Asean-South Korea FTA: challenges and options

The Asean-South Korea FTA had been in the works since August 2003, when joint research put the issue on the economic policy agenda. In August 2006, the FTA on trade was signed, while the FTA on service was signed in November 2008. At the latest summit, Asean leaders signed an FTA on investment, which completed the long march to creating an Asean-South Korean Free-Trade Area.

In the past two decades, bilateral trade between Asean and South Korea has risen from US$8.2 billion to $90.2 billion (Bt279.5 billion to Bt3.1 trillion). South Korea investment in the Asean has also increased from $200 million to $6.8 billion. At present, Asean is South Korea's fifth-largest trading partner, and South Korea is Asean's third largest.

While Asean benefits from direct investment and import demand, South Korean firms enjoy Asean's abundance and diversified resources as well as cheap labour. Asean's population of nearly 580 million also represents a substantial market for Korean products, while Asean provides favourite destinations for Korean tourists.

By lowering trade barriers, many predict that intra-trade and investment between Asean and South Korea will rise to an equivalent of $150 billion by 2015.

Undoubtedly, governments, business leaders and economic analysts welcome completion of the FTA. The logic is clear: the lower the trade barriers, the better.

However, there are several things challenging this optimism. At the global level, the ongoing recession has adversely affected Asean and South Korean economies, given that they have both relied on the US export market.

In the case of Thailand, the first quarter's real gross domestic product contracted by 7.1 per cent year on year. Worse yet, gross fixed investment and exports plummeted by 15.8 per cent and 16.4 per cent year on year respectively.

South Korea's GDP and exports dropped by 19 per cent in the first quarter year on year. Since export-oriented policies have been the main driving force behind Asean and South Korean economies for several decades, the global recession has forced them to rethink future development strategies. The slowdown is also challenging the premise that deregulation is a panacea for development. Without systematic financial regulation and investment strategy, the influx of investment can do more harm than good. The massive short-term capital inflow, which resulted during the 1997 economic crisis, is an experience that Asean and South Korea do not want to repeat.

At the regional level, the Asean-South Korea FTA can add more complexity to trade relations within Asia. Currently, Asean has signed trade agreements with China, Japan, Australia and New Zealand, not to mention the myriad bilateral agreements that each country has signed with their preferred partners. Each FTA has different requirements on the "rules of origins". Hence, multiple FTAs with multiple partners can complicate trade regulations and add more administrative costs, creating what the famous trade economist, Jagdish Bhagwati, calls "the Spaghetti Bowl" effect. In the Asian context, one could call it "the Noodle Bowl" factor.

Asean countries appear to be competitive "foes" rather than "friends". For instance, Thailand and Vietnam are competing to become the world's top exporter of rice and are fiercely fighting for foreign direct investment in similar industries.

One could argue that this enables the region to nurture "competitiveness", however, it could also start the race to a new bottom, whereby workers lower their costs to become more economically attractive.

Indeed, the economic integration of Asean and South Korea is good for the region. But lowering trade barriers is only a shallow partnership. It isn't enough nor is it sustainable.

However, there are several options available. In the short run, Asean governments could invest in large public infrastructure and strengthen basic logistics systems. This would help secure employment and encourage domestic consumption.

To foster a stronger economic integration between Asean and South Korea, the investment strategy should be selective and targeted. For instance, Asean's low transportation infrastructure could present itself as an economic opportunity for South Korean expertise and investment. Similarly, Asean and South Korea can increase their investment in the energy sector, with Asean offering natural gas and energy, South Korea leading in terms of green technology.

In the long run, a stronger tripartite partnership between public and private sectors and educational institutions is needed to restructure the economy. More investment in research and development can help foster new industries that would complement existing manufacturing industries.

South Korea can also help Asean in the areas of education, science and technology to increase its human-capital profile while benefiting Korean businesses by offering a large skilled workforce. By establishing itself as an exemplar in education, South Korean universities can become a new destination for Asean's growing population.

While global recession makes the economic environment gloomy, systematic and strategic Asean and South Korea planning strategies are essential to ascertain Asian prosperity and sustainable development.