SEOUL SEARCHING DURING THE ECONOMIC CRISIS:THE

C O N F I D E N T I A L SECTION 01 OF 03 BEIJING 002398 SIPDIS STATE FOR EAP/CM -- THOMAS, FLATT, THORNTON, SHEAR STATE FOR EAP/J, EAP/K STATE FOR S/P -- CHOLLET, GREEN STATE FOR E -- YON STATE FOR D -- PARK STATE FOR EEB/OIA -- SCHOLZ, HICKS, TRACTON STATE PASS USTR FOR STRATFORD, WINTER, KALLMER, BAHAR NSC FOR LOI TREASURY FOR EUGENE HUANG, CHRIS WINSHIP, MICHEAL CARR COMMERCE FOR KASOFF,WU, LU, BLANK E.O. 12958: DECL: 08/07/2019 TAGS: ECON EFIN PREL EINV ETRD JA KS CH SUBJECT: SEOUL SEARCHING DURING THE ECONOMIC CRISIS:THE KOREAN APPROACH TO ECONOMIC RELATIONS WITH CHINA REF: A: BEIJING 01747 Classified By: Acting Economic Minister Counselor Robert W. Forden, for reasons 1.4 b, d ¶1. (C) Summary. Falling China-ROK trade levels and an investment dispute between a Chinese firm and its Korean employees have put some strain on China-ROK economic relations. Regarding negotiations among China, Japan, and Korea of a trilateral investment treaty, the Koreans (who signed a bilateral investment deal with China two years ago) have less at stake than the Japanese and low expectations of rapid progress. The recent first-ever trilateral meeting of the three Northeast Asian finance ministers did not produce concrete deliverables, but did set a precedent for an ongoing high-level dialogue on economic issues, with a second meeting scheduled for October this year. End Summary. ¶2. (U) Econoffs met August 6 with ROK Embassy Economic Counselor Myung-hee Yoo and First Secretary Min-Jeong Seo. Before her assignment to Beijing, Yoo had participated in the negotiation of the U.S.-ROK free trade agreement, including the provisions dealing with competition. She said that, after Washington, Beijing is now one of the highest-regarded postings abroad for Korean diplomats. Less trade, more friction -------------- ¶3. (U) Counselor Yoo lamented that the global economic crisis had made impossible the commitment made by the leaders at the December 2008 China-Korea-Japan Trilateral Summit to maintain the 2009 volume of trade at 2008 levels. In fact, bilateral trade between Korea and China has decreased 26 percent since last year. Korea's trade surplus with China appears to have widened, as Chinese exports to Korea have dropped by 33 percent. Cross-border investment flows are also down. ¶4. (SBU) The ROK is closely following China's Ministry of Commerce (MOFCOM)'s recent anti-dumping investigation of TPA exports (TPA is a petrochemical intermediary product that accounted for USD 3 billion of ROK exports to China last year). Korea is worried this case might set a precedent for other actions against Korean products and will be watching for MOFCOM's preliminary determination, due in August or September. ¶5. (U) Economic relations between Korea and China also hit a snag when Chinese-owned Korean carmaker Ssangyong initiated bankruptcy proceedings earlier this year. China's Shanghai Automotive Industry Corporation (SAIC),a state owned enterprise based in Shanghai, had bought a controlling share in the company in 2004. At that time, it was profitable. However, Ssangyong, which had been counting on increased sales to the growing Chinese auto market, faced bureaucratic obstacles, high tariffs, and a tightly regulated Chinese market that disappointed its expectations, left it in the red, and prompted SAIC to look for an exit. ¶6. (SBU) Labor unions in Korea claim SAIC failed to honor its promise to invest USD 1 billion in Ssangyong; Ssangyong directors have also sued SAIC for stealing technology. Yoo said she was confident these issues would be worked out satisfactorily in the Korean legal system, and that the Chinese understood the independence of the ROK courts. The more pressing issue, she asserted, has been the 77 day occupation of the Ssangyong factor in Pyeongtaek by hundreds of workers striking against massive layoffs. The occupation, which ended August 7, resulted in violent altercations between the police and striking workers. Analysts opine that for Ssangyong to survive in the long run it needs to find a new owner, given SAIC's clear lack of interest in continuing to manage the carmaker. In the meantime, a number of articles appearing in China's financial media have urged Chinese BEIJING 00002398 002 OF 003 investors to avoid the Korean automobile market. ROK not pushing hard on trilateral investment deal -------------- -------------- ¶7. (C) Unlike the Japanese, whose last bilateral investment deal with China dates back decades, the Koreans completed one with China just two years ago, giving them relatively little motivation to push hard for progress in the ongoing negotiations for a Korea-China-Japan trilateral investment treaty. Rather, the Koreans (who according to Counselor Yoo were aggressively wooed by Japan to join in the negotiations) see this process merely as an opportunity to make slight improvements to their existing bilateral deal. Yoo mentioned, for example, that the Japanese were pushing hard for stronger transparency language from China. Korea would welcome success on this front, but would view it as icing on the cake. ¶8. (C) During the last round of negotiations, the parties were able to narrow their differences on China's proposed Investor Corporate Social Responsibility provision (see reftel A). Counselor Yoo said the provision had been a sticking point and that the movement toward more "modified, toned-down language" made it slightly more palatable. However, both Korea and Japan still view the new Chinese proposal that investors should abide by the host country's domestic laws and regulations as overly vague and will press to further limit its scope. ¶9. (C) Seo asserted that China had moved slightly forward in some areas, such as performance requirements and intellectual property rights. At the same time, Japan seemed to recognize that it needed to lower its ambitions regarding those two issues and transparency. Despite these small steps, Seo said "there is no chance" that pre-establishment national treatment would be included in the agreement. Korea, she said, was more flexible on those issues than Japan. ¶10. (C) Seo also provided information on the following noteworthy topics of discussion from the most recent round of negotiations: --Principles of Investment Agreement: China withdrew its position to impose on investors an obligation to benefit the receiving country's economic and social development, replacing that language with a newly proposed "non-obligatory clause." --Performance Requirement: China said it could list its WTO/TRIMs obligations, but not its obligations listed in the protocol of China's accession to the WTO. --Entry of Personnel: The three parties failed to narrow the gap on this issue. China hopes to increase and broaden the movement of persons, while Korea and Japan would like to maintain tighter controls. --Intellectual Property: China said it would be able to accept an "endeavor clause" related to IPR. Japan provided a revised proposal which the parties will review at the next round. --Transparency: China strongly opposed Japan's new proposal on administrative procedures, review, appeal, notification, and provision of information. More dialogue in the works -------------- ¶11. (SBU) Yoo and Seo said the global economic crisis has prompted increased dialogue among the Northeast Asian partners. The heads of the Chinese, Japanese, and ROK central banks held a first-ever stand-alone meeting in July to exchange views on how to improve economic cooperation in BEIJING 00002398 003 OF 003 Asia. The three countries are also planning for their second Trilateral Summit in October. Originally scheduled for August, the summit had to be pushed back due to Japan's elections. It will likely take place in Tianjin, China, and will focus the leaders' attention on economic and energy issues. The first summit was launched in December in an effort to bolster cooperation in the wake of the global financial crisis. Although the December summit produced no deliverables, it did set the stage for the countries to adopt a collaborative, regional approach in future engagements. GOLDBERG