KOREA-ASEAN FTA: TRADE IN GOODS AGREEMENT FINALIZED

UNCLAS SECTION 01 OF 04 SEOUL 001981

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/K AND EB/TPP
COMMERCE FOR 4431/MAC/OPB/EAP/DUTTON
PASS USTR FOR CUTLER, WEISEL, AUGEROT AND KI

E.O. 12958: N/A
TAGS: ETRD PREL KS XC
SUBJECT: KOREA-ASEAN FTA: TRADE IN GOODS AGREEMENT FINALIZED

REF: SEOUL 449 AND PREVIOUS

SUMMARY
--------------


1. (SBU) Korea and the Association of Southeast Asian
Nations (ASEAN),with the exception of Thailand, finalized
and signed the Trade in Goods (TIG) part of their free trade
agreement (FTA) on May 16 in Manila. The agreement will
liberalize 90 percent of tariff lines, amounting to 90
percent of trade volume by 2010. Liberalization follows two
tracks: a "Normal Track," which accounts for 90 percent of
goods and trade volume, and a "Sensitive Track," which
applies to 6-7 percent of goods and 7 percent of trade
volume. The Sensitive Track is further broken down into a
"sensitive list" and a "highly sensitive list," each with
its own staging periods and exclusions. The remaining three
percent are taken up by tariff lines fully excluded from
liberalization.


2. (SBU) Korea succeeded in cajoling ASEAN members into
granting preferential treatment to some goods processed in
the Kaesong Industrial Complex (KIC) located in North Korea
(in which South Korean firms manufacture goods and parts for
the South Korean market using cheap North Korean labor).
However, such preferential treatment will apply to less than
half of the products manufactured in the KIC -- more
restrictive treatment than Korea was able to obtain in its
FTAs with Singapore and the European Free Trade Association
(EFTA). End summary.

THE NORMAL TRACK
--------------


3. (SBU) Kim Min-cheol, Country Coordinator for the Korea-
ASEAN FTA in the Ministry of Foreign Affairs and Trade
(MOFAT),provided Econoff with a detailed briefing on the
provisions of the FTA on June 13. He explained that for
purposes of the FTA, ASEAN is divided into two groups -- the
six, more developed, original ASEAN members (ASEAN 6) and
the four lesser developed members: Cambodia, Laos, Myanmar,
and Vietnam (CLMV). Obligations and staging periods differ
somewhat among the two groups, with the CLMV countries
enjoying longer phase-in periods for liberalization.


4. (SBU) According to Kim, the bulk of goods traded among
Korea and the ASEAN members are to be liberalized according
to what the TIG part of the FTA defines as the "Normal
Track." This box contains 90 percent of tariff lines
comprising 90 percent of the trade volume between Korea and
the individual ASEAN members. Each ASEAN member will
maintain its own concession list -- there is not a common
ASEAN list. Korea and the ASEAN 6 countries will eliminate
tariffs included in the Normal Track by 2010, except for
Indonesia and the Philippines, which will be allowed to wait
until 2012 to fully eliminate tariffs on 5 percent of their
Normal Track tariff lines. Vietnam will have until 2016 to
eliminate its Normal Track tariffs, with Cambodia, Burma,
and Vietnam having until 2018.


5. (SBU) Korea will eliminate 70 percent of its Normal Track
tariffs (i.e. 70 percent of 90 percent) upon the agreement's
entry into force, while the ASEAN 6 countries will eliminate
50 percent of their Normal Track tariffs upon
implementation. For tariffs not immediately eliminated,
staging periods are calculated by formula, based on the
respective products' initial MFN applied tariff rate, with
higher tariffs being eliminated over a longer period of time
than lower initial tariffs. All tariff lines are based on
HS six-digit categories.

THE SENSITIVE TRACK
--------------


6. (SBU) The Korea-ASEAN TIG Agreement contains extensive
provisions for according special treatment to politically
sensitive items. Sensitive Track goods are placed in one of
two boxes: the "sensitive list" or the "highly sensitive
list." Korea and ASEAN 6 countries must reduce tariffs on
items in the sensitive list to (note: not "by") 20 percent
by 2012, and to 0-5 percent by 2016. The CLMV countries
have longer staging periods of 2016 and 2020, respectively.


7. (SBU) The highly sensitive list contains five boxes:


SEOUL 00001981 002 OF 004


-- Box A: Tariffs cut to 50 percent by 2016 (Korea and ASEAN
6) or 2024 (CLMV);

-- Box B: Tariffs cut by 20 percent (same time periods);

-- Box C: Tariffs cut by 50 percent;

-- Box D: Goods receive a Tariff Rate Quota (TRQ);

-- Box E: Total exclusion.


8. (SBU) There are three basic restrictions on placing items
in the highly sensitive list. First, each party may place a
maximum of 200 items on this list. Second, parties may
place a maximum of 40 items in Box E (total exclusion).
Third, none of the items placed on the highly sensitive list
can account for more than three percent of the import volume
(2004 baseline) for that item from the other party. For
example, if automobiles took up more than three percent of
Indonesia's imports from Korea, Indonesia could not place
autos on the highly sensitive list. However, this factor is
not dynamic, but rather fixed at 2004 levels, so even if
import volume rises above the three percent threshold, the
party would not have to subsequently liberalize tariffs for
that item.


9. (SBU) According to Kim, it is essentially left up to each
party's discretion as to which items are placed on the
various lists. He did admit, however, that there was some
negotiation designed to prevent a party from placing a given
item on the highly sensitive list. For example, while
Malaysia has put automobiles on its total exclusion list,
Korea convinced it to open up the CKD (automobile knockdown
kit) market.

AGRICULTURE
--------------


10. (SBU) All of the 200 goods that Korea placed on its
highly sensitive list are agricultural or fisheries items.
(ASEAN members included various industrial and chemical
goods on their list.) In addition to the 40 excluded items
in Box E, Korea also placed five items whose tariff is less
than 50 percent in Box A (tariff reduced to 50 percent),
thus providing those goods with a de facto exclusion.
According to Kim, Korea originally intended to place many
more such items in Box A, but the ASEAN members strenuously
objected to Korea using Box A as a de facto exclusion list,
and they succeeded in forcing Korea to limit such items to
five.


11. (SBU) Nevertheless, Korea will have to open up its
agriculture markets more under this FTA than under its
previous agreements. Kim said that Korea has 445 tariff
lines (HS six digit) for agricultural and fisheries
products. Since "only" 200 can be placed on the highly
sensitive list and "only" 45 completely excluded, over half
of the agricultural/fisheries tariff lines will have to be
opened to some extent.

KAESONG INDUSTRIAL COMPLEX
--------------


12. (SBU) According to Kim, Korea had to negotiate very hard
to wring any concessions on goods processed in the KIC out
of the ASEAN members. Unlike Korea's previous FTA partners
with which it negotiated preferential treatment for goods
processed in Kaesong -- Singapore and EFTA -- ASEAN had
economic interests opposed to granting preferential
treatment, as Kaesong presents direct competition for the
low-wage, light industrial goods that form ASEAN members'
competitive advantage.


13. (SBU) Kim said the final deal on Kaesong was not reached
until the May 16 Korea-ASEAN trade ministers' meeting, where
Korean Trade Minister Kim Hyun-chong reportedly made a
forceful intervention on behalf of the Kaesong provisions
with his counterparts.


14. (SBU) The resulting compromise was that the same
"outward processing" language that Korea used in the EFTA
FTA to secure preferential treatment for Kaesong goods,
which uses a content requirement of at least 60 percent
South Korean content for an "outward processed" good to be
considered originating, was also included in the Korea-ASEAN

SEOUL 00001981 003 OF 004


TIG Agreement. However, an additional hurdle was placed on
Kaesong-processed goods. Korea provided ASEAN with a list
of 232 goods that are currently being processed in Kaesong,
or will be by the end of 2006. From this list, each ASEAN
member separately will choose 100 of these to which it will
grant preferential treatment.


15. (SBU) Additionally, the ASEAN members will develop a
common list of approved Kaesong items, notionally by the end
of August. After that, there will be 10 individual Kaesong
lists plus one common list. For each individual ASEAN
member then, the number of Kaesong goods to which it
individually accords preferential treatment will equal 100 -
- whichever goods are on the common ASEAN list, plus
additional goods it selects so that the total comes up to

100.


16. (SBU) In addition to the numerical limitation of
approved Kaesong items, the agreement also provides ASEAN
members the right to review the situation at any time and
elect to stop providing preferential treatment to Kaesong.
ASEAN members also enjoy a special safeguard provision for
Kaesong goods that is not subject to dispute settlement and
can by used virtually unconditionally.

THAILAND OPTS OUT
--------------


17. (SBU) Thailand opted out of the TIG Agreement. While
the Thai delegation cited political confusion in Bangkok as
the reason for being unable to sign at the May 16 trade
ministers meeting, the real underlying reason was Thailand's
unwillingness to accept Korea's exclusion of rice,
Thailand's chief export.


18. (SBU) According to Kim, Thailand can join the TIG at any
time in the future, and Thailand is still a part of the
remaining FTA negotiations on services and investment.
However, he noted that Thailand would essentially have to
join the TIG on a "take it or leave it" basis, which would
put Thailand at a disadvantage. Kim said that Korea does
plan to try to entice Thailand to sign the TIG by sweetening
its offers in the service negotiations, but Kim left no room
for the possibility of giving Thailand any concessions on
rice, including by increasing the Thai country specific
quota under Korea's 2004 rice agreement with the WTO.

SERVICES AND INVESTMENT
--------------


19. (SBU) With the TIG Agreement finalized, Agreements on
Services and Investment remain to be completed to finish the
Korea-ASEAN FTA "package." Each agreement is considered a
stand-alone agreement, however.


20. (SBU) Negotiations on services and investment are
ongoing, with a target completion date of the end of 2006.
Kim admitted that Korea's "ambition is not so high" in the
services and investment areas, where Seoul is pursuing a
basic WTO-plus agreement -- with the "plus" being relatively
minor. The negotiating parties are using each other's
revised GATS offers as the basis for services concessions.
The Korea-ASEAN Investment Agreement is being modeled on the
ASEAN Investment Agreements (AIA's) the ASEAN members have
concluded amongst themselves.

COMMENT
--------------


21. (SBU) The Korea-ASEAN Trade in Goods Agreement, while
not nearly as comprehensive as a U.S.-style FTA, represents
a fruitful conclusion to a complicated, multi-party
negotiation, and probably helped to increase Korea's
negotiating experience and prowess. The agreement also has
economic significance, providing for substantially opened
trade between Korea and its fourth-largest trading partner
(counting ASEAN as a single entity).


22. (SBU) The agreement is expected to be uncontroversial in
Korea, and should easily pass the National Assembly in time
for entry into force by August. This is despite the fact
that it will open Korea's agricultural markets more than
Seoul's previous FTAs. In this regard, Korea's ASEAN
negotiation team is benefiting from the fact that the Korea-
ASEAN FTA is being almost completely drowned out, both in

SEOUL 00001981 004 OF 004


terms of media interest and interest group attention, by the
U.S.-Korea FTA negotiations.

VERSHBOW