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

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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

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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