominant mode of supply;  estimates 
suggest that globally it accounts for 55 -60% of total trade in  services.  Cross-borde r supply (mode 1) and 
consumption abroad (mode 2), respectively, account for 25- 30% and 10-14%.  By contra st, movement of natural 
persons (mode 4) accounts for less than 5% of the total (Magdeleine and Maurer, 2008).  No such data were 
available  for Korea. Republic of Korea WT/TPR/S/268/Rev.1 
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  government support averaging 2.2% of GDP (in 2008- 10), almost as much as agriculture's declining 
2.7% share of GDP (in 2011), labour productivity in agriculture remains relatively low at roughly two fifths of the national average, although it improved during the period under review 
(Chapter IV(2)(ii)(b)). 
Table I.2 
Basic economic and social indicators, 2007-11 
    2007 2008 2009 2010 2011 
Real GDP at market prices ( ₩ billion, 2005 prices) 956,514.5  978,498.8  981,625.1  1,043,666.3  1,081,593.9  
Real GDP at market price (US$ billion, 2005 prices) 1,029.4  887.4  768.8  902.6  976.2  
Current GDP at market price ( ₩ billion) 975,013.0  1,026,451.8  1,065,036.8  1,173,274.9  1,237,128.2  
Current GDP at market price (US$ billion) 1, 049.3  930.9  834.1  1,014.7  1,116.5  
GDP per capita at current market price ( ₩ '000) 20,062.8  20,969.8  21,655.0  23,745.7  24,852.4  
GDP per capita at current market price (US$) 21,591.5  19,018.5  16,960.4  20,535.9  22,430.0  
(Annual percentage change) 
GDP by economic activity at constant 2005 prices 
Agriculture, forestry and fishing 4.0 5.6 3.2 -4.4 -2.0 
Mining and quarrying -4.1 0.6 -0.8 -8.6 -4.6 
Manufacturing 7.2 2.9 -1.5 14.7 7.2 
Electricity, gas and water 3.8 6.2 4.1 4.3 2.9 
Construction 2.6 -2.5 1.8 -2.7 -4.6 
Services 5.1 2.8 1.2 3.5 2.6 
Wholesale and retail trade, restaurants and hotels 5.2 1.4 -0.9 7.1 4.6 
Transport and storage 5.5 4.8 -5.8 10.3 3.8 
Financial intermediation 10.8 4.9 4.4 2.4 1.6 
Real estate, renting and leasing 1.4 1.5 -0.2 1.3 2.2 
Information and communication 3.7 3.4 2.2 3.9 5.5 
Business activities 5.2 2.8 -0.6 3.1 1.0 
Public administration and defence, compulsory social 
security 3.3 1.4 3.8 1.6 1.2 
Education 3.0 3.3 1.0 1.2 0.2 
Health and social work 8.3 3.9 7.9 6.8 4.6 
Culture and entertainment 9.7 3.4 2.5 2.1 1.7 
Other 4.6 1.4 1.4 2.6 1.1 
(Per cent) 
Share of gross value added, current prices 
Agriculture, forestry and fishing 2.9 2.7 2.8 2.6 2.7 
Mining and quarrying 0.2 0.3 0.2 0.2 0.2 
Manufacturing 27.3 27.9 27.8 30.3 31.2 
Electricity, gas and water 2.2 1.3 1.8 2.0 2.0 
Construction 7.4 7.0 6.9 6.3 5.9 
Services 60.0 60.8 60.4 58.5 58.1 
Wholesale and retail trade, restaurants and hotels 10.7 10.9 10.8 10.9 11.1 
Transport and storage 4.6 4.5 4.2 4.2 3.7 
Financial intermediation 7.0 7.1 6.8 6.8 7.0 
Real estate, renting and leasing 7.9 7.8 7.8 7.2 7.1 
Information and communication 4.5 4.3 4.3 4.0 3.8 
Business activities 5.2 5.4 5.3 5.3 5.2 
Public administration and defence, compulsory social 
security 6.3 6.5 6.6 6.2 6.2 
Table I.2 (cont'd)  WT/TPR/S/268/Rev.1 Trade Policy Review 
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      2007 2008 2009 2010 2011 
Education 6.4 6.6 6.6 6.2 6.1 
Health and social work 4.1 4.2 4.5 4.5 4.6 
Culture and entertainment 1.4 1.4 1.4 1.4 1.4 
Other 2.0 2.1 2.1 2.0 1.9 
Share of sector in total employment 
Agriculture, forestry and fishery 7.4 7.2 7.0 6.6 6.4 
Mining and quarrying 0.1 0.1 0.1 0.1 0.1 
Manufacturing 17.1 16.8 16.3 16.9 16.9 
Electricity, gas and water  ..   ..   ..   ..   ..  
Construction 7.9 7.7 7.3 7.4 7.2 
Services 66.2 66.9 67.9 67.8 68.2 
Wholesale and retail trade  ..   ..   ..   ..   ..  
Hotels and restaurants  ..   ..   ..   ..   ..  
Transport, storage and communication  ..   ..   ..   ..   ..  
Financial institution and insurance  ..   ..   ..   ..   ..  
Real estate, renting and leasing  ..   ..   ..   ..   ..  
Business activities  ..   ..   ..   ..   ..  
Public administration and defence, compulsory 
social security  ..   ..   ..   ..   ..  
Education  ..   ..   ..   ..   ..  
Health and social work  ..   ..   ..   ..   ..  
Other community, social and personal service 
activity  ..   ..   ..   ..   ..  
Othera  ..   ..   ..   ..   ..  
.. Not available. 
a Including private households with employed persons , and extra-territorial organizations and bodies. 
Source : Korea National Statistical Office, Monthly Statistics of Korea 2012.1 ;  and Bank of Korea online information.  
Viewed at:  http://www.bok.or.kr/contents/total/eng/ boardView.action?menuNaviId=634&boardBean.brdid=10 
742&boardBean.menuid=634&boardBean.rnum=1 [02/04/2012]. 
7. Not surprisingly, as a consequence of the shar p drop in growth, Korea's unemployment rate 
edged up from 3.2% in 2007 and 20 08 to 3.6% in 2009 and 3.7% in 2010, still relatively low by 
OECD standards, and then fell back to 3. 4% in 2011 owing to the economic recovery.18 
8. After rising steadily between 1997 and 2008, ma inly as a consequence of rising poverty 
among the elderly, income inequality as measured by the Gini coefficient flattened out (at 0.314) in 
2009, then fell slightly (to 0.310) in 2010.  Income  inequality in Korea is closely related to the 
difference in labour productivity between those employed in the tradeable (mostly manufacturing) 
sector and those employed in the non-tradeable (mostly services) sector, as well as to labour market 
practices.19 
(3) BALANCE OF PAYMENTS  
9. In line with its traditional strategy of enc ouraging export-led growth based on manufactures, 
Korea continues to run a surplus in merchandise trade and a deficit in services (Table I.3).  Except 
                                                      
18 According to a report just issued by the Hyundai Economic Research Institute, however, the 
"perceived unemployment rate" was 11.3 % in 2011.  The perceived unemploym ent rate is a measure of real 
job-market conditions, which takes in to account discouraged workers and wo rkers preparing to enter the labour 
market. 
19 IMF (2011). Republic of Korea WT/TPR/S/268/Rev.1 
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  in 2008, the surplus in merchandise considerably ex ceeded the deficit in services.  Consequently, the 
current account registered a substantial overall surplus, averaging roughly 2.3% of GDP during 
2007-11.  The overall current account surplus reflects the extent to which gross national saving (31.4% of GDP) exceeds gross domestic investment (29.0% of GDP).   
Table I.3 
Balance of payments, 2007-11 
(US$ million) 
    2007 2008 2009 2010 2011 
Current account 21,769.7  3,197.5  32,790.5  29,393.5  26,505.3 
Goods and services balance 25,161.8  -564.0  31,245.5  31,456.5  26,572.9 
    Trade balance 37,129.1  5,170.1  37,886.0  40,082.5  30,950.3 
       Exports 389,568.5  434,651.5  358,189.7  461,444.9  552,564.3 
       Imports 352,439.4  429,481.4  320,323.7  421,362.4  521,614.0 
    Services balance -11,967.3 -5,734.1 -6,640.5 -8,626.0 -4,377.4 
       Receipts 72,994.8 90,634.8 73,580.4 87,282.4 95,000.4 
   Transportation 33,556.0 44,767.8 28,693.2 38,981.9 37,056.7 
   Travel 6,138.4 9,773.5 9,818.7 10,358.8 12,304.3 
   Communication 547.2 723.9 725.0 833.7 792.4 
   Construction 9,697.8 13,686.2 14,552.9 11,977.4 15,185.2 
   Intellectual property 1,735.1 2,381.6 3,199.1 3,144.7 4,320.5 
   Other business 14,420.6 12,965.4 12,088.3 16,834.2 18,910.5 
   Government 1,620.1 1,206.4 1,114.6 1,016.8 1,196.8 
   Other 5,279.6 5,130.0 3,388.6 4,134.9 5,234.0 
       Payments 84,962.1 96,368.9 80,220.9 95,908.4 99,377.8 
   Transportation 29,075.5 36,769.8 23,450.9 29,675.4 27,797.0 
   Travel 21,975.3 19,065.2 15,039.6 18,779.5 19,462.7 
   Communication 913.1 1,148.9 1,227.2 1,460.4 1,464.2 
   Construction 1,828.4 2,607.6 2,806.1 2,302.2 3,091.6 
   Intellectual property 5,133.8 5,655.7 7,187.6 9,031.4 7,301.7 
   Other business 21,829.1 27,244.8 27,093.5 30,422.2 35,827.4 
   Government 1,008.6 936.2 695.6 952.5 1,139.7 
   Other 3,198.3 2,940.7 2,720.4 3,284.8 3,293.5 
Income balance 135.0 4,435.4 2,276.7 1,015.9 2,455.8 
       Credit 18,914.7 21,653.0 14,514.2 16,353.9 17,422.3 
   Compensation of employees 691.7 744.8 594.4 710.5 686.2 
   Investment income 18,223.0 20,908.2 13,919.8 15,634.4 16,736.1 
       Debit 18,779.7 17,217.6 12,237.5 15,338.0 14,966.5 
   Compensation of employees 186.0 555.7 647.4 1,077.6 1,180.9 
   Investment income 18,593.7 16,661.9 11,590.1 14,260.4 13,785.6 
Current transfers  -3,527.1 -673.9 -711.7 -3,078.9 -2,523.4 
       Credit 11,158.0 14,069.6 12,700.4 13,424.3 15,345.2 
       Debit 14,685.1 14,743.5 13,412.1 16,503.2 17,868.6 
Capital and financial account -23,876.6 -1,154.0 -34,651.1 -27,478.5 -31,964.6 
Capital account -2,387.5  109.3 289.6  -217.9  150.0 
Financial account -21,489.1  -1,263.3  -34,940.7  -27,260.6  -32,114.6 
   Direct investment -17,935.2 -16,940.6 -14,948.0 -22,184.3 -15,694.0 
      Korea's direct investment abroad -19,719.6 -20,251.3 -17,197.0 -23,278.4 -20,354.9 
      Foreign direct investment in Korea 1,784.4 3,310.7 2,249.0 1,094.1 4,660.9 
   Portfolio investment -26,057.8 -2,405.6 49,727.7 42,479.8 10,312.2 
Table I.3 (cont'd) WT/TPR/S/268/Rev.1 Trade Policy Review 
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      2007 2008 2009 2010 2011 
      Assets -56,436.1 23,484.3 1,435.5 -1,189.5 -5,230.6 
   Equity securities -52,550.1 7,124.0 -2,108.9 -2 ,877.7 -1,078.4 
   Debt securities -3,886. 0 16,360.3 3,544.4 1,688.2 -4,152.2 
      Liabilities 30,378.3 -25,889.9 48,292.2 43,669.3 15,542.8 
   Equity securities -28,727. 9 -33,622.7 24,856.4 23,606.7 -7,479.3 
   Debt securities 59,106. 2 7,732.8 23,435.8 20,062.6 23,022.1 
   Other investment 32,187.5 -23,593.2 2,038.7 -21,414.4 -11,084.9 
      Assets -14,835.9 -13,742.3 1,687.6 -15,980.6 -23,614.9 
   Trade credits -926.2 75.5 -2,532.4 -5,837.3 -3,295.3 
   Loans -9,191.2 10,158.1 360.7 -5,957.2 -11,842.6 
   Currency and deposits -3,477.8 -6,320.3 2,270.0 -1,383.6 -4,936.9 
   Other assets -1,240.7 2,660.6 1,589.4 -2,802.5 -3,540.2 
      Liabilities 47,023.4 -9,850.9 351.1 -5 ,433.8 12,530.0 
   Trade credits -133.3 -24.9 1,293.3 5,447.8 -2,338.1 
   Loans 41,967.7 -24,139.7 7,848.3 -9,228.6 10,497.8 
   Currency and deposits 5,105.3 13,508.5 -12,347.1 -610.3 5,774.8 
   Other liabilities 83.7 805. 2 3,556.6 -1, 042.7 -1,404.5 
      Reserve assets -15,128.4 56,446.0 -68,666.4 -26,970.6 -13,912.6 
Net errors and omission 2,106.9 -2,043.5 1,860.7 -1,915.0 5,459.3 
Source :  The Bank of Korea online information.  Viewed at:  http://ecos.bok.or.kr/. 
10. During the same period, the capital and financial account registered annual deficits of similar 
magnitudes to the current account  surpluses.  Korea's direct investment abroad was roughly 
eight times as much as foreign direct investment  (FDI) in Korea during 2007-11 (Table I.3), making 
its inward FDI (in relation to GDP) among the lowest of all OECD countries.20  Outflows and inflows 
of FDI have been fairly stable, unlike net por tfolio investment.  Whereas Korea experienced 
substantial net outflows of foreign portfolio inv estment in 2007 and 2008, very large net inflows 
occurred in 2009 and 2010, thereby exerting upward pressure on the exchange rate of the won and 
prompting the BOK to implement macro-prudentia l measures to alleviate what the authorities 
consider to be excessive volatility of capital flow s into and out of Korea's financial markets.   
11. Since 2008, Korea's foreign exchange reserve s have increased substantially and now amount 
to over US$300 billion (equivalent to nearly seven mont hs of imports), the seventh largest holdings of 
reserves in the world.  The authorities maintain th at Korea's macro-prudentia l measures, put in place 
in the wake of the 2008 financia l crisis, have no direct relationshi p with its accumulation of foreign 
exchange reserves during 2009-10, which they attribut e mainly to the withdrawal of foreign currency 
liquidity following the collapse of Lehman Brothe rs and to earnings from the operation of reserve 
assets.21  
                                                      
20 See OECD (2010b). 
21 Furthermore, the authorities maintain that there is no absolute standard to measure the adequacy of a 
country's foreign exchange reserves.  In their view, the adequacy of reserv es needs to reflect the size of the 
economy and structure of external debt.  It also needs to be considered in the light of the major recent crises, 
particularly the 1997 Asian curren cy crisis and the 2008 global financial crisis, the demand for foreign 
payments, and the different cost of carrying reserves ov er time, as well as Korea's heavy external dependence 
and geopolitical risk. Republic of Korea WT/TPR/S/268/Rev.1 
 Page 9 
 
 
  (4) KEY POLICY DEVELOPMENTS  
(i) Macroeconomic policies  
(a) Monetary and exchange rate policies 
12. Monetary policy has been conducted by the i ndependent Bank of Korea (BOK) mainly on the 
basis of an inflation target of 3±1%.22  During the review period, inflation, by and large, remained 
within this target, even in 2011, amid rising f ood a fuel prices.  The BOK conducted its monetary 
policy in such a way to reduce consistently th e degree of monetary accommodation.  Following on 
from its two-step increase of the policy rate during the second half of 2010, it raised the policy rate on 
three occasions by a total of 0.75 percenta ge points during the first half of 2011.23   
13. Whereas at the time of the previous Review  (and from 1997 to 2008), Korea's exchange rate 
was classified as "free floating", since 2010 it has b een classified as "floating" apparently as a 
consequence of a change in the IMF's internal classification criteria.  The Korean Government 
maintains that exchange rates should be freely dete rmined by the market so as to reflect economic 
fundamentals and market supply/demand, and that an y deliberate foreign exchange rate policy tailored 
to exchange rate levels, exports, or price levels is inadvisable.   However, i n order to alleviate systemic 
risks to the Korean economy caused  by large and volatile inflows of capital through the portfolio 
channel, and presumably concerns that they could lead to excessive exchange rate volatility and 
increase the vulnerability of the financial sector (a nd possibly with an eye on the international 
competitiveness of manufactured exports), in 2010 the authorities implemented three macro-
prudential measures.24  These measures included withholding taxes on interest income and capital 
gains on non-residents' holdings of Treasu ry and Monetary Stabilization Bonds.   
14. The outcome of monetary policy and other measure s is that the real effective exchange rate 
(REER) is estimated by the IMF staff's Consu ltative Group on Exchange Rates (CGER) to be 
undervalued by about 10%25, to the detriment of Korea's terms of  trade;  according to the IMF, this 
reflects in part the risk premium that investors att ach to the Korean won in the current environment of 
heightened uncertainty in international financial markets.  The Korean authorities disagree with the 
IMF's assessment as they consider that that th e CGER methodologies contain a number of inherent 
flaws.26   
                                                      
22 IMF (2011). 
23 In addition to monetary policy, in order to mitigate the rise in inflation, the Government has been 
implementing administrative price stab ilization measures, since January 2011 , including temporary tariff cuts, 
tax incentives, freezing of  public utility prices, and moral suasion as we ll as measures to alleviate distribution 
bottlenecks and address anti-competitive practices.  However,  while helping to ease inflationary pressures, such 
administrative measures are not substitutes for appropriate monetary (and exchange rate) policies to relieve 
demand pressures or dampen inflationary expectations.  Moreover, freezing the prices of energy provided by state-owned utilities, for example, would tend to contribu te to an inefficient use of energy and greenhouse gas 
emissions.  Furthermore, the freezing of energy prices may have adverse quasi-fiscal consequences insofar as 
energy is produced by loss-making state-ow ned utilities (Chapter IV(4)(iii)) (IMF, 2011). 
24 The authorities maintain that the main purpose of these measures was to reduce volatility in capital 
flows, not exchange rates, and that they are irrelevant to the international competitiveness of large 
conglomerates' manufactured exports.  They also indicated that these meas ures were recognized as adequate 
policy response by the G20, IMF, and OECD. 
25 IMF (2011). 
26 An undervalued exchange rate is equivalent to a combination of uniform tax on imports and a 
uniform subsidy for exports at equal rates.  A higher exch ange rate would not only tend to alleviate inflation, but 
also help redress the advantage enjoyed by the tradea ble (mainly manufacturing) sector over the non-tradeable 
(mainly services), and raise living standards by improving Korea's terms of trade. WT/TPR/S/268/Rev.1 Trade Policy Review 
Page 10 
  
  (b) Fiscal policies 
15. Korea's prudent fiscal policy, reflected in cont inuing modest fiscal surpluses (which have 
contributed to its current account surpluses) du ring much of the period under review, and 
consequently low central government debt (amoun ting to only 32.6% of GDP) in 2011, have served it 
well.  In particular, it enabled the Government to  counteract the 2008 crisis with stimulus packages 
amounting to 6.5% of GDP.27  Over the medium-term, the Government's National Fiscal Management 
Plan and National Debt Management  Plan provide a medium-term fi scal framework for 2011-15 that 
sets out fiscal balance and debt targets, and iden tifies priorities concerning expenditure.  Looking 
beyond the medium-term, however, there are sever al fiscal challenges, notably:  the central 
Government's contingent liabilities associated w ith loan guarantees (3% of GDP);  the rise in 
state-owned enterprises' debt (to 23% of GDP), main ly related to real estate;  and the expected 
increase in spending (amounting to 11% of GDP) associated with the expanded range of services 
covered by the National Health Insurance and pens ions, during the next 50 years, owing to Korea's 
rapidly aging population.28  Furthermore, tax reform can help redress structural imbalances in the 
economy. 
(ii) Structural policies 
(a) Tax reform 
16. Import tariffs, whose average applied MFN rate (13.3% in 2012) is among the highest in the 
OECD area (Chapter III(2)(iii)(f)), as well as ta x incentives, have long been among the main 
instruments of industrial policy used to protect  specific domestic industries from competition from 
foreign products and to assist domestic manufacturer s.  Such tax measures have thus contributed to 
the imbalance in Korea's economy in favour of ma nufacturing (for export) while neglecting services.  
It follows that this imbalance can be addressed by a more neutral tax structure that would place 
manufacturing and services on a more equal footing.  A more neutral tax structure can be achieved by 
curtailing incentives in accordance with "sunset clauses" so as to broaden the base and reduce tax 
rates, especially in the cases of corporate and pers onal income taxes (rather than increasing incentives 
for services).   
17. Such tax restructuring is under way, with perm anent cuts by two and three percentage points, 
respectively, in corporate and personal income tax rates in 2009-10, in accordance with the principle 
of "Lowering tax rates and broadeni ng the tax base", and more relian ce on indirect taxes for additional 
revenues (Chapter III(4)(i)(c)).29  Further reforms are contained in a tax revision bill unveiled in 2011 
by the Ministry of Strategy and Finance.  These reforms are aimed at facilitating sustainable growth 
and job creation (including for young adults worki ng in SMEs), promoting fair competition, and 
improving fiscal conditions.30 
18. Over the longer-term, meeting the challenge po sed by the necessary financing of increased 
public expenditures associated with a rapidly aging p opulation might require a further shift in the mix 
of taxes away from direct taxes (notably corporate a nd personal income taxes) to  indirect taxes, such 
                                                      
27 OECD (2010b). 
28 IMF (2011). 
29 Ministry of Strategy and Finance (2010). 
30 Among the main measures in the bill are:  replacem ent of the tax deduction for facilities investment 
with a tax deduction for job creation;  and the introduction of new taxes on profits earned by companies through contracts with their affiliates;  an expanded Earned In come Tax Credit (EITC) and income tax reduction for 
young adults working in SMEs (Ministry of Strategy and Finance online information.  Viewed at:  
www.mosf.go.kr). Republic of Korea WT/TPR/S/268/Rev.1 
 Page 11 
 
 
  as a consumption-based VAT, which tend to be le ss distorting as regards economic decisions and 
international trade.31 
(b) Privatization 
19. The Government remains committed to privati zation of some state-owned enterprises (SOEs), 
especially in the services sector (electricity, gas, finance, telecommunications, and transportation), in 
order to improve their productivity, and thus comp etitiveness.  However, little progress has been made 
in implementing these plans (Chapter III(4)(iii)). 
(c) Competition policy 
20. Distortions to competition can be the conseque nce Government interventionist policies, but 
also possibly weak policies to address anti-comp etitive practices of large business conglomerates 
(many of which are family-controlled ( chaebols )), that may abuse their dominant market position to 
the detriment of consumers and SM Es, not to mention productivity.32  Fifty years after the start of 
Korea's economic "miracle", its economy is still dominated by a fe w big-name export-based large 
business conglomerates.  While these conglomerates have traditionally formed the backbone of 
Korea's economy and its export-led growth, there is c oncern that due to their size is they are stifling 
the country's small and medium-sized busin esses (SMEs), which account for roughly 90% of 
employment33, and thereby polarizing the economy, despite the fact that many SMEs are currently 
assisted by state subsidies and cheap loans.  Not only do the large business conglomerates 
increasingly dominate domestic product markets, with many increasing their market shares during the 
most recent economic downturn34, their market power is such that, in  order to cut costs, they can also 
exert downward pressure on the prices they pa y to small and medium-sized suppliers.35  Moreover, it 
is alleged that once the latter become successful , large business conglomerates often buy them in 
order to strip out talent and snuff out competition36, and thus innovation, the main determinant of TFP 
growth in the long run.  In add ition, although large business conglomerates  have traditionally been 
involved mainly in manufacturing, they also appear to be encroaching increasingly into the production 
of services, including the retail sector. 
21. The authorities maintain that excessive regulation of large business conglomerates may 
constrict the business environment, to the detrimen t of investment, employment, and growth in the 
economy.  Nonetheless, concern over the "polarization" of Korea's economy prompted the President to establish a Commission for the Shared Growth for Large and Small Companies in December 2010.  
This Commission has reviewed 234 business items, of  which it picked 82 as suitable for production 
by SMEs.  As a consequence, large companies w ill be discouraged from entering or expanding their 
                                                      
31 Whereas indirect taxes (such as the VAT) can be rebated on exports, direct taxes cannot 
(Daly Michael, 2011). 
32 Reportedly, Korea's Fair Trade Commission detect ed over 3,500 cases of price-fixing in 2010, but 
only 66 resulted in fines.  The average penalty amounted to just 2.3% of unfairly earned revenue.  Samsung and 
LG were fined in January for fixing the price of notebook PCs and flat-screen TVs between June 2008 and September 2009.  Samsung was ordered to pay a fine of ₩ 25.8 billion (US$23 million) and LG ₩ 18.8 billion.  
LG's fine is to be waived, in return for cooperation with  the FTC.  This is the third time these two large business 
conglomerates have been caught price-fixing in the past two years ( The Economist , "Let them eat cake," 
4 February 2012). 
33 Financial Times , "South Korea:  An economy divided", 29 May 2011. 
34 Financial Times , "South Korea:  An economy divided", 29 May 2011. 
35 Financial Times , "Lee warns against curbing congl omerates", 31 January 2012. 
36 Financial Times , "South Korea:  An economy divided", 29 May 2011;  and Financial Times , "Lee 
warns against curbing conglom erates", 31 January 2012. WT/TPR/S/268/Rev.1 Trade Policy Review 
Page 12 
  
  operations in the market, or obliged to aba ndon production of these items within three years.37  The 
Commission also evaluates and reports on efforts by major business conglomerates to promote shared 
growth, including their adherence to fair-trade  practices and provision of support for SMEs.  In 
addition, it is reportedly trying to persuade c onglomerates to share profits with SMEs, thereby 
possibly helping to address the widening income gap (Chapter III(4)(iv)(a)).   
22. In addition to regulating large business conglomerates, the Korea Fair Trade Commission 
(KFTC) has reportedly started to offer incentives to encourage them to provide financial assistance 
and technology transfer to their sub-contractors.38  In order to ensure that conglomerates  do not use 
their monopsony power to depress the prices they pa y to SME suppliers for components, the KFTC 
has monitored, investigated, and cracked dow n on any unfair attempts to depress prices.39  Measures 
to encourage the transfer of technology to subcont ractors could help to redress a possible imbalance 
between the monopoly accorded to conglomerates, in or der to protect their intellectual property rights, 
and the broader social benefits of  the dissemination of new technolog y, a major determinant of growth 
in total factor productivity (TFP).  Korea's recently concluded FTAs with India, Peru, the EU, and the 
United States contain provisions concerning competition policy (Chapter II(6)(iii)).  
(d) Corporate governance and the cost of capital 
23. The dominance of large business conglomerates is  also reflected in corporate governance in 
Korea and, according to a recent report40, contributes to the so-called "Korea discount", the amount by 
which investors undervalue Korean stocks owing to  the perceived higher investment risk in Korea 
compared with other countries.41  This discount, ranging from 10% to 40%42, is thought to be due not 
only to heavy reliance on large family-run chaebol , but also to, inter alia , geopolitical risks on the 
Korean peninsula, investors' concern over the hi gh level of household debt , Korea's reputation for 
                                                      
37 Maeil Business , "Tofu, LED, remicon chosen as SME business items", 4 November 2011.  Viewed 
at:  http://news.mk.co.kr/english/newsRead.php?s c=30800001&cm=TopStory&year=2011&no=717090&sel 
Flag=&relatedcode=&wonNo=&sID=308 [27 January 2012]. 
38 BBC online news, "South Korea's small businesses fight for survival", 17 August 2011.  Viewed at:  
www.bbc.co.uk/news/business-14554015?print=true. 
39 This is in accordance with the provisions of th e Fair Transactions in Subcontracting Act, which 
prohibits principal contractors from relying on illicit methods to lower their payments to subcontractors to a 
level that is significantly lower than usual. 
40 This report highlights three practices that have helped Korean large business conglomerates to 
achieve faster growth:  tunnelling, propping, and exprop riation.  Tunnelling involves artificial channelling of 
new projects and business deals to key units, which are largely partly-owned by chaebol  family members, and is 
thought to be easier in the services sector;  propping refers to sharing risk among chaebol  affiliates under the 
assumption that even a financially non-viable unit will get support from other affiliates;  and expropriation is a 
broader term that includes both tunnelling and propping,  while carrying a connotation of irregular transfer of 
wealth by higher and bigger conglomerate units (Tongy ang Securities Inc., 2011).  The World Bank ranks Korea 
7th among the 12 biggest Asian economies as regards corporate governance ( Forbes , "Cutting the Korean 
Discount", 21 May 2007.  Viewed at:  http://www.for bes.com/global/2007/0521/034.html [27 January 2012]). 
41 See The Korea Times , "Korea Discount", by Stephen G. Heckman.  Viewed at:  
http://www.koreatimes.co.kr./www/news/ include/print.asp?n ewsIdx=58738.  However, the authorities state that 
not every big conglomerate is the cause of the "Korea discount".  There are large business conglomerates  that 
take the lead in various investment ventures, market development and technological innovation, to the benefit of 
the Korean economy. 
42 As a consequence, Korean stocks trade at the lowest valuation among Asia's major markets – about 
eleven times expected earning s in 2010, compared with an average across Asia of  15.6 times expected earnings 
(The Wall Street Journal Online , 24 November 2010.  Viewed at:  http://online.wsj.com/article/SB100014240 
52748703572404575633921601247064.html). Republic of Korea WT/TPR/S/268/Rev.1 
 Page 13 
 
 
  labour militancy, and Korea's low ranking (43rd out of 183 countries in 201143) on Transparency 
International's Corruption Perceptions Index (CPI);   the Government has taken steps to address 
corruption (Chapter II(5)).  It follows that soun der corporate governance would reduce the cost of 
capital in Korea. 
(e) Labour market policies 
24. Labour market policies are being focused, inter alia , on increasing investment in 
labour-intensive activities, notably services, and th ereby raising labour prod uctivity, strengthening the 
social safety net, and increasing participation of the elderly and females in the labour force.  However, 
the rapid aging of Korea's population will not just raise the dependency ratio of the retired to the 
working population, it can also be expected to result in a shortage of labour.44  Such a shortage could 
be somewhat relieved by inflows of temporary workers or immigration (mode 4 under the GATS), 
especially into SMEs and service sectors, such as healthcare and nursing homes for the elderly.  
However, immigration has been rest ricted to such an extent that foreign workers accounted for only 
about 2.2% of Korea's labour force in 2008, well below the OECD average of roughly 10%.45  I n  
October 2008, the Government launched the Contact Korea programme, under the authority of the Korea Trade-Investment Promotion Agency (KOTRA),  with the aim of attracting highly specialized 
foreign professionals to Korea. 
(5) C
OMPOSITION AND PATTERN OF TRADE  
25. The openness of Korea's economy is such that its dependence on foreign trade rose markedly 
during the period under review.  Exports and impor ts of goods and services, respectively, accounted 
for 56.2% and 54.1% of GDP in 2011, compared with 41.9% and 40.4% in 2007 (Table I.1).   
26. Manufactures continue to account for the bul k of Korea's exports, although their share 
dropped from 88.9% in 2007 to 85.3% in 2011.  Manu facturing's share of imports also dropped, while 
the share of primary products increased (Chart I.1, Tables AI.1 and AI.2). 
27. At the same time, the pattern of trade is sh ifting away from the United States, the EU, and 
Japan (to China), especially for merchandise trade.  Whereas exports to the three trading partners fell 
between 2007 and 2011, exports to Asia increased, with China's share rising from 22.1% to 24.2% 
(Chart I.2, Table AI.3).46  During the same period, China's share of total imports fell, although it 
remains Korea's major merchandise supplier, follo wed by Japan, the EU, and the United States 
(Chart I.2 and Table AI.4).  It remains to be seen whether Korea's recently concluded FTAs with the 
United States and EU do anything to divert or create  sufficient trade to slow or reverse this trend 
(Chapter II(6)(iii)(h)).  
                                                      
43 Transparency International (2 011).  Korea's ranking was 43rd out of 179 in 2007. 
44 See OECD (2010b). 
45 See www.oecd.org/migration/imo;  and OECD (2007). 
46 Korea runs large trade surpluses with China, almo st US$22 billion in 2010.  These surpluses partly 
reflect outsourcing by Korean companies who have invest ed in China.  To a larg e extent, those companies' 
operations involve exporting components for processing and assembly in China, with the finished products 
subsequently being exported to other parts of the world (see  Institute for International Trade, 2010).  In this way, 
Korea has, in effect, exported part of its trade surpluses with other countrie s, such as the U.S. and EU, through 
China.  By contrast, Korea runs large trade deficits w ith Japan, almost US$42 billion in 2010, much of it owing 
to the importation of components ( Yonhap , "Trade Commission 'Decrease in Trade Deficit with Japan Last 
Year'", 16 January 2012.  Viewed at:  http://app.yo nhapnews.co.kr/YNA/Basic/ar ticle/new_search/YIBW_show 
SearchArticle_New.aspx?searchpart=article&s earchtext=%eb%ac%b4%ed%9 8%91+%22%ec%a7%80%eb%82
%9c%ed%95%b4+%eb%8c%80%ec%9d%bc+%eb %ac%b4%ec%97%ad%ec%a0%81%ec%9e%90+%ea%b0
%9c%ec%84%a0%22&contents_id=AKR20120 116079500003 [27 Ja nuary 2012]). WT/TPR/S/268/Rev.1 Trade Policy Review 
Page 14 
  
  Chart I.1
Product composition of merchandise trade, 2007 and 2011
2007 2011
(a)    Exports (f.o.b.)
Other 
consumer goods
8.1
Manufactures
88.9
Total:   US$371.5 billion Total:  US$555.2 billion  
(b)    Imports (c.i.f.)
Office
machines & 
telecom. equip.
12.8
Chemicals
9.1Transport equipment 
3.8
Manufactures
57.8Other electrical 
machines  
4.9
Non-electrical 
machinery
8.6Other mining
8.4Textiles & clothing
2.4Other
0.4
Other electrical machines  
4.3Office machines & 
telecommunication equipment
17.3
Other 
semi-manuf.   
3.5Transport equipment  
3.7
Chemicals
9.1Manufactures
51.0Non-electrical
machinery
7.5
Total:   US$356.8 billion Total:   US$524.4 billion Per cent
Manufactures
85.3Fuels
9.6
Other consumer goods  
5.8
Other
0.6Other electrical 
machines
4.8Transport 
equipment
21.3Other
0.6
Other semi-
manufactures
3.9Iron & steel
5.7
Source :  UNSD, Comtrade database (SITC Rev.3).Other consumer goods 
6.4
Mining
42.0Other 
consumer goods 
8.1
Textiles & clothing
2.6
Other semi-
manufactures
4.0
Other semi-
manufactures
3.8Iron & steel
5.1Mining
9.1
Agriculture
6.6
Iron & steel
6.0Mining
35.5
Iron & steel
4.9Chemicals 
10.1
Chemicals
10.9Other 
0.2
Other mining
8.9Fuels
33.1Textiles & clothing
3.3Agriculture
1.7
Non-electrical 
machinery
7.4 Non-electrical
machinery
7.8
Agriculture
6.2 Textiles & clothing
2.2
Office machines &
telecommunication
equipment
9.9Fuels
27.0Agriculture
2.3
Transport
equipment
23.3
Other electrical
machines
5.7
Office machines & 
telecommunication equipment
25.0Mining
11.8Fuels
6.6Other mining
2.5Other mining
2.3
 Republic of Korea WT/TPR/S/268/Rev.1 
 Page 15 
 
 
  Chart I.2
Direction of merchandise trade, 2007 and 2011
2007 2011
(a)    Exports (f.o.b.)
Other Asia  
11.6
Asia
52.5
Total:  US$371.5 billion Total:  US$555.2 billion
(b)    Imports (c.i.f.)
Other Asia  
9.2
EU27
10.3EU27
9.0
China
16.5Chinese Taipei
3.2Other
2.5United States
8.5
Total:  US$356.8 billion Total:  US$524.4 billionPer cent
Asia
59.1Other Asia  
15.1
Middle  East
5.2Other
1.6
Other 
Middle East  
5.4United States
12.4
Other Asia  
9.2United States
10.2
Source :  UNSD, Comtrade database.Japan
13.0EU27
10.2
Middle
East
4.5
Asia
50.0Asia
51.7
Japan
15.8
Qatar  2.4EU27
15.1Hong Kong, 
China   
5.0Other
1.4
Other America
8.1
Australia
4.8Singapore
3.5
Hong Kong, 
China  
5.6
Chinese Taipei 
2.8Chinese Taipei
3.2Singapore
3.8
Australia  3.7  Indonesia  3.3Other America
7.8
China  
24.2Africa  3.3
Other America
4.0Other America
5.0
China
17.7Indonesia  2.6China
22.1
Qatar  4.0Chinese Taipei
3.3
Middle East
18.4Middle East
22.5
United Arab Emirates  3.5Saudi Arabia
5.9
U.A.E.  2.8
Other 
Middle East
4.1Saudi Arabia
7.1United States
10.5Other
2.8Japan
7.1
Japan
7.1
Americas
13.6Americas
14.5Americas
18.2
Africa  3.0Americas
20.2
CISa   2.6
CISa3.0
a    Commonwealth of Independent States.CISa2.2CISa2.3
Kuwait  3.2 Kuwait  2.5
 WT/TPR/S/268/Rev.1 Trade Policy Review 
Page 16 
  
  (6) TRENDS AND PATTERNS IN FOREIGN DIRECT INVESTMENT  
28. Korea is not only a major exporter of goods, but al so of capital, with the main destinations 
being the EU, the United States, and China (Table I.4).  By contrast, the stock of inward foreign direct 
investment (FDI) in relation to GDP was only 12 .6%, the third lowest among OECD countries in 
2010.47  The same applies to the share of services in  Korea's inward FDI, which enables foreign 
companies to establish a commercial presence, usua lly the main mode for delivering services across 
borders.48  Total inward FDI in 2010 amounted to US$6. 9 billion, mainly from the EU, Japan, and the 
United States;  30% of the investments were in services, the main recipients being financial intermediation;  real estate, renting, and busin ess activities;  trade and repairs;  and hotels and 
restaurants. 
Table I.4 
Outflows of foreign direct investment, 2007-10 
(US$ million and %) 
  2007 2008 2009 2010 
Total outflows (US$ million) 19,966.5 20,867.4 18,138.9 21,464.4 
    Per cent of GDP 1.90 2.24 2.17 2.12 
 (% of total) 
Outflows by destination      
EU  14.9 7.9 22.7 25.3 
United States 14.3 22.8 16.6 14.6 
China 24.9 16.4 9.5 13.1 
Malaysia  0.7 1.5 0.5 7.0 
Hong Kong, China  9.2 11.8 7.9 5.3 
Brazil  1.3 3.0 0.7 4.9 
Canada  0.7 0.7 13.3 3.9 
Indonesia  1.2 2.1 1.7 3.8 
Viet Nam  6.3 6.2 2.9 3.5 
Australia  0.7 2.7 1.3 2.6 
Cayman Islands  .. 0.7 2.1 2.3 
Japan 2.4 1.9 2.0 1.4 
Singapore 2.4 1.2 1.3 1.3 
India 1.3 0.9 1.2 0.8 
Kazakhstan 1.2 3.9 0.8 0.5 
Other 18.5 16.4 15.2 9.8 
Outflows by sectors     
Agriculture and fishing 0.5 0.4 0.4 0.5 
Mining and quarrying 9.6 17.0 29.5 31.7 
Manufacturing 38.6 30.6 21.1 27.1 
Electricity, gas and water 2.1 0.4 1.9 1.4 
Construction 3.5 3.2 1.8 1.1 
Table I.4 (cont'd) 
                                                      
47 Korea ranked 122nd among 141 economies according to th e UNCTAD's Inward FDI Performance 
Index (UNCTAD, 2011b). 
48 In 2008, Korea was one of four OECD countries wh ere the share of FDI in se rvices is less than one 
half of the total stock.  Consequently, in 2008 the stock of inward FDI in services in Korea was only 4% of GDP 
compared with an OECD average of 28% (OECD, 2010b).  However, more recent data provided by the 
authorities indicate that the share of the stock of inward FDI in services reached 54%, and 7% of GDP in 2010. Republic of Korea WT/TPR/S/268/Rev.1 
 Page 17 
 
 
    2007 2008 2009 2010 
Services 45.7 48.4 45.3 38.3 
     Trade and repairs 12.3 17.2 8.5 5.0 
     Hotels and restaurants 1.7 1.6 0.7 0.6 
     Transport, storage and communication 2.5 5.6 4.0 4.2 
     Financial and insurance 5.1 8.0 9.5 14.1 
     Real estate, renting and business activities 21.8 14.0 21.7 13.2 
     Other services 2.3 2.1 0.8 1.2 
Source:  Data provided by the authorities of the Republic of Korea. 
29. Inward FDI is not only an additional source of capita l.  It also brings with it entrepreneurship, 
management skills, and especially new technology,  which contribute to improved TFP.  The reasons 
for the relatively low inflows of FD I into Korea are unclear, although th ey may be related in part to 
the factors explaining the "Korea discount", including geopolitical risk.49  Korea's relatively low level 
of FDI may also be due partly to informal as well as formal barriers to FDI (in certain services, such 
as broadcasting, telecommunications, and transportati on).  However, the Government is taking more 
concerted action to attract FDI, including to speci al economic zones (Chapters II(7) and III(2)(ii)(b));  
although all manufacturing industries qualify for bene fits, including tax breaks, in these zones, the 
only eligible services are logistics, tourism, education, R&D, and medical services.50  As a 
consequence, in 2011, inward FDI jumped  by 4.6% (year on year) to US$13.7 billion.51  The chemical 
industry saw an 81.5% jump in inward FDI, whil e the financial services and retailing industries 
respectively recorded 81.5% and 55.1% gains.  Th e EU was the largest investor, followed by the 
United States and Japan, with increases of 97.6%, 81 .5%, and 55.1%, respect ively.  FDI from China 
rose by 21.6%, making it the fourth biggest source of FDI.   
30. Further regulatory and other reforms, including re laxation of foreign owne rship restrictions in 
key services, and a more active competition policy, among other things, could help create an environment that would attract more FDI to Korea.   Korea's recent FTAs with the United States and 
the EU may also provide a catalyst for further inward FDI from these two sources. 
 
 
                                                      
49 Gerlach and Yook (2012). 
50 See OECD (2010b). 
51 Economist Intelligence Unit, "South Korean Economy:  Investors Welcome?", 19 August 2011.  
Viewed at:  http://performance.ey.com/wp-conten t/uploads/downloads/2011/08/South-Korea-economy-
Investors-welcome.pdf.