KOREA FOCUS

Korea and India officially signed a comprehensive economic partnership agreement, or CEPA, in Seoul on August 7. The two countries began negotiations in March 2006 and concluded the pact after three and a half years. The CEPA, a term adopted to stress comprehensive economic relations inclusive of merchandise and service trade, investment and economic cooperation, is a de facto free trade agreement (FTA). The conclusion of the CEPA with India is meaningful in that Korea has secured a bridgehead for advancing into another colossal overseas market in addition to the United States and the European Union.

 

As is well known, India has a population of 1.2 billion people and is the world`s fourth-largest market after the United States, China and Japan, in terms of purchasing power parity. With its economic growth topping 8 percent annually, India is an emerging market of enormous potential. The CEPA with India is expected to help Korea increase its exports to a mega economy. In addition, the deal will help the two countries expand bilateral trade, investment, personnel exchanges and economic cooperation.

 

The pact`s biggest benefit for Korea is that it will help Korean companies gain inroads into the huge Indian market. Korea is the first member nation of the Organization for Economic Cooperation and Development to seal a trade agreement with India. Moreover, India has yet to sign trade pacts with two economic giants of East Asia, namely China and Japan, which means Korea is the only country among the East Asian competitors with a CEPA in the Indian market. This will provide Korean enterprises with opportunities to enter and occupy India`s massive market on more advantageous terms than their international competitors.

 

The bilateral CEPA calls on India to eliminate or cut tariffs on 85 percent of imports from South Korea on the basis of transaction value and items. Korea`s 10 major export goods to the Indian market, including automobile parts, steel, machinery, petrochemicals and electronic goods, will be subject to tariff reduction or elimination. Under the deal, India also agreed to offer preferential tariffs to 108 manufactured items produced from an inter-Korean industrial park in North Korea`s border town of Kaesong by recognizing them as South Korean-made. Opening its markets wider, Korea agreed to slash or remove tariffs on 93 percent of imports from India on the basis of items and 90 percent on the basis of customs value.

 

Lately, the two-way trade between Korea and India is rapidly increasing. Moreover, Korean companies` inroads into the Indian market are on the rise. The CEPA with India is expected to contribute to expanding India-bound Korean exports and investments. For example, the free trade deal will benefit Korean automakers operating plants in India. Lower tariffs on auto parts are expected to help the Korean automakers enhance their price competitiveness and market share in India. Other beneficiaries will include Korean exporters of steel and petrochemical products, which are frequently hampered by import restrictions and non-tariff barriers, such as anti-dumping duties. CEPA regulations meant to prevent the abuse of non-tariff barriers will considerably ease import restrictions on Korean steel and petrochemical products, resulting in a steady increase in their exports to India.

 

Korea and India have complementary industrial structures. In particular, India`s manufacturing sector still has a long way to go but its knowledge-based services, including information technology service, are globally competitive. The signing of the bilateral CEPA will lead both countries to extensively open their service sectors to each other, while its clause on a free flow of labor will allow the two countries` professional workers to easily enter each other`s job markets. The Korea-India CEPA also calls for barriers to fall in the investment field, improving the investment environment and liberalizing investment in most manufacturing businesses. Therefore, the deal will enable Korean companies to further expand investments in India`s promising manufacturing and service sectors. The deal is also expected to facilitate the influx of Indian experts in IT and science and technology into Korea, contributing to the development of its state-of-the-art industries.

 

In short, the Korea-India CEPA will give Korean firms an opportunity to boost India-bound exports, expand investments in Indian service and manufacturing sectors, and upgrade their competitiveness in state-of-the-art industries by taking advantage of the influx of professional Indian workers. Of course, from the perspective of the easing of tariff barriers, the Korea-India CEPA can be said to be disappointing. Indeed, the proportion of tariff elimination in the Korea-India CEPA is low, while the level of its overall liberalization falls short of that of the Korea-ASEAN FTA. Cars and some electronic goods were excluded from tariff concessions under the Korea-India deal.

 

However, as seen in the process of the DDA (Doha Development Agenda) negotiations, India, a leading emerging economy, is known for its reluctance toward market opening. The level of liberalization under the Korea-India CEPA is not satisfactory. But the deal is significant in that we have been offered opportunities to expand trade and investment ties with a very promising mega-market and occupy the market ahead of our rival countries.

 

[ KERI Column, August 21, 2009,
Korea Economic Research Institute ]