From being involved in an anti-missile dispute with China to renegotiating a free trade deal with U.S. President Trump, it’s been an eventful period for South Korea on the trade front. Lawyers in the country talk about how this has been affecting the way their clients do business, and what trends to look forward to in the future.
These have been uncertain times for South Korea’s trade-reliant economy as its top two trading partners, China and the United States, have been on the verge of a trade war since March.
The world’s two economic superpowers have threatened each other with tariffs on tens of billions of dollars’ worth of exports, worrying nations around the world that it could lead to a full-scale trade war that could damage global growth and destabilise financial markets.
During talks between top economic officials from Washington and Beijing in early May, the Trump administration presented a lengthy list of demands to the Chinese side, including a mammoth $200 billion cut in the Chinese trade surplus with the U.S. Last year, China had a record U.S. goods trade surplus of $375 billion in 2017.
The talks, which ended inconclusively, were described by China’s state-run Xinhua news agency as “constructive, candid and efficient” but with disagreements that remain “relatively big.”
“The trade tension between China and the U.S. is one of the biggest risk areas for trade and business for Korean business community,” says Youngjin Jung, a partner at Kim & Chang. “In particular, the tit-for-tat tariff threats between China and the U.S. make our clients nervous about their impacts on the global supply chain.”
“The recent Section 232 steel and aluminium tariffs by the United States are a good example of U.S.-China trade frictions having a negative impact on other countries,” he notes. “Although Korea received the country exemption, questions remain regarding the administration of the quota system by the U.S. and the Korean governments.”
The U.S. imposed a 25 percent duty on steel imports and a 10 percent tariff on aluminium imports on all countries, effective from March 23. Several major trading partners and allies have received some exemptions, including South Korea, the U.S.’s third largest steel exporter last year after Canada and Brazil, which avoided the hefty steel tariffs.
However, the South Korean government did instead agree to cut its steel exports to the U.S. by 30 percent from the past three years’ average. “Internally, a new problem arose, which was deciding how much each Korean steel company should reduce its quota by,” says Sungbum Lee, a partner at Yoon & Yang. “There are disagreements among the companies with regard to what standard should be applied in allocating the volume that an individual steel company could export to the U.S.”
There are other issues beyond steel. When Seoul and Washington met in late March to renegotiate their bilateral free trade deal – U.S.-Korea Free Trade Agreement (KORUS) – the countries agreed to extend U.S. tariffs on Korean pickup trucks by 20 years until 2041. This agreement to prolong the tariff reduction period for Korean pickup trucks exported to the U.S. was the most outstanding issue that damaged Korea, says Lee.
While the market access for South Korean pickup trucks in the U.S. is restricted, conversely, U.S. automakers won improved market access to South Korea as they will be able to bring into the market 50,000 vehicles per automaker per year that meet U.S. safety standards, not necessarily Korean standards, up from 25,000 vehicles previously.
All in all, South Korea’s trade relationship with the U.S. is still rocky due to the drastic measures by the Trump administration against major South Korean exporters to the U.S., says Shin Tong-chan, a partner at Yulchon. “Especially among my clients, a substantial number of them are worrying about the increased economic sanctions by the Trump administration against Iran and Russia, which are among the major trading partners of South Korea.”
Iran, in particular, has recently been subject to severe sanctions. On May 8, Trump announced the U.S. was withdrawing from the 2015 international nuclear agreement with Iran and reimposed an array of wide sanctions, and a day later, the White House said that it is preparing to impose new sanctions on the Islamic Republic to ensure it does not develop nuclear weapons.
Iran is the third-largest oil producer in the Organization of the Petroleum Exporting Countries (OPEC) and a key supplier, especially to refiners in Asia. South Korea’s Ministry of Trade, Industry and Energy said it planned “to minimize the damage” to its companies, adding it would seek an exemption from sanction.
CHINA RELATIONS CALM DOWN
Fortunately, South Korea’s trade relationship with China, its largest trade partner, seems to be calming down since the dispute over the deployment of U.S.-made Terminal High Altitude Area Defence (THAAD) anti-missile system in South Korea last year.
Seoul and Beijing were at a standoff since then, with China saying the anti-missile system’s powerful radar could see far into its territory. As a result, trade and business exchanges between the two froze, denting South Korea’s economic growth, especially its tourism industry, as group tours from China came to a halt while charter flights from South Korea were cancelled.
The THAAD disagreement prompted an undeclared Chinese boycott of products ranging from South Korean cosmetics to cars, and was estimated to have knocked about 0.4 percentage points off South Korea’s expected economic growth in 2017.
But after the commencement of the current South Korean administration in May last year, and especially after this year’s summit between Chinese President Xi Jinping and South Korean president Moon Jae-in, Yulchon’s Shin finally sees the light at the end of the tunnel regarding the so-called THAAD retaliation by Chinese government to South Korean companies in China.
“Especially under the renewed engagement policy of South Korea’s new administration towards North Korea, it seems to us that the South Korean government has encouraged South Korean companies to conduct more business in China, which may help broker the political deal between the two Koreas,” he says. “State-owned companies of South Korea are actively exploring business opportunities in various Chinese industry sectors such as electricity and energy.”
Though the THAAD dispute between South Korea and China seems to have been settled, the trade metrics between the two countries, including the number of Chinese visitors to Korea and the number of Korean automobiles sold in China, have not recovered yet, notes Yoon & Yang’s Lee.
“Korean companies have made tremendous amount of investments in China. However, after the THAAD disagreement, Korean companies have started moving their facilities from China to Southeast Asian countries,” he says. “This is because of the lack of predictability when it comes to Chinese policies and measures. We expect to see more Korean companies move from China to other countries which have more predictable policies.”
Southeast Asia, a region that has undergone fast economic development and possesses growth potential for the next few decades, has always been a very important area for Korean businesses in terms of trade and investment, notes Kim & Chang’s Jung.
“Reflective of this importance, Korea has signed a Free Trade Agreements (FTA) with Vietnam, one of its biggest trade and investment partners, as well as with the Association of Southeast Asian Nations (ASEAN), in addition to working closely with other countries, such as Thailand, the Philippines, Malaysia and Singapore to pursue closer economic and political relationships.”
All of the major South Korean firms already have some presence in Southeast Asia. Yoon & Yang, for example, has two offices in Vietnam: In Hanoi and Ho Chi Minh City.
Most of the work the firm does there relates to the business of Korean companies in the region, including advising on regulations governing foreign investment, as well as local regulations. There is also a lot of FTA-related work related to the goods imported from this region into Korea, shares Lee, adding that numerous global companies have their manufacturing facilities in this region.
“Consequently, many importers of goods that are made in Southeast Asian countries apply for preferential tariff rates under the Korea-ASEAN FTA, as well as FTAs that Korea has signed with individual ASEAN member countries,” he notes. “The Korea Customs Service actively conducts origin verification investigations of these goods, and most of the companies that we assist from FTA perspective come to us seeking help with this issue.”
Other trade trends lawyers in South Korea are seeing:
Regional Trade Agreements
Despite the growing trend of protectionism coming out of the U.S., the world is still busy signing regional trade agreements for further trade liberalization. In particular, the growth of mega-regional trade agreements is by far the most visible phenomenon in Asia, with South Korea leading negotiations for mega-regional trade agreements with key trading partners.
South Korea is a negotiating party to the Regional Comprehensive Economic
Partnership (RCEP) agreement, a 16-party regional trade agreement which includes ASEAN, China, India, Japan, Australia and New Zealand. Korea is also considering joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
In addition, Korea, Japan and China are negotiating a trilateral free trade agreement; Korea anticipates that the trilateral Korea-Japan-China FTA will facilitate economic integration as well as regional security and stability.
Korea is also considering the feasibility of FTAs with the Eurasian Economic
Union (EAEU), Mercosur, GCC and Mexico, whose common characteristics include natural resources; geopolitical importance; and size of the market with growing number of young middle-class consumers with purchasing power.
-Youngjin Jung, Kim & Chang
Investor-State Dispute Settlements
Nowadays, foreign investors are more frequently utilizing investor-state dispute settlement procedures. The Korean government had not expected to face such a growing number of investor-state dispute, but in the past few years, we have seen key cases like Lone Star, Hanocal and Dayyani. The government can expect more in the near future.
In the past, subjects of the trade agreements were limited to sovereign countries, and foreign investors could not utilize trade agreements on their own. However, this has changed since the adoption of Investor-State Dispute Settlement mechanism. Private companies are actively using this tool to protect their civil rights.
In response to such phenomenon, the Korean government might seek to remove the investor-state dispute mechanisms from the trade agreements it will be signing in the future, and may challenge these mechanisms at the annual meeting under FTAs already signed.
-Sungbum Lee, Yoon & Yang
Engagement with North Korea
Another trade trend in South Korea is the possibility of engagement with North Korea. We already saw that during the 2018 Pyeongchang Winter Olympics, when some of our clients were asked by the South Korean administration to provide certain goods and services to North Korean delegations in South Korea, and to certain sporting and cultural events held in the two Koreas.
However, given the tight international sanctions regime against North Korea’s nuclear programme already in place, those requests need to be carefully reviewed from the sanctions’ perspective. Often, we may ask for guidance from U.S. Treasury Department’s Office of Foreign Assets Control, which is responsible for the enforcement of U.S. sanctions.
We believe that, even if there’s a possibility of a breakthrough in the North Korea nuclear crisis, much like the Iran sanctions, the current sanctions regime against North Korea will continue to affect our clients in the foreseeable future.
So, we have expanded our knowledge and expertise related to sanctions in order to address those challenges, and also increased our cooperation with U.S. law firms’ sanctions experts.
-Shin Tong-chan, Yulchon
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