• South Korea’s economy expanded by 2.8% year-on-year (YoY) in the first quarter of 2012, easing from 3.6% in 2011. With exports decelerating due to the slowing global economy, the Korean economy is expected to maintain growth of around 3.5% in 2012 because of higher private consumption.
• Inflation has eased from the peak of 4.7% in August 2011 to 2.2% in June 2012. Moderating inflation points to lower interest rates that are expected to support private consumption.
• South Korean exports increased by a mere 0.7% YoY in the first half of 2012 amid the sluggish performance of mature and emerging markets. While imports grew by 2.5% over the same period, Korea managed to attain a trade surplus of US$10.7 billion, mainly attributed to the rise in automobile exports, in particular some popular fuel-efficient models.
• Following the tripartite summit of South Korea, Japan and China in May 2012, free trade agreement negotiations involving the three countries will be launched by end-2012.
Current Economic Situation
Expansion of the South Korean economy has been losing momentum since 2010. GDP growth has slipped from 7.4% YoY in the second quarter of 2010 to only 2.8% YoY in the first quarter of 2012, with the modest growth in Q1 2012 mainly contributed by government spending (+4.4% YoY) and investment (+9.1% YoY), in particular manufacturing investment. The IMF expects South Korea’s economy to grow by 3.5% in 2012. Supply chain disruptions arising from the March-11 earthquakes of Japan in 2011 have ceased to have much impact on Korea’s manufacturing activities and thereby the country’s economic growth.
Alongside slower economic growth, inflation in South Korea has been easing. The Consumer Price Index (CPI) has fallen from the peak of 4.5% in Q1 2011 to 2.2% in June 2012. The Bank of Korea (BOK) kept the administered rate unchanged at 3.25% for the 12th consecutive month in June 2012, amid higher prices of imported raw materials and uncertain outlook of developed economies.
South Korea is one of the Asian economies with high trade dependency, with total foreign trade accounting for 96% of the country's 2011 GDP. The performance of Korea’s economy is closely related to the performance of its exports, which contribute almost 50% of its GDP. South Korean exports increased by 19% US$555 billion in 2011, surpassing levels before 2008-2009 the financial tsunami. Export growth in 2011 was primarily a result of the rising demand from emerging markets, and to an extent, the recovery of some industrial economies. However, with the Eurozone debt problems overshadowing the global economic outlook, export growth of South Korea is expected to decelerate in 2012.
In the first half of 2012, South Korea’s exports increased by 0.7% YoY. While exports to the EU and China dropped 16% and 1.2% YoY respectively, exports to the Middle East, Oceania and the US increased by 18.3%, 15.4% and 10.7% over the year-earlier period. Major export destinations of South Korea included the Chinese mainland (23.2% share), ASEAN (13.9%), the US (11.2%), EU (9.3%), Japan (7.0%) and Latin America (7.0%). Among all major export items, automobiles (15.7%), petroleum products (11.5%) and automobile parts (10.2%) showed the strongest growth, while exports of consumer electronics were relatively weak. During the same period, imports by Korea grew 2.5% YoY, driven by the higher imports of raw material and capital goods. The major sources of imports to South Korea are the Middle East (25.1% share), China (15.4%) and Japan (12.4%).
To promote inward FDI, the Korean government provides cash assistance for overseas companies investing in the country. The minimum cash grant for foreign investment is 5% of the amount of investment. Moreover, there are two types of Foreign Investment Zones (FIZs) designated for foreign-invested SMEs and large foreign-invested companies respectively. Land purchase, rent subsidies and tax incentives are offered in those FIZs. Foreign investment on service industries including tourism, logistics and other business services are also encouraged. Besides, qualified foreign investment can be exempted from customs duties, VAT, and special excise tax on imported capital goods for the first three years.
In 2011, total FDI in South Korea increased by 4.6% to US$13.7 billion. Investment from the EU, the US and Japan increased 57.4%, 20.2% and 9.6 %.
In the past, South Korea's trade policy placed heavy emphasis on import control and export growth promotion. South Korea has revised its trade policy to a more neutral stance in recent years, which includes, amongst other things, reaching free trade agreements (FTAs) with other countries. It has entered into FTAs with Chile, Singapore, Peru, the European Free Trade Association (consisting of Switzerland, Norway, Iceland and Lichtenstein), ASEAN, the EU and the US. The FTA with the US was ratified in November 2011. A Closer Economic Partnership Agreement between South Korea and India was signed in 2010.
On the other hand, South Korea began FTA negotiations with China in May 2012, while considering FTAs with countries including Japan and Indonesia. A South Korea-China FTA has significant implications for both parties with bilateral trade reaching US$221 billion in 2011. In comparison, South Korea’s bilateral trade with the US and EU in 2011 were, respectively, US$101 billion and US$103 billion.
In 1997, following the amendment of the Customs Act and its Enforcement Decree, South Korea simplified import procedures and required documentation. Most goods can now be imported without licences, except items restricted for health or security reasons. All of Hong Kong's leading export products can be freely imported into South Korea.
Most duties are assessed on an ad valorem basis. For non-agricultural products, over 90% of goods are charged at tariff rates from 0% to 10%. Tariff rates for leading import items (e.g. electrical machinery) from Hong Kong range between 0% and 13%.
In addition to tariffs, imports are also subject to other taxes, including a value-added tax (VAT). The VAT rate on imports is 10% of the CIF value plus customs levies. In addition, a special excise tax, which ranges from 10% to 20%, is levied on certain luxury and durable consumer items.
The South Korean government still maintains a safeguard mechanism, which allows the government to impose a maximum of 100% tariff on goods which might disrupt the local markets. For example, jewellery is taxed at up to 65% and perfume is taxed at up to 35% (comprising regular tariffs, special excise tax and value added tax).