KOREA'S FREE TRADE AGREEMENT WITH ASEAN

UNCLAS SECTION 01 OF 03 SEOUL 000449

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/EP, EAP/K AND EB/TPP/BTA
PASS USTR FOR CUTLER AND KI

E.O. 12958: N/A
TAGS: ETRD ECON PREL KS KN XB
SUBJECT: KOREA'S FREE TRADE AGREEMENT WITH ASEAN

REF: (A) 05 SEOUL 3353
(B) 05 SEOUL 2163

Summary
--------------

1. (U) On December 13, 2005, the Republic of Korea and the
Association of Southeast Asian Nations (ASEAN) announced the
conclusion of a Framework Agreement for a bilateral free
trade agreement (FTA). Although the parties had also
concluded negotiations for the Trade-in-Goods (TIG) and
Dispute Settlement agreements by the time of the December 13
Korea-ASEAN summit in Kuala Lumpur, those agreements were
not announced. The TIG announcement is being held up due to
Thailand's demand that Korea not be allowed to exclude rice
under the agreement; Korea and Thailand are currently in
bilateral talks to resolve this issue. The Dispute
Settlement Mechanism agreement announcement is being held
back until the TIG is fully completed and announced.


2. (SBU) The ASEAN-Korea FTA (AKFTA),when completed, will
be a collection of stand alone agreements, rather than a
single unified pact. It is being negotiated and implemented
in stages. The agreement also provides for differential
treatment between ASEAN's more developed and less developed
members. It provides for long staging periods, with full
liberalization by ASEAN's less developed members not being
reached until 2026 -- 20 years after the expected conclusion
of negotiations.


3. (SBU) The Framework Agreement sets the stage for Korea
and ASEAN to announce the subsequent TIG and Dispute
Settlement Mechanism agreements in the first half of 2006.
Negotiations of the Services and Investment agreements are
scheduled to conclude by the end of 2006. If successful,
the ASEAN-Korea FTA (AKFTA) would be Korea's second FTA with
a multi-national organization, following its FTA with the
European Free Trade Association. The Korean government is
interested in concluding an FTA with ASEAN because of its
strong economic ties to Southeast Asia and support for ASEAN-
Plus-Three, as well as out of a sense of competition with
China and Japan, which also have (in the case of China) or
are negotiating FTA's with ASEAN. The ASEAN-Korea pact will
allow for preferential treatment for products manufactured
in the Kaesong Industrial Complex (KIC) in North Korea. End
Summary.

Korea and ASEAN Approve FTA Framework Agreement
--Q -------------- -

4. (SBU) Econoff met with Korean Ministry of Foreign
Affairs and Trade (MOFAT) FTA Coordination Division Deputy
Director Ryu Ho-kwon, Embassy of Singapore Diplomatic Chief
of Mission Gabriel Liow, and Embassy of Thailand First
Secretary Bhavivarn Noraphallop in January 2006 to discuss

SIPDIS
the ASEAN-Korea FTA.


5. (SBU) Ryu and Liow confirmed that Korea and ASEAN
concluded a Framework Agreement, Dispute Settlement
Mechanism and TIG Agreement for the FTA at the December 2005
ASEAN-Korea Summit. The Framework Agreement and Dispute
Settlement Mechanism were signed by all countries, but only
the Framework Agreement was publicly announced at the
Summit. The ASEAN-Korea FTA Working Group will also
withhold announcing the Dispute Settlement Mechanism until
the TIG Agreement is announced. Although the TIG Agreement
was signed by Korea and all ASEAN countries except Thailand,
tQ TIG exclusions list must be finalized according to
tariff line and staging times for initially-excluded
products. The Framework Agreement specifies that Korea and
each ASEAN country may choose specific items to exclude from
tariff reductions, provided that the total trade items on
the exclusion list does not exceed three percent of the
total trade volume or tariff lines.

Kaesong Goods Considered "Made in Korea"
--------------

6. (SBU) Korea scored a diplomatic victory when it persuaded
ASEAN to accord goods produced in the Kaesong Industrial
Complex the same treatment as good produced in South Korea
under the Rules of Origin provisions of the TIG. The
Kaesong Industrial Complex is an industrial park located in
North Korea where South Korean firms use North Korean labor,
and pay the North Korean government a fixed wage per laborer
per day. It is considered by Seoul to be a showcase of its
economic engagement policy with the North. Accordingly,
Korea has requested FTA treatment for Kaesong products in
all its FTA negotiations (save Chile, for which negotiations

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were completed before Kaesong was established).


7. (SBU) According to Korean press reports, several ASEAN
members were initially reluctant to grant Kaesong goods
preferential treatment due to concern about competing with
its low North Korean wages. The news that ASEAN did end up
agreeing to grant FTA treatment to Kaesong goods therefore
met with prominent press coverage here.

ASEAN and Korea Agree to Implement FTA in Stages
-------------- ---

8. (SBU) Liow emphasized that ASEAN and Korea will
implement key aspects of the FTA in stages -- but ahead of
China and Japan, which are also currently negotiating FTA's
with ASEAN. Both the China-ASEAN FTA and Japan-ASEAN FTA
will likely go into effect in 2010, while Korea wants to
implement the first stage of its FTA with ASEAN by 2009.
Ryu explained that implementing the FTA in stages will give
all countries time to prepare for tariff reductions. Liow
suggested that bragging rights is a major factor driving the
Koreans to push for an earlier implementation date. He also
claimed that Korea preferred to initially address more
difficult FTA issues, namely goods, before services, in
order to ensure that the FTA will be implemented.


9. (SBU) Under the TIG Agreement, Korea and ASEAN's six
more-advanced countries (Brunei, Indonesia, Malaysia, the
Philippines, Singapore and Thailand) would abolish tariffs
on 80 percent of traded goods by volume and tariff line by
2009, and 90 percent by 2010. By 2016, tariffs on the
remaining 10 percent of traded goods initially excluded in
the TIG Agreement will be decreased or eliminated. ASEAN's
less developed members (Cambodia, Laos, Myanmar, and
Vietnam) would abolish tariffs on 80 percent of traded goods
by volume and tariff line by 2017, and 90 percent by 2018.
By 2026, tariffs on the remaining 10 percent of traded goods
initially excluded will be decreased or eliminated. MOFAT
anticipates that the liberalization schedule for services
and investment will correspond closely with the TIG tariff
reduction schedule. By 2026, tariffs on 97 percent of all
ASEAN-Korea trade by volume and tariff line should be
eliminated.


10. (SBU) On February 3, 2006, ASEAN and MOFAT negotiators
met at the 10th ASEAN-Korea Summit in Jakarta, Indonesia to
finalize the TIG exclusions list and tariff reduction
schedule. Negotiators also commenced negotiations on
separate services and investment agreements, which will
continue concurrently through 2006. MOFAT and Thai
negotiators also met bilaterally to resolve differences over
the rice tariff, paving the way for Thailand to sign the TIG
Agreement. Pending the outcome of these negotiations, ASEAN
and Korea plan to implement all AKFTA agreements by early

2007.

Rice Issue Hinders Trade-in-Goods Agreement
--------------

11. (SBU) During the December 2005 AKFTA Summit, Thailand --
one of the world's top rice producers -- opted not to sign
the TIG Agreement after Korea refused to open its rice
market. At the time, Thailand believed it could delay the
TIG Agreement unless Korea agreed to accept rice
concessions. However, because the "ASEAN minus X principle"
allows other ASEAN members to sign the agreement over
Thailand's objection, Thailand must bilaterally negotiate
rice concessions with Korea. According to Liow, Thailand
will press for derivative concessions rather than a rice
tariff reduction. He said that Thailand will ask Korea to
waive the tender process for rice and contribute up to USD
60 million to Thai development.


12. (SBU) In 2004, under Annex 5 of the Agriculture
Agreement, the WTO ruled that Korea's rice quota could
continue for up to ten more years, but only after individual
WTO members had the opportunity to negotiate rice
concessions with Korea. Ryu and Liow stated that because
Korea formally adopted the agreement in December 2005 to
expand the quota on imported rice, Korea will probably not
agree to any additional change in its rice quota, tariff, or
offer rice concessions to entice Thailand to sign the TIG
Agreement. Liow added that Thailand will likely sign the
TIG Agreement regardless of the outcome of the rice
negotiations. Other concessions are possible. Thai Embassy
officer Noraphallop admitted that Thailand would be willing
to consider other concessions from Korea in lieu of rice,
citing Thai fruit as a possible alternative.

SEOUL 00000449 003 OF 003




13. (SBU) Korean and ASEAN officials are optimistic that
the TIG Agreement will be signed by Thailand and that the
TIG exclusions list will be finalized by April 2006.
Thailand, however, estimates that it may take up to six
months before it signs the TIG Agreement. The Korean
government hopes to take the necessary steps to ratify and
implement the AKFTA Framework Agreement, TIG Agreement, and
the Dispute Settlement Mechanism by July 1, 2006.

Singapore Supports Multiple FTAs with Korea
--------------

14. (SBU) Singapore is in a unique position in that it
already finalized a bilateral FTA with Korea, set to enter
into force on March 2, 2006. Nevertheless, Singapore
strongly supports the AKFTA because it gives the small
nation additional economies of scale, and Singapore has not
agreed to any additional concessions under AKFTA. Singapore
hopes that ASEAN's FTAs with Korea, China, and Japan will
lay the foundation for greater cooperation through the East
Asia Summit.

Comment
--------------

15. (SBU) The main "innovation" of the AKFTA is the decision
to negotiate and implement the pact in stages, broken up
into separate agreements: TIG, Dispute Settlement,
Services, Investment. The long staging periods (until 2026)
for a relatively large segment of trade volume is striking,
and could be problematic for future negotiations if Korean
officials and domestic interest groups come to view this
approach as a precedent to be applied in future agreements.
The granting of FTA Rules of Origin treatment to goods
produced in the Kaesong Industrial Complex located in North
Korea gives Korea a consistent record of achieving this
demand in its FTA negotiations, thus far, and could whet its
negotiators' appetites -- and affect public expectations --
for a repeat in future FTA's.

VERSHBOW