The talks about a free trade deal between Korea and China have started. After a long preparation period of seven years, the two countries announced an official start to the trade talks last Wednesday and plan to hold the first round of negotiations on personnel and agendas in Beijing later this week. Today, we will talk with Mr. Lee In-cheol, a reporter with Korea Economic TV, about the outlooks and key agendas of the planned trade talks. First, he tells us what the two sides agreed on in the May 2nd announcement.

Korean Trade Minister Bark Tae-ho took part in a trade ministers’ meeting in Beijing and announced that the two countries would start negotiating for a bilateral free trade accord. The trade talks would take place in two stages. In the first stage, the participants would hammer out a comprehensive set of framework, such as which sensitive items would be included in the talks and which ones would be excluded from tariff exemption. More detailed talks will take place in the second stage, in which discussions on the country of origin marking, investment, service, intellectual property rights, dispute settlement, and other thorny issues will take place. One of the more important factors distinguishing a Korea-China trade deal from others is that the two sides agreed to include the issue of giving the same tariff benefits to products manufactured in the Gaeseong Industrial Complex in North Korea. In Korea’s FTAs with the United States and the European Union, the products manufactured in the inter-Korean industrial park were considered North Korean, deferring the decision on whether or not to give them tariff considerations for one year.

With the trade negotiations just beginning, Korea and China announced the principles they would follow throughout the talks. The service and investment sectors will be liberalized at a level higher than designated by the World Trade Organization, and “outward processing zones” such as the Gaeseong Industrial Complex will be established on the Korean Peninsula. The Korean government also emphasized the concept of “gradual negotiations on the protection of sensitive items.” This indicates that guidelines will be established on the scope and protection of sensitive items, such as agricultural products, before any serious negotiations can take place. This process differs from other free trade deals worked out by Korea. Why did Korea and China decide to take on the trade talks?

With 1.3 billion people, China is undoubtedly a huge market with explosive potential, but it is still not a completely open market. China has lately emerged as Koreas’ largest trading partner, much larger than Korea’s trade with the United States and Europe combined. This means the conditions of the Chinese economy directly and indirectly impact the Korean economy. China recently suffered a slowdown in its exports and is showing signs of contraction in its local economy due to a collapse of its real estate market. In March, the Chinese government shifted its export-driven growth strategy to one focusing more on the domestic economy. This change in economic policy hurt Korea’s export of intermediate goods to China, sharply undermining the growth of Korea’s export to China in the first quarter. What is worse, the market shares of Korean corporations in China still remain in the single-digit range, while Korea’s competitor Taiwan is enjoying a greater presence in China’s domestic market through trade liberalization.

Korea’s trade with China accounts for about 20% of total trade. Once a free trade agreement is struck between the two countries, China will have to lift an average of 9.6% tariff either immediately or gradually, which will result in higher price competitiveness for Korean products in the Chinese market. In addition, FTA negotiations with China would motivate Japan’s involvement in a trilateral free trade deal among Korea, China, and Japan, building the foundation for a Northeast Asian economic zone and a global FTA alliance rivaling the ones with the United States and the European Union. But it appears that it will take some time before a free trade pact can be concluded between Korea and China.

Unlike Korea’s FTAs with the U.S. and the E.U., the trade talks with China will take place in two stages. The first stage of talks are expected to begin in May, and in this stage the two sides must agree on how to proceed with sensitive issues, and set the boundaries for trade liberalization. Without wrapping up this stage successfully, there will be no serious talks in the second stage. Given that it took Korea one year of discussions to complete a trade deal with the U.S. and two years with the E.U., our best hope is to see the second stage of the Korea-China trade talks conclude sometime in 2014, at the earliest. But we will also see much opposition from local farmers and wrangling over the scope of liberalization of sensitive items, which could push back the conclusion date much farther.

A trade deal between Korea and China could certainly boost the economies of both countries, but it is also cause for serious concerns. Disagreements over agricultural products and other thorny issues are likely to occur. Competition and conflicts, rather than mutually beneficial arrangements, may intensify, because the two sides’ industrial structure and technological levels are similar. It would not be surprising to see the two sides engage in a tense battle of wills at the first round of talks scheduled for later this week. Seoul is likely to classify agricultural and livestock items like meat and produce as sensitive items, while Beijing will try to defend its industries against Korea’s highly competitive automobiles and petrochemical products. The Korean government is to adopt the following measures for the upcoming negotiation.

Local farmers and some small and medium-sized manufacturers are bound to suffer serious damages once more Chinese imports are allowed into Korea. The Korea Rural Economic Institute reported that once a Korea-China free trade accord goes into effect, agricultural imports would increase more than 10 billion dollars and Korea’s agricultural productivity would fall at least 14%. The Chinese have similar preferences in agricultural products as Koreans, and it is easier to import produce from China than any other FTA partner countries. Some experts worry that the damage to Korean farmers caused by Chinese imports will be more than five times greater than American imports. Nonetheless, the Korean government pointed out that China has been a net importer of Korean produce and agricultural products since 2004. Also, given that China is Korea’s second largest export market of agricultural products, Korean produce could enjoy bigger shares in the upper end agricultural markets in China. Therefore, the Korean government’s strategy is to focus on maximizing economic effects such as public welfare and job creation and to minimize the damages to sensitive industries.

A free trade accord between Korea and China is certain to provide a turning point for the growth of both economies. But in order to hammer out an agreement that best preserves Korea’s national interests, the Korean government must take time to ensure full protection for sensitive items in the first stage of negotiations.