Republic of Korea WT/TPR/S/204/Rev.1 
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IV. TRADE POLICIES BY SECTOR 
(1) INTRODUCTION  
1. Korea's approach to protection of goods re mains dualistic.  Relatively low manufacturing 
protection, contrasts with high levels of protection and low market orientation in agriculture, the most 
distorted sector. 
2. Despite persisting, but more market-oriente d government intervention, agriculture's GDP 
share has continued to fall and labour productivity h as remained low.  Although self-sufficiency has 
been attained for some major products (i.e. rice) , the volume of agricultural imports has risen.  
Average applied MFN tariff protection for agricultural goods is still more than eight times the average 
for non-agricultural goods, with tariff peaks as hi gh as 887.4% (manioc).  Tariff quotas are either 
utilized, administered or allocated by state-trading entities or indust ry associations.  Action has been 
taken to compensate farmers affected by recent FTA liberalization commitments through a fund aimed at strengthening competitiveness.  Quantitative import restrictions for rice were relaxed (i.e. 
increased quota), but are to remain in force until 2014;   quantitative export restrictions have also been 
in place for rice since 2007.  Whereas in 2006 Korea' s net agricultural support exceeded the sector's 
GDP contribution (3.3% versus 3.2%), in 2007 the sector's share of GDP contribution was virtually 
the same as its support (3.04%).  Most assistance  involves product-specific market price support;  
non-product-specific support includes soft loans and cross-subsidized electricity prices.  These 
substantially distort agricultural trade and produc tion, and force Korean consumers to pay much 
higher prices (on average well over double world leve ls).  Support through direct payments has 
increased significantly, especially after the introduction of the direct payments system for paddy fields 
in 2005.  The government purchasing system for rice was replaced by a public stockholding system in 2005.  A differentiated pricing system for surplus mi lk has reduced the surplus milk volume.  Action 
has been taken to, inter alia,  facilitate farm enlargement, farm land mobility, and land conservation, as 
well as to cope with the recent rise in world food prices by, inter alia,  reducing import duties and tax 
rates on certain grains.  Efforts have been made to reduce over-fishing, despite retaining fisheries-
related subsidies;  adjustment duties were raised for nine fish species. 
3. During the period under review, efforts have been  made to reduce oil dependence and to cope 
with rising energy demand in several ways, in cluding through recourse to renewable energy and 
projects overseas.  Lack of progress in privatization means that state involvement persists in the gas 
and electricity sectors.  As from 2005, some industries have obtained licences to import gas directly 
for their own use rather than purchasing it from th e state monopoly, which now adjusts regularly the 
price of the commodity to costs.  Domestic co al production, mainly destined for power plants, 
continues to be assisted by direct production su bsidies.  The power exchange pool sets power 
generation prices to manage electricity dispatch ;  cross-subsidies between alternative consumers 
distort prices, with agricultural and industrial users the main beneficiaries. 
4. Manufacturing as a share of GDP and employment declined slightly, as the economy became 
more services-based.  The sector is heavily out ward oriented and remains a world leader in 
information and communications technology (ICT) , as well as in shipbuilding and cars, activities 
dominated by large chaebols .  Border protection, which is almost totally confined to tariffs and 
adjustment duties, is virtually unchanged sin ce the previous Review.  Several tax and non-tax 
incentives assist R&D and SME activities.  Comp ensation may be requested by manufacturers 
affected by FTA liberalization (Chapter III).  In 2 007, investigations were initiated on the pricing of 
imported motor vehicles.  Domestic support to the sh ipbuilding industry has apparently been extended 
to 2009. WT/TPR/S/204/Rev.1 Trade Policy Review 
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5. Services are characterized by relatively low labour  productivity (little more than half the level 
in manufacturing, for example) and declining gr owth in total factor productivity.  This poor 
productivity performance is partly due to the lack of competition owing to, inter alia , state-ownership 
and excessive regulations, including restrictions on fore ign direct investment.  Despite some decline, 
state-ownership persists in financial, telecommuni cations, and transport services.  Maritime and air 
transport are also subject to cabotage restrictions.  Several sectors, notably telecommunications, air transport, and coastal maritime services are subj ect to ceilings on foreign ownership;  foreign 
ownership is prohibited in radi o and television broadcasting.  On the other hand, services have 
benefited from regulatory reforms, including progr essive liberalization in line with Korea's GATS 
commitments.  However, Korea has unilaterally liberalized its foreign ownership regime in 
telecommunications beyond its GATS commitments.  Increased competition in banking, partly due to 
FDI, together with consolidation and restructuri ng have significantly improved banks' balance sheets 
(and thus reduced their non-performing loans) as well as their productivity and profitability;  banks 
are also migrating to the more stringent Basel II capital adequacy rules in 2008. 
(2) A
GRICULTURE  
(i) Features 
6. Despite receiving relatively high protection, ag riculture's GDP share has continued to fall.  
The share (including forestry and fishing) declined fro m 3.8% in 2003 to 3.3% in 2006 (Table I.2);  it 
also accounted for a declining share of total employment (7.7% in 2006).  The sector's labour 
productivity is little less than half of the national average.1  Agriculture's low labour productivity 
reflects several factors, including Korea's high proportion of older farmers, small-scale farming, and 
lack of capital investment, which hampers its ove rall efficiency, and thus competitiveness.  Despite 
intensive efforts to increase the cultivated area through drainage, irrigation, and reclamation, the 
cultivated area has tended to decline due  to industrial and urban development.2  In 2005, a quarter of 
the value of the agricultural production consisted of ri ce.  While self-sufficiency  has been attained for 
some major products, such as rice, the volume of  Korean imports of agricultural products has 
increased strongly, inter alia,  as a result of rapid income growth, changes in dietary patterns, and 
agricultural trade liberalization.  Korea is a signi ficant net food importer.  In 2007, its  agricultural 
trade deficit could hit a record US$13.65 billion fuel led by a rise in international grain prices and high 
domestic demand.3  
(ii) Policy developments 
7. The agriculture sector remains sensitive a nd seemingly complicates Korea's position in 
international trade negotiations.4  Protection remains centred on self-sufficiency policies aimed at 
addressing food security concerns, especially for rice, and other "non-trade" objectives.5  Korea 
believes that any multilateral agricultu ral liberalization must be sufficiently gradual to take account of 
the sector's "multifunctionality".  Recent policy an nouncements and new policy designs have been 
developed with an eye to WTO consistency by, for example, replacing the pre-2005 support 
                                                      
1 The authorities indicate that in 2005 average labour productivity was US$42,251 and agriculture's 
labour productivity was US$18,720 (OECD, 2007f). 
2 OECD (2007d). 
3 MIFAFF online news.  Viewed at:  http://english.maf.go.kr/index.jsp. 
4 APEC (2007). 
5 Self-sufficiency ratios on crops averaged 27% in 2006, the same as in 2003.  They varied widely 
between commodities, ranging from 99.4% for rice, 98.5% for potatoes, and 52.8% for barley, to 11.3% for 
pulses, 0.8% for corn, 0.2% for wheat, and 10.4% for other crops.  Self-sufficiency in meat (including beef, pork and chicken meat) was 70.6%.  Republic of Korea WT/TPR/S/204/Rev.1 
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arrangements, involving annual direct purchase and stock of rice, with a two-tier income support 
system (section (iii)(a)).6  Policy priorities have been widened to include agri-environment, consumer 
interests, and rural development.   
8. In their efforts to restructure the agriculture sector in an acceler ated and efficient manner, the 
authorities have shifted policy orientation, focusi ng more on the stabilization of farm income and 
farming management, while reducing investment in infrastructure, such as land and water-resource 
development.  Direct payments continue to be  expanded and farm inco me support strengthened.7  The 
authorities indicate that their strategic goals in agriculture in 2007 were to, inter alia,  ensure the 
supply of safe and good quality food to the popula tion, strengthen fundamentals of agriculture, 
enhance competitiveness, increase farmers' income, and create a society where people from rural and 
urban areas can live and prosper together.   
9. According to the authorities, Korea's action fo r coping with the recent rise in world food 
prices will be focused on:  promoting the supply of crops;  relieving the agri-food industry of the burden of price surges in cereals;  and generati ng substitution crops for imported wheat by creating 
new demand (e.g. developing processed rice product s).  The authorities adopted several short-term 
measures including setting up a task force consisti ng of public and private sector representatives, 
establishing an early warning system on interna tional grain supply and price, quantitative export 
restrictions on rice (Chapter III), suspending the au tonomous tariff for grains such as wheat, corn etc. 
(from 1 April to 31 December 2008), and extending the VAT exemption period for the sales volume 
of feed (which expires in 2008) from late 2008 to late 2011.  Mid- and long-term measures include:  
increasing efficiency in land use and self-suffici ency through expanding domestic production by 
utilizing idle farmland in winter;  expanding the cult ivation area for wheat, feed crop, and other winter 
crops from 34,000 to 66,000 hectares by 2012;  pl ans to extend the volume of tariff-rate quota items 
(soybean, corn, etc.), operated by the Korean Agro -fisheries Trade Corporation (Chapter III);  and 
promoting Korean investment in agriculture overseas. 
Border protection 
10. Liberalization of agricultural imports through the WTO and various FTA negotiations is one 
of the most important challenges facing the sector.
8  The key agricultural commodities of rice, apples, 
and pears were permanently excluded from the Kor ea–Chile FTA, and tariff re ductions were deferred 
on many food items until after the current multila teral negotiations.  In the FTA with ASEAN 
(Chapter II), 71 sensitive agricultural products were exempt from tariff reductions.  The FTA with the 
United States is expected to bring significan t market opening (except for rice) and introduce 
competition in the domestic market.  Korea took acti on to compensate farmers affected by its recent 
FTA liberalization commitments (see below).   
11. High MFN tariffs (peaks up to 887.4% for manioc), including alternate duties and possibly 
prohibitive out-of-quota rates, remain in place for many commodities (Chapter III).  At 53.5% 
(including out-of-quota rates and ad valorem  components of alternate duties) in 2008, the average 
applied MFN tariff on agricultural products (WTO de finition, which includes processed food) is much 
higher than for non-agricultural imports (6.5%) (Table III.1).  Moreover, the averag e fill ratio of tariff 
quotas is about 69%;  tariff quotas, are either utilized , administered or allocated by state-trading 
entities or industry associations (Chapter III);  this  raises potential conflicts between their importing 
                                                      
6 APEC (2007). 
7 The Government's long-term plan is to raise the share of direct payments to 35% of the agricultural 
budget by 2013.  The share is projected to decrease from 24.6% in 2008 to 22%.  
8 OECD (2007d). WT/TPR/S/204/Rev.1 Trade Policy Review 
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interests and those of their farm constituents.9  Domestic producers of rice, the main staple crop, still 
benefit mainly from a quantitative import restricti on, which is to remain in force until 2014 
(section (3)(iii)(a) and Chapter III);  quantitative export  restrictions have also been in place since 2007 
(barley until 2008, Chapter III).  During the period under review, Korea has ma de regular use of the 
special safeguard provisions (SSG) under of the WTO Agreement on Agriculture (Chapter III).  
Export subsidies to reduce exporters' marketing costs are in place for certain farm products 
(Chapter III).   
Domestic support 
12. According to the authorities, Korea has full y implemented its multilateral commitments on 
agriculture, and provides assistance consistent with  WTO obligations.  Nonetheless, overall, there has 
been limited progress in market orientation, with  the level of producer support remaining high.10  
Between 2004 and 2006 producer support (as measured by the OECD's11 percentage Producer Support 
Estimate (PSE)12) remained stable at 63% (down from 68% in 2002), but still double the OECD 
average.13  Support levels (as defined by the OECD's Single Commodity Transfer (SCT)14) varied 
substantially:  in 2004-06, they were more than 70% for rice, barley, and soybeans, and around 60% 
for milk and beef, and less than 40% for poultry and eggs (Table IV.1).  Korea's total agricultural 
support (net of specific sectoral budget receipts) of W 27.4 trillion in 2006 as a share of GDP (3.3%) was among the highest of OECD members;  in 200 7 the share of total support estimate in GDP 
dropped slightly (3.04%).
15  Over 90% of assistance involves market price support (W 21.8 trillion in 
2006), paid for by consumers paying higher prices.  In the period 2004-06, Korean agricultural 
commodity prices averaged two and a half times world levels (consumer nominal assistance 
coefficient, NAC (Nominal Assistance Coefficient)16, of 2.58 in 2006), and total transfers from 
consumers (including on imports) amounted to W 28.5  trillion (2006).  Producers'  gross farm receipts, 
on average, remained relatively stable (equivalent  to W 24.2 trillion additional income in 2006) 
(producer NAC of 2.72) during the period 2004-06.  Such high levels of support within its WTO commitments suggests that scope exists to incr ease assistance without exceeding these commitments.  
 
 
                                                      
9 Nevertheless, the authorities indicated that indu stry associations manage the TRQ volumes for 
commodities whose domestic demand exceeds supply, theref ore, it is important to coordinate opinions among 
concerned importers.  In addition, they are of the view that it is unlikely that there would be conflict between 
importers and producers of those commodities. 
10 Most support continues to be provided through market price support that was supplemented by direct 
payments which accounted for an increasing share of fa rm household income in recent years (OECD, 2007c). 
11 The OECD-based support calculations may not be comparable to domestic support calculations 
required under the WTO Agreement on Agriculture;  the OECD calculations may not correspond with the 
information on current total AMS vis-à-vis  final bound total AMS reflected in Chapter III of this report.  
12 The Producer Support Estimate (PSE) represents th e annual monetary value of gross transfers from 
consumers and taxpayers to agricultu ral producers, measured at the farm gate level, arising from policy 
measures that support agriculture.  It  includes market price support, budgetary payments and budget revenue 
forgone. 
13 OECD (2007d), Table 9.1. 
14 Single Commodity Transfers (SCT) are the annual monetary value of gross transfers from policies 
linked to the production of a single commodity such that the producer must produce the designated commodity 
in order to receive the payment. 
15 OECD (2008a). 
16 The NAC measures the monetary value of support (transfers) from consumers and taxpayers to 
producers relative to current production valued at border prices.  It is expressed as a ratio between the value of 
gross farm receipts (including all form s of measured support) and the gross fa rm receipts valued at border prices 
(without support). Republic of Korea WT/TPR/S/204/Rev.1 
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Table IV.1 
Agricultural support by commodity, 1986-88 and 2004-06 
 1986-88 2004-06 2004 2005 2006a 
Total PSE (W billion) 9,635 24,109 23, 644 24,483 24,199 
Total producer SCT (W billi on) 9,541 22,367 22,099 22,682 22,319 
Share of producer SCT in total PSE (%) 99 93 93 93 92 
Other grains      
Producer SCT (W billion) 220 159 168 183 127 
Percentage SCT 72.8 76.7 77.0 76.2 77.1 
Producer NPC 3.69 4.30 4.34 4.20 4.36 
Consumer SCT (W billion)  -210 -160 - 170 -184 -128 
Consumer NPC  3.42 2.94 2.89 3.17 2.74 
Rice      
Producer SCT (W billion)  4,509 6,720 7, 620 6,783 5,759 
Percentage SCT 82.0 72.2 75.0 72.2 69.3 
Producer NPC 5.59 3.45 4.00 3.26 3.08 
Consumer SCT (W billion) -4 ,452 -6,487 -7, 190 -6,533 -5,737 
Consumer NPC  5.59 3.45 4.00 3.26 3.08 
Soybean      
Producer SCT (W billion) 156 393 379 437 362 
Percentage SCT 78.7 88.3 86.6 88.8 89.5 
Producer NPC 4.75 8.63 7.47 8.91 9.52 
Consumer SCT (W billion)  -175 -441 - 412 -486 -423 
Consumer NPC  1.72 1.97 1.57 2.13 2.21 
Milk      
Producer SCT (W billion) 299 913 912 898 929 
Percentage SCT 66.7 59.8 60.2 57.9 61.2 
Producer NPC 3.04 2.49 2.51 2.37 2.58 
Consumer SCT (W billion) - 295 -1,240 -1,229 -1,201 -1,290 
Consumer NPC  3.04 2.49 2.51 2.37 2.58 
Beef and veal      
Producer SCT (W billion)  496 1,536 1,004 1,784 1,819 
Percentage SCT 53.8 61.2 53.2 63.8 66.6 
Producer NPC 2.23 2.63 2.14 2.76 2.99 
Consumer SCT (W billion) - 495 -3,265 -2,275 -3,382 -4,138 
Consumer NPC  2.23 2.63 2.14 2.76 2.99 
Pigmeat      
Producer SCT (W billion)  307 1,461 1,141 1,567 1,675 
Percentage SCT 32.2 47.1 36.5 49.8 54.9 
Producer NPC 1.50 1.93 1.58 1.99 2.22 
Consumer SCT (W billion) - 303 -1,733 -1,307 -1,898 -1,994 
Consumer NPC  1.50 1.93 1.58 1.99 2.22 
Poultry      
Producer SCT (W billion) 132 325 303 333 339 
Percentage SCT 49.4 37.3 32.3 39.4 40.0 
Producer NPC 2.09 1.60 1.48 1.65 1.67 
Consumer SCT (W billion)  -132 -366 - 337 -422 -339 
Consumer NPC  2.09 1.60 1.48 1.65 1.67 
Eggs      
Producer SCT (W billion) 1 241 289 253 180 
Percentage SCT 0.5 25.8 29.4 24.5 23.3 
Producer NPC 0.92 1.35 1.42 1.33 1.30 
Consumer SCT (W billi on) 28 -241 - 289 -253 -180 
Consumer NPC  0.92 1.35 1.42 1.33 1.30 
Table IV.1 (cont'd)  WT/TPR/S/204/Rev.1 Trade Policy Review 
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 1986-88 2004-06 2004 2005 2006a 
Other commodities      
Producer SCT (W billion)  3,421 10,618 10, 281 10,444 11,129 
Percentage SCT 70.9 60.2 60.9 59.7 59.9 
Producer NPC 4.56 2.53 2.61 2.48 2.50 
Consumer SCT (W billion) -3 ,436 -12,866 -11, 462 -12,879 -14,257 
Consumer NPC  2.73 2.45 2.34 2.46 2.56 
Total GCT (W billion) 24 543 862 431 334 
Share of GCT in total PSE (%) 0.2 2 4 2 1 
Total ACT (W billion) 70 728 657 751 777 
Share of ACT in total PSE 1 3 3 3 3 
Total OTP (W billion) 0 471 26 619 769 
Share of OTP in Total PSE (%) 0 2 0 3 3 
a Provisional. 
Note: PSE:  Producer Support Estimate;  CSE:  Consumer Support Esti mate;  NPC:  Nominal Protection Coefficient;  NAC:   Nominal  
Assistance Coefficient;  SCT:  Single Commodity Transfer;  GCT:  Group Commodity Transfer;  ACT:  All Commodity 
Transfer;  OTP:  Other Transfers to Producers. 
Source: OECD (2007), Agricultural Policies in OECD Count ries – Monitoring and Evaluation 2007, Paris. 
13. Market price support is implemented through do mestic price stabilization schemes, including 
government purchases and public stockholding, supporte d by trade barriers.  Following the 2004 rice 
quota re-negotiation, government purchasing of rice was abolished and a direct income support 
mechanism for paddy fields was introduced as from 2005 (section (iii)(a)). 
14. Publicly funded purchase and stockholding schemes  support agriculture by stabilizing prices 
at higher than world market levels.  Such schemes are now operated either directly by the state-run 
Korea Agro-Fisheries Trade Corporation, mainly on  red peppers, garlic, onion s, and soybeans, or by 
industry associations, especially for crops such as maize and barley.  The purchase prices of barley 
and maize have been held constant since 2001;  however, the price and quantity of government 
purchase of soybeans have increased.17  Government purchases of barley decreased from 
180,000 tonnes in 2004 to 124,000 to nnes in 2006.  Also, government purchases of maize have 
dropped sharply, from 2,500 tonnes in 2004 to 600 tonnes in 2006, reflecting the sharp fall in domestic production.  Rice stocks were estimated to  be 13.7% of the demand (695,000 tonnes) at the 
end of 2007, much lower than in  2003 (21.7%, 1.1 million tonnes).
18 
15. The significance of direct product-specific pa yments relative to consumer-funded market 
price support increased from about 1% of producer s upport in 1986-88 to 9% in 2004-06, and 9.6% in 
2006.  These payments amounted to W 2.3 trillion in  2006 (W 1.5 trillion in 2004);  total government 
payments, including provision of general support se rvices, amounted to W 5.7 trillion in 2006 (up 
from W 4.7 trillion in 2004) (Table IV.2).  Direct payments, if sufficiently de-linked from production, 
are far less distorting than market price support, which, being output-based, distort trade and 
production most by contributing to over-production.19  Korea has no output-based direct payment 
schemes per se , but makes such payments based on overall farming income, area planted or animal 
numbers, and input use.  Nevertheless, while likely to be less distorting than output-based assistance, 
such subsidies still stimulate production and input use, thereby distorting agricultural trade with 
                                                      
17 OECD (2007c). 
18 Rice consumption per capita has been declining sharply and is likely to continue to do so, although 
rice still dominates the Korean diet;  per capita annual cons umption declined from 107 kg  in 1995 to 85.6 kg in 
2003 and around 80 kg in 2005.   
19 Output-based assistance is also re latively ineffective in transferring  income to poor farmers or in 
achieving environmental objectives. Republic of Korea WT/TPR/S/204/Rev.1 
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potentially adverse effects on the environment, ev en though accompanied by new schemes to help 
reduce these harmful effects.  Direct payments based  on area, input use, and overall farm income each 
accounted for 7.4% of Korea's PSE in 2006 (4.4% in 2004), an increase seemingly related to higher 
direct payments for rice; almost all area payments  are contingent on environmentally friendly farming 
practices.  Such schemes include Direct Payments  for Environmentally Frie ndly Farming for reduced 
fertilizer and pesticide use.20  Government-provided general farm services include mainly 
infrastructure, public stockholding, and research and development.   
Table IV.2 
Direct payments to agriculture, 1986-88 and 2004-06 
(W billion) 
Type of payment 1986-88 2004-06 2004 2005 2006a 
Specific      
Based on output 0 0 0 0 0 
Based on input use 66 518 481 535 539 
Based on current area planted/animal 
numbers/receipts/income production required 28 1,199 1,038 1,548 1,009 
Based on non-current area planted/animal 
numbers/receipts/income production not required 0 464 10 614 769 
Based on non-commodity criteria  0 7 16 5 0 
Total 94 2,188 1,545 2,702 2,317 
General services      
Research and development 52 531 450 499 645 
Agriculture schools 5 88 83 83 97 
Inspection services 21 148 137 150 157 
Infrastructure 374 1,809 1,878 1,839 1,709 
Marketing and promotion 0 40 36 42 42 
Public stockholding 394 641 573 599 752 
Total 845 3,257 3,157 3,212 3,402 
TOTAL 939 5,445 4,702 5,914 5,719 
a Provisional. 
Source:  OECD (2007), Agricultural Policies in OECD Count ries – Monitoring and Evaluation 2007, Paris. 
16. The Ministry for Food, Agriculture, Forestry  and Fisheries (MIFAFF) budget was increased 
by 2.1% in 2007 to W 12.1 trillion (5.1 % of the Government's total budget).21  It plans to raise total 
agricultural investment to W 119 trillion to boos t rural farm and non-farm incomes, and to 
compensate farmers for reduced protection.22 
17. Programmes to protect farm household income  from natural disasters were reinforced.23  A 
crop insurance scheme, introduced for apples and pears in 2001, was implemented for seven agricultural products in 2006.  The farmers' shar e of insurance premiums for the scheme decreased 
from 41% in 2002 to 31% in 2006, with the remainder paid by the Government.  Also, the product 
coverage of the livestock insurance scheme  to protect farmers' income from outbreaks of animal 
                                                     
 
20 The Government planned to support a rise in environmentally friendly production to 9.7% of total 
output in 2007 (5% in 2005, 2.7% in 2001).   
21 Based on total expenditures, the MIFAFF budget was W 10.7 trillion (5.9% of the total government 
budget) in 2004, W 11.1 trillion (5.8%) in 2005 and W 11.9 trillion (5.3%) in 2006. 
22 Ministry of Planning and Budget (2007). 
23 OECD (2007c). WT/TPR/S/204/Rev.1 Trade Policy Review 
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disease and natural disaster increased from four livesto ck products (cattle, por k, chicken, and horses) 
in 2002 to nine livestock products, including deer , duck, pheasant, quail, and turkey, in 2006.  
18. Policies for promoting environmentally friendly farming have been continued.24  In 2007, 
payment per hectare was increased to W 524,000-794,000 (US$548-831) for dry fields and W 217,000-392,000 (US$227-410) for paddy fields.  About 60,090 farm house holds who participate 
in the production of low-chemical, chemical-free, and organic products received total payments of 
W 17.5 billion (US$17.7 million) in 2006.  Th e pilot programme of direct payments for 
environmentally friendly livestock practices, intr oduced in 2004, was completed for 599 livestock 
producing farm households with a budget of W 5 billion (US$6 million).  Through increased 
promotional efforts, the share of environmentally friendly products in total agriculture increased to 
9.7% in 2007.  The complete withdrawal of subs idies on chemical fertilizers in 2005 has increased the 
price of fertilizer by 17.7% leading to a dec line in the use of fertilizer and pesticides. 
19. Farmland ownership was deregulated in 2003 (Far mland Act, 2002), including removal of the 
five-hectare limit outside of the Farming Promotion Ar ea (which accounts for almost half of all arable 
land).  It also allows agricultural corporations to own farmland.  Both forei gners and Korean nationals 
must prove that they are capable of cultivating fa rmland on their own in order to be eligible for 
ownership;  foreign investment in rice and barley  growing land is prohibited, seemingly for the sake 
of stable food supply (Chapter II).  The Act wa s amended in 2006 to relax the maximum limit of 
farmland ownership and in heritance by non-farmers, and in 2 007 to expand the use of farmlands.   
20. To further facilitate farm enlargement a nd farmland mobility, a new farmland banking 
system, run by the Korean Rural Community and Ag ricultural Corporation (KRC), was introduced in 
2005.
25  The KRC provides information to farmers a nd farmland owners th rough its website.  If 
farmland owners consign their lands to the KRC fo r lease or sales, the KRC looks for tenants or 
buyers and serves as an agent for contracts.  Although non-farmers are prohibited from holding 
(including owning and leasing) farmland in principle, they may hold farmland as long as they lease it 
through the KRC farmland banking syst em for more than five years.26  This change has operated since 
2005.  Its aim is to minimize the fragmentation of farmland and encourage young full-time farmers to 
increase the scale of their farms more easily th rough a farmland banking system.  In 2006, a new 
programme was introduced whereby the KRC would buy farmland from farmers who hold a 
significant amount of debt.  If viable, the KRC would then lease the farmland back to them.  The programme is aimed at stabilizing the farmland mark et and supporting farmers in temporary financial 
difficulty.  
21. In 2005, a new pilot project of direct paymen ts was introduced for landscape conservation, 
with a budget of W 600 million (US$586,000).
27  It involves a payment per hectare to farmers who 
cultivate plants for aesthetic purposes to preserve tr aditional landscape in selected villages.  About 
470 hectares from 1,000 farm households participated in this pilot payments programme in 2006.  A 
programme of direct payments for less-favoured areas,  introduced on a pilot basis in 2004, became a 
national programme in 2006.  Its budget incr eased from W 10 billion (US$8.7 million) to 
W 52.3 billion (US$54.4 million) and the particip ating areas increased from 31,000 hectares to 
109,266 hectares in the same period.  In 2007, 165,0 00 farm households whose arable land was below 
22%, with land gradient of over 14% of total surface, applied for less favoured area direct payment.  
                                                      
24 OECD (2007c). 
25 OECD (2007c). 
26 In accordance with the Farmland Act, after more than eight year s of farming, those out-migrated 
from farming can own up to 1 hectare of farmland without leasing their land through the farmland banking 
system.  In order to own inherited farmland from 1 hectare to 3 hectares or to own farmland of more than 
1 hectare after out-migration, owners must have a lease contract with an agency of the farmland banking system. 
27 OECD (2007c). Republic of Korea WT/TPR/S/204/Rev.1 
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After reviewing the applicants' implementation of obligations, su ch as farmland management, the 
authorities disbursed W 200,000 per hectare for pasture and W 400,000 for dry fields. 
22. During the ratification process of the Korea-Ch ile FTA in 2004, a Law for Implementing Free 
Trade Agreement established a W 2.1 trillion fund to compensate some retiring fruit producers (of 
grapes, kiwis, peaches) who affected by the Korea-Ch ile FTA, had to close their farms, as well as to 
enhance competitiveness so as to en able the fruit industry to respond rapidly to the changes in 
consumption patterns.28  Between 2004 and 2007, W 698.8 billion was disbursed, of which 
W 642.2 billion (53.5% of total fund) was used.  Up to 2007, W 427.2 billion was spent on enhancing 
competitiveness (e.g. modernization of orchard fac ility, cultivation of premium seedings, scale-up of 
orchard) and W 201 billion on compensating retiring fruit farmers.   
23. Policies to cope with growing consumer c oncerns on food safety have been intensified.29  The 
traceability scheme for agricultural and livestock produc ts, launched on a pilot basis for beef in 2004, 
has begun to be applied throughout the market.  In 2006, the Government established a traceability 
information system for agricultural products (www. agros.go.kr) and about 8,800 farm households and 
800 distributors are participating in this progra mme.  In 2006, the Government launched the Good 
Agricultural Practices (GAP) regulation and designat ed 21 institutions as GAP inspection agencies.  
About 3,700 farm households participated in th is programme.  The number of safety tests for 
agricultural products rose from 56,000 items in 2002 to 66,000 items in 2006. 
24. Upon the implementation of the 2004 Special Act for Improving the Quality of Life of 
Farmers and Fishermen and Promoting Devel opment in Rural, Mountainous and Fishing 
Communities, (involving 15 ministries and 1 govern ment agency), in 2005, health insurance 
premiums for farmers were lowered by 50% (the other 50% being paid by the Government) and 
expanded government suppor t for pension payments.30  Support programmes were implemented to 
improve living conditions, such as education, me dical services, roads, dwellings, drinking water 
supply, and infrastructure for the Internet.  Seve ral policy measures to increase off-farm income by 
promoting agri-tourism were put in place  with a budget of W 10.6 billion (US$11.1 million) in 2006.  
To establish regional networks among the academic  community, research institutes, the industrial 
sector, and local governments, to provide techni cal or marketing assistance to farmers, the 
Government implemented the regi onal agriculture cluster programme  with a budget of W 12 billion 
(US$12.6 million) in 2005 and W 20 b illion (US$20.9 million) in 2006.   
(iii) Selected activities 
(a) Rice 
25. Rice remains by far the most important single product and the dominant grain in Korea, as 
shown by its contribution to agricultural production and land use, as well as its weight in Koreans' 
diet.  Rice is heavily assisted;  as a result, its domestic price was well over three times world levels in 
2006 (consumer NPC of 3.0831, Table IV.2).  Rice production fell from 4,768,000 tonnes in 2005 to 
4,408,000 tonnes in 2007 reflecti ng a decrease in cultivated area.   
26. The current rice policy aims, inter alia,  to respond to increased market openness, improve rice 
quality, facilitate farm enlargem ent, expand and improve the facilities of rice processing complexes, 
and stabilize farmers' income.  Rice policy reforms during the review period involved both border and 
                                                      
28 OECD (2007c);  and APEC (2007). 
29 OECD (2007c). 
30 OECD (2007c). 
31 Consumer Nominal Protection Coefficient (consumer NPC)  is the ratio between the average price 
paid by consumers (at farm gate) and the border price (measured at farm gate). WT/TPR/S/204/Rev.1 Trade Policy Review 
Page 98 
 
 
domestic support measures.  Following the re-nego tiation of the quantitative restriction on rice 
imports (section (2)(ii) and Chapter III), the speci al treatment for rice was extended until 2014, and 
the minimum market access (MMA) volume was to increase from 225,575 tonnes in 2005 to 
408,700 tonnes in 2014 in equal annual instalments to  cover 8% of domestic consumption.  Since 
ratification by the national assembly was delaye d in November 2005, the MMA volume for 2005 was 
imported in 2006;  the authorities indicate that ha d the two years' volume (i.e. 2005 and 2006) been 
introduced simultaneously, it could have caused an ex cess of supply.  Imports are subject to a 5% 
tariff.  Korea seems to meet its multilateral quota commitments in this area;  MIFAFF exclusively 
controls rice imports for use by food processors.  In 2006, 21,564 tonnes of imported rice were sold 
on the domestic market for table use;  a further 34, 429 tonnes were imported in 2007.  Mark-ups with 
a tariff-like effect were imposed on imported tabl e rice;  they were at W 9.1 billion in 2006 and 
W 20.9 billion in 2007.  Rice (and barley) farming is closed to foreign direct investment.  
27. Under the Rice Production Control Scheme, when  rice or other commercial crops are not 
grown in a paddy field, W 3 million per hectare is  provided for the field annually.  Between 2003 and 
2005, the scheme covered 74,400 hectares and dis bursed W 229.6 billion.  After three years of 
implementation the scheme was suspended in 2005;  its  resumption is under consideration in light of 
the situation in rice supply and demand and its farming trend. 
28. Support through direct payments has increased si gnificantly in recent years, especially after 
the elimination of government purchasing and the introduction of the direct payments system for 
paddy fields in 2005 following the rice negotiation.  The share of direct payments in the national 
agricultural budget has increased to 24%, and the share of direct payments in farm household income 
has increased to 5.3% in 2006.  A new direct in come support mechanism for rice producers consisting 
of a fixed and a variable payments syst em has applied since the 2005/06 crop year.32  To be eligible 
for the fixed payment, paddy fields had to be in production during 1998-2000.  The fixed payment per 
hectare for registered paddy fields was W 600 ,000 (US$586) in 2005 and increased to W 700,000 
(US$732) in 2006.  Expenditure for the 1,017,000 h ectares eligible for the fixed payment in 2006 was 
W 712 billion (US$750 million).  The variable payment  is given only to farmers currently producing 
rice on registered farmland.  The payment is determ ined according to the difference between a target 
price and each year's post-harvest price.  The target price for 2005-07 was W 170,083 (US$178) per 80 kg sack of rice.  In January 2008, Korea was moving to implement a price stability measure that would set minimum rice prices for the next five years by freezing the so-called target price for an 80 kg sack at around W 170,000 (US$179).
33  If the post-harvest price is lower than the target price, 
farmers receive 85% of the difference, after deducti on of the fixed payment, which is multiplied by a 
fixed national reference yield to calculate the paymen t per hectare.  The variable payment per hectare 
fell from W 958,310 (US$936) in 2005 to W 459,757 (US$481) in 2006 and W 299,327 in 2007.   
29. The new system is more market-oriented and less expensive than the previous one.34  
According to the OECD, although the introduction of fixed and variable paymen ts on paddy fields is 
an improvement over continued use of market price support35, these policies are not without problems.  
While the fixed payment is more decoupled from production, it has the potential to cause land prices 
to rise.  The variable payments remain connected to rice production, and offer a form of price support 
that reduces farmer's risks, but can magnify the dist orting effect of the policy.  The incentive to rice 
                                                      
32 OECD (2007c). 
33 KOIS online information, "Seoul to support rice price stability policy", 30 January 2008.  Viewed at: 
http://www.korea.net/News/ News/NewsView.asp?serial_no=200 80130004 [15 February 2008]. 
34 OECD (2007c). 
35 The authorities indicate that the direct payment sy stem is a post-income support for farm households 
rather than a price support measure. Republic of Korea WT/TPR/S/204/Rev.1 
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production created by this policy occurs in a situation where, until 200736, Korea had a surplus of rice 
production over domestic needs, and self-sufficiency in other commodities remains low.  While paddy 
fields were once exclusively used for growing rice,  about 10% are currently used for cultivating other 
agricultural products, including strawberries, melons , and paprika, and this share is growing every 
year.  The variable payment for rice may retard this development.  
30. The abolition of government purchasing and the introduction of a public stockholding system 
for rice in 2005 has been a signifi cant step towards an alternativ e way to achieve food security.37  A 
Public Stockholding Scheme  for rice, which is a purchase and release mechanism based on the current 
market price, has been operated  since then.  The target volume of public stockholding for rice is 
864,000 tonnes for 2007 and 2008;  in 2007,  417,000 tonnes were purchased.   
(b) Beef 
31. Beef imports attract a tariff of 40% in 2008.38  As the price of beef has been high, the number 
of cattle increased from 1.6 million in 2004 to 2.2 million in 2008.39  The volume of beef imports 
(based on quarantine record) also increased by 53% from 132,874 in 2004 to 202,785 tonnes in 2007;  
between 2003 and 2004 the volume dropped considerably  as a result of the suspension of imports of 
U.S. beef, whose share of imports was progressively  and partially replaced by Australian beef.  The 
Calf Breeding Stabilization Scheme, introduced in 2001, assists beef producers.  In 2007, 
136,000 cattle farms participated in the scheme representing 90% of total farms and covering 
894,000 head (some 600,000 in 2004).  The same y ear the scheme operated a stabilization price of 
W 1.55 million/calf (W 1.2 million/calf in 2003) and de ficiency payments of up to W 300,000 per calf 
(W 250,000 in 2003).  No payments have been ma de since the establishment of the scheme as the calf 
price has remained above the base pr ice.  Despite the removal of tari ff quotas, beef assistance remains 
high (Single Commodity Transfer (SCT) of 66.6% in 2006, Table IV.1).  Foreign direct investment of less than 50% is permitted (since March 2001) in cattle raising and meat wholesale. 
32. Cattle imports are more competitive, costing W 1.66 million per head (including customs and 
quarantine costs) compared with W 2.6 million for a domestic animal.  
(c) Dairy 
33. Dairy production remains assisted (SCT of 61.2%  in 2006, Table IV.1).  Tariff quotas could 
restrict imports;  relatively high in-quota tariff rat es of 20% or 40% apply to dairy products, with 
much higher out-of-quota rates, of 49.5%, 89%  or 176% (Table AIII.5) resulting from the 
"tariffication" exercise in the Uruguay Round.  In 2004, their fill ratio ranged from zero (evaporated 
milk)
40 to 100% (butter) (Table AIII.6).  
34. Past policies in the dairy sector have lead to high domestic prices and a national surplus of 
milk production over domestic demand.41  Recently, policies to stabilize milk supply and demand 
                                                      
36 As of 2007, rice production has not exceeded domestic consumption (i.e. domestic production of 
4,408,000 tonnes against domestic consumption of 4,636,000 tonnes). 
37 OECD (2007c). 
38 The beef tariff quotas were replaced  with a tariff-only regime from 2001. 
39 OECD (2007c). 
40 The authorities indicate that since domestic mark et prices for evaporated milk were lower than 
import prices, importers did not participate in the public auction, leaving the entire TRQ unsold. 
41 Reportedly, the problem with the milk supply and demand policy in Korea is that the system for 
flexible milk price and production volume adjustment is deficient.  The milk pri ce increased when production 
costs increased, but not vice versa , and the market situation was not taken into account in determining the price.  
The current two-tier milk collection structure, composed of the indirect milk collec tion by KDC and the direct WT/TPR/S/204/Rev.1 Trade Policy Review 
Page 100 
 
 
have been implemented;  as a result, the nationa l milk surplus declined from 335,000 tonnes (2004) to 
313,000 tonnes (2007) though the surplus rate (surplus /production) has remained stable at above 14% 
except for 2006.  Under a differentiated pric ing mechanism for surplus milk (as from 
November 2002) for member farms of  the Korea Dairy Committee (KDC)42, which accounts for about 
27% of the entire milk production, the KDC, a non-profit organization, has classified the milk 
collected above the contracted vol ume as surplus milk and pays dairy farmers less than the normal 
price for the surplus43;  these lower prices seem to range between 7% and 70% below the normal 
price.44  Since it was introduced, the differentiated pr icing system for surplus milk has reduced the 
surplus milk volume purchased by the KDC from 120,835 tonnes in 2004 to 94,109 tonnes at the end 
of 2007, thus reducing the budgetary outlays (i.e. subsidies) required to address the milk surplus from 
W 31.9 billion to W 28 billion.45  According to the OECD, the cu rrent quota-based system of milk 
pricing encourages overproduction and provides high leve ls of support to producers with already high 
levels of farm income.46  However, the authorities consider that the current quota system helps 
suppress excessive production of milk by cutting the individual quota volume by 20% in case of quota 
transfer.  Furthermore, they indicate that 31.7% of dairy farms are small-scale farms with less than 
40 head of milk cows and annual income ranging from W 17 million to W 68 million;  as such, they 
have a vulnerable income base, and the recent surg e in feed prices is posing greater challenges to 
them.  Reducing support levels a nd deregulating the marketing of m ilk would improve efficiency and 
equity, and lead to considerable budget savings. 
(3) FISHING  
35. In 2007, the total value of fish caught was W 5.7 trillion.  About 51% is caught in adjacent 
waters and 17% in distant waters.  Korea's large fi shing fleet includes many distant-water vessels that 
operate overseas.  While the sector's GDP contribut ion remained stable at 0.3%, between 2004 and 
2007 the fishing population has fallen.  Most fi shermen are employed in traditional small-scale 
fisheries based in coastal commun ities.  Declining catches have b een largely offset by increased 
aquaculture production, which accounted for one  third of fish production in 2007.  
36. Depletion of Korea's fishery resource, is due pa rtly to over-fishing and climate change and the 
consequent increase in water temperature.  It  is implementing a coastal and offshore fishery 
restructuring project aimed at establishing a sustainable fishery (Fishery Act, 2007).  The scheme provides for reducing the number of fishing vessel s, re-adjusting fishing zones, and developing 
environment-friendly fishing methods.  Some 8,451 fishing vessels (mainly coastal) have been 
de-commissioned since 1994.  The authorities have  planned to spend W 512 billion from 2007 to 
2010 in a buy-out programme for 1,280 fishing boa ts (about 35% of the local fleet operating 
offshore), in order to curb over-fishing and keep  the number of boats at a manageable level.
47  All 
fishing vessels must be licensed, including coastal vessels below 10 metres in length, and the number 
of licences has been reduced.  
                                                                                                                                                                     
collection by dairy product manufacturers, makes flexible response to demand and supply changes more 
difficult (Korea Rural Economy Institute, 2005). 
42 Since 1999, the KDC has been entrusted with:  improving the structure of the dairy industry;  
balancing supply and demand of raw milk and dairy produ cts;  stabilizing prices;  and enhancing the distribution 
structure.  
43 The basic milk price for 2007 was W 584 per litre.  The normal (farm gate) milk price is calculated 
by adding to or subtracting from the basic other amounts depending on hygiene factors (e.g. bacterial counts, somatic cell counts, milk composition factors).   
44 Korea Rural Economy Institute (2005). 
45 The authorities indicate that subsidies for the implementation of the differential pricing system were 
W 28.5 billion in 2006, whic h accounted for only 1.87% of the total dair y production, valued at W 1.5 trillion. 
46 OECD (2007d). 
47 USDA (2007). Republic of Korea WT/TPR/S/204/Rev.1 
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37. A total allowable catch (TAC) has been set fo r Korean waters by MIFAFF;  in 2007, it was 
381,930 tonnes (about 65% more than in 2002) as a result of expansion of the species covered, especially squid.
48  A comprehensive monitoring and enfo rcement programme is in place for the 
TAC-based management system.  The TAC Comm ittee and the Central Committee for Fisheries 
Coordination sets TACs for each species, based on an annual assessment of fish stocks by the 
National Fisheries Research and Development Instit ute:  70% of quotas are allocated equally to 
fishermen, and the rest on a "first-come first-served" basis.  Quotas are not tradeable.  Community-based self-regulation of coastal fisheries has also been encouraged since 2000, and is 
reducing illegal fisheries, and improving resource ma nagement and resolution of fishery disputes and 
conflicts.  At end 2007, there were 579 fisher men-oriented co-management communities with 
44,000 fishermen working in community fisher ies, capture fisheries, and aquaculture.  
38. Access to Korean waters by foreign fishing v essels is controlled by bilateral agreements;  
vessels must be licensed.  Quotas for foreign vessel s are approximately equal to the TAC, which 
applies only to domestic fishermen.  In 2008, ther e were 1,000 (1,232 in 2003) licensed Japanese 
vessels and 1,859 (2,531 in 2003) Chinese vessels.  Ko rean vessels also operate in foreign waters 
under similar agreements, including w ith the Russian Federation, China
49, Japan, Tuvalu, Solomon 
Islands, Kiribati, and Papua New Guinea.   
39. According to Korea's latest statistics, fisheri es-related subsidies were W 101.2 billion in 2006 
(W 68.7 billion in 2004).50  These financed mainly:  aquaculture , deep-sea fishery, fish products 
processing and development;  and support for fishi ng activities, old fishing vessel and equipment 
replacement, and vessel decommissioning.  Korea has continued to participate, including through joint 
submissions for a framework for di sciplines in fisheries subsidies,  in the WTO Negotiating Group on 
Rules.51  In a joint communication with Japan and Chinese Taipei at the WTO Negotiating Group on 
Rules, Korea favoured the prohibition of certain subs idies, such as for the acquisition and construction 
of fishing vessels, and for vessel modification, etc., which contribute to overcapacity and over-fishing.
52  
40. Korea is laying a foundation for environmenta lly friendly aquaculture, and is working to 
prevent contamination of the ocean environment through mandatory management of fishing grounds 
by fishers, as well as a programme for the improvement of the fishing ground environment.  The recent Marine Environment Management Act, and the Act for Conservation and Management of the 
Marine Ecosystem, are aimed at implementing systematic and efficient ecosystem approaches to 
fisheries as well as oceans.  Under the Farming Ground Management Act of 2000, mariculture 
grounds are left idle for certain periods to fac ilitate sustainable production, sanitary inspection, and 
cleaning.   
                                                     
 
48 Ten species are actively managed under the Korean TAC-based fisheries management system:  
three species of pelagic fish (mackerel, jack mackerel, sa rdine);  three species of shellfish (pen shell, purplish 
Washington clam, spiny top shell);  three species of cr ab (snow crab, red snow crab , blue crab), and common 
squid. 
49 An agreement with China on the fishing quot a for 2007, allows Kore an vessels to catch 
68,000 tonnes (the same as in 2006), inside China's EEZ, and Chinese vessels to catch 71,930 tonnes in the 
Korean zone. 
50 WTO document G/SCM/N/123/KOR, 24 January 2006. 
51 WTO documents TN/RL/W/160, 8 June 2004;  TN/RL/W/172, 22 February 2005;  TN/RL/GEN/114, 
21 April 2006;  TN/RL/GEN/92, 18 November 2005;  TN/RL/GEN/114/Rev.1, 2 June 2006;  and 
TN/RL/GEN/114/Rev.2, 5 June 2007. 
52 WTO document TN/RL/GEN/114/Rev.2, 5 June 2007. WT/TPR/S/204/Rev.1 Trade Policy Review 
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41. Foreign investment in coastal and offshore fishing ventures is generally limited to less than 
50%.  In coastal fishing, permission is required from the local government.  Foreigners wishing to 
invest more than 50% must obtain permission from the MIFAFF.   
42. Fish and fish products are subject to relatively high tariffs of 10% or 20%.  To better protect 
domestic seafood producers from imports (mainly fro m China), as from 1 January 1992 the authorities 
have set higher "adjustment tariffs"(Table AIII.4)  ranging from 22% to 57% for nine fish species, 
which are not subject to WTO tariff binding commitments.53   
(4) ENERGY  
43. Energy security is of paramount importance in  Korea's energy and overall economic policy.  
With limited natural resources, Korea imports aro und 96.5% (2006) of its energy requirements.  
Korea's high economic growth has induced a substa ntial increase in energy demand;  total final 
consumption has been growing at an average annual rate of around 6.5% for the last two decades.  
Total energy demand is projected to rise by 3.1%  annually until end 2010.  In 2006, the main energy 
sources were oil (43.6%), coal (24.3%), nuclear (15.9%), and liquid natural gas (LNG) (13.7%).  
Industry is the main user (56%, 2006);  the tr ansport sector accounts for 21% of final energy 
consumption, followed by the residential sector ( 12.3%) and commercial and other sectors (10.5%).  
As a result of the switch from oil to gas in indus try and residential/commercial use, and energy 
conservation in the transport sector, the share of oil in total energy consumption registered a 0.7% decline in 2006.  
44. Korea's "Energy Vision 2030", launched in  November 2006, has three basi c directions (3 Es):  
energy security, energy efficiency and environm ent-friendly as recommended by the International 
Energy Agency.
54  Nine tasks are set for implementation,  including expanded potential for overseas 
energy development, establishment of the infrast ructure of a hydrogen-based economy, improvement 
in energy consumption efficiency, and a strengthene d effort for investment in the energy industry 
overseas.  Korea plans to realize "universal energy services" across the nation by 2016 so that no citizen will be excluded from the syst ematic expanded energy welfare scheme.   
45. The Ministry of Knowledge Economy (MKE, former  MOCIE) sets energy policy.  A National 
Energy Committee, launched under the Basic Act on Energy in November 2006, envisages meeting a 
third of Korea's energy consumption from Korean investment in resources overseas
55, seeks to raise 
the ratio of renewable energy use to 9%  and reduce dependence on petroleum to 35%.56  It plans to 
help the county emerge as an expor ter of energy facilities and technology, and convert it into a society 
of low energy consumption by the target year 2030.  As of 2006, Korea's energy self-sufficiency rate 
for petroleum and gas was 3.2%, renewable energy  rate 2.24%, and dependency rate on petroleum 
43.6% of total energy production. 
                                                      
53 USDA (2007). 
54 KOIS online information, "'Vision 2030' calls for active overseas energy development", 
1 December 2006.  Viewed at:  http://www.korea.net/News/News/Ne wsView.asp?seria l_no=20061130033 
[26 February 2008]. 
55 The Government considers overseas resource de velopment by Korean companies as a means of 
ensuring security of supply to domestic market;  at end 2007, 123 oil exploration and/or production projects were under way in 32 countries, incl uding Indonesia, Peru, and Viet Nam.  
56 KOIS online information, "'Vision 2030' calls for active overseas energy development", 
1 December 2006.  Viewed at:  http://www.korea.net/News/News/Ne wsView.asp?seria l_no=20061130033 
[26 February 2008]. Republic of Korea WT/TPR/S/204/Rev.1 
 Page 103 
 
 
(i) Petroleum and petroleum products 
46. All oil is imported, mainly from the Middle East (about 82%).  Diversifying oil imports is a 
policy goal.  Korea was the world's seventh largest o il consumer in 2006.  It has the second-, third- 
and seventh-largest oil refineries in the world an d is now a major exporter of refined products.57  
About a third of total refinery output is exported.  
47. The oil industry was deregulated in 1998;  a major change in oil policy since 2004 has been 
the liberalization of retail prices.  Imported crude o il is dutiable at a tariff of 3% and refined products 
at 5%, 7%, and 8% (greases), thus encouraging dom estic refining.  Surcharges applied to imported 
crude oil and domestically produced refined produc ts finance the Energy Project Special Account.58  
Four private companies dominate the oil refining industry, accounting for over two thirds of the 
market.59   
48. The state-owned Korea National Oil Company (KNOC) handles oil and gas exploration, 
development and producti on, and maintains Korea's emergency oil reserves.60  Most exploration is 
offshore, where 12 concession blocks have been estab lished.  MKE issues concessions for oil and gas 
exploration, which also specify future tax treatment in the event of discovery.  All concessions issued 
to date (seven blocks) have gone to KNOC.   
(ii) Other energy 
(a) Natural gas 
49. Korea is the world's second and fourth largest importer of LNG (liquefied natural gas) and 
LPG (liquefied petroleum gas), respectively.  A ll LNG is imported, although small quantities (less 
than 2% of annual domestic consumption) of natu ral gas have been produced  from the East Sea gas 
reserve since July 2004.  SK Gas and E1 (formerly  LG-Caltex Gas) import just over half of Korea's 
LPG requirements, while domestic refineries produce the rest.  In 2007, LNG was used mainly for 
generating electricity (43%) and cooking and heating (31%).   
50. In the absence of a market-based system in this sector, the Korean gas industry lacks 
competition.  The majority state-owned enterprise,  Korea Gas Corporation (KOGAS), which is the 
largest LNG importer in the world, has a monopo ly over the wholesale trade, including imports, 
storage, transmission, and wholesale distribution of  LNG by pipeline.  It supplies natural gas to 
private city gas companies, which have territori al monopolies and supply retail users through their 
distribution pipelines.  Nevertheless, since 2005, some companies (POSCO, K-POWER (joint-venture 
company between SK & BP)) have been able to  obtain licences to import gas directly for the 
company's "own use".  Wholesale gas tariffs must be approved by MKE, and retail gas prices by local 
governments.  Price regulation is essentially by rate of return on assets.61  KOGAS maintains its 
                                                      
57 OECD/International Energy Agency (2006). 
58 The surcharge applies to all refined sales, incl uding imports, at a specified rate not to exceed 
W 36 per litre (The Act on Petroleum Businesses). 
59 The top four in terms of market share are SK Corp (32.9%), GS Caltex (24.0%), S-Oil (10.6%), and 
Hyundai Oilbank (10.8%).  GS Caltex is 50% foreign owned by Chevron, S-Oil 35% owned by Saudi Aramco, and Hyundai Oilbank 70% owned by International Petroleum Investment Corporation (IPIC).   
60 Since Korea became a member of  the International Energy Agen cy (IEA) in March 2002, it is 
required to hold reserves of at least 90 days of net oil imports.  In February 2008, Korea's stock levels were at 
139 days, with 70 days held by government-owned stocks and the remainder by industry (OECD/International 
Energy Agency, 2006).  
61 KOGAS does not earn any profit on sale of the commodity, only a handling charge;  it is allowed to 
recoup its costs for infrastructure and personnel through a rate of return that gives a reasonable profit. WT/TPR/S/204/Rev.1 Trade Policy Review 
Page 104 
 
 
policy of long-term take or pay deals, despite te mporarily high spot purchases for coping with an 
unexpected significant rise in demand for natural gas in 2006.  KOGAS adjusts the price of the 
commodity every two months for domestic cons umers and every month for power plants.  
51. No major reforms have been undertaken sin ce 2004.  The Government had announced the 
restructuring and further privatization of KOGAS in  1999, when it was partially privatized (Natural 
Gas Industry Restructuring Plan).62  The plan provided for an independent regulator, the Gas 
Committee, to facilitate a competitive gas market by instituting an open access regime, including 
third-party access to LNG terminals for a fee.  The implementation of the plan slowed since 2000 due 
to failure to legislate the relevant act, the oppos ition of the labour union and concerns from the 
Assembly about its side-effects.  Some progress h as been made by introducing Third Party Access 
(TPA) to the wholesalers' pipeline for LNG importers (POSCO, K-Power) in 2005.  In December 2007, the Gas Act was revised to regulat e mandatory TPA to the wholesaler's pipeline. 
(b) Electricity
63 
52. The six subsidiaries (see below) of the majority state-owned Korea Electric Power 
Corporation (KEPCO) generates 95.1% of power an d handles distribution and transmission.  A few 
independent (gas-fired) power producers (IPPs), including co-generation facilities, also supply 
electricity.  Korea has no network interconnections with  other countries.  Most electricity was nuclear 
generated (39%) in 2006, followed by coal (35%), g as (18%), oil (4.4%), and hydro (1.4%).  Thermal 
electricity is mainly generated from imported bitu minous coal, supplemented by domestic anthracite 
coal, which KEPCO must purchase at nearly twice th e price of imported, better quality, coal.  The 
Government imposes fees on electricity consumpti on to finance the Electric Power Industry Basis 
Fund.  This fund, which amounted to W 1,832 billi on in 2007, is disbursed on activities aimed at 
achieving non-commercial objectives (discussed below) ;  KEPCO remains entrusted with some public 
services covered by the Fund.  It made a "take or  pay" long-term arrangement with KOGAS in 2006 
to stabilize natural gas supply until 2026.  Power gene rators have been dispat ched LNG according to 
costs, which are adjusted monthly.64  A reference price system subsidises costs of power generated 
from alternative renewable energy  (e.g. solar and wind).  The a nnual budget was W 6.3 billion in 
2004, W 20.8 billion in 2005, and W 26.6 billion in 2006. 
53. The electricity sector was progressively deregulated and privatized to allow greater 
competition, according to the ten-year Basic Plan fo r Restructuring the Electricity Industry announced 
in 1999.  KEPCO's monopoly on non-nuclear pow er generation was abol ished in 1999, and 
competition was introduced to power generation in  2001 when its power gene rating operations were 
spun off into six wholly owned subsidiaries (Act on Promotion of Restructuring of the Electric Power 
Industry, 2000).  KEPCO's state-owned equity ha d fallen from over 70% to 51.1%  (Table III.5).  
Plans to privatize KEPCO's five thermal power generating subsidiaries, announced in April 2002, 
have not yet been implemented.65  In order to implement the plans more efficiently, specific action 
plans detailing the time frame, methods, etc. are currently under consideration.   
                                                      
62 KOGAS is 38.82% privately owned.  The Government owns 26.86% and the Korea Electric Power 
Corporation 24.46%.  Fourteen provincial/city governments hold the remaining equity, with the largest share 
held by Seoul City (3.99%).  The maximum permitted aggregate foreign ownership of KOGAS is 30%, and 
individual share ownership (foreign or domestic) is capped at 15%.   
63 This section is based on OECD/I nternational Energy Agency (2006). 
64 OECD/International Energy Agency (2006). 
65 The sixth subsidiary, the Korea Hydro and Nuclear Power Corporation, remains a subsidiary of 
KEPCO for security reasons.  Republic of Korea WT/TPR/S/204/Rev.1 
 Page 105 
 
 
54. The Korea Electricity Commission (KOREC), an  independent unit within MKE, regulates 
generation, transmission, distribution, independe nt power producers (IPPs), generation companies, 
and the Korea Power Exchange (KPX), in addition  to overall industry functions.  The electricity 
market, including KEPCO, is also subject to gene ral competition legislation administered by the 
Korea Fair Trade Commission.  The division of regulatory roles and responsibilities between KOREC 
and the KFTC remain to be determined.  
55. The KPX, an electricity pool owned by particip ating companies and in operation since 2001, 
has used administratively set generation prices to manage dispatch.66  Operating expenses are covered 
through electricity trading fees.  The pool is ma ndatory for all generators (above 20MW) with a few 
exceptions, such as generators in island areas.  KPX,  administers the hourly market;  handles trading, 
metering, and settlements;  and is responsible for oper ation of the grid.  Unlike a standard electricity 
pool, generators participating in the KPX pool bid on an hourly basis according to their availability.  
Generators' costs are fixed administratively each month by the KPX's Cost Assessment Committee on 
the basis of fuel and other operating costs.  KPX dispatches power for each hour according to the 
available bid stack in the pool, starting with the ch eapest generation until all demand is met.  IPPs are 
paid the cost-based marginal price (i.e. the bid price of the most expensive generator) except for 
nuclear and coal.67  These resources (nearly 80% of supply) ar e paid an administratively set base-load 
price that is lower than the cost-b ased marginal price.  Given that th e marginal price does not take into 
account location or transmission constraints, genera tors are not penalized or rewarded for their 
distance or proximity to demand, excluding transm ission losses.  The country is considered as one 
zone, with no separate zonal prices.  Korea is not currently considering replacing the cost-based, 
regulated dispatch mechanism with a competitiv e price pool or other trading arrangements.  
56. MKE approves electricity tariffs.  Retail rates do not reflect directly the hourly cost-based 
prices derived from the KPX mechanism.68  Since 2002, the MKE has been implementing an 
electricity tariff reform to reduce the cross-subs idies between residential and industrial users and 
construct a cost-based tariff system;  between 2002 and 2007 industrial rates were cut by 11% and 
residential rates by 2.6%.  In addition to residentia l and industrial rates, separate rates for a number of 
customer classes are in place according to type of energy use.  Cross-subsidies between alternative 
users distort prices, with agricultural and industria l users the main beneficiaries.  Prices for the 
agriculture sector pays are very low:  its fixe d prices represent only 8-23% of those for small 
industrial customers, and rates for electricity  per kilowatt-hour delivered represent 39-68%.69  
Reportedly, these rates are very low, as the standa rd industrial rates are already below actual cost.  
Plans are under way to introduce a voltage- and cost-b ased rate system in the medium and long term.  
But according to the authorities, cross-subsidies n eed to be substantially reduced prior to this 
reorganization so as to prevent a steep rise in industria l and agricultural rates;  this process is expected 
to take a few years.  
57. Upon implementation of the Electric Industry R estructuring Law in 2001, most of KEPCO's 
non-commercial objectives were tr ansferred to the Government, along with the establishment of 
Electric Power Industry Basis Fund.  Since then, th e Government has been responsible for meeting 
                                                      
66 OECD/International Energy Agency (2006). 
67 In addition to marginal price payments, generato rs receive capacity paymen ts.  The capacity payment 
is paid to all generators who submit capacity offers, whether or not they are dispatched.  Capacity payments are 
provided to ensure recovery of capital costs and to underpin further investment. 
68 Although KEPCO does not offer real-time pricing, it has 300,000 one-way digital meters capable of 
remotely recording consumption every 15 minutes.  These meters covered over 70% of total consumption in 
2005. 
69 Korea's industrial and residential retail electricity rates are relatively low compared with other IEA 
countries, despite the reliance on high-priced LNG. WT/TPR/S/204/Rev.1 Trade Policy Review 
Page 106 
 
 
non-commercial objectives, such as:  supplying elect ricity to remote areas;  supporting the domestic 
coal industry;  supporting areas adjacent to power pl ants;  and supporting the co-generation industry.  
Non-commercial objectives are im plemented through four programmes comprising seven projects, 
budgeted at about W 213 billion in 2007;  most of  this spending is for subsidies on power plant 
operations in remote islands (41.7%), peak load operations (35.4%), and efficiency enhancement 
(14.2%) projects.  
58. There have been no reforms in the distributio n network during the review period, but plans 
are under consideration.  KEPCO owns the distributi on network and is responsib le for retail supply.  
It purchases power directly from KPX and suppli es it to customers.  The manufacturing sector 
accounts for just over half of total sales, public an d commercial sectors account for over a quarter, and 
the residential sector accounts for the rest.  
(c) Coal 
59. Coal plays a dominant role in electricity gene ration (section (4)).  Seven domestic coal mines 
produce anthracite coal;  three are operated by the state-owned Korea Coal Corporation (KCC) and account for 47% of domestic production.  Korea' s production, mainly of high-cost low quality 
anthracite coal, rose from 1.387 million tonnes in 2004 (2.4% of total coal supply) to 2.89 million 
tonnes in 2007 (3.3%).
70  It is used mainly for power generation (51%) and briquettes (49%).  
Imported (bituminous) coal covers over 90% of dom estic consumption.  Korean investment in 
overseas coal joint ventures is encouraged, including  through direct participation by the state-owned 
Korea Resources Corporation, and provision of loans;  there are currently 42 projects in 8 countries.  
The government target remains to procure 45% of  bituminous coal imports from such projects by 
2012;  in 2007, it procured 31%. 
60. Domestic coal production is supported by direct  production subsidies (W 75 billion annually), 
including insurance benefits, support for production re ductions, social benefits, and health premiums;  
implementation of the policy to downsize the coal industry has brought about a steady decline in 
production subsidies since 2000.  Consumption subsidi es are also available in the form of social 
welfare benefits to low-income users of briquett es for residential and commercial purposes, such as 
heating and cooking.  The Government is planning  to decrease the subsidies by raising the price of 
briquette and anthracite coal.  Coal imports are duty free but a 10% discriminatory VAT is levied on imported coal.
71  KEPCO may buy domestic coal at well-above import prices.  
(5) MANUFACTURING  
61. Manufacturing as a share of GDP declined slightly to 27.9% in 2007 (28.6% in 2004, 
Table I.2);  its share in employment also fell, to 17.6%.  Labour productivity in manufacturing is, therefore, roughly 80% higher than in the rest of the economy.  High labour productivity is partly due 
to substantial capital investment.  Manufacturing is  heavily export oriented.  More than 89% of 
exports in 2006 were heavy industry products, comprising mainly electrical and electronic machine 
products;  cars;  machinery, and precision equipment;  chemicals;  iron and steel;  and ships.
72  Korea 
remains a leader in information and communication technology (ICT), as well as a major player in 
                                                      
70 The Electricity Pool defines the market trading rules and procedures but does not itself act as market 
maker buying or selling electricity.  The pool facilitates the mechanisms to support competition in supply, where customers can choose their supplier (OECD/International Energy Agency, 2006). 
71 A 10% VAT is levied on imported bituminous coal while domestic anthracite coal is exempt 
(Ministry of Finance and Economy, 2007). 
72 UNSO Comtrade data. Republic of Korea WT/TPR/S/204/Rev.1 
 Page 107 
 
 
other areas of manufacturing, such as ships (the  world's largest producer) and cars (fifth largest).73  
The electronics sector is considered as the main engine of growth.74  Korea's competitiveness in 
manufacturing is underpinned by a high level of i nvestment in R&D and a high share of young adults 
in tertiary education.  Reportedly, chaebols  still dominate Korea's major export industries such as 
cars, electronics, telecommunications, shipbuilding, steel, and petrochemicals.75  The authorities were 
unable to provide data on chaebols,  including chaebol  companies' exports, because the term " chaebol " 
is not defined in their official statistics and data differentiate only between SMEs and other 
enterprises.  
62. Korea's industrial vision for 2010 is to become one of the world's top four "industrial 
superpowers", based on strengthening its global  position in the traditional basic industries of 
semi-conductors, cars, petrochemicals, steel, machiner y, and shipbuilding, but also further expanding 
exports of digital electronics and other "strategic" industries.76  Policies are directed at improving 
competitiveness and developing high-value-added advanced technology products based on innovative 
strategies.  The policy objective is to achieve av erage annual growth in manufacturing of 6.1% until 
2010, when the sector's GDP share is projected to fa ll to 27.4%;  in 2007, average annual growth in 
manufacturing fell to 6.5% from 11. 1% in 2004, and the sector's GDP share fell to 27.9% from 28.6% 
in 2004.  A particular concern is that significant manufacturing industries may relocate offshore, 
especially to China, where production costs are lo wer.  From 2004 to 2007, 5,965 firms in the 
manufacturing sector established in China. 
63. As of August 2003, ten strategic industri es were classified as growth engines77;  these 
essentially involved the manufacture of highly inn ovative, R&D-intensive high-technology products 
and related services.  More than W 1 trillion was inv ested in R&D in the ten strategic industries in 
2004-07.  The authorities also plan to make the economy more services-oriented.  The new 
Government is currently mapping new strategies fo r development of the growth engines including 
action plans to be released during 2008.  
64. Since 2004, Korea's average applied MFN ta riff on imports of industrial products has 
remained virtually unchanged at 6.5% (Table III.1) .  Adjustment duties protected two industrial items 
only (plywood at 11%, and surface mount machines at 16%) (Table AIII.4) in 2007;  autonomous 
tariff quotas have allowed concessional tariff treatme nt for imports of inputs (including hides and 
skins, polymers, and copper fo il) and machinery necessary for dom estic industry (Table AIII.7).  
Several tax and non-tax incentiv es support R&D and SME activities (Chapter III);  manufacturers 
benefit from the lowest average electricity prices among different consumer groups as well as of the 
possibility to seek support for adjustment (advice, info rmation, loans) whenever adversely affected by 
a bilateral free-trade agreement. 
(i) Automobiles 
65. Between 2004 and 2007, total automobile production, including passenger and commercial 
vehicles, rose by 17.8% to 4.1 million units;  Ko rea accounted for 5.8% of global production in 
                                                      
73 OECD (2007a). 
74 Concentration on five mass-produced items (cellular phones, memory semiconductors, non-memory 
semiconductors, wireless communication components, and LCD monitors) has allowed for economies of scale 
since 2005 (Korea National Statistical Office, 2007). 
75 EIU (2007). 
76 MKE online information.  Viewed at:  http:// www.mke.go.kr/language/eng/toward/industry01.jsp 
[2 March 2008]. 
77 See WTO (2004). WT/TPR/S/204/Rev.1 Trade Policy Review 
Page 108 
 
 
2006.78  Sales of domestic automobiles increased by 11.5% as a result of, inter alia, release of new 
models;  exports rose by 19.6% (in units), mostly increasing in emerging markets.  In 2007, almost 70% of domestic production was exported;  importe d vehicles grew by 111.7% to 73,227 units, 
originating mainly from the EC (55.3%) and Japan (33%)
79;  they account for about 5% of the 
domestic automobile market.  
66. Customs tariffs remain unchanged at 8% (passenger vehicles) and 10% (commercial 
vehicles).  Used car imports are subject to the same ad valorem  duty as new vehicles, and special 
customs valuation procedures are used.  The rates of the special excise tax (5%, 10%) and the local 
automobile taxes depend on engine capacity with the highest rate applied to cars with engines 
exceeding 2,000 cc (Chapter III);  reportedly, the effect of the customs tariff, compounded by the 
effect of multiple automotive taxes, raises th e effective rate of protection to around 12%.80 
67. Euro 4 standards were introduced for light duty diesel vehicles in January 2006 and ultra-low 
emission vehicle (ULEV) certification standards for light duty gasoline vehicles are being phased in for gas fuelled vehicles from 2006 to 2009.
81  Auto-makers are also required to install on-board 
diagnostic (OBD) systems gradually, as from 2005, for gasoline-powered vehicles.  For diesel 
vehicles, the system applied primarily to newl y manufactured mini and small vehicles in 2006, 
medium-duty vehicles as from 2007, and heavy-duty vehicles as from 2009. 
68. In 2007, the Korea Fair Trade Commission (KFTC ), which has been investigating importers 
of foreign-made cars for setting prices excessively  high, expanded the probe into allegations of 
price-fixing and other unfair business activities.  Official car importers have long been criticized for 
profiteering through high prices (for example, as much as twice the price for the same model in the 
United States.82  SK Networks, an affiliate of SK Group (Korea's third largest chaebol ), was to sell 
five foreign auto brands below the prevailing market prices at its new (parallel or grey) imports-only stores.  Reportedly, parallel or "g rey" importers, such as the SK congl omerate, do not have to meet the 
same costly standards imposed on official dealers;  foreign carmakers consid er this to be reverse 
discrimination.
83  The authorities indicate that the KFTC investigation does not discriminate between 
foreign and domestic companies in enforcing comp etition law;  also officially imported cars and 
parallel imports are subject to the same environmen tal and safety standards, reverse discrimination 
does not take place.  
(ii) Shipbuilding 
69. Since 2003, Korea has maintained its position as th e world's shipbuilding leader, in terms of 
new orders, completion, and order book.84  It is home to seven of the world's ten largest shipbuilding 
companies, and is benefiting greatly from a surge in global trade, oil prices, energy demand, and the 
                                                      
78 Korea Automobile Manufacturers Association online statistics.  Viewed at:  http://www.kama.or.kr/;  
and Korea National Sta tistical Office (2007). 
79 Korea Automobile Importers and Distributors Association online statistics.  Viewed at:  
http://www.kaida.co.kr/site/kaida_eng/dataroom/yeardata.jsp. 
80 USTR (2007). 
81 OECD (2007h). 
82 The Korea Times,  "Car Importers Probed for Pri ce-Fixing", 13 December 2007.  
Viewed at:  http://www.koreatimes.co.kr/www/news /biz/biz_view.asp?newsIdx=15484&categoryCode=123 
[7 March 2008]. 
83 Financial Times,  "Seoul car probe puts pressure on trade agreements", 14 Decem ber 2007.  Viewed 
at:  http://search.ft.com/ftArticle?sortBy=gadatear ticle&queryText=Korea+automobile&page=2&y=5&aje= 
false&x=16&id=071214000071&ct=0 [10 March 2008]. 
84 OECD (2006). Republic of Korea WT/TPR/S/204/Rev.1 
 Page 109 
 
 
need to meet tougher environmental requirements set by the International Maritime Organization.85  
Exports of vessels have increased by 25% per year on average since 2004.  Shipbuilders' order books 
are full until 2010, with orders at the top three shi pbuilders expected to reach US$50 billion for 2007.  
However, Korean shipbuilders face challenges, su ch as the need to address spiralling costs and 
material shortages, as well as exchange rate de velopments, problems with steel plates, and the 
shortage of skilled labour.  To cut costs, Korea' s second- and third-largest shipbuilders have both 
opened yards in China where they produce entirely ships,  but also blocks used as the base for building 
ships in Korea.86 
70. Tariff protection for ships ranges from zero to  8%.  Between 2002 and 2005, Korea was a 
respondent in a WTO dispute settlement case c oncerning certain measures affecting trade in 
commercial vessels.87  A subsidy (Local Tax Reduction for Bu ilding and Acquisition of International 
Line Vessels and Deep Sea Fishing Vessels) aimed at promoting the shipping industry by relieving 
the tax burden on international line vessels, deep-sea  fishing vessels and coastal line vessels, which 
was to be eliminated at end 2006,  will now be extended to end 2009.88  Korea is playing an 
increasingly active role as a rule-maker for regulatio ns in the international shipbuilding industry by 
engaging in various conferences and rule-making sessions. 
(6) SERVICES  
(i) Features 
71. The services sector makes a significant contributio n to the Korean economy;  its GDP share 
increased from 55.6% in 2004 to 57.6% in 2007, and its  share of total employment (mainly in trade, 
hotels and restaurants, and real estate) rose from 63.8% in 2004 to 65.3% in 2006 (2007 figure not available (Table I.2).  Labour productivity in services is just over half the level in manufacturing.  The 
largest contributor to gross value added within servi ces is real estate, renting, and business activities, 
followed by wholesale and retail trade, and financial intermediation. 
72. Between 2004 and 2 007, exports of non-factor services grew at an average annual rate of 
12.6% to over US$63 billion (approxi mately 17% of merchandise exports  (Table I.3)).  However, 
over the same period, services imports grew at an av erage annual rate of nearly 17%, resulting in the 
services deficit increasing from US$8.1 billion to US$20. 6 billion.  Transportation and travel are the 
main traded services. 
(ii) Overall commitments under the GATS 
73. Korea has made commitments in 98 of the 155 sectors under the GATS.  Foreign equity 
limitations of 49% on commercial presence are scheduled for basic telecommunications businesses.  To be able to provide professional services, such as legal, accounting, and a udit and taxation services, 
                                                     
 
85 IMF (2007);  and BusinessWeek , "Korea's Shipbuilding Industry Sails Ahead",  
12 May 2006.  Viewed at:  http://www.businessweek.com/globalbiz/content/may2006/gb20060512_131557.htm 
[5 March 2008]. 
86 Financial Times,  "Strategy of cheap labour", 27 July 2007.  Viewed at:  
http://search.ft.com/ftArticle?sortBy=gadatearticle& queryText=Korea+shipbuilding&y=8&aje=true&x=9&id=0
70727000551&ct=0&page=6 [10 March 2008]. 
87 In March 2005, the Panel found that certain (but not all) preshipment loans and advance payment 
refund guarantees were prohibited export subsidies, and thus that Korea was in violation of relevant WTO provisions.  In April 2005, Korea assured Members that, since all loans and guarantees had been repaid or had 
already expired, it was in compliance with relevant WT O obligations (WTO Secretariat online information.  
Viewed at:  http://www.wto.org/e nglish/tratop_e/dispu_e/cases_e/ds273_e.htm [6 March 2008]). 
88 WTO document G/SCM/N/123/KOR, 24 January 2006. WT/TPR/S/204/Rev.1 Trade Policy Review 
Page 110 
 
 
foreign qualifications need to be approved in Korea.  Access to other services, such as daily 
newspapers and non-daily ne wspapers and news agency business, is subject to different foreign equity 
ceilings (Chapter II).  Additionally, according to its 2006 IAP report, Korea's keen areas of interest in 
services are the liberalization of infrastructure services, such as maritime transport, construction, 
telecommunications, distribution, and financial services. 
74. In the ongoing negotiations, Korea s ubmitted a revised offer in May 200589, under which it 
improved its sector-specific section in:  business services, distribution, education, telecommunications, transport, and financial services.  It also offered to widen the scope of specific 
commitments by addressing intra-corporate transferees and contractual service suppliers in its 
horizontal mode 4 section.   
(iii) Banking and finance 
75. The financial sector accounted for 8.9% of GDP  in 2007 and 3.4% of employment in the 
economy in 2006 (2007 figure not available) (Table  I.2), making labour productivity in the sector 
much higher than in the overall services sector.  The sector has undergone reforms and restructuring, 
which have resulted in a fundamental change in the behaviour of banks, which now focus more on 
profitability and competitiveness than they did in the past.
90  
(a) Structure and ownership 
76. The financial sector comprises banks and non-bank financial institutions (NBFI).  Subsectors 
within the former include commercial banks, which comprise nation-wide banks, regional banks, and 
branches of foreign banks, and specialized ba nks, such as the EXIM Bank and the Development 
Bank.  Commercial banking is dominated by natio n-wide banks, which controlled over 80% of the 
sector's assets in 2007;  foreign bank branches we re responsible for approximately 12% and local 
banks for 8%.91  The NBFIs include, inter alia,  credit unions, mutual savings banks, asset 
management companies, credit speci alized companies, securities compan ies, and insurance firms.  As 
a result of the restructuring, the sector has been consolidated;  both the number of banks and NBFIs 
declined during the period under review (Table IV.3).92 
77. Since the last TPR of Korea, the Government has continued to divest its holdings in banks 
(Table IV.4).  Significant among the divestment were the reduction in the Korea Deposit Insurance 
Corporation's (KDIC) holding in Woori Financial group, the sale of Korea First Bank (in which the 
Government previously had a controlling stake) to Standard Chartered Bank, and divestment of the 
Government's share in Hana Bank.93  On the other hand, foreign holdi ngs in Korean banks have risen 
significantly, with Citigroup and Standard Chartere d particularly upping their stakes.  The authorities 
indicate that there is no state presence in the NBFI  sector.  Foreign particip ation is limited to just 
                                                      
89 WTO document TN/S/O/KOR/Rev.1, 14 June 2005. 
90 Soo-Myung Kim, Ji-Young Kim and Hoon-Tae Ryoo  (2006). 
91 Bank of Korea online information.  Viewed a t:  http://www.bok.or.kr/inde x.jsp [20 January 2008]. 
92 In 2003, the Government sold its controlling stakes in Chohung Bank and Korea Exchange Bank to 
Shinhan Financial Group and to Lone Star Fund, respec tively.  In 2004, Hyundai Investment & Securities Co. 
was sold to Prudential Financial Inc.  In 2005, Ko rea Investment & Securities Co. was sold to Dongwon 
Financial Holdings, Daehan Investment & Securities Co. was sold to Hana Bank, and Korea First Bank was sold to the U.K.-based Standard Chartered Bank.  In 2006, Shinhan Bank and Chohung Bank merged as "Shinhan 
Bank". 
93 The Government is expected to divest 49% of its  stake in KDBH, as well as its shares in Woori 
Financial Group and IBK by 2010.  Furthermore, it will sell its management stake in KDBH by 2012. Republic of Korea WT/TPR/S/204/Rev.1 
 Page 111 
 
 
one mutual savings bank and 13 credit specialized companies (accounting for nearly 11% of the total 
assets of such companies). 
Table IV.3 
Structure of the financial system, 2003 and 2007 
(W billion) 
No. of establishments Assets 
(W billion) Loans and discounts 
(W billion) Institutions 
2003 June 2007 2003 June 2007 2003  2007 
Banks 59  54  1,221,179  1,645,659  700,896  1,033,569  
Commercial banks 54  49  890,208  1,188,057  507,700  723,010  
   Nationwide 8  7  739,091  948,690  453,207  638,229  
   Regional 6  6  61,756  94,779  35,715  62,558  
   Foreign bank branches 40  36  89,361  144,589  18,778  22,223  
Specialized banksa 5  5  330,971  457,602  193,196  310,559  
   (KDB) 1  1  102,903  133,038  47,504  57,075  
   (Korea EXIM) 1  1  11,282  19,832  9,297  20,099 
Non-bank financial institutions 4,596  4,263  565,025  797,956  215,263  275,123  
Merchant banking corporations 2  2  820  1,416  75  581  
Mutual savings banks 114  108  32,787  53,265  23,050  44,412  
Credit unions 1,086  1,015  19,556  27,123  10,526  17,017  
Mutual credit facilitiesb 1,577  1,423  148,292  197,710  87,163 112,353  
Community credit cooperatives 1,671  1,560  43,940  59,534  23,978  29,252  
Credit-specialized financial companiesc 50  54  65,976  75,840  13,568  22,700  
Life insurance companies 23  22  183,238  282,719  45,352 56,361  
Non-life insurance companies 26  27  37,933  59,588  6,333 11,285 
Postal life insurance 1  1  21,296  20,793  1,131 1,011  
Asset management companies 45  50  1,546  2,184  21  25  
Korea Securities Finance Corpora tion 1  1  9,641  17,784  4,066 2,826 
Totald 4,655  4,317  1,786,204  2,443,615  916,159  1,308,692 
a The Korea Development Bank, the Export-Import Bank of Kor ea, the Industrial Bank of Korea, the National Agricultural 
 Cooperative Federation, and the Nationa l Federation of Fisheries Cooperatives. 
b Facilities for the agriculture, forestry and fishery sector. 
c Credit card companies, leasing companies, instalment fina ncing companies, and venture capital finance companies. 
d Does not include other quasi-non-bank financial institutions such  as securities companies, investment advisory companies, 
futures companies, postal savings, etc. 
Note: End-of-period figures. 
Source: Financial Supervisory Services, Korea EXIM, Korean Federation of Community Credit Cooperatives, Korea 
Insurance Development Institute. 
(b) Restructuring 
78. Following the financial crisis  in 1997, the financial sector in Korea underwent significant 
reform and restructuring, which was completed in 2006.94  Reforms focused on restructuring banks' 
balance sheets through, inter alia,  recapitalization and purchase of sub-standard or below loans 
(SBLs), by Korea Asset Management Corpora tion (KAMC), improving corporate governance and 
management, and encouraging di versification of bank assets through changes in prudential 
regulations.  Consequently, the banks have focu sed less on industrial conglomerates, and more on 
other more profitable lending opportunities. 
                                                      
 94 OECD (2007g). WT/TPR/S/204/Rev.1 Trade Policy Review 
Page 112 
 
 
 
Table IV.4 
Government and foreign ownership of commercial banks, end 2006 
(Per cent) 
Type of ownership Commercial bank  
Government Foreign 
A.  Nation-wide banks   
Woori (formerly Hanvit Bank)a Woori Financial Group(WFG) - KDIC (77.97) 9.53 
Korea First - 100 (Standard chartered) 
Korea Exchange EXIM Bank (6.25), Bank of Korea (6.12) 76.0 (Lone Star 64.62) 
Kookmin - 82.88 (Euro-Pacific Growth fund 5.46)  
Shinhan Financial Groupb KDIC (5.86) 58.90 
Citibank Korea (formerly KorAm) - 99.95 (Citigroup 99.94) 
Hana - 80.21 
B.  Local banks   
Daegu - 66.56 (Small cap 7.99)  
Pusan - 56.06 (CRGI 11.90) 
Kwangjua Woori Financial Group(WFG) - KDICa 
(77.97) 9.53 
Jeju KDIC (31.96) 36.87 
Jeonbuk - 28.12 
Kyongnama Woori Financial Group(WFG) - KDICa 
(77.97) 9.53 
a Woori (100%), Kwangju (99.99%), and Kyongnam (99.99%), ar e owned by the Woori Financial group.  The KDIC owns 
77.97% of Woori Financial group. 
b Shinhan Financial Group (100%) and Jeju (62. 42%) are owned by the Shinhan Financial group.  
Source: Information provided by the Korean authorities. 
79. In June 2007, a total of W 168.3 trillion had been allocated to fina ncial sector restructuring, of 
which W 63.5 trillion was used to recapitalize st ricken institutions, W 38.7 trillion to purchase 
non-performing loans from the banks (to enable them  to restructure their balance sheets), and 
W 30.3 trillion to pay claims on account of deposit insurance.  Funding came from various sources 
(Table IV.5).95 
Table IV.5 
Use of public funds for financial sector restructuring, June 2007 
(W trillion) 
 Recapitalization Purchase 
of assets Compensation 
for losses Repayment 
of deposits Purchase 
of NPLs Purchase of 
subordinated 
debentures Total 
Korea Deposit Insurance 
Corporation 50.8 11.0 18.5 30.3 .. .. 110.6 
Korea Asset Management 
Corporation .. .. .. .. 38.7 .. 38.7 
Fiscal resources 11.8 .. .. .. .. 6.3 18.1 
Bank of Korea 0.9 .. .. .. .. .. 0.9 
Total 63.5 11.0 18.5 30.3 38.7 6.3 168.3 
.. Not available. 
Source:  Bank of Korea (2007), Financial System in Korea,  December.  
                                                      
 95 Bank of Korea (2007). Republic of Korea WT/TPR/S/204/Rev.1 
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(c) Profitability and non-performing loans 
80. As a result of the reform process, the banking sector has shown significant improvement with 
respect to profitability and balance sheet strength.   Capital adequacy ratios improved from 11.2% in 
2003 to nearly 13% in 2006, considerably higher than the minimum 8% required by the Basle core 
principles.96  Despite provisioning being over 100% a nd the interest rate spread declining 
(Chart IV.1), profits have been rising, with ne t income in excess of W 13.5 trillion in 2006.  The 
increased profits are mainly due to growth in tota l loans, which increased from approximately 98% of 
GDP in 2003 to nearly 110% of GDP in 2006.97  Returns on assets and equity have also risen during 
the period under review (Table IV.6).  Consequent ly, productivity gains are also evident, with GDP 
per worker in the financial intermediation sect or nearly doubling by 2004 compared with 1992.98 
3.54.04.55.05.56.06.57.0
2003 2004 2005 2006 20070246810121416
Source:     Bank of Korea (2008), Monthly Statistical Bulletin 2008.2;  and Financial Supervisory Service online information.  
                   Viewed at:  http://www.fss.or.kr/kr/main.html.Per centChart IV.1
Interest spreads and profits, 2003-07
Trillion won
Left-hand scale: Deposit rate
Lending rateRight-hand scale: Net income
 
81. SBLs as a proportion of total loans has been declining for all categories of banks during the 
period under review (Table IV.7).  The improvement  is on account of greater market-based lending 
and enhanced supervision.  Howe ver, SBL ratios for mutual savings  banks and credit unions remain 
high;  the ratio for the former actually increas ed between 2003 and 2005 before declining in 2006.99  A 
possible reason for the high incidence of SBLs in mu tual savings banks could be that they are subject 
                                                      
96 At present all banks meet the minimum capital requirements. 
 97 IMF (2007b). 
98 IMF (2007a). 
 99 IMF (2007b). WT/TPR/S/204/Rev.1 Trade Policy Review 
Page 114 
 
 
to less stringent prudential regulations, such as mi nimum loan loss provision requirements and loan 
classification criteria, than commercial banks.100  
Table IV.6 
Financial sector indicators, 2003-06 
(Per cent) 
 2003 2004 2005 2006 
Capital adequacy ratio 11.16 12.08 12.95 12.75 
Net income 1.7 8.8 13.6 13.6 
Income before provisioning 16.2 19.2 20.9 22.3 
Return on assets 0.17 0.85 1.27 1.13 
Return on equity 3.41 15.16 18.42 14.89 
Net interest margin 2.6 2.6 2.8 2.6 
Source:  Financial Supervisory Service (2007), 2006 Annual Report,  June.  
Table IV.7 
Sub-standard and be low loans, 2003-06 
(Per cent of total loans) 
 2003 2004 2005 2006 
Commercial banks 2.8 2 1.3 0.9 
Specialized banks 2.4 1.7 1.1 0.7 
Mutual savings banks 11.8 13 13.8 10.5 
Credit unions 6.3 6 5.4 4.5 
Source: IMF (2007) , Republic of Korea Staff Report fo r the 2007 Article IV Consultation , October, Washington D.C.  
Viewed at:  http://www.imf.org/external/ pubs/ft/scr/2007/cr07344.pdf [5 January 2008].  
(d) Regulatory and supervisory framework 
82. Financial sector regulation and supervision is the responsibilit y of the Financial Services 
Commission (FSC), and its executive body, the Fina ncial Supervisory Service (FSS).  The Securities 
and Futures Commission (SFC), located within the FSC, supervises and regulates the securities and 
futures markets.  The FSC requires banks and othe r creditors to closely monitor credit risks of 
corporate borrowers.  Corporate transparency, including more rigorous accounting and corporate 
governance, has been improved, through increased focus on external, independent auditors, and 
insisting on higher standards of professional condu ct.  The FSC has established generally accepted 
accounting principles and disclosure requirements that closely reflect internationally accepted 
accounting standards.101  Regular on-site examinations and o ff-site surveillance of banks and other 
financial institutions are conducted based on risk assessment.  Where problems are detected, such as 
the BIS capital ratio of a bank falling below th e minimum criteria, the FSC issues management 
improvement recommendations and requirements or orders, depending upon the severity of the case.  Under the Banking Act, the minimum legal capital requirement is W 100 billion for a nation-wide 
commercial bank and W 25 billion for a regional bank. 
83. A foreign bank branch locating in Korea must have permission from its own regulatory 
authority and be conducting banking business at home under appropriate supe rvision;  be from a 
reputable foreign bank;  and have the necessary expe rtise in international banking business.  It must 
                                                     
 
 100 IMF (2006).  Mutual savings banks' borrowers tend to be less credit worthy than those who 
patronize commercial banks. 
101 The FSC has announced a roadmap to adopt IFRS (International Financial Reporting Standards) in 
March 2007 and will start to apply IFRS to listed companies from 2011. Republic of Korea WT/TPR/S/204/Rev.1 
 Page 115 
 
 
also have proper risk-management procedures, a viab le and sound business plan, and be able to supply 
the FSC with data needed for supervision.  In add ition, a foreign bank branch is required to have core 
operational funds of W 3 billion at the time of establishment. 
84. Prudential regulations apply e qually to domestic and forei gn financial institutions, in 
accordance with internationally accepted standards.   Korea applies the BIS Core Principles for 
Banking Supervision, and successfully implemented the information management system to support 
risk based supervision, as well as  the risk assessment and dynamic analysis rating system in 2006.  
Implementation of the Basel II Accord began in 200 8 for domestic banks as sc heduled, and at present 
pillar I has been implemented in 18 banks.  In th is regard the FSS issued supervisory guidelines in 
2006;  these included experience requirements for the use of advanced measurement approaches, risk 
measurement methods for operational and credit risk s, and internal capital adequacy assessments.  
Additionally, the FSS has held training sessions a nd published guidelines for smaller regional banks, 
so that they can better understand the new system. 
85. To better protect against SBLs, the FSS increased minimum provisioning requirements in 
2006, and expanded the types of loans subject to prov isioning requirements;  in addition, in response 
to mortgage growth and real estate speculation, th e authorities made loan-to-value and debt-to-income 
conditions on mortgages more stri ngent.  A number of measures were  also taken in 2006 to strengthen 
consumer protection, including enc ouraging banks to transfer funds from dormant accounts to their 
rightful owners, and a registration requireme nt for loan solicitors used by banks. 
Non-bank financial institution 
86. The prudential and supervisory framework of non -bank institutions is similar to that for 
banks.  Merchant banks and mutu al savings banks must be approved and licensed by the FSC, and 
credit unions require approval.  All types of credit-specialized finance companies must be registered 
with the FSC (except for credit card companies, which must obtain a business licence from the FSC).  
They must meet certain minimum capital requirement s.  Furthermore, merchant banks are required to 
extend at least 25% of their loans to SMEs, while mutual savings banks must extend at least 50% of 
their loans to individuals and SMEs within  their authorized geographical territory. 
87. During the period under review, certain regul ations were eased for well funded mutual 
savings banks, such as the limit on lending to an individual borrower and a si ngle business borrower.  
In addition, a proposal was made by the FSC, wh ich would allow mutual savings banks to expand 
geographically.  The FSC also released regulatory guidelines pertaining to real estate project financing used for overseas construction projects.  Furt hermore, to protect against the growth in SBLs, 
mutual savings banks were directed to increase provisioning for project financing loans, limit their exposure to 30% of total assets to a single industry, and if their assets were in excess of W 300 billion 
then an external independent auditor would be required to view their BIS capital ratios.
102 
Credit unions and credit cooperatives 
88. To improve the overall soundness of the sector, merger requirements between credit unions 
were eased in 2006 to facilitate restructuring of credit unions.  To improve their profitability and asset 
management, credit unions were permitted to invest  in subordinated bonds, a nd were granted several 
exemptions from the common bond requirements.  The FSC also authorized the creation of two new 
credit unions in 2006.103 
                                                      
102 Financial Supervisory Service (2007). 
103 Financial Supervisory Service (2007);  and information provided by the authorities. WT/TPR/S/204/Rev.1 Trade Policy Review 
Page 116 
 
 
Consumer credit 
89. The FSC has continued its efforts to stre ngthen the financial soundness of credit card 
companies and increase customer protection.  Recent reforms have included the issuance of 
best-practice guidelines for risk management of credit card companies, as well as an associated 
workshop to encourage sharing of risk management expertise;  reclassification of delinquent loans;  
and stricter monitoring of marketing activities.  A dditionally, in 2008, the FSC introduced measures to 
strengthen lending standards and ri sk management, as well as raising the asset soundness standards 
for credit card companies.104   
Securities sector 
90. Securities and securities-related businesses, such as dealing, brokerage, and underwriting, 
must be licensed by the FSC.  Foreign branches or other business offices must be approved by the 
FSC according to the type of business.  Without such a licence, the foreign branch cannot conduct 
business with Korean residents.  Foreign branches or other business offices must have an operating 
fund of at least W 3 billion.  To be licensed, fore ign securities companies must also have adequate 
experience and facilities, and have a high international credit rating.   
91. The securities sector compris es mainly securities compan ies and asset management 
companies.105  At end 2007, there were 54 securities compan ies, of which 14 were foreign branches.  
In addition, there were 36 domestic and 15 foreign asset management companies. 
92. In order to promote competition and innovatio n in the capital markets, the authorities 
announced the Financial Investment Services and Capita l Market Act, which is expected to enter into 
force in 2009.  The Act will consolidate several  capital-market-related la ws and thus streamline 
regulation.  It defines financial investment products  in broader terms, enabling increased flexibility for 
financial companies to design new products and se rvices.  Under the new legislation, regulatory 
barriers that restrict financial companies from enga ging in multiple areas are to be removed.  Thus, 
the new Act will promote the growth of globally comp etitive local investment banks.  A wide range of 
measures to enhance consumer protection are al so incorporated, and it introduces the know-your-
customer rule and the suitability rule, as well as re quiring financial investment companies to disclose 
to their customers the risks and structures of financial investment products. 
(iv) Insurance 
(a) Structure 
93. Korea has the second largest in surance sector in Asia, after Japan.  The sector's assets 
amounted to approximately 39% of GDP in 2007.  There are 22 firms offering life insurance, 
including 8 foreign firms.  Total assets of firms in the subsector as of March 2007 were 
W 273 trillion.  The life insurance sector is domina ted by the three largest firms, which collectively 
account for 72% of the sector's assets;  the larg est, Samsung Life, is respons ible for 40%.  Although 
the share of foreign firms has been rising, it is still less than 20% (17.5% in 2005).  On the other hand, 
the non-life insurance sector is l ess concentrated and much smaller, with W 57 trillion of assets.  
                                                      
104 These measures include elevating the risk weight  of ABS (asset-backed securities) from 20% to 
50% to calculate adjusted capital ratio of credit car d companies and introducing 'best practice' for risk 
management of those companies. 
105 The Act on the Business of Operating Indirect Investment and Assets, enacted in 2004, allowed for 
securities investment trust companies and asset management companies, which had previously been regulated under separate Acts, to be regulated together as asset management companies. Republic of Korea WT/TPR/S/204/Rev.1 
 Page 117 
 
 
There are 29 non-life insurers, including 13 forei gn firms.  The largest, Samsung Fire and Marine, 
accounts for 32% of the sector's assets;  the share of foreign non-life insurers is less than 2%. 
(b) Performance 
94. Assets of life insurance firms rose from W 211.6 trillion in fiscal year 2004 (April 2004-
March 2005) to W 273 trillion in fiscal year 2006,  while assets of non-life insurance firms increased 
from W 44 trillion to over W 57 trillion over the same period.106  The rise in assets is due to a rise in 
premiums from variable insurance policies.  Despite rising premiums and assets, net income of 
insurance companies declined s lightly, due to increased operating expenses and higher mandatory 
reserve ratios for incurred but unreported claims. 
(c) Regulation 
95. Under Korea's Insurance Business Act, the life and non-life sectors are strictly divided;  life 
insurers are banned from offering non-life products, a nd vice versa.  There are no barriers to foreign 
entry.  Foreign branches must maintain funds of at least W 3 billion, if wanting to do business with 
both Koreans and foreigners.  The FSC has adopted the EU-based solvency margin ratio;  insurance 
premiums (both life and non-life) are set by the market. 
96. Bancassurance (life and non-life insurance po licies provided by banks  and other financial 
institutions) was introduced in August 2003, initiall y limited to designated branches;  the proportion 
of insurance policies sold from a single insurer ha s also been restricted.  To ease the impact on 
existing insurers, the scope of products open to ba ncassurance is to expand in three phases.  The first 
phase, from August 2003 to March 2005, opened the wa y for sales of long-term savings policies and 
personal pension insurance policies.  The sec ond phase, from April 2005 to March 2008, opens the 
offering of casualty insurance, long-term care insu rance, and illness insurance.  The rest of the 
insurance industry was to be liber alized completely from April 2008, but this was suspended with the 
National Assembly's concurrence.  Under the amen ded law, bancassurance providers are required to 
make in-house sales, outbound sales are prohibited, as are tie-in sales of bancassurance products by 
banks offering loans. 
(v) Telecommunications 
97. The legislative framework governing teleco mmunications services (fixed-line, mobile and 
internet) has essentially remained unaltered durin g the period under review.  The size of the 
telecommunications market has continued to grow , accounting for 6.6% of GDP (W 50.6 trillion) in 
2006, compared with 6.2% of GDP (W 41.6 trillion) in  2003.  Korea's main policy goal is to achieve 
convergence between telecommunications services and broadcasting and audio-visual services.107 
Overview and market structure 
98. Growth has been led by the mobile sector, wh ere the subscriber base grew from 33.6 million 
in 2003 to over 40.5 million in 2006 , with penetration in excess of 80%.108  On the other hand, the 
number of fixed subscriber lines per inhabitant is declining109, due to substitution on account of 
broadband and internet prot ocol telephony and mobile services.  Gr owth in the internet sector has also 
been significant, with penetration at nearly 75% in 2006, one of the highest in the world. 
                                                      
106 Financial Supervisory Service (2007b) . 
107 Ministry of Information and Communication (2007) . 
108 Ministry of Information and Communication (2007). 
109 OECD (2007h). WT/TPR/S/204/Rev.1 Trade Policy Review 
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99. Since 2005, local service has been supplied by two carriers (KT and Hanaro Telecom);  there 
are five operators of national long-distance servic es (KT, Dacom, Onse, Hanaro, and SKTelink), and 
five in the international market (KT, Dacom, On se, Hanaro, and SKTelink), as well as other resale 
companies.  KT is by far the dominant carrier in non-mobile services, with nearly 94% of the local 
market, 80% of the long-distance, and 26.5% of the international market;  it is the only integrated 
operator providing all three services.  The mobile se ctor is operated by three suppliers, SK Telecom, 
KTF (the fixed line incumbent has a share of 48.7% of KTF), and LG Telecom, with market shares of 
50.7%, 32.2%, and 17%, respectively.110 
100. The Telecommunications Basic Act, administered by the Korea Communications 
Commission (KCC), provides for basic telecommunications policy.111  The Telecommunications 
Business Act, which regulates the sector, is also administered by the KCC. 
101. In 2008, the Ministry of Information and Co mmunications (MIC) and the Korea Broadcasting 
Commission (KBC) were merged in to the KCC to form a completely independent single regulatory 
entity, under the President's Office.  The KCC is re sponsible for licensing, pricing, promotion of fair 
market conditions, and consumer protection.  It is also responsible for arbitration in disputes between 
carriers, and between carriers and users.   
102. KFTC and KCC are jointly responsible for curbi ng unfair trade practices in the sector.  Under 
mutual agreements, the KCC regulates unfair ac tivities as stipulated in the Telecommunications 
Business Act.112 
103. Foreign investment in the sector is subject to a 49% ceiling, and under the 
Telecommunications Business Act, the KCC can pr ohibit a foreign shareholder from becoming the 
largest shareholder in KT.  However, owing to an ex ception, the largest shareholder in KT is presently 
foreign.113  Other operators also have significant foreign investment (Table IV.8). 
Table IV.8 
Ownership structure of major telecom operators, December 2006 
State-participation Foreign participation Company 
(Per cent of shares) 
Korea Telecom None 47.6 
LG Dacom None 19.0 
SK Telecom None 47.5 
KT Freetel None 22.36 
LG Telecom None 30.25 
Hanaro Telecom None 46.2 
Source:  Ministry of Information and Communication.  
104. In 2006, the Government allowed handset subs idies for customers who had been with the 
same operator for over 18 months and for subscrib ers to new services, such as wireless broadband 
                                                      
110 OECD (2007h). 
111 As a result of the Korea-US FTA, Korea is pr eparing to amend the Telecommunications Business 
Act, which would introduce a resale clause, under which the Government would ensure that the major supplier 
does not impose unreasonable or discriminatory conditions on the resale of its public communications service. 
112 Although both the Telecommunications Business Ac t and the Fair Trade Act can be applied to the 
telecommunications sector, the duplicate jurisdiction is resolved according to the Article 37.3 of the 
Telecommunications Business Act, which stipulates th at once a corrective order or penalty is issued in 
accordance with th e Telecommunications Business Act, the KF TC cannot take action on the same issue 
113 OECD (2007h). Republic of Korea WT/TPR/S/204/Rev.1 
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(WiBro) and high speed downlink packet access (HSD PA).  However, other new subscribers are not 
entitled to the subsidy.  The Government terminat ed the subsidies regulation in March 2008, thus 
enabling all customers to be eligible for handset subsidies.  
105. Number portability, which allows a subscriber to transfer their number from one network to 
another after cessation of contract, was implemente d in 2004 for fixed-lin e services and between 2004 
and 2005 for mobile services;  in January 2004, SKT, the dominant mobile carrier, was required to 
implement portability, followed by KTF in July 20 04 and LGT in January 2005.  According to data 
provided by the authorities, the number of subscribers changing service providers increased from approximately 3 million in 2004 to nearly 9 m illion in 2007, depicting increased competition. 
106. Since July 2007, price discounts are permissible on sales of bundled products, such as local 
telephone, high-speed internet, and mobile services.  Previously, bundling was permitted, but without 
price discounts.  The change in policy should result in increased competition and lower prices. 
107. Changes to the licensing process were made in 2005:  facilities-based businesses can now 
apply for a licence at any time (pre viously only during two periods in the year).  Furthermore, the 
screening period for licence applications has been redu ced by one to two months.  To obtain a licence, 
facility-based providers must furnish a business pl an, a sales plan, a technology plan, and an R&D 
plan.  Once licensed, facilities-based providers are re quired to contribute 0.5% of the previous year's 
total revenues for the R&D expenditure fund, while  dominant providers are required to contribute 
0.75%.  Telecom operators that pay spectrum fees are exempt, as well as telecom operators that made 
net losses or whose previous year's revenue does not exceed W 30 billion.  The R&D contribution is 
managed by the Ministry of Knowledge Economy. 
Interconnection 
108. The KCC is responsible for formulating the sc ope of interconnection agreements, including 
the conditions and procedures, and the pricing me thodology.  Operators are required to conclude 
agreements within 90 days of receiving a requ est from another operator.  The KCC changed the 
interconnection pricing methodology in 2004 by implementing interconnection charges based on a 
long-run incremental cost methodology (LRIC), the new methodology is applicable to interconnection 
of local, long-distance, and mobile services.
114   
Price regulation 
109. The KCC in consultation with the Ministry of Finance and Economy approves the dominant 
operator's (KT) local telephony prices, which include the monthly subscriber charge and local calls.  
Since 2005, when the KCC reclassified the broadba nd market as a facilities-based service, broadband 
prices of the operator with the largest market share are also subject to KCC approval.  Price changes 
are to be approved within 30 days, with the possi bility of a one-time extension.  Telecommunications 
tariffs that do not require KCC approval still need to be notified/reported before becoming effective;  
long-distance and leased-line prices also need to be filed with the KCC.  Thus, it would appear that 
only the operator with the largest market share is  subject to price controls and price regulation.115  
Korea has one of the highest rates for international calls among OECD countries.116  On the other 
                                                      
114 OECD (2007h). 
115 OECD (2007h). 
116 Based on the OECD basket of international ca lling charges per call, Korea's rates for business 
(excluding VAT) and residential (including VAT) were US$2.14 and US$2.88 respectively in 2006.  These are much higher than in the United States (US$0.56 and US$0.5), United Kingdom (US$1.13 and US$1.08), WT/TPR/S/204/Rev.1 Trade Policy Review 
Page 120 
 
 
hand, the rates for mobile, internet, and local a nd long-distance fixed-line services are less than the 
OECD average.  
Universal service obligations 
110. Universal service includes provision of local  telecommunications services, subsidized 
services for low-income and disabled customers, provision of services in remote areas, and wireless 
communications for ships.  Provision of universal  services tends to incur losses and are thus 
subsidized through a universal service fund, to wh ich all operators contribute a proportion of their 
revenue.117  From 2004 to 2007, contributions to the fund were based on an operator's financial 
strength;  for example, an operator that had incu rred a loss for three consecutive years was entitled to 
a 50% discount on its contribution;  in contrast an operator that required government approval for a 
user agreement could be liable for an extra 10% , implying that the system discriminated against 
efficient operators.118  This system was abolished in January  2007.  The KCC migrated to an LRIC 
system for the determination of costs associated  with universal service provision in 2004.  
Responsibility for universal service costi ng was given to the KCC in May 2006. 
Broadcasting  
111. The KCC handles all the functions related to the broadcasting subsector previously 
undertaken by the KBC and MIC, including policy rela ted to content.  The KCC is responsible for 
managing broadcasting spectrum, licensing, m onitoring the transmission and programming of 
broadcasting programmes, and broadcast technical st andards policy.  Terrestrial radio and television 
broadcasting are closed to foreign investment, while  the ceiling on foreign investment in other areas 
of broadcasting is 49%.   
112. Convergence between telecommunications services and broadcasting services seems to be the 
main thrust of policy.119  In this regard the Government designated broadband access providers and 
CATV providers as facilities-based opera tors in 2004 and 2007, respectively.120  Moreover, WiBro 
services were commercialized in 2006 and terr estrial digital broadcasts began in 2007.121 
113. In 2005, the Government amended the Radio Wa ves Act by placing an initial five-year limit 
on spectrum allocation, which could be renewed fo r a maximum period of 20 years.  The amendment 
also allowed for a legal basis to charge for spectru m as well as allowing operators that have paid their 
fees to rent their allocated spectrum. 
(vi) Transport 
114. Roads dominate domestic transport in Korea, while seaborne transport is used mainly for 
cargo and freight;  international p assenger transport is predominantly by air.  Both road and air 
transport are subject to competition laws, while maritime transport is exempt. 
                                                                                                                                                                     
Germany (US$0.27 and US$0.41), and the OECD average, which was US$0.97 for business and US$1.29 for 
residential calls. 
117 The universal service compensation fund amounted  to W 71.5 billion in 2006.  Facilities-based 
service providers with revenue of W 30 billion or more make contributions based on their revenue (SKT 33.4%, 
KT 32.4%, KTF 15.6%, LGT 8.9%, Hanaro Telecom 2.5%, LG Dacom 2.5%, and eight other companies 
including SK Telink 4.7%) (information provided by the authorities). 
118 OECD (2007h). 
119 Ministry of Information and Communication (2007). 
120 As a facilities based operator the providers can be subject to ex ante regulation and price controls. 
121 Wibro services allow mobile internet  terminals high-speed wireless access. Republic of Korea WT/TPR/S/204/Rev.1 
 Page 121 
 
 
(a) Maritime transport 
115. The maritime sector is regulated through the Korean Maritime Law, which covers sea 
passenger transportation, sea freight transportation, ship’s brokerage, shipping agents, ship rental, and 
ship management.  The Ministry of Land, Trans port and Maritime Affairs, which administers the 
Law, is also responsible for maritime safety and development, port policy, and improving the 
competitiveness of the shipping industry. 
116. During the review period, the maritime sector ha s continued to grow;  Korea's merchant fleet 
capacity rose from 11 million gross tonnes in 2003 to approximately 15 million gross tonnes in 
2006.122  However, the sector is highly concentrated with the five largest operators controlling over 
70% of the market.123  There are no restrictions on foreign carriers from accessing the Korean liner 
market, and they are accorded national treatment at Korean ports and in the registration process.124  
Cabotage continues to be reserved for Korean vessels;   however, foreigners are allowed to participate 
in transport of goods and passengers between No rth and South Korea as a minority joint-venture 
partner with a South Korean firm.  In 2008, the number of foreign crew members permitted on a 
Korean ship was increased from six to ten.  
117. The Government does not intervene directly in providing shipping services, but provides 
various financing and tax schemes to assist shipping  companies.  It is implementing a tonnage tax 
system, and a ship investment company system desi gned to provide tax incentives to private investors 
in ships for lease to shipping co mpanies.  Most maritime auxiliary services, including tug services, 
freight forwarding, and maintenance and repair services are provided by the private sector;  pilots 
must be Korean. 
118. Government policy is directed towards making Korea a logistics and shipping hub of North 
East Asia.  In this regard, the Government has built large container terminals in Pusan and 
Gwangyang, which have the ability to accommodate the largest and most modern ships.  With a view 
to attracting more foreign shipping lines, the G overnment announced plans in 2006 to modernize port 
facilities and streamline operations.  In addition, the Government announced plans to revamp port 
infrastructure by introducing automated operation systems, improving securities standards, and 
allowing night-time operations.125 
119. The Ministry of Land, Transport and Maritime Affairs administers ports.  They are 
state-owned and rented free of charge to the Korea Container Terminal Authority, which in turn rents 
port facilities to private terminal operators.  Contai ner throughput continued to  grow strongly between 
2000 and 2007, rising from 9.0 million to 17.5 milli on TEU (an average growth rate of 9.9% per 
year).126  Development of a significant transshipment business at Pusan  has contributed significantly 
to this growth.  The Government is increasingl y turning to the private sector to develop port 
infrastructure and provide services under various  concession agreements, such as build-operate-
transfer (BOT) or build-transfer-operate (BTO) contracts. 
120. For example, phase one of Pusan New Port (PNP ), opened in January 2 006, it is owned by a 
consortium consisting of Samsung Corporation;  Hanjin Group and Hyundai Engineering and 
Construction;  and DP World, the latter also manag es the operation of the port.  Phases two, three, and 
                                                      
122 Information provided by the authorities. 
123 Lee et al. (2007). 
124 Carriers need to be incorporated and have equity of W 500 million and a cargo capacity of 
5,000 tonnes. 
125 Information provided by the authorities. 
126 UNESCAP (2007). WT/TPR/S/204/Rev.1 Trade Policy Review 
Page 122 
 
 
four, consisting of three berths  are still to be constructed.127  The capacity of Incheon Container 
Terminal is also to be increased by 400,000 TEUs annually, by adding a second berth to its existing 
container facility by June 2008.  Concurrently, the local terminal operator E1 is investing 
US$70.34 million in the construction of a new berth with an annual capacity of 185,000 TEUs, to be 
completed in 2009.128  Port charges in Korea are moderate co mpared with other ports in the region;  
for example, total harbour charges at Pusan ar e less than those at Kobe, Osaka, Hong Kong, 
Singapore, and Kaohsiung. 
(b) Air transport 
121. Air transport policy and licensing arrangements are under the Ministry of Land, Transport and 
Maritime Affairs (Aviation and Railroad Bureau), which administers the Aviation Act.  Since 2003, 
both air passenger traffic and freight have continued to grow.  Korea has six privately owned national 
flag carriers, Korean Air, Asiana Airlines, Jeju  Air, Jin Air, Yeongnam Air, and Hansung Airlines.  
Korean Air and Asiana Airlines operate internationa l and domestic services, while the others operate 
domestic services only.  Cabotage is prohibited under th e Aviation Act (Article 149).  International air 
services are governed by bilateral air services agre ements (ASAs) negotiated primarily by the 
Ministry of Land, Transport and Maritime Affa irs.  Korea has signed bilateral ASAs with 
87 countries, including an "open skies" agreement wi th the United States.  Korea plans to negotiate 
additional agreements, while progressively liber alizing existing bilateral arrangements.  
122. Foreign ownership of Korean airline operators  providing scheduled or non-scheduled services 
is limited to less than 50%, and operators must register their aircraft in Korea.  
123. Aviation Safety Strengthening Measures, focusing on the safety management system (SMS) 
are being implemented, airport and aviation safet y facilities are being update d.  Furthermore, the 
Safety AtoZ Programme was implemented in 2007, to provide public with safety information for 
airlines in service in Korea, and enhance tr ansparency in the safety of airlines.  
124. There are nine international and six domestic ai rports in Korea.  All except Incheon are 
managed and operated by the Korea Airports Cor poration, which is government owned.  Incheon 
Airport is operated and ma naged by the Incheon International Ai rport Corporation, which is also 
government owned.  The Government envisages In cheon International Airport as a mega regional 
hub, and phase two of construction of the airport w as completed in June 2008.  Takeoff and landing 
slots are allocated in order of priority, accordi ng to slots retained from the previous season for 
scheduled air services, slots used for scheduled air services in the previous equivalent and 
non-equivalent season, and new slots requested fo r scheduled and non-scheduled air services.  
Landing and takeoff charges at Incheon are higher th an other airports in region, such as Hong Kong, 
Shanghai, and Taipei. 
(c) Land transport 
125. Road transport in Korea, accounts for over 90%  of national passenger transport and freight 
needs.  The Ministry of Land, Transport and Maritim e Affairs is responsible for land transport policy, 
national road construction and maintenance, a nd managing toll expressways.  Korea has over a 
100,000 kilometres of road, with 26 expressways and 51 national highways (as of August 2008).  
According to the National Highway Network Plan, 6, 000 km of expressways are to be built by 2020;  
                                                      
127 Three consortiums, led by Ssangyong Construction, Posco Construction, and Hyundai Development 
respectively, have submitted proposals to the Republic of  Korea's Ministry of Maritim e Affairs and Fisheries for 
their construction.   
128 UNCTAD (2007). Republic of Korea WT/TPR/S/204/Rev.1 
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3,368 had been built at end 2007.  Private investment  in roads is encouraged  through build transfer 
operate (BTO) contracts.  The main barrier to entry to passenger transport is an "economic needs" test, 
while bus and taxi fares are regulated by local governments based on costs.  Bus companies receive 
partial subsidies for losses, in the form of ma tching central-local government funds (total support 
provided to buses was W 569 billion in 2006), and they receive a portion of the fuel tax revenue back 
as a subsidy;  this amounted to W 435 billion in 2006. 
126. The railway sector comprises national railways, including high-speed railways and subways 
in major urban centres.  There are 97 railroad rout es, covering over 3,800 kilometres;  approximately 
50% are multi-tracked and nearly 60% are electrified.129  The Government plans to increase track 
coverage to almost 5,000 kilometres, with over 80% multi-tracked and electrified.  At end 2006, 
railways were responsible for less than 10% of domestic passenger and freight transport;  the 
Government expects to more than double the share of railways in the domestic market by 2019.   
127. The Korea Railway Network Authority, establishe d in January 2004, is  responsible for all 
railway construction activity, while the Korea Rail Corporation (Korail) looks after railway 
operations.  The latter is a state-owned monopoly.  Both entities come under the Rail Policy Bureau, 
which was established within the Ministry of Co nstruction and Transporta tion in March 2004.  Any 
changes with respect to train fares, including freight  rates, need to be notified to the Ministry.  
However as of June 2008, Korail has greater autonom y in setting fares based on a price cap system.  
In the longer term, the plan is for passenger and freight services to be separated and supplied by 
independent corporations;  the initial target for this was 2006. 
128. Under the Railroad Enterprise Act, all railway ope rators need to be licensed.  There are no 
restriction on foreign enterprises supplying rail tran sport services for routes built after 1 July 2005, 
but they must comply with the economic needs test and regulations on licences of the Railroad 
Enterprise Act.  At present, there are no privat e of foreign companies in the railway sector. 
(vii) Distribution services 
129. During the period under review (2004-07), growth in the distribution services subsector 
(wholesale and retail trade, restaurants, and hote ls) averaged a modest 3.7% per annum, and its 
contribution to GDP remained static at 6.0%.  On the other hand, the share of distribution services in 
total employment declined. 
130. Liberalization of the subsector has been contin uous since 1996;  the number of stores of large 
distributors has increased, and foreign participati on in the sector is rising.  Between 2004 and 2006, 
retail outlets declined  by 3.8%;  on the other hand, between 2004 and 2007 foreign investment in the 
distribution sector rose by 20.6%.  The share of traditional family stores has been on a declining 
trend.130  Growth in the distribution sector has been fuelled by hype rmarkets, as these are also the 
preferred choice of foreign participants in the sector.131   
131. The sector is subject to the competition policy and consumer protection legislation 
(Chapter III).  It is also subject to the Distribu tion Industries Development Act, enacted in April 1997 
to facilitate the development of distribution industries .  Legislative changes in 2005 and 2006 have 
made opening and modifying the registration of a large store (floor space of 3,000 m2) easier, by 
                                                      
129 Ministry of Transportation and Construction online information.  Viewed at:  
http://www.mltm.go.kr/EngHome/policie s/pol0101.jsp [26 March 2008]. 
130 Between 2001 and 2006, the total number of family stores decreased by 2.8% per annum and total 
employment decreased by 1.6% per annum. 
131 Kim et al. (2000) . WT/TPR/S/204/Rev.1 Trade Policy Review 
Page 124 
 
 
increasing the number of streamlined services, such as authorization and licensing, from 13 to 20, as 
well as reducing the processing time and documentation required.132  There are no restrictions on 
foreign entry in sectors where it is not excluded , and foreign participants are accorded national 
treatment.  Foreign entry is excluded in:  trade in pharmaceuticals, medical, and functional goods;  
firearms, explosives and swords;  works of art and antiques;  and operation of and distribution 
services at public wholesale markets for agricultural,  fishery, and livestock products;  in addition, 
there are economic needs test requirements in w holesale and retail services related to used cars and 
gaseous fuels.133 
 
 
 
                                                      
132 Distribution Industry Development Act, revised as of 23  December 2005, and Enforcement Decree 
of the Distribution Industry Development Act, revised as of 23 February 2006. 
133 APEC (2007) . Republic of Korea WT/TPR/S/204/Rev.1 
 Page 125 
 
 
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