Korea: levelling the playing field

This is not to say that it hasn’t been lucrative – the value of two-way trade topped $32 billion in 2013, two-thirds of which accrued to Australia.

And it has been growing strongly, defying the battering that global trade has suffered as a result of the downturn in the world economy. Between 2009 and 2013, the value of Australian exports to Korea grew almost 22 per cent, while imports from this country leapt 56 per cent.

Despite these impressive numbers, the negotiation of the Korea–Australia Free Trade Agreement (KAFTA) has not come too soon, according to proponents. They warn that without it, the nation was at risk of falling behind commercial rivals from the US, Europe, Canada, New Zealand and Chile, who threatened to steal a march in terms of access to lucrative Korean markets, especially for food and services.

This is particularly the case because of a remarkable transformation in Korea’s trade policy in the past 15 years.

At the turn of the century, it was one of the few East Asian economies still a standard-bearer for multilateralism in trade. But, with the Doha Round negotiations bogged down, it decided to change tack. In a flurry of deal-making since the early 2000s, it has signed or is negotiating 22 preferential trade agreements, including with the US, the European Union, Canada, China, Japan and India. While these are yet to impede Australia’s valuable minerals and energy trade with Korea, exporters – particularly food producers – are becoming increasingly anxious. In submissions to a parliamentary inquiry into the new KAFTA agreement held last year, industry groups warned of the risk that Australian exporters would lose out in the competition for market share with rivals who already had preferential access.

The Australian Chamber of Commerce in Korea reported that Australian companies already established there said they needed KAFTA to put them “back on a level playing field” with rivals from the US, the EU and Chile. The Export Council of Australia urged “swift action is paramount in ensuring Australian exporters remain competitive and retain market share.”

In the beggar-thy-neighbour world of preferential trade agreements, even strong supporters of multilateral trade liberalisation pushed parliament to ratify KAFTA as soon as possible.

As the Joint Standing Committee on Treaties (JSCOT) stated in its report on the KAFTA deal, “Australia must compete for preferences in bilateral agreements or risk losing market share and competitiveness to others. KAFTA is a good example of such a ‘competitive liberal’ or ‘catch up’ agreement”.

What’s KAFTA worth?

Politicians are fond of attaching a dollar value to trade deals, but quantifying them is always a tricky business.

Tariffs may be cut to zero, but that means nothing unless businesses take advantage. And by pursuing the opportunity in one market, attention invariably shifts from others. Then there is the competition for domestic producers from cheaper imports, and the associated benefits that are likely to accrue to consumers.

But the Department of Foreign Affairs has cited estimates by the Centre for International Economics that the KAFTA deal – which came into force in December 2014 – will boost national GDP by $226 million in its first year and, after 15 years, will raise annual GDP by $653 million.

Much of this is expected to come from a sharp increase in food exports. Trade barriers are no higher than when it comes to food, and the Australian Food and Grocery Council said last year that Korea had “one of the most distorted agri-food markets in the world”.

It is why farming groups are excited about the terms of KAFTA, which include the immediate elimination of tariffs on sugar, wheat and dried fruit, and the phased abolition of tariffs on beef, dairy, lamb and some seafood.

All up, the proportion of Australian exports that are duty free has jumped from 68 to 84 per cent, and will virtually reach 100 per cent upon full implementation in 15 years’ time.

Benefits for accountants

Services groups are equally enthused about what the deal may offer. Under KAFTA, for the first time, accountants and law firms are able to set up offices in Korea and provide consultancy services on international and Australian accounting laws.

Work is also underway to establish mutual recognition of professional credentials, and the progressive removal of entry restrictions and local employment rules means Australian accountants will be able to work and invest in Korean accounting firms within the next five years.

Federal trade minister Andrew Robb says the changes mean Australian accountants, lawyers and other service providers now have access to Korea equal to that of competitors from the US and Europe.

“The services chapter in this agreement opens up a whole new front,” the minister told the Australia Korea Business Council last October, arguing that the importance of business services in supporting global transaction would “really turbocharge” merchandise trade between the two countries.

Australian Services Roundtable president Vivianne Arnold says the agreement means accountants and other professionals will be able to provide services in Korea without having to enter into partnerships with Korean firms, while the mutual recognition of qualifications, once established, will open up opportunities to work for Korean firms in Korea.

“There are a lot of opportunities for professional services as a result of KAFTA reducing the number of trade barriers,” says Arnold, noting Korea’s strong economic growth and ageing population make it a potentially lucrative market for professional and financial services exporters.

Other hurdles

But even with lower trade barriers, Korea can still be a challenging market. John Wotton, executive director of the Australia Korea Business Council, says many Koreans have only “recently got involved” in learning English, making language differences a big barrier, and exporters needed to account for Korea’s quite different legal system.

Then there is Korea’s unique business structure. The country’s commercial scene is dominated by a handful of massive conglomerates (known locally as chaebols), such as Samsung, Hyundai, Daewoo and giant steelmaker POSCO, which is Australia’s largest single offshore customer.

In a submission to the JSCOT inquiry, Financial Services Council chief economist James Bond warned that Korea’s business environment can be tough for outsiders. “The chaebol structure of large conglomerate businesses favours services provided by other subsidiary companies of the chaebol group,” he said.

Even with KAFTA, there are concerns that Australian financial services firms entering the Korean market will have little choice but to partner with companies that are part of chaebol groups if they want to compete for contracts.

A separate analysis of KAFTA by the New South Wales Parliamentary Research Service suggests that far and away the greatest share of the extra income generated in the longer term by the deal – $603 million – will flow to goods producers, implying only about $50 million will accrue to the services sector.

It is a disappointingly small return, and business groups have warned the Australian Government of the need for much more intensive efforts to support service exporters if they are to take full benefit of the opportunities the agreement provides.

Devil in the detail

Experience both in Australia and internationally shows that, despite all the hype, businesses are poor at taking advantage of preferential trade agreements.

An Economist Intelligence Unit study found that, across East Asia, less than a third of eligible firms used concessions provided by trade deals, and a survey of Australian companies by the Australian Chamber of Commerce and Industry (ACCI) in late 2013 found that in almost all instances, their understanding of Australia’s trade agreements was low – more than half said they didn’t understand them at all, and a further fifth used them but did not comprehend them.

A lot of this confusion is due to complexity. To take advantage of preferential agreements, exporters have to negotiate a thicket of rules about where components are made, how products are assembled, variable tariff rates and other technical details.

Even a high-quality deal like KAFTA runs to 1,700 pages and covers more than 4,000 productspecific rules.

Working out how to take advantage of a trade agreement can be a huge undertaking for a company, particularly if it is small or operates in multiple markets. Ultimately, if it is too hard and costly to use, businesses will just avoid using the concessions provided in trade deals.

ACCI warned in a submission to the JSCOT inquiry, “Australia may have the best trade agreements in the world, but they are wasted if the Australian Government does not follow through and ensure that…businesses know how to use them”.

The government has developed an 11-page guide to help companies navigate KAFTA more easily. It includes a two-page chart to assist in determining whether particular goods or services qualify under the deal’s rules of origin.