The Koreas

South Korea’s Free Trade Dilemma

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The Koreas

South Korea’s Free Trade Dilemma

The agricultural sector demonstrates the challenges Seoul’s trade liberalization agenda faces.

South Korea’s Free Trade Dilemma
Credit: REUTERS/Kim Hong-Ji

With the Park administration’s promise to finish free trade negotiations with Beijing by the end of this year, South Korea is on the verge of opening a new chapter in its trade liberalization.

Having already ratified free trade agreements (FTA) with the European Union and the United States, South Korea may soon enjoy the unprecedented position of maintaining FTAs with the world’s three largest economies. Perhaps this is to be expected from a country that is heavily dependent on exports. However, contrary to the image of an economy on the forefront of trade liberalization, South Korea remains one of only two countries in the world that has kept its rice market completely closed to international competition. Now, nearly 20 years after the country’s entry into the World Trade Organization, Seoul is finally taking the first step to opening its rice market. However, the economic gains from these trade reforms could be diminished by the loss of legitimacy that the Blue House is likely to incur in the process.

Liberalizing the rice market remains an ongoing political challenge in nearly every East Asian economy. For President Park Geun-hye, these difficulties have been exacerbated by her campaign pledge not to leave the agricultural sector to “market logic.” Taking note of this pledge, the opposition New Politics Alliance for Democracy (NPAD) criticized the administration for making a unilateral shift in policy without allowing time for a proper discussion. Reiterating the administration’s position that the sector’s reform is inevitable, the ruling Saenuri Party provided some support for the president, but also underscored the need for the government to devise separate policies to improve the competitiveness of domestic rice growers.

The timing of the government’s decision to act on the rice market is understandable. Since the Uruguay Round of multilateral trade talks in the mid-1990s, Seoul has delayed opening its rice market to foreign competition and accepted a mandatory import quota in its place. Initially, South Korea had to purchase around 20,000 tons of rice per year, but that figure has now ballooned to 400,000 tons and will double next year. Further adding to the cost of protecting the rice market, per capita rice consumption in South Korea has fallen from 93.6 kg per annum in 2000 to 67.2 kg per annum in 2013. This national shift in dietary habits has slowed the income growth of rural communities, one of the core objectives in protecting the rice market, and has prompted the government to consider other means to protect farmers. In addition, if Seoul remains obstinate on this issue, the country runs the risk of facing increased retaliatory measures in foreign markets where South Korean firms are already often charged with anti-dumping violations.

Of course, Seoul is not planning on suddenly lifting all the trade barriers protecting its domestic rice producers. The government has proposed introducing a 300 to 500 percent tariff on imported rice starting in 2015 to maintain the competitiveness of rice grown in South Korea, which is estimated to cost nearly three times more than rice from the United States. Studying the measures taken by Taiwan and Japan, where the rice market was opened but high tariffs were imposed, the Park administration is hoping for a similar result in South Korea. However, the administration could still face further challenges to its trade policy if it is unable to rally public support behind its reforms.

Mireya Solis, a senior fellow at the Brookings Center for Northeast Asian Policy Studies, succinctly summarized the challenges facing Seoul in her model of trade governance dilemma. She broadly divided the conflicts into two cases – first, when a government pursues bold reforms, it often chooses to centralize policymaking to effectively advance negotiations, but this comes at the cost of being responsive to bottom-up demands and weakening the legitimacy of the trade agreement. Alternatively, governments often make side payments to those who are likely to lose out from liberalization, which lowers opposition to the trade agreement but surrenders some of the incentives for market efficiency.

These two cases capture the current predicament facing the Blue House. South Korea is a top-down, centralized state where the policymaking authority is concentrated in the hands of elite diplomats appointed by the president. It is this institutional structure that allowed both the previous and current administrations to single-mindedly pursue free trade agreements. On the flip side, the speed and unilateralism of the Park administration’s pursuit also provoked sentiments that the government is not doing enough to protect the public’s interests. During the ratification of the Korea-U.S. and the EU-Korea FTAs, this opposition did not affect the legislative process because the conservatives had secured a majority in the unicameral legislature. However, with the upcoming by-election on July 30 potentially threatening the ruling party’s control over the national assembly, the public’s displeasure over the successive conservative administrations’ unilateral push for trade reforms could affect the delicate balance of power in the legislature. If the Saenuri Party is unable to win a majority of the seats, the president’s policymaking authority could be significantly weakened by the opposition holding the keys to ratification.

In addition, the recent victory of Kim Moo-sung over the pro-Park Suh Chung-won in the Saenuri party chairmanship contest signaled to the Park administration that the party would no longer unquestioningly follow the executive office. On top of shifting the party’s relationship with the Blue House, Kim is acutely aware of President Park’s declining popularity and thr negative impact this has on support for the Saenuri party. This certainly challenges the notion that the party is united behind key executive decisions like free trade with China.

While the South Korean state is undoubtedly centralized, rice is a sensitive topic that had been repeatedly left untouched in Seoul’s free trade negotiations. Both the ruling and opposition parties have rice-producing constituencies, creating demand for policies that will allow domestic farmers to remain competitive after imported rice is introduced in the market. The high tariff barrier is effectively a side payment designed to gain compliance from the farming communities. However, if the tariff wall is too effective in keeping out foreign competition, South Korea will not reap the benefits of competitiveness in the domestic agricultural sector.

In short, the Park administration is in uncharted territory. Not only is South Korea charting the frontiers of global trade liberalization, but the government is also taking unprecedented action in opening the most protected sector in the economy. However, as a result, the fevered negotiations, signings, and ratification of free trade agreements that headlined the Lee Myung-bak administration’s legacy has also reached its limit. This time Seoul cannot simply set the rice question aside as the strain placed on the economy by the mandatory import quota and potential retaliatory tariffs pose significant threats to the country’s export-oriented economy. In particular, if the upcoming by-election does not provide the Saenuri Party with a majority in the national assembly, the Park administration will be forced to devise a new political arrangement that would permit Seoul to more effectively engage in trade governance.