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24 Jan 2008

International Economy

Monitoring South Korea’s FTA Benefits: Expanding Investment in ASEAN-Thailand (Business Brief No.2029)

The ASEAN-South Korea FTA is expected to bolster the price competitiveness of exports from ASEAN – including Thailand – in South Korea. Amid tougher competition in the South Korean market, low-priced Chinese counterparts have garnered a larger market share at the expense of ASEAN products over the past five years (2002-2006). The ASEAN-South Korea FTA agreement, where 90 percent of all ASEAN exports will be shipped duty-free to South Korea by 2010, is expected to pave the way for an increased market share for ASEAN goods in South Korea. For Thailand, Thai exporters should get well-prepared for the pact. Negotiations have been finalized between Thailand and South Korea on market opening for trade in goods. Tariff reductions listed in the agreement between Thailand and South Korea are expected to come into effect this year after the pact took effect in other ASEAN countries around mid-2007.
For South Korea's investments in ASEAN, the prospect of steady increase in South Korean FDI into ASEAN can be attributed to the following factors:
1. Tariff privileges per the ASEAN Free Trade Agreement (AFTA) South Korea would like to take advantage of these tariff privileges by investing in ASEAN countries which are entitled to low tariff rates (not exceeding 5 percent) imposed on imports of raw materials or components from other countries in the AFTA framework.
2. Liberalization of trade in goods and services per the ASEAN-South Korea FTA will pave the way for lower tariffs on imported raw materials, intermediate components and capital goods from South Korea into ASEAN. South Korea will also be able to establish more service businesses there such as those in education, health and tourism, thanks to the deregulation featured in the ASEAN-South Korea FTA agreement.

For Thailand, despite the moderate value of South Korean FDI in Thailand, it has exhibited marked growth over the past two years (2006-2007). South Korean investment applications submitted to the Board of Investment are becoming more varied in the manufacturing and service sectors. The increase in South Korean FDI into Thailand can be attributed to Thailand's proactive stance toward liberalization policies over the past 4-5 years, following the signing of bilateral FTA agreements between Thailand and several countries. South Korea will benefit from the reduced tariffs provided for in such FTA pacts if it invests in Thailand for further exporting to the third country which have entered into bilateral FTA agreements with Thailand. Thailand's service businesses with bright prospects in South Korea include restaurants and hotels. This is because service sector liberalization per the ASEAN-South Korea FTA pact will allow several businesses, e.g., hotels, restaurants, entertainment and cleaning services to be wholly-owned (100 percent) by ASEAN investors in South Korea.

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International Economy