FOREIGN TRADE

Trade Policies

Korea's basic trade policies are balanced expansion of external trade, internationalization and liberalization of the local economy, trade diversification, and expanded multilateral cooperation.

Since the first trade surplus in 1986, Korea embarked on an ambitious plan to liberalize its markets. The market-opening program gained additional momentum in October 1989, when Korea was graduated from GATT balance-of-payments (BOP) protection. In pursuing this program, Korea has experienced some structural, economic and social constraints. The trade balance returned to the red in 1990 after posting consecutive surpluses from 1986 to 1989. However, Korea will maintain its basic policy of seeking balanced expansion of economy.

In addition, the government is pursuing a closer balance between production for export and production for domestic consumption. The growth of the export industry at the expense of the domestic industry, a persistent trend since the 1960s, was halted and, to some extent, reversed by 1990. It was hoped that a more balanced allocation of resources between these two sectors would have favourable industrial effects and thereby help correct the excessively dualistic structure of Korea's economy.

Korea also pursued rapid structural transformation toward more skilled and technology-intensive production so as to upgrade its industrial structure and thus, enhance export competitiveness. This trend has been gaining momentum for several years now, ever since it became apparent in the 1970s that Korea was gradually losing its comparitive advantage in labor-intensive manufactured exports.

Another major thrust of korean trade policy aims at diversifying the nation's export market and import sources in order to avoid over-dependence on a few traditional trading partners, most notably the United States and Japan. Korea has grown increasingly dependent on the United States market for its exports, leading to successive trade surpluses with that country and mounting trade frictions. Conversely, Korea's dependence on Japan as its major source of imports has generated large and chronic annual trade deflicts with itseastern neighbour.

Korea will cooperate fully with other trading nations in multilateral forums such as GATT to improve and strengthen multilateral trade disciplines and to combat the spread of protectionism. Since the future of the world economy hinges in part on the success or failure of efforts to reverse protectionism and to strengthen free trade system by reaching a consensus on a new international trade regime, Korea will continue to actively participate in the Uruguary Round of multilateral trage negotiations.

Moreover, Korea will accelerate its unilateral market-opening measures to improve the climate of the Uruguary Round as the negotiation sessions proceed. Korea, as a responsible trading nation, will be most forthcoming in market liberalization not only in commodity trade, which falls within the existing GATT rules, but also in such sectors as services, trade and trade-related investment that are, at present, outsided the purview of GATT.

Import Trends

Korea is highly dependent on imports both of raw materials, especially energy, and capital goods. Imports of raw materials and capital goods accounted for 53.9% and 36.5% respectively of total imports in 1990. Foreign purchases of consumer goods, on the other hand, accounted for only 9.6% of the total.

The nation's merchandise imports showed significantly low growth rates in 1985 and 1986 mainly due to drastic declines in primary commodity prices in the international market and crude oil prices. However, the growth of merchandise imports began to gain momentum again from 1987 as imports of industrial supplies such as raw materials, machinery, and electric & electronic parts increased considerably and the government carried out strong measures to open up the domestic market in a move to mitigate intensifying trade frictions.

Moreover, imports for domestic use recorded a high growth rate of 22.3% in 1990 due to robust consumer spending and investment, while the growth rate of imports for export use stood at 0.3% as a result of the slowdown in exports. Overall imports in 1990 showed high but slower growth of 13.6% amounting to $69.8 billion on a customs clearance basis, compared with an increase of 18.6% in 1989.

The share of raw materials in total imports has declined from 65.0% in 1980 to 53.9% in 1990, mainly due to the stability of raw material prices in the international market and to the relatively rapid increase in imports of capital goods.

Crude oil, which accounted for 25.3% of total imports in 1980, constituted only 8.0% in 1989. In 1990, imports of crude oil increased to $6.4 billion, up 29.5%, due to a sharp hike in the price of oil. Meanwhile, imports of chemicals increased sharply during that period in response to soaring domestic demand caused by booms in such industries as petrochemicals, rising from 5.2% in 1980 to 10.6% in 1990.

As Korea is making the transition from an economic strategy based on low-cost labor to one based on capital- and technology-intensive industries, the import of capital goods has continued to increase sharply in the 1980s. In 1990, they rose 8.8% to $25,470 million from $22,370 million in 1989. The share capital goods in total imports also advanced from 23.0% in 1989 to 36.5% in 1990. Encouraged by the government's substantial import liberalization program in recent years, imports of consumer goods have continued to increase sharply since 1986.

Korea's imports from developed countries in 1990 amounted to $42,771 million, accounting for 61.2% of total imports, and imports from developing countries reached $14,790 million, registering 21.1% of total imports. This shift in the pattern of imports reflects the government's efforts to diversify import sources and to mitigate mounting trade frictions. Whereas Korean imports from advanced nations comprise mainly capital goods and consumer goods, those from developing countries are to a large extent raw materials such as crude oil.

Imports from Japan rose 6.4% from $17,449 million in 1989 to $18,574 million in 1990. In contrast, the share of imports from the United States increased from 15.9% in 1986 to 24.3% in 1990. This reflected a substantial increase in imports from the U.S. during the same period which hit an annual record of $16,942 million in 1990. Imports from Western Europe also increased by 12.9% in 1990, registering $10,512 million. Accordingly, its share of total imports increased from 13.2% in 1989 to 15.0% in 1990. In the meantime, imports from the Middle East expanded 46.7% due to higher oil prices in 1990.

Principal Import Commodities (1970-1990)

 Imports by Economic Bloc(1988-1990)

Export Trends

Merchandise exports in 1990 totaled $65.0 billion on a customs clearance basis, up a more 4.2% from the previous year. Exports in volume terms rose 3.3% from 1989. The slowdown in exports can be traced to the changes in the economic environment both at home and abroad. Externally, widespread regionalism has caused the strengthening of protectionism worldwide, thereby rapidly worsening the export environment Korea has had to face since the late 1980s. Domestically, the year's sluggish export performance was attributed more to non-price factors such as higher product defect ratios, slow development of new products and concentration on the domestic market rather than normal cost-push factor like wages and exchange rates.

In 1990, exports of light industrial products recorded $25,033 million, rising only 2.3% over the previous year as compared with the 21.9% increase recorded in 1989. The lower growth rate was largely due to a substantial erosion in price competitiveness caused by domestic wage increases.

Export of textiles, which hold one of the largest portions in total merchandise exports, declined from $15,140 million in 1989 to $14,670 million in 1990. Exports of footwear increased 25.0% over the previous year, due to the return of big foreign buyers and upgraded quality which, in turn, resulted in a substantial rise in exports to the United States and the EC.

On the other hand, exports of heavy and chemical industrial products registered $36,965 million on an increase of only 6.4% in 1990, much lower than the 36.8% growth achieved in 1998. Consequently, the share of heavy and chemical industrial products in total exports rose from 53.9% in 1998 to 56.4% in 1990.

Among heavy and chemical industrial products, exports of iron & steel products recorded $3,605 million in 1990 on a decrease of 1.8% due to worsened price competitiveness and brisk domestic demand. Exports of ships, which had recorded a decrease of 37.3% in 1987, registered $2,801 million with an increase of 56.6% in 1990. This was attributed to the increased demand for vessels, price rises for vessels and improved industrial relations. In contrast, the growth rate for automobile exports, which saw an impressive 106.6% jump in 1987, fell sharply to 26.1% in 1988, mainly as a result of the rapid rise i domestic demand and the shortage of components caused by the mid-year labor unrest. In 1990, exports actually decreased by 7.2% owing mostly to soft demand in the U.S., as well as a weakening of price competitiveness. Exports of electronics, led by high value-added products such as semiconductors, computers, VCRs and fax machines, rose 11.8% while those of machinery expanded 7.8% in 1990. 

As a result, the following changes occurred in the commodity composition of exports in 1990: 1) the portion of heavy and chemical industries i total exports increased, recording 56.4% of the total; 2) capital-intensive and high value-added products increased at the expense of labor-intensive products as dramatic growth in wages has eroded price competitiveness in recent years.

In reviewing merchandise exports by market, Korea has depended very heavily on the U.S. and Japan with 76.5% of all shipments going to these markets in 1970. This high concentration has been diluted to degree through overseas market diversification efforts, and was reduced to 49.2% in 1990. Exports to the U.S. amounted to $19,360 million in 1990, recording a 6.3% decrease over the previous year. Exports to Japan stood at $12,638 million, down 6.1% from 989, while exports to Ec countries grew 19.7% over 1989 to $8,876 million. Export to communist nations and Africa expanded sharply, reflecting government and private-sector attempts to diversify overseas markets in response to increasing protectionism in industrialized nations. Influenced by the reforms in the former communist bloc and Korea's efforts to diversity its export markets, trade between Korea and these nations increased steadily in recent years. In 1980, the proportion of exports to nations of the former communist bloc was 0.235 of total exports, though by 1990 this figure has risen to 2.7%.

 Principal Export Commodities (1970-1990)

Exports by Economic Bloc(1988-1990)

Opening of Domestic Markets 

Import Liberalization

Korea has made substantial progress toward opening its market to foreign products. The import liberalization ratio has increased sharply from 68.6% in 1980 to its current level of 97.3% and is expected to reach 99.9% in 1994.

Out of 10,274 products, only 283 items still face import restrictions in 1991. In the case of industrial products, only 10 products now require prior import licensing. With regard to agricultural products, the government announced a three-year (1992-94) liberalization schedule in March 1991. Over this period, 131 agricultural products are scheduled to be liberalized such that, by 1994, the import liberalization ratio of agricultural products will rise from the present level of 87.4% to 92.1%. Thirty-four and forty-three of the 131 products were specifically requested for liberalization by the U.S. and EC, respectively.

In addition, Korea was graduated from the GATT balance-of-payments protection in October 1989, marking the first such case in which a developing country revoked the GATT provision permitting import protection under the condition of a balance of payments deflict. In according with this decision, the Korean government will either eliminate remaining import controls or conform to GATT provisions by 1997.

Tariff Reduction

Market opening via import liberalization has been complemented with an ongoing tariff reduction program. Between 1983 and 1991, the average overall tariff rate fell from 22.6% to 11.4%, while tariffs on manufactured goods dropped from 22.6% to 9.4% in the same period. Furthermore, average tariff rates including those for industrial products will follow a 1992-94 reduction schedule, falling from 11.4% to 7.9%. the average tariff rate on industrial products will be reduced from 9.4% in 1991 to 6.2% in 1994, and for agricultural products the average will drop from 19.9% in 19991 to 16.6% in 1994.

 Tariff Reduction Schedule

Distribution Services

To expand the access of foreign goods to the Korean market, the government has launched a three-phase, five-year plan to liberalize the distribution system. In conjunction with Tariff reductions and import liberalization, opening the distribution market to foreign firms will provide access for foreign goods equal to that of domestic products. The first phase implemented in 1989 and 1990 has allowed foreign firms to invest in wholesale distribution. In July of this year, the government removed barriers to foreign investment in retail distribution. Foreign firms are now permitted to operate a maximum of 10 stores each with a size less than 1,000 square meters. in the final phase, Korea will further liberalize retail distribution.