Korea-New Zealand Free Trade Agreement Hits Wall

Ongoing since June 2009, New Zealand's negotiations for a free trade agreement with Korea still seem bogged down by the sensitive issue of agriculture. Here we examine the Korean perspective and the domestic issues that present significant obstacles to concluding the agreement.

In the week of 20 September 2010, South Korea was the scene of some of the world’s worst traffic jams as tens of millions of urban Koreans hit the roads heading for ancestral rural villages among the hills and rice paddies. This is Chuseok, the harvest festival.

The annual pilgrimage, Korea’s most important national holiday, offers a clue as to why a highly promising Free Trade Agreement ( FTA)  between New Zealand and South Korea is currently bogged down in a quagmire.

“For the present, [negotiating] officials have gone as far as they can,” said Alison Mann, New Zealand’s lead negotiator for the FTA. “We need some political decision to be reached.”

The issue holding up the FTA is one all Koreans interviewed for this article cited as “sensitive”:  agriculture.

Farmers a powerful bloc

“Korea and New Zealand have had four rounds of FTA negotiations since June of 2009,” said Song I-song, a researcher at Korea International Trade Association (KITA), a trade lobby group. “During the four rounds of the negotiation, issues of the environment, competition policy  and labor had been discussed and agreed. However, the progress of the discussion on agriculture has been relatively slow.”

As Chuseok’s monster traffic jams show, while Korea is an urbanised nation, noted for its industrial exports and fondness for high technology, most Koreans are only one or two generations removed from the land. This engenders strong emotional bonds to a vanishing rural Korea. Moreover, farmers’ lobby groups are well organised and frequently militant: they have demonstrated against free trade in places as distant as Hong Kong and Cancun.

The end result is an inefficient and heavily protected sector  (Koreans currently pay five times the global prices for food products) that wields political muscle out of all proportion to its role in the national economy. Agriculture represents less than 4 percent of Korea’s GDP. But as many farmers are aged family heads, younger Koreans are ill-placed to remonstrate with them.

“In relation to Korea's other FTAs, agriculture looms particularly large;  it is about 60 percent of the trading relationship. For Korea it is an issue they have to wrap their heads around, because it is politically sensitive for them,” said Ms Mann. “They say they are looking for what they can get out of it that they can set against agriculture, and that they are scratching their heads as New Zealand is already a pretty open market.”

Therein lies the rub. New Zealand, an agricultural economy, has low tariff barriers to industrial goods, while Korea, an industrial economy but one that is also beholden to its farmers, has high tariffs. Seen in this light, Wellington has little leverage, granting Seoul little motivation to dismantle its own barriers.

“Domestic concerns about the agricultural market liberalisation in Korea and insufficient industry back-up, due to New Zealand's low tariff rates, have slowed down the negotiations,” said Kim Hae-yong, Director General of the FTA Negotiation Bureau at Seoul’s Ministry of Foreign Affairs. “It is hard to balance the interest of the two countries in the FTA.”

Yet the economic benefits of the FTA for both parties have already been spelled out in a bilateral study. Why are these benefits not being promoted to the public by government or consumer organisations?

The issue returns to “sensitivity.” While there have been negative reports in agricultural trade media about the Korea-New Zealand  FTA, there have been no demonstrations, and the deal is far from being a front-of-mind issue in South Korea. Agriculture remains a sector that any public official is extremely reluctant to raise his voice on, however rational the argument may appear, for fear of provoking a backlash from farmers.

“This is a very, very emotional country and there are protests about every conceivable issue, outside local government offices, almost every day,” said Michael Breen,  author of “The Koreans” and chairman of Seoul-based PR company Insight Communications, which advises foreign investors facing issues in the Korean market. “Nobody wants to be responsible for having caused one.”

Hence the negotiating stalemate, and the hopes for political intervention. But how much political capital Seoul is willing to expend in promoting the Korea-New Zealand FTA is questionable.

A tricky political situation

President Lee Myung-bak’s Grand National Party was routed in local elections this summer. As a result his government – seen as conservative, business-friendly and pragmatic – now finds itself having to engage and cut deals with the opposition – seen as liberal, more responsive to interest groups, and more protectionist.

Moreover, while the FTA was first proposed by Lee himself, and while Lee spent a longer-than-expected 90 minutes discussing the FTA with New Zealand Prime Minister John Key in July 2010,  the president  has had to encounter explosive emotions domestically, on the issue of agricultural imports.

In the first test of his presidency in spring 2008, massive demonstrations were sparked by news reports that Korea had agreed to import US beef that was at risk of BSE. For months, central Seoul was occupied by protestors clashing with riot police.

The situation showed that over agricultural imports, perception trumps reality.  The incendiary TV documentary proved to be seriously inaccurate and was completely discredited, but by then, public emotion was running high and  the situation had escalated, eventually morphing into broad anti-government demonstrations.

This suggests that even if officials roll out statistics from studies showing how complementary the two agricultural economies are, or how minimally New Zealand’s exports ( currently, a mere 2 percent of Korean agricultural imports) will impact the Korean agricultural sector, it does not mean that the message will sink home.

These factors put New Zealand in an unenviable place. New Zealand wants to remove tariffs from the most sensitive sector in the Korean political economy, but lacks the economy of scale that would justify urgent prioritisation of its FTA.

According to Korean International Trade Association figures, in 2009 New Zealand was Korea’s 46th largest trading partner (the 51st largest export market and the 39th largest import partner), while South Korea is the 7th largest trading partner of New Zealand (the 6th export market and the 7th import partner). The conclusion is inescapable: Korea is a more important market for New Zealand than vice versa.
This is important, as Seoul’s FTA-focused resources are finite.

Practical constraints on negotiations

A range of Korean official organisations are actively involved in FTA talks. These include: the FTA Negotiations Bureau and the FTA Policy Bureau in the Ministry of Foreign Affairs and Trade, as well as different offices and individuals from the Ministry of Strategy and Finance, the Ministry of Knowledge and Economy and the Ministry of Agriculture and Fisheries.

This manpower pool faces a formidable volume of work. The Korea-US FTA is in an administrative limbo, having been passed by neither country’s legislature due to allegations of non-tariff barriers facing US beef and cars, so almost certain to face renegotiation.

The Korea-EU FTA was finally agreed in mid-September 2010 and will enter into force on 1 July 2011. Korea will thus become the first Asian country to hold an expanded preferential trade deal with the 27 countries making up the European Union. Korea continues to negotiate FTAs with Australia, Columbia, the Gulf Cooperation Council, Turkey and New Zealand.

“Due to active FTA initiatives, the Korean government has barely managed the human resources devoted to all the FTAs,” admitted Mr Kim of the FTA Negotiation Bureau.

So what is the present situation?

New Zealand media covering Prime Minister Key’s  July talks with President Lee expected stalled FTA negotiations to restart within two months. That has not happened. Then, the two leaders agreed that their respective trade ministers would meet to get things back on track. That meeting took place on the sidelines of the ASEAN meetings in Danang in August 2010.

“They focused on discussing areas relating to each side's needs in the FTA,” said Ms Mann. “They didn't reach conclusions, but agreed to meet in late October or early November to take the discussion further.”

At the time of publication, no future negotiations have been tabled. One source in Seoul suspects that for the FTA to be concluded, seven rounds of negotiations will be required.

With New Zealand lacking leverage and South Korea’s agricultural and party-political sensitivities entangling the deal, the process looks some way from conclusion.

- by Andrew Salmon in Seoul, October 2010
Images sourced from Flickr under Creative Commons licence.

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Last updated: 22 February 2012