Trans-Pacific Partnership feared to sap S. Korea’s export competitiveness

October 6, 2015
Trade ministers from the 12 Asia-Pacific countries hold a press conference in Atlanta to announce the conclusion of talks to create the Trans-Pacific Partnership on Oct. 5, 2015. (Yonhap)

Trade ministers from the 12 Asia-Pacific countries hold a press conference in Atlanta to announce the conclusion of talks to create the Trans-Pacific Partnership on Oct. 5, 2015. (Yonhap)

SEOUL/SEJONG, Oct. 6 (Yonhap) — A landmark free trade deal spanning the Pacific Rim is feared to weaken the competitiveness of South Korean exports as Seoul may have to cope with harsher competition from its rival Japan, observers here said Tuesday.

The accord, which 12 Asia-Pacific countries reached in Atlanta to form the Trans-Pacific Partnership (TPP), will likely create new opportunities for Asia’s fourth-largest economy, but it may also pose challenges because Seoul is not a member of the new open trade pact, they said.

After marathon talks, the United States, Japan, Canada, Australia, Mexico, Vietnam, Malaysia, New Zealand, Chile, Peru, Singapore and Brunei reached the deal aimed at setting new global standards for trade, intellectual property rights protection, and service sector liberalization. The member states account for 40 percent of the world’s gross domestic product (GDP).

“South Korea has free trade agreements (FTAs) with 10 of the 12 TPP members, including the United States, so it will not be left out in any way from these markets,” said a government official, who did not wish to be identified. “However, Seoul can find itself facing stiffer competition from its traditional economic rival Japan.”

Once the regional trade pact goes into effect, Japan will be on a similar or even a more advantageous footing vis-a-vis South Korea in terms of market access to TPP countries, and in particular the U.S.

In 2014, South Korea’s trade with the 12 TPP member states reached US$355.3 billion, or 32.4 percent of the country’s total.

“They may be able to fully exploit the TPP network and make products that are both price competitive and of good quality,” he said.

Other watchers said that South Korean firms will have to cope with tougher competition in the realm of such areas as automobiles, car parts and machinery.

Local carmakers such as Hyundai Motor Co. and Kia Motors Corp. have benefited from the bilateral FTA with the U.S. that allows them to expand car and automotive parts sales in the world’s No. 1 economy.

“Japan gaining the same kind of access will become a challenge that needs to be dealt effectively,” a Hyundai insider said.

He pointed out that Toyota and Honda are already doing well due in part to the weaker yen, but if they benefit from lower tariffs for car and automotive parts, they will become even more competitive.

The same conditions also apply to the machinery sector, where local companies compete with Japanese rivals, although the impact in steel and electronics will be minimal.

POSCO, the country’s largest steelmaker, said that South Korean and Japanese mills don’t compete head-to-head in places such as the U.S.

Industry watchers said Japanese steel products are much more expensive than those made in South Korea, so even if they benefit from lower tariffs, its impact will not be too great. They said in some markets, the TPP may erode the market share of Taiwanese steel products.

On electronics, local companies said their Japanese rivals may be able to sell their products more cheaply due to lower duties, yet the advantage will be marginal. They pointed out that most countries already do not levy import duties on information technology products and mobile phones.

Companies like Samsung Electronics are more focused on raising their brand image, and moving even more upmarket to differentiate themselves from Japanese rivals and win over consumers.

In the textile field, local companies that have moved or are planning to relocate to Vietnam will not be affected and may even be able to increase exports. The Southeast Asian country is building up its textile sector, yet the quality of the synthetic yarns it produces remains low, making it possible for local companies to sell goods there.

“If local companies are able to make full use of their overseas operations and successfully use existing FTA arrangements, they can overcome possible challenges posed by the TPP and even take advantage of it,” said Korea Trade-Investment Promotion Agency chief Kim Jae-hong.

He said that the country needs to follow a careful and systematic approach to tackling the TPP arrangement.

Local companies and business associations, meanwhile, said that Seoul’s effort to join the TPP must be centered on maximizing the country’s best interests.

Seoul already expressed formal interest in joining the TPP in late 2013 and has engaged in bilateral talks with all 12 members.

“All have expressed a desire to see South Korea join the mega trade bloc,” said Kim Hak-do, assistant minister for trade negotiations.

He said policymakers plan to carefully check the details of the agreement, and come up with a strategy for joining the trading bloc under the best possible terms.

Other officials said that because South Korea depends heavily on trade for growth, there is no advantage to be gained by delaying TPP entry, although there is a need to be careful about certain fallouts.

A study by the Korea Institute for International Economic Policy claimed that joining the TPP can push up the country’s GDP by 1.7 to 1.8 percent in a decade, while failure to join can cause a 0.12 percent contraction.

Becoming a TPP member can improve the country’s balance of trade by upward of $300 million per year. Staying out can cause a $100 million decrease in the country’s trade surplus, it added.

Reports have even shown that reaching a free trade pact involving Japan can boost exports of South Korea farm and fisheries products.

On the negative side, Jung Bong-ho, head of the international cooperation division at the Federation of Korean Industries, pointed out that there is no reason to hastily join the TPP.

He said that while free trade is good, opening the local market to goods from Japan can pose problems.

“Autos, machinery, industrial materials and chemicals are some of the sectors that can be hurt if Japanese make a good start entering the country,” he warned. “Companies are worried about this aspect of free trade.”