South Korea’s signing of RCEP and future implications

South Korea’s President Moon Jae In has kept a close eye on the ASEAN region since the early days of his presidency. Recently, he took South Korea’s relations with Southeast Asia one step further by signing the historic Regional Comprehensive Economic Partnership (RCEP).

The agreement was signed on November 15, 2020, including all ten ASEAN states as well as South Korea, China, Japan, Australia and New Zealand. Together, the countries make up one third of the world’s GDP. The ‘mega’ free trade agreement is set to open new markets for more than 90 percent of Korean export items.

Although the South Korean government is hailing the signing of the deal as a great success, exactly how this new partnership will affect the South Korean economy remains to be seen.

Key motivations

So far, President Moon has been promoting the signing of the agreement as a major economic victory, saying it will positively impact the country’s main industries: automotive, petroleum, steel, and chemical. South Korea is also hoping this new deal will help counter some of the negative consequences of the pandemic on the national economy.

Besides this, South Korea also hopes to recover some of the losses the economy incurred as a result of the US-China trade spat. Currently, South Korea depends on the US and China for 40 percent of its exports and hopes diversifying its export markets to include more ASEAN nations will decrease its current economic vulnerability.

Decreasing South Korea’s economic dependence on China and the US has been one of President Moon’s key goals from the start. He made this clear back in 2017 by announcing his New Southern Policy aimed at strengthening relations with ASEAN states. After the signing of RCEP, the South Korean presidential office described the deal as a “core result” of the president’s New Southern Policy. The President said the deal would “contribute to the recovery of multilateralism and the development of free trade around the world, beyond the region”.

The government has continuously hailed the agreement as a golden opportunity to expand free trade in the region as well as to expand South Korea’s export market. Although it is too early to elaborate on how this deal will affect South Korea’s economy in the long-term, there are several areas the new partnership is likely to impact.

Closer ties with Japan?

Some optimistic voices in South Korea believe the recently signed RCEP could help mend relations between Japan and South Korea. The two nations have failed to see eye to eye on many issues during Moon’s presidency as a result of continued disagreements on historical matters. These disagreements eventually escalated in 2019 and materialized into a trade war between both countries. Moreover, although before RCEP South Korea had signed a total of 15 FTAs around the globe, it had yet to sign any such agreement with Japan.

Despite being close neighbors, the two countries have, so far, been unable to put the past behind them and bring diplomatic and economic ties to their highest potential. But, some argue, RCEP could finally bring positive change to South Korea-Japan economic relations.

By signing the RCEP, South Korea indirectly signed an FTA with Japan. Thus, for the sake of making multilateralism work and decreasing its dependency on China and the US, it will be in South Korea’s best interest to actively cooperate with Japan and significantly deepen economic ties.

Besides the indirect bilateral FTA, talks to sign a trilateral FTA between China, Japan, and South Korea are also currently underway. Chinese Foreign Minister Wang Yi emphasized China’s continued commitment to the deal as recently as this past November during his visits to Tokyo and Seoul. According to Chinese media, as a result of the signing of RCEP, “negotiations for the trilateral FTA are expected to speed up significantly”.

However, some have also voiced concern over how RCEP could end up helping Japan more than South Korea. According to the Korea International Trade Organization (KITA), since both countries have never signed a separate bilateral FTA in the past, it is difficult to say with certainty whether the Korean economy will benefit through the RCEP.

Some analysts are particularly concerned about this deal given South Korea’s decades-long trade deficit position with Japan. Moreover, according to Nikkei Asia, among Japan’s exports to South Korea, 92% of goods will be waived from duties, a jump from the current 19%. Analysts also point out that Japan, which unlike South Korea, did not have an FTA with China before RCEP, will benefit more from the agreement as a result.

Net benefits?

Last month, President Moon stated his goal to further increase the South Korean economy’s competitiveness by focusing on 3 key industries: biohealth, system semiconductors and future cars. One of the most competitive fields covered by the RCEP will likely be the automotive industry. South Korean carmakers will have to compete for quality with Japanese cars and low prices of Chinese cars in the ASEAN market. As such, some in South Korea are concerned whether the deal will actually bring about the net gains the government has promised.

But, there has been some good news. As a result of the signing of RCEP and a separate FTA with Indonesia, South Korea’s Hyundai Motors is set to expand its production and operation in Indonesia. A large manufacturing plant east of Jakarta is scheduled to begin operation later this year and, with lower tariffs, could be able to improve its price competitiveness. Hyundai has been trying to expand its operations and increase sales in Southeast Asia ever since the 2017 THAAD incident with China saw sales plummet. The RCEP could be just the push they need to get closer to achieving this goal.

Besides the automotive industry, South Korea’s steel industry also welcomed the RCEP deal given the newly eliminated tariffs that are expected to benefit the domestic steel industry. An official representing POSCO, one of South Korea’s biggest steel manufacturers, said:  “We expect positive effects in terms of restoring free trade”.

Moreover, according to South Korea’s electronics industry, RCEP is expected to significantly lower trade barriers which could help boost sales of domestic electronic companies. In the case of LG Electronics, tariff exemptions in Japan could make the price of LG’s OLED TVs close to that of domestic brands, thus improving its price competitiveness.

When it comes to the South Korean semiconductor industry, it is less likely to be affected by the RCEP. This is mainly due to the fact that semiconductors are designated as tariff-free in more than 50 countries under the World Trade Organization’s Information Technology Agreement (ITA). Nevertheless, South Korea’s Samsung Electronics, which has already been working on strengthening its competitive position, is expected to compete aggressively with Japanese semiconductor companies.

Regarding agricultural products, China, Australia, and New Zealand would be South Korea’s biggest competition in this field. Given South Korea’s relatively weaker competitive advantage in this area, the government decided to maintain tariffs on agricultural and fisheries products at existing levels similar to previously signed FTAs with countries in the region.

Overall, according to the Korea Institute for International Economic Policy (KIEP), as a result of RCEP, Korea’s real GDP is expected to increase 0.51 percent over a decade and consumer welfare is expected to increase by about $5.48 billion. The Institute also predicted that RCEP would have a stabilizing effect on the Korean economy even if faced with continued US-China trade tensions.

A path to CPTPP?

Another development that could result from South Korea’s signing of RCEP is the possible joining of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a free trade agreement comprising Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. The agreement was signed in March 2018 after the US decided to withdraw from the TPP in 2017.

Last month, South Korea’s President Moon said that his country was continuing to review the options for membership. Some analysts believe that in order to gain the upper hand in negotiations about tariff concessions and liberalization of the domestic market with existing members, South Korea will try and join the CPTPP before the Biden administration decides join in.

Too soon to tell

Although some in South Korea remain skeptical about the deal’s long-term net benefits, the overall mood seems to be positive. As with any economic deal involving many countries, there are risks involved and South Korea’s bets may not pay off in the long-run. For now, the main cause for concern will remain how the domestic economy is affected by the indirect FTA with Japan and how long it will take for South Korea’s GDP to see significant growth as a result of this deal.

Given that South Korea had previous FTAs in place with 14 of the 15 states in question, including an FTA with ASEAN, the deal might not have an immediate significant impact on the Korean economy. But, this doesn’t mean it never will. For now, the signatories will first have to ratify the agreement for it to officially enter into force. The agreement has potential to positively impact the South Korean economy, but time will be necessary to fairly evaluate the deal’s full impact.

Picture credits: Yonhap News