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Policy Reference
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OECD Principles of Corporate Governance and Lessons for Korea
■ With the increasing necessity for the establishment of stable international investment practice to cope with globalization of world economy and of corporate governance to cope with fast change of business environments such ..
Seung-Bong Lee et al. Date 1999.07.10
Business managementDownloadContentSummary■ With the increasing necessity for the establishment of stable international investment practice to cope with globalization of world economy and of corporate governance to cope with fast change of business environments such as technical innovation, capital liberalization, OECD has been really discussed these these issues from the year of 1995. After four years discussion, OECD Council, meeting at Ministerial level on 26-27 May 1999, confirmed the OECD Principles of Corporate Governance.
■ The OECD Principles are composed of Preamble, Principles, and Annotations to the OECD Principles of Corporate Governance. The Principles are divided into (i) the rights of shareholders, (ii) the equitable treatment of shareholders, (iii) the role of stakeholders in corporate governance, (iv) disclosure and transparency (v) the responsibilities of the board. The Annotations not only help to understand the Principles, but also contain the alternatives to be used in the specific application of the principles and major trend of the relevant items.
■ Although the OECD Principles are non-binding, it is viewed that the Principles will be executed as a way of more powerful restriction than the internatonal law, because they contain the minimum rules for the corporations to abide by internationalay. Accordingly it is needed to check the specific contents of the OECD Principles and to cope with positively at the level of government and corporations
■ Our national counter measures to the OECD Principles are to accept them willingly. Especially the International Monetary Fund (IMF) and the World Bank, etc are expected to apply them as the policy recommendations to the member countries. Accordingly we are needed to take proper measures to these issues.
■ Positive attitude is needed to utilize the OECD Principles as the benchmarks of the voluntary reforms for the repairment of corporate governance rather than the passive copings to the policy recommendations of the IMF of the World Bank. They should be accepted not only to establish and excute the reform policies at the level of government for the advancement of corporate governance, but also to reform the present corporate governance framework at the level of private corporations.
■ The following five principal considerations could be presented for the repairement of our national corporate governance framework based on the five areas of the OECD Principles.
■ First, corporate control under the efficient capital markets. The first area emphasized in the OECD Principles is the right of shareholders. The untrancsparency of our national corporate governance framework and the poorly kept rights of minority shareholders mainly resulted from the underdeveloped local capital markets. The present corporate administration of owner management will be solved at most with dissipated ownership and reflected administration effect as a result of developed markets.
■ Second, management supervision based on the shareholders' activism. especially the activities of shareholders centered by institutional investors should be stimulized. The minority shareholders with the axis of citizen group have shown huge effect but they have some problems, because it is restricted to some specific corporations and do not have specialty in the arrproaching methods. These restrictions could be overcome by shareholder activism of some special institutional investors.
■ Third, management supervision by credit institutions. The third area of the OECD principles is to improve the engagement of stakeholders in corporate governance. The engagement of credit holders in the corporate governance could be most reliable under the local markets with no other major powers to crosscheck the owner-managers and to supervise powerfully the corporate administration.
■ Fourth, inreasing transparency through enhanced corporate disclosure. Disclosure and transparency were elected as fouth area in the OECD Principles, and the content is comprehensive to a great extent. The increasement of administration transparency has been emphasized in the repairment of international compatitiveness of Korean corporations and many proper measures have been taken to inrease the administration transparency. Afterwards the transparency of corporate administration should be higherd and increasement of understandbility and reliability of disclosed informations should be exerted.
■ fifth, ensuring the board's responsibilities increasing board members. The OECD Principles mentions the responsibilities of the independent board members. The OECD Principles proposes the management of the independent board members with the recognition of the need of considerable independence of the board from the managers. In Korea the independent board members system introduced in 1998 for the listed companies was an idea to inrease the status of the board. The effectiveness of this system should be more enhanced. -
1999-2000 World Economic Outlook
The world economy, which suffered from a series of financial crises in the emerging markets of East Asia, Russia and Brazil, has recently been relatively stable as financial contagion from the Brazilian crisis in mid-January did n..
Jong-Hwa Cho eds Date 1999.07.05
Economic outlookDownloadContentSummaryThe world economy, which suffered from a series of financial crises in the emerging markets of East Asia, Russia and Brazil, has recently been relatively stable as financial contagion from the Brazilian crisis in mid-January did not fully materialize as many had feared. Following the deep economic output contractions of last year, activity has recently turned around in Korea and seems to have bottomed out in Malaysia and Thailand. The international financial environment has been stabilized as liquidity is returning to many of the emerging markets. Most of the advanced economies of North America and Europe have so far not been seriously affected by the crises in emerging markets. In particular, the U.S. economy has shown continued strong growth. Furthermore, inflation has generally remained subdued, despite the fact that the United States and many other economies that have been operating at close to full capacity.
Over the periods of the second half of 1999 and 2000, the world economy will show stable growth while the possibility of global recession is reduced. The U.S. economy will continue to grow over 3 percent until the end of this year and slow down moderately in 2000 as a result of an inevitable increase in interest rates and a likely correction of the stock market. While at the present, Japan's recession does not seem to have bottomed out yet, the Japanese economy will begin a modest recovery in the end of this year as a result of aggressive fiscal stimulus measures and a weak yen. Outside of Japan, most of Asia will continue on its recovery path. Many major forecasting institutions have revised upward their forecasts of the real growth rates of Korea, Thailand and Malaysia. Economic activity in the major European economies will slow over 1999 due to weak investment and exports. Decrease in interest rates and a weak Euro will support Europe's recovery in 2000.
However there remain risks which may hinder the stable growth of the world economy. First, the slowdown in the U.S. economy may be more abrupt than assumed if inflation pressure grows, or the stock market correction surpasses expectations. Secondly, the recent weakening of growth in the euro area may turn out to be prolonged in spite of the interest rate cut. Thirdly, large increases of current account imbalances among the major economies may causes protectionist pressures or destabilizing movements in international exchange rates. -
APEC After 10 Years: Is APEC Sustainable ?
The purpose of this paper is to evaluate the ten years of APEC. There has been progress in several respects, that is, in terms of institutional development, membership, and coverage of issue areas. However, there also exist wid..
Hyungdo Ahn Date 1999.06.30
Economic cooperationDownloadContentSummaryThe purpose of this paper is to evaluate the ten years of APEC. There has been progress in several respects, that is, in terms of institutional development, membership, and coverage of issue areas. However, there also exist widespread doubts about the APEC's substance and performance. Some questions what have been achieved after 10 years of lengthy discussion on Asia-Pacific Cooperation. In this paper, we briefly review the major achievement of APEC over 10 years. Then we evaluate the performance of APEC in three areas: TILF, Ecotech, and Macroeconomic and Financial Cooperation.
The review of APEC's performance over the last 10 years turns out to be unsatisfactory. The difficulty seems to rise from the heterogeneity of the member economies, especially in the level of development and consequent differences in interest. Despite the unsatisfactory performance, APEC still appears to be a useful forum for Asia-Pacific economies. In the least, APEC provides an arena where Asia-Pacific economies get together and discuss on their common problems. Also, APEC played a useful role as a regional economic body in the process of completing UR Agreement and Information Technology Agreement. Over the last 10 years, APEC member economies have been able to deepen the understanding about one another through clashes and agreements of opinions. APEC is moving forward even though it is slow. As long as the member economies have the will for the Asia-Pacific community and patience to reach the Bogor goal in 2010/2020, APEC is sustainable. -
Inward FDI Regime and Some Evidences of Spillover Effects in Korea
This paper seeks to document Korea's inward foreign direct investment regime and some evidences of its spillover effects. Since the financial crisis of the late 1997, the Korean government started to actively promote inward foreig..
June-Dong Kim Date 1999.06.30
Foreign investmentDownloadContentSummaryThis paper seeks to document Korea's inward foreign direct investment regime and some evidences of its spillover effects. Since the financial crisis of the late 1997, the Korean government started to actively promote inward foreign direct investment (FDI). In November 1998, the Korean government enacted the Foreign Investment Promotion Act. This new legislation focuses on creating an investor-oriented policy environment by streamlining foreign investment procedures, strengthening investment incentives and establishing an institutional framework for investor relations, including a one-stop service. The Korean government also undertook full-fledged liberalization in the area of hostile cross-border M&A and foreign land ownership.
As of July 1998, the government liberalized medium-term foreign loans in order to reduce the burdens on businesses seeking foreign capital. The requirement that commercial borrowing from abroad should exceed $1 million was eliminated. In April 1999, Korea abolished the restrictive Foreign Exchange Management Act and replaced it with the Foreign Exchange Transaction Act. With the Foreign Exchange Transaction Act in place, most of the restrictions on foreign exchange transactions and domestic transactions in foreign currencies have been eliminated. Remaining restrictions are now classified under a negative rather than a positive listing system.
Thanks to these policy changes, the FDI inflow has increased remarkably in 1998, reaching a record amount of US$ 5.1 billion. The pace of foreign direct investment through cross-border M&A has picked up markedly. Compared to US$ 698 million or only 10% of total foreign direct investment in 1997, foreign acquisitions of outstanding Korean stocks have increased to US$ 1,241 million or 14% of total FDI in 1998. If the acquisitions of assets were included in the statistics of cross-border M&A, the amount of cross-border M&A would be more than half of the total FDI inflow in 1998.
The case studies on some selected industries including semiconductor and chemical show that foreign invested firms raised domestic productivity by spinning out skilled workers; providing technical guidance to subcontractors; bringing in new capital goods and technology; introducing advanced management know-how; conducting in-house R&D; enhancing competition.
Considering the benefits of FDI in raising productivity through spillover effects, it is needed to attract more FDI by removing remaining barriers. As entry barriers have been almost completely ended, most remaining obstacles are the same as faced by domestic investors. Although the government is making some progress by streamlining investment procedures, Korea's markets and industries are still bogged down with regulations that are as complicated as they are vague. In particular, the ambiguous tax laws as well as cumbersome regulations on customs and import procedures are regarded as the most serious impediment to foreign investors.
Another important area which has not been adequately addressed is labor market inflexibility. Layoffs are still difficult to execute on a large scale and are allowed only in the case of emergency. Efforts to enhance labor market flexibility is limited by the lack of a social safety net.
Anti-foreign public sentiment remains at the top of lists of perceived weaknesses of the Korean culture from the point of view of foreign investors. Other weaknesses pointed out by foreign investors include a lack of rationality due to personal decision-making or emotional reactions, relationships based on school or locality, lack of flexibility or resistance to change, militant labor unions, poor dissemination of information, and the lack of internationalization. -
The present and Future Prospects of the North Korean Economy
Confronted with economic difficulties and no alternative options for rehabilitating the economy without international help, North Korea seems to be inclining toward greater openness to South Korea and the U.S. There are increasing..
Myung-Chul Cho et al. Date 1999.06.20
North Korean economyDownloadContentSummaryConfronted with economic difficulties and no alternative options for rehabilitating the economy without international help, North Korea seems to be inclining toward greater openness to South Korea and the U.S. There are increasing signs that North Korea's relationship with the US and Japan, both political and economic, is likely to improve rather than to deteriorate as long as the political regime of North Korea remains stable. On the other hand, South Korea and the U.S. seem to be moving toward broader ranged assistance to North Korea.
In the short term, there seems to be little chance for North Korea to undertake wide-ranging reforms, but it is also unlikely that the North Korean regime will collapse. In the longer term, however, so long as North Korea maintains political stability, it is likely to grow bolder with reforms, especially if South Korea and the international community remain supportive of these reforms.
A scenario of reform will likely to entail the two Koreas entering into some period of peaceful coexistence, followed by a gradual economic integration with South Korea. On the other hand, if political stability in North Korea begins to weaken as a result of policies of broader-ranged openness, an implosion is likely to occur. -
Restructuring and the Role of International Financial Institution : A Korean View
Since the agreement on the IMF restructuring program, Korea has swiftly implemented a wide range of economic reform measures. All of the measures have been driven towards rebuilding market confidence as well as expediting the econ..
Yunjong Wang Date 1999.06.20
Economic reformDownloadContentSummarySince the agreement on the IMF restructuring program, Korea has swiftly implemented a wide range of economic reform measures. All of the measures have been driven towards rebuilding market confidence as well as expediting the economic restructuring. Although foreign sentiment relates that Korea's restructuring process is moving toward the right direction but slowly, Korea deserves much credit for its recovery and reform efforts so far made, as it has come up with solid results. The international credit rating agencies have each upgraded Korea's sovereign credit rating from non-investment to investment, and it is among the evidences, which purport to show that Korea has been committed and will continue to commit itself to changes and improvement.
In retrospect, we can draw some lessons about the role of international financial institutions (IFIs). Certainly, the key question is whether the diagnosis of the IMF was correct and the policy prescription of the IMF was relevant and effective. Regarding such diagnosis, a balanced view regarding the root of the Asian crisis is needed. The amount of research and policy papers pouring out since the onset of the Asian crisis is understandably great, with the differing views leading to different policy implications. Academics have greater liberty to choose among different economic models or theories on which to base their views. However, policy makers have to be more cautious in implementing the policy measures by taking into account the reality and relevance of all findings and views.
The fundamental difference among the academic circles may be divided into two camps for the sake of simplicity. One camp, which focuses on the liquidity shortage of the Asian countries, emphasizes the vulnerability of the international financial market and the skittish behavior of international investors and creditors as a major triggering factor in the outbreak of the crisis. In this light, expanded financial support facilities through the IFIs, orderly capital market liberalization, and safeguards in the case of emergency could be relevant policy proposals for building the new international financial architecture. In addition, this view holds that the high interest rate policy and/or other austerity programs should be reconsidered as those policy measures may aggravate the situation rather than improve credibility in the eyes of international investors.
The other camp, which focuses on structural weakness of the country in question, and, in particular, the moral hazard problem in both the corporate and financial sectors, stresses the necessity of restructuring and growth sustainability based upon a sound economic system. In the international dimension, the practice of bailing-out international private creditors with international public funds or government debt payment guarantees has created a serious moral hazard problem. In this regard, a pre-established program for international debt workouts would help to shape market expectation in advance and thereby would reduce uncertainty in times of crisis.
The purpose of this paper is to discuss the role of international financial institutions by reviewing Korea's restructuring program and its process. Based on Korea's experience of crisis management, this paper will address four issues. First, this paper will discuss the key question of whether the root of the Asian crisis should be attributed to regional structural weakness, or must be understood in the context of inherent vulnerability of the global financial market. Second, the Asian crisis has ignited a lively debate on the necessity of the inclusion of a restructuring program in the IMF rescue package. Because both internal structural weakness and external factors combined together have caused the Asian crisis, overcoming the crisis in the true sense will not be achieved without a successful completion of restructuring. Third, as the liquidity provision by the IFIs is alone insufficient to resolve the immediate crisis, we will ask if there is a catalytic effect of lending by the IFIs. In light of Korea's experience, the credibility and capital inflows are largely associated with the perceived strength of commitment of the government to economic restructuring rather than IFI involvement per se. Finally, a short remark will be made on the necessity of an international lender of last resort.
Dr. Yunjong Wang, Director of Department of Global Economy, earned his Ph.D in Economics from Yale University. He specializes in international economics, both trade and finance. Currently, his interest covers financial cooperation in Northeast Asia, Korea's exchange rate markets and policy, and Korea's restructuring process under the IMF and IBRD program. Corresponding address: 300-4 Yomgok-Dong, Seocho-Ku, Seoul 137-747, Korea. Tel. (822) 3460-1124; Fax. (822) 3460-1212, E-mail: yjwang@kiep.kiep.go.kr. -
A Review and Evaluation of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transaction and Subsequent implementation Measures
In 1997 December, 34 nations, most of which are the OECD countries, has agreed upon the OECD Convention on anti-corruption involving foreign public officials and, accordingly, Korea has legislated the Foreign Bribery and Trade Pre..
Keun-Ho Chang Date 1999.06.05
DownloadContentSummaryIn 1997 December, 34 nations, most of which are the OECD countries, has agreed upon the OECD Convention on anti-corruption involving foreign public officials and, accordingly, Korea has legislated the Foreign Bribery and Trade Prevention Law on last January 4th.
The Convention, above all, requires Each Party to bring a criminal case against any person who intentionally offers or authorizes any undue benefit to a foreign public official for business advantages directly or indirectly and to establish the liability of legal persons including monetary sanctions for the bribery of foreign public officials. Also, Each Party must deny the tax deductibility of such bribes and take necessary measures to establish relevant accounting requirements, jurisdiction, and mutual legal assistance including extraditions.
Furthermore, for a full implementation and functional equivalence, the Working Group under the CIME shall monitor and evaluate implementation measures of Each Party and report recommendations on following-up measures to the OECD General Council. Specifically, in order to enhance the effectiveness of the Convention, the Group will first study the extension of the coverage of the Convention into foreign political party and its officials as well as candidates for public office. The Group will also study the issue of making the bribery a predicate offence for money laundering legislation and the role of foreign subsidiaries and off-shore financial centers in bribery. In addition, other OECD committees such as CFA will review bribery solicitation by public officials, corruption between private businesses, the establishment of the OECD tax audit guideline, and automatic information exchanges.
The Convention was initiated by nations such as the United States in an effort to provide a level playing field for their business. However, integrations of commodity and service markets like financial market have made a regional crisis into global one. In turn, these external effects intensified developed countries' effort to achieve a 'globalization of system' through OECD and IMF as well as a 'globalization of market' through WTO.
According to the OECD, the distorting effects of bribery on competitive conditions undermine good governance and economic growth. In particular, limited competition reduces international trade and investment and spreads out rent seeking behavior which, in the long run, contributes to market breakdown like the recent financial crises. However, rapid system reform will impose a heavy burden on the developing countries because decision-making behavior as well as economic system are dependent upon the level of economic development.According to the Transparency International, Korea ranks in 43th place among 85 nations with respect to 1998 corruption level and tends to pay bribes for the acquisition of contracts in international trade. More serious problem for Korea is its insensitiveness toward corruption which led to the stalemate in reforming measures designed to prevent and prosecute bribery, as demonstrated by the recent failure to adopt anti-money laundering law and the relaxation of the law requiring real name in financial transactions.
On the other hand, as good and service market including investment market are integrated globally, the efficiency of a nation's system which works like a sort of infra-structure in the flow of good and services emerged as a major factor in determining economic growth. The system efficiency which includes just government management is, in turn, decided eventually by sound working of system.
Thus, the important task for Korea is to initiate system reform by utilizing international movement toward globalization of economic system. First of all, it needs to bring about good governance by improving the pay system and government function because frauds most likely result from absurd administration. Secondly, in order to fight against political corruption, anti-money laundering law should be legislated and the law requiring real name in financial transactions must be reinforced. Finally, Korea should be ready to adopt internationally accepted financial supervision and accounting regulation that the IMF and OECD are currently developing in order to boost voluntary compliance by business and effective prevention of bribery. -
Distressed Corporate Debts in Korea
This paper undertakes an investigation of the loans extended by Korean financial institutions to their corporate borrowers based on forward-looking criteria - namely, corporations?debt levels and their debt-servicing capabilities ..
Jae-Jung Kwon et al. Date 1999.04.30
Overseas direct investmentDownloadContentSummaryThis paper undertakes an investigation of the loans extended by Korean financial institutions to their corporate borrowers based on forward-looking criteria - namely, corporations?debt levels and their debt-servicing capabilities ?while focusing on the future size of non-performing loans (NPLs). We define NPLs as loans and credits extended to corporations, whose interest coverage ratio commonly defined as the ratio of earnings before interest and taxes to interest expense is less than 100 percent.
Financial statements from 1998 demonstrate that the NPLs held by listed companies amount to 32.1 percent of their total debts carried. The ratio for unlisted companies in 1997 appears higher than that of listed companies. We classified our sample companies into four groups based on their sizes. The NPL ratios of unlisted companies consistently ascend in the order of second-tier chaebols, SMEs, third-tier chaebols and the top five chaebols. In the case of unlisted companies, the order is slightly different in that the ratio of third-tier chaebols precedes that of SMEs. However, the order in 1998 resembles that of unlisted companies.
Having classified our data by different industries, it has been shown that the NPL ratios of listed companies in industries, such as textile, apparel, non-metal mining products, automobiles, furniture, construction, and chemical have recently experienced relative increases. In the case of unlisted companies, their NPL ratios are high in industries, such as agriculture, fishing, wood and publishing, and transportation and telecommunications.
Our sensitivity test results show that the decline in interest rates by 5 percentage points will reduce the NPL ratio by 13.9 percentage points - from 35.7 percent to 21.8 percent. Although the reduced interest rates and the rebounding economy are alleviating the corporate debt problem to a certain extent, a significant proportion of the Korean corporate sector still remains subject to the various risks, such as commercial and market risks and external shocks. This study has the following policy implications: reflationary macroeconomic policy is the only option in the absence of plausible alternatives; debt restructuring by creditor financial institutions is necessary, given that the effects of cost reduction from lower interest rates and slimming-down efforts are proven insufficient; and additional public resources may be necessary even after the appropriate cost allocation. -
Korea-U.S. FTA: Prospects and Analysis
In the 1990s, regional trade agreements (RTAs) have become widespread and increasingly became a threat to non-member countries. Despite the GATT/WTO Article 24 and its provision for the overall trade barriers in any new regional o..
Inkyo Cheong Date 1999.04.05
Free tradeDownloadContentSummaryIn the 1990s, regional trade agreements (RTAs) have become widespread and increasingly became a threat to non-member countries. Despite the GATT/WTO Article 24 and its provision for the overall trade barriers in any new regional or bilateral trade agreement to be no higher than the preexisting ones, the trade diversion effects of regionalism are having an increasingly negative effect on the trade of non-member countries. A realistic Korean policy response to the spread of RTAs would be the establishment of free trade agreements (FTAs) with major trading partners. This paper analyzes the potential effects of a Korea-U.S. FTA, as this would become the most significant trade agreement, which Korea might enter into.
Not only would a Korea-U.S. FTA allow both countries to benefit from the preferentially favorable measures, but it would likely reduce the amount of trade disputes involving Korea. The United States is the most important trading partner for Korea, and yet, it also is the greatest source of trade friction.
Although a Korea-U.S. FTA could not eliminate every trade friction between the two countries, such a liberalization effort would likely reduce the frequency and gravity of the trade disputes.
In this paper, we have performed simulations to cover five different scenarios of tariff reduction. In each of the scenarios, we have found that the welfare of Korea and the United States would both increase, with Korea receiving a relatively greater share of the welfare benefits. Korea's greater reliance on the trade with the United States and comparatively higher existing tariffs may explain its greater potential benefits. An FTA between the two countries would improve Korea's welfare by 0.73 to 1.73 percent, and that of the United States by 0.07 percent at the most. In addition to the simulations covering an exclusive FTA with the United States, we also have performed a simulation, measuring the effects of Korea's joining the NAFTA. Due to the larger market size, trading with the NAFTA would result in a 0.54 percent increase in Korea's welfare gains, which is higher than that expected from Korea's signing an FTA exclusively with the United States. The simulations also demonstrated that the United States would optimally benefit from an FTA with Korea, if it would have a clause, eliminating all of the agricultural tariffs. In effect, this would promote liberalization for this very sensitive sector.
In this paper, we have focused on the effects of tariff reduction. A more comprehensive analysis / particularly, the one which considers the effects of preferential rules of origin - yet remains undone. And while economic considerations should be the logical starting point, political benefits and burdens of signing an FTA, which this paper only briefly addresses, also require further study. -
Korea's FTA Policy Consistent with APEC
Up until very recently, Korea had maintained a steadfast support of trade liberalization realized only through multilateral means, such as through the WTO and APEC. However, as countries of almost all regions except East Asia hav..
Inkyo Cheong Date 1999.04.03
Free tradeDownloadContentSummaryUp until very recently, Korea had maintained a steadfast support of trade liberalization realized only through multilateral means, such as through the WTO and APEC. However, as countries of almost all regions except East Asia have embraced regionalism, Korea has been forced to question its adherence to a view that would see it lose out to the substantial trade diversion of these growing agreements, even though Korea still remains a strong supporter of the WTO. This paper begins with a more detailed analysis of the factors that led to Korea's more open approach to FTAs, culminating in the officially stated intention of exploring a bilateral FTA with Chile. Korea and Chile have concluded preliminary talks and working-level negotiations are expected to begin in 1999. Looking beyond the FTA with Chile, Korea has stated that it is pondering establishing FTAs with Thailand, South Africa, and Turkey. The choice of these countries is part of Korea's strategy to establish an FTA with a country in each continent in order to increase market access around the world. However, this paper takes the position that if Korea seeks for future free trade partners after the establishment of a Korea-Chile FTA, Korea needs to look a new regional trading bloc within APEC. Through extending preferential bilateral FTAs to other APEC economies, Korea's FTA may not only accelerate the trade and investment liberalization of APEC, but also help Korea play a leading role in APEC in the future.
This paper then proceeds to support a view that Korea's next move needs to be the consideration of bilateral FTAs with Australia, New Zealand and Canada or a multilateral FTA encompassing all four countries. While trade with all of these countries would be highly complementary for both sides, the most compelling reason for such a FTA would be its potential for spreading free trade throughout the Asia Pacific region. Along with Chile, Australia, New Zealand and Canada are all APEC members. Such a free trade area would demonstrate the benefits of free trade to regional economies and possibly exert the pressure needed to restart the currently stalled free trade talks of APEC. Such progression would move Korea to the forefront of international trade talks.
Korea's overall position remains one of the pursuit of widening free trade through multilateral agreement. APEC is one potential vehicle through which Korea's goal may be realized. However, currently, efforts to expand APEC trade liberalization appear stalled. This paper takes the stance that one possible approach to reinvigorating free trade under APEC free trade talks is for a group of member economies to spur intra-APEC trade.
The paper evaluates the economic impact of Korea's bilateral and multilateral FTAs with Australia, Canada, and New Zealand. While individual bilateral trade agreements with each country would increase the welfare of Korea, they would also result in an overall increase in Korea's trade deficit. Meanwhile, Korea would likely realize a trade surplus if a multilateral agreement includes all four countries. Furthermore, this four-way multilateral agreement increases Korea's welfare the most. Therefore, this paper concludes that pursuing a multilateral FTA covering all four countries is more in Korea's interest than pursuing bilateral FTAs with each country individually.
Dr. Inkyo Cheong, a Research Fellow of KIEP, earned his Ph.D. in Economics from Michigan State University. He specializes in Korea's FTA policy, economic cooperation in the Asia-Pacific region, international trade policy, and building multi-region, multi-sector computational general equilibrium model (CGE). He wrote several books about Korea's FTA policy and published academic articles on APEC economic cooperation in leading international journals. Corresponding address: 300-4 Yomgok-Dong, Socho-Ku, Seoul 137-800, Korea. Ph. (822) 3460-1208; Fax. (822) 3460-1077; E-mail: ikcheong@kiep.kiep.go.kr