Korea's woes fracture NZ's free trade hopes

By SIMON COLLINS

A joint study into a free trade deal with South Korea that could boost New Zealand exports by more than $100 million a year looks to be making little headway in Seoul.

The study by economic institutes in both countries was announced by Korean President Kim Dae-jung and former New Zealand Prime Minister Jenny Shipley after the Apec summit in Auckland in 1999.

The NZ Institute of Economic Research delivered a 106-page report on the proposal in April and plans were made for a symposium in Seoul to release it and a matching report by the Korean Institute for International Economic Policy.

But the Korean institute has provided only a first draft of its report and plans for the symposium have come to nothing.

The former chairman of the Korea-NZ Business Council, Michael Stephens, said the Korean economy was suffering following the economic slowdown in the US.

"Given the current political environment, I can't imagine anyone trying to push through a free trade agreement at the moment in Korea," said Mr Stephens.

Prime Minister Helen Clark diplomatically made no mention of the proposal in any of three public speeches when she visited Korea in May.

The New Zealand report found that complete free trade would boost New Zealand exports to Korea by between $26 million and $210 million a year, with a central estimate of $105 million.

On the other hand, New Zealand imports from Korea would expand by only between $8 million and $61 million, with a central estimate of $31 million.

The gains for New Zealand would be much greater because present Korean duties are much higher on key New Zealand imports such as beef (30-40 per cent), dairy products (40-50 per cent) and fruit (over 50 per cent).

In contrast, New Zealand's highest duties on Korean imports are only 19 per cent on clothing and textiles. About half of New Zealand's Korean imports already come in duty-free.

The New Zealand institute said these results were only the initial "static" outcomes based on higher purchases of existing imports in each country if import duties were eliminated. The true gains to both countries would be "far greater" because free trade would force firms to become more efficient and provide a market for them to increase production.

It said there was only "negligible" risk that cutting import barriers between the two countries would divert trade that would otherwise have gone to other markets, because New Zealand and Korea were "natural trading partners".

New Zealand exports mainly logs and farm produce to Korea, and imports manufactured goods.

The report warned that free trade "may accelerate [the] contraction" of New Zealand's clothing, footwear and textiles sector. But it said the industry was shrinking anyway.

A surprise in the report was the low level of Korean investment in New Zealand - only a cumulative total of $2 million by 1999, almost entirely due to a single joint venture between the Korean company Hansol and Ngati Porou Whanui Forests on the East Coast.

But Mr Stephens said this figure, apparently based on Overseas Investment Commission statistics, was a gross under-estimate. The Hansol investment alone was "considerably in excess" of $2 million, and investments by Korean business migrants "could be several hundred million dollars".

The draft report by the Korean institute counted 42 Korean investments here worth $42 million - still only 0.06 per cent of Korea's total investment overseas.

It counted 15 New Zealand investments in Korea worth a similar total of $43.3 million, or 0.03 per cent of total foreign investment in Korea. Both reports predicted that two-way investment would grow under a free trade deal.

The counsellor at the South Korean Embassy in Wellington, Kim Kyung-soo, said Korea wanted to finish free trade talks with Chile, which began in 1999, before starting talks with any other countries. Besides New Zealand, Japan, Singapore and Thailand have all officially asked Korea to consider free trade agreements.

South Korea is New Zealand's fifth biggest export market, buying $1.45 billion of New Zealand products in the year to August, up 19 per cent from the previous year. It is our eighth biggest source of imports, worth $700 million.

Korea is also our third biggest source of overseas full fee-paying students and our seventh-biggest net source of immigrants. Just over 12,000 Koreans were living in New Zealand at the 1996 census.

New Zealand Institute of Economic Research