Proceedings of Eurasia Business Research Conference
16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey, ISBN: 978-1-922069-54-2
Performance and Prospects in Trade and Investment
between Republic of Korea and India since CEPA of
2010*
Skand R. Tayal** and Ki-Kwan Yoon***
Four years have passed since CEPA between Republic of Korea and India
took effect. However, its outcome has not met both countries’ expectations in
the growth of trade and investment. The reasons are that liberalization rate is
very low, custom tariff rates of several liberalized goods had already been
lowered and many goods of both countries with comparative trade advantage
remain un-covered under CEPA. Due to these reasons the two countries’
bilateral trade volume has not increased substantially. Accordingly, CEPA
needs to be revised to improve its impact. This paper suggests some
policy-proposals for the CEPA revision through the analysis and estimation of
both countries’ trade and investment during last 4 years. This paper
concludes that such upgrade of CEPA’s quality, enlargement of list of lines
with tariff elimination and acceleration of tariff concession rate reduction will
help both the countries to add to their economic growth.
JEL Codes: F34, G21, and G24
I. Introduction
The Republic of Korea (ROK), which, due to a rather small domestic market
and scarce resources endowment, is compelled to depend for sustainable
economic growth on foreign trade needs to secure new export markets for goods
and safe sources of energy and strategic mineral resources.
The Comprehensive Economic Partnership Agreement(CEPA) between ROK
and India, was India's second such economic agreement and seventh for Korea
and took effect from January 1, 2010.This is also India‟s first Free Trade
Agreement to cover not only trade in Goods but also Investments, Services
and Bilateral Cooperation in other areas of common interest.
Four years have passed since CEPA took effect and this paper aims at
analyzing both trade and investment record and presenting some policy
recommendations in the trade and investment sector for the revision of
ROK-India CEPA.
* This paper is based on a presentation at the international conference held in Delhi University
on January 2, 2014.
** Skand R. Tayal, former Ambassador of India to the ROK, is now a visiting professor at the
Department of East Asian Studies of Delhi University, India. Email: skandtayal@hotmail.com
*** Ki kwan Yoon is a professor of international trade at the department of international trade,
Chungnam National University, ROK. Email: kkyoon@cnu.ac.kr
1
Proceedings of Eurasia Business Research Conference
16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey, ISBN: 978-1-922069-54-2
II. Major contents of Korea-India CEPA
1. Historic Progress to Economic Relations between ROK and India
Historically there is no evidence of any direct trade between Indian and
Korean peninsulas in the ancient or medieval periods. In the 18 th and 19th
centuries also, India had trade with many countries of South East Asia but not
with Korea. After the second world war the two newly independent countriesIndia and South Korea- had the first opportunity to build trade and economic
relations starting with a clean slate.
However, in the aftermath of the Korean War (1950-53) significant political
differences emerged between the authoritarian regime of President Syngman
Rhee and a democratic and non-aligned worldview of Prime Minister Jawaharlal
Nehru. In the 1960s and later the two countries adopted two radically different
paths for economic growth and development .Republic of Korea, under the
leadership of President Park Chung-hue, embarked on a route of export led
growth and India adopted a strategy of internal self-reliance and tightly regulated
economy. The two countries neither viewed each other as a lucrative market nor
as a source of investment or technology and largely ignored each other.
Following the India-China border tension of 1961, Consular relations were
established between India and ROK in 1962. Subsequently, the first trade
agreement between the two countries was signed in 1964. ROK was moving
rapidly on the course of industrialization, modernization and urbanization and
made an impressive display at the 3rd Asia International Trade Fair in New Delhi
in 1972. India also had a trade exhibition in Seoul in 1975. The results were
encouraging and the bilateral trade rose from a low figure of $ 12.4 million in
1971 to $ 170 million in 1979.
Reflecting the higher level of industrialization of ROK the exports from
ROK to India of manufactured goods rose. In the latter half of 1970s, the trade
balance changed from surplus for India to surplus for ROK, a situation which
continues till date.
1980s witnessed another spurt in export of high value goods from ROK to
India. It included colour TV tubes (with the introduction of colour TV in India in
1982 for the Asian Games), container ships & bulk carriers, off-shore platform for
Bombay High etc. The two-way trade rose in the year 1984 to $1.4 billion largely
because of import of ships by India. However, the trade declined to $718 Million
in 1990.
For India, the rising trade imbalance with Korea has always been a matter
of concern. While ROK was exporting high value goods to India, such as
2
Proceedings of Eurasia Business Research Conference
16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey, ISBN: 978-1-922069-54-2
chemicals, synthetic fibers, iron & steel, TV components, ships etc , India‟s
export basket to Korea had traditional and primary articles like coal, naphtha,
leather, cotton, farm products, iron ore, coffee etc.
1990s ushered a new era in India- ROK economic relationship with the
sweeping liberalization and de-regulation of the Indian economy introduced by
Prime Minister Narasimha Rao. Controls and fetters on the private sector were
largely lifted and the doors were opened for foreign investment. The dynamic
Korean Chaelols1 were among the first to realize the huge potential of Indian
market and consider India as a production center. Initially, India did not permit
100% FDI and several joint ventures were established between ROK and Indian
companies e.g. between DCM of India and Daewoo for production of
passenger cars. When, in 1996, India allowed 100% FDI to Samsung
Electronics and Hyundai Motors, it led to a breakthrough and market domination
in India by Korean Companies in white goods and consumer electronics and 20%
market share in automobiles. In 1997, ROK became the third largest foreign
investor in India with approvals amounting to $ 1.5 billion.
Bilateral trade also increased steadily from $ 1.5 billion in 1995 to $ 2.6
billion in 2002. In tandem with the impressive economic growth in India in the
new millennium, bilateral trade with Korea also had a robust increase to $ 9.17
billion in 2006 and $ 20 billion in 2011. As a victim of the global economic
downturn the trade has marginally declined to $ 19 billion in the year 2012.
During the official visit of Prime Minister Dr. Mammohan Singh to ROK in
March 2012,in the discussions a target of $ 40 billion in bilateral trade was fixed
by the year 2015 .At the end of 2013,this target seems to be over-ambitious and
un-achievable.
India became the 9th biggest source of imports for ROK in 2011. Main
Indian exports were petroleum products (mainly naphtha, 53%), cotton yarn
, ferro-alloys, unwrought aluminum, unwrought zinc, metal scrap, oil cakes,
iron-ore, sesame seeds and marine products. Major Korean export items i
nclude - automobile parts and accessories, telecom equipment, ships, petr
oleum products, hot rolled products of iron.
1
The chaebol are the large, conglomerate family-controlled firms of South Korea
characterized by strong ties with government agencies. There were family-owned
enterprises in Korea in the period before 1961 but the particular state-corporate alliance
came into being with the regime of Park Chung Hee (1961-1979).(Applet-magic.com,
Thayer
Watkins
Silicon
Valley
&
Tornado
Alley
USA(www.sjsu.edu/faculty/watkins/chaebol.htm‎)
3
Proceedings of Eurasia Business Research Conference
16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey, ISBN: 978-1-922069-54-2
2. Overview on ROK-India CEPA
Under the CEPA Agreement, tariffs will be reduced or eliminated on 93% of
Korea‟s tariff lines and 85% of India‟s tariff lines. It will facilitate Trade in Services
through additional commitments made by both countries to ease movement of
Independent Professional and Contractual Service Suppliers. Both countries
have committed to provide national treatment and protect each other‟s
investments to give a boost to bilateral investments in all sectors except these
specifically exempted from it.
The CEPA's strategic vision and goal will be the same for both countries.
Through the effects of CEPA, ROK wants to grow as the economic and logistic
hub in East Asia, and India wants to diversify its trade partners from traditional
Western countries to Asian countries. While trade between ROK and India has
continuously improved, there was a problem of imbalance. The Korean imports
from India traditionally consisted of low value added items slowly shifting to
industrial products while Korea's exports to India were high value added
products-brands like LG, Samsung and Hyundai which have a huge presence in
India.
As we know well, Indian economy‟s purchasing power ranks third2 in the
world with a rapidly growing consumer market of 400 million people, according to
official data.
ROK can now expect increased diversity and investment effects not only for
large companies, but also for small and medium sized ones. Famous economic
experts are of the opinion that the lack of a strong presence of small and
medium sized firms is one of the weak points in the Korean economy. The
abolition of tariffs between the two countries will help these companies advance
into the global market through the huge Indian market consisting of 1.2 billion
people.
The CEPA between India and ROK allows 75 percent of Korean export goods
to India to face no tariff or an eight-year phasing out of tariffs. India‟s tariffs on
another 10 percent of goods will be phased out after 8-10 years.
Korea‟s major export items-auto parts, handsets, steel, machinery, chemicals
and electronics–will all benefit from the CEPA with India. Korean companies
have been searching for many business opportunities in China so far, with many
errors and trials. With ROK-India CEPA in place, they don‟t have to experience
errors and trials in the Indian market.
From Korean side, 90 percent of imports from India will face no or reduced
tariffs but most of the current tariffs on Indian raw materials were already low at
2
According to the World Bank, The International Comparison Program(ICP), released
new data on 2011 International Comparison Program Summary Results Release
Compares the Real Size of the World Economies, shows that India hasl reached the third
county‎ in‎ the‎ world‎ economy’s‎ PPP-based GDP following China, USA and 4th
Japan.(World Bank, ICP, 2011 International Comparison Program Summary Results
Release Compares the Real Size of the World Economies, 2011 International Comparison
Program Summary Results Release Compares the Real Size of the World Economies,
April 29, 2014)
4
Proceedings of Eurasia Business Research Conference
16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey, ISBN: 978-1-922069-54-2
1-3 percent, thus not affecting the domestic market much.
Some people raised concerns about the ROK-India CEPA‟s impact on the
domestic agricultural and service industry but damage to the Korean domestic
market will be negligible. About half of the agricultural products were excluded
from the market opening. Plus, some inflow of India‟s IT experts and engineers
into Korea will not be large enough to affect the local employment market.
Due to the CEPA between ROK and India, improvements are expected not
only in the economies but also in mutual trades in terms of quality and quantity.
It is expected that due to CEPA the trade account between the two countries
will increase by 3.3 billion dollars, and Korea's GDP will increase by
approximately 1.3 trillion won every year.
As these facts show, CEPA, which is now in its initial stage, is expected to
improve the relations between the two countries and bring unprecedented
economic growth. As the two countries welcome the new agreement, farsighted
policies and investment based on prudent decisions are essential. It will
contribute to the stable industrial structure that will help small and medium
companies with high-end technology and open management expand into the
global market. After ten years from now, It is expected to see not only the
expansion of their bilateral trade to a greater height, but also a solid relationship
in manufacturing.
Tariffs on Indian import items to Korea, excluding several sensitive items such
as rice, beef, pork and chicken, will be eliminated or cut by 93 percent based on
the number of items, and 90 percent based on the amount of imports.
With CEPA, small Korean exporters will have price competitiveness in the
Indian market. For example, in the case of automobile parts, the tariff will be cut
down from the current 12.5 percent to between 1 and 5 percent in 8 years, and
export tariffs on steel will be reduced by 50 percent in 10 years, while the
general tariff on steel will be phased out in 5 to 8 years. The effect will be an
increase in exports of raw industrial materials to Korea.
III. Performance and challenge of ROK -India CEPA
1. Performance of ROK-India CEPA
1) Korea‟s Trade with India
(1) Exports
Since the effectuation of the Korea-India CEPA, Korea‟ trade volume with India
has increased at a faster rate than with the rest of the world. Korea‟ exports to
India in 2010 amounted to around USD 11.4 billion, a 42.7% increase from the
same period in 2009, much higher than the rate of increase in Korea‟ exports to
the world (28.3%).
Korea‟ exports to India in 2011(January–August) increased by 19% from 2010,
which is lower than 23.7%, the rate of increase in Korea‟ exports to the world.
The lower rate of increase in Korea‟ exports to India is attributable to the base
effect of the sharp rise in Korea‟ exports to India in 2010.
5
Proceedings of Eurasia Business Research Conference
16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey, ISBN: 978-1-922069-54-2
< Figure 3 >‎Trends‎in‎Korea’‎Exports‎
to India
<Figure 4> The Growth Rates of
total exports and
Korea’s Exports to India
Germany (Unit: USD million) (Unit: %)
Note for Figures 1 and 2: The export growth rate in 2011 is of the period of
January–"August 2011.
Source for Figures 1 and 2: KITA.net Trade Statistics.
India became Korea‟ 7th largest trading partner following Germany in 2010,
up from 9th place in 2009. With regard to bilateral trade volume in real terms,
India‟ rank could be as high as no.5, if Hong Kong and Singapore where most of
the trade is undertaken in the form of entrepot trade, are not counted. As for
India‟ share in Korea‟ total exports, it was 2.1% in 2008, 2.2% in 2009, and rose
to 2.5% in 2010. Currently, it stands at 2.3% in 2011 (January-August).
Korea‟ exports to India have been increasing primarily in boilers and
machinery, electric equipment, steel, and auto parts. The exports of boilers and
machinery including their parts, the largest export items of 2010, totaled USD 1.8
billion, representing a 55.6% increase from 2009. In addition, the exports of
electric equipment (32.8%), steel (41.2%), and auto parts (30.6%), and organic
chemicals (86%) rose significantly compared with 2009. The exports of boiler
and machinery including their parts (4.8%), electric equipment (13.5%), steel
(17.6%), and auto parts (15.7%), and organic chemicals (31.9%) in 2011
(January-August) increased compared with the same period in 2010.
6
Proceedings of Eurasia Business Research Conference
16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey, ISBN: 978-1-922069-54-2
< Figure 5 >‎ Korea‘‎ Exports to India by Item <Figure 6>‎ Korea’‎ Imports
from
India
by
item(Jan-Aug)
(Unit: HS 2, USD 1,000)
Source: KITA.net Trade Statistics.
(2) Imports
Since the ROK-India CEPA entered into force, Korea‟ imports from India rose
sharply compared with its total imports during the same period. Korea‟ imports
from India in 2010 amounted to around USD 5.6 billion, an increase of 37% from
2009, which is higher than 31.6%, the rate of increase for Korea‟ imports from
the world during the same period. Korea‟ imports from India in 2011
(January-August) rose by 46.1% compared with the same period in 2010, which
is higher than the 26.7% increase in Korea‟ imports from the world.
India‟ share in Korea‟ total imports was 1.5% in 2008, 1.3% in 2009 and 2010,
after which it rose to 1.8% in 2011 (January-August). Although Korea‟ imports
from India recorded increases recently, India has remained Korea‟ 16th largest
source of imports since 2008.
An increase in Korea‟ imports from India has primarily been in steel, minerals,
cotton, aluminum, and zinc. The imports of minerals, the largest import item in
2010, totaled USD 3.1 billion, increased by 35.6% from 2009; and also, steel
(118%), cotton (66.1%), aluminum (435%), and zinc (264%) have substantially
increased compared with 2009.
7
Proceedings of Eurasia Business Research Conference
16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey, ISBN: 978-1-922069-54-2
< Figure 7 > Korea’‎Imports‎from‎India‎<Figure‎8> The Growth Rates of
Korea’‎Total Imports
and‎Korea’‎Imports‎
from India
(Unit: USD million)
(Unit: %)
Note for Figures 5 and 6: The import growth rate in 2011 is of the period of
January–August 2011.
Source for Figures 5 and 6: KITA.net Trade Statistics
In particular, although the tariff rate for cotton products fell only by a mere 0.5%
with the CEPA preferential rates, the imports of cotton have risen considerably.
In 2011 (January-August) as well, the imports of minerals (50.9%), steel (53.8%),
and organic chemicals (57%) have increased significantly compared with the
same period in 2010.
<Figure 9>‎Korea’‎Imports from India <Figure 10>‎Korea’‎Imports‎from‎by
Item India
by Item (Jan.-Aug.)
(Unit: HS 2, USD
million)
8
Proceedings of Eurasia Business Research Conference
16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey, ISBN: 978-1-922069-54-2
2)‎India’s‎Trade‎with‎Korea
India is one of the fastest growing countries in trade along with China. India‟s
rate of increase in export and import over the past 5 years has been higher than
that of emerging economies of Asia and the world. Rate of increase in India‟s
export was 18% in 2005-2009, higher than that of China (16.5%). As for India‟s
imports, its growth rate during the same period was 23.3%, higher than that of
Russia (18.4%). In particular, India‟ total trade volume in 2010 was USD 577.4
billion, reaching the USD 500 billion mark in just 8 years after achieving USD
100 billion in 2002.1)
<Figure 10> Growth Rate of Exports by Period <Figure 11> Growth Rate of
Imports by Period
Source: IMF DTS.
Source: IMF DTS.
2. Challenges of Korea-India CEPA
(1)Items for CEPA Preferential Rates to be Increased
At the time of the entry into force of the Korea-India CEPA in 2010, there
were quite a few items for which the CEPA preferential rates were higher than
the MFN rates due to the standard tariff rates and the subsequent lowering of the
actual tariff rates by India. Korea and India began negotiations in 2006 based on
the MFN rate of 1 April 2006, and since then, as India continued to lower the
MFN rate, there were items for which the CEPA preferential rate was higher than
the MFN rate at the time of the entry into force of the CEPA in January 2010.
India‟ average tariff rate for non-agricultural products was 16.4% in 2006, and it
fell to 10.1% in 2009.
As of 2011, the CEPA preferential rate for 8 out of the top 50 export
commodities to India (HS6) is still the same as or higher than the MFN rate, and
the exports of these items amount to around USD 1.6 billion in 2011
(January-August), accounting for 17.3% of the total. The top 50
export items to India account for about 64% of the total exports. On the other
hand, among the top 50 import commodities from India, there are only 3 items
for which the CEPA preferential rate is either the same as, or higher than the
MFN rate as of 2011. The imports from India during the same period for these
items amount to around USD 90 million, which accounts for about 1.5% of the
9
Proceedings of Eurasia Business Research Conference
16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey, ISBN: 978-1-922069-54-2
total imports.
<Table 12> Comparison between the MFN Rate and the CEPA Preferential
Rate on Korea‟ Top 50 Export Commodities to India (As of Jan.-Aug. 2011)
(Unit: %)
Tariff Rates
CEPA
CEPA
Conce Import
Preferentia
HS
Commodity
MFN Rate
ssion
Share
l
of 2011
Type
Rate
of
2011
Terephthalic
Organic
acid and its SEN
3.37
10
11.3
(291736)
Salts
Of steam and
Chemicals other
E-5
0.63
7.5
7.5
(840290)
vapor-generati
ng boilers
Macinery with
Nuclear
a 360°
Reactor
E-8
0.86
7.5
9.4
revolving
(842952)
superstructure
Of derricks/
Of road rollers,
mechanically
Boilers
propelled/
and
Of
ships
Machinery derricks
and
E-5
1.06
7.5
7.5
and Their cranes/
Parts
Of
other
(843149)
excavating,
leveling
Of pile driver,
etc.
Electronic Having
a
Equipment power-handling
and
its capacity
4-8
0.63
7.5
9.4
Parts
exceeding
(850423)
10,000kVA
Motor
Gear boxes
SEN
0.45
10
11.3
(870899)
Vehicles
Other parts
RED
10.27
10
10.6
(870899)
Note: 1) E-5 (To be abolished within 5 years), E-8 (to be abolished within 8
years), SEN (to be reduced by 50% within 10 years), RED (to be reduced to
10
Proceedings of Eurasia Business Research Conference
16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey, ISBN: 978-1-922069-54-2
1-5% within 8 years).
2) The share of the aforementioned commodities in the total exports is
18.11%. Korea‟ exports to India from Jan. to Aug. of 2011 totaled around USD
8.6 billion.
Source: KITA.net Trade Statistics, Tariff Concessions in the Korea-India
CEPA, Tariff rates from the Customs Offices of Korea and India.
<Table 13> Comparison between the MFN Rate and the CEPA Preferential
Rate on Korea’‎Top‎50‎Import‎Commodities‎from‎India‎(As‎of‎
Jan.-Aug. 2011)
(Unit: %
)
Tariff Rates
HS
Commodity
CEPA
Conce
ssion
Type
Import
Share
CEPA
Preferentia
MFN Rate
l
of 2011
Rate
of
2011
Feed(230690
)
Of Semamum
SEN
0.5
55.10
55.13
Seeds
Ureines
Organic
and
their
Compounds
E-5
0.2
2.0
5.2
derivates:salts
(292421)
thereof
Steel(720230 Ferro-silco-ma
E-8
0.8
5.0
6.0
)
nganese
Note: The share of the aforementioned commodities in the total imports is 1.6%.
The total imports from India amounted to around USD 5.5 billion from Jan. to
Aug. 2011.
Source: KITA.net Trade Statistics, Tariff Concessions in the Korea-India CEPA,
Tariff rates from the Customs Offices of Korea and India.
However, since such a discrepancy is not likely to be addressed in any
significant manner , there is a need to further reduce the CEPA preferential rate
between the two countries in order to increase the trade volume substantially.
(2)Trade Concessions to be Increased
Despite the entry into force of the Korea-India CEPA, the aforementioned
discrepancy has led to an expansion of items outside of the list of concessions,
thus undermining the impact of the CEPA. At the time of entry into force of the
CEPA in 2010, the concessional rate vis-à-vis the bilateral trade volume was
89.7% for Korea, and 85.5% for India. Especially in the case of Korea, the CEPA
preferential rate is higher than the MFN rate on items accounting for at least 17%
of the trade volume. Therefore, India‟ actual concessions based on the trade
volume fall to less than 68.2% from 85.5% initially. It is lower than the
11
Proceedings of Eurasia Business Research Conference
16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey, ISBN: 978-1-922069-54-2
concessional rate at which India offered to Japan in the CEPA which went into
effect in August 2011. The concessions between Korea and India are smaller in
scale than those between Japan and India, but the tariff rates are being reduced
at a faster rate.
<Table 14> Comparison of Schedules of Concessions between the
Korea-India CEPA and the Japan-India CEPA
Category
To be
abolis
India hed
imme
Kore diatel
a
y
(34%
)
To be
abolis
India
hed
imme
Japa
diatel
n
y (Abt
7.6%)
Schedule of Concessions
E-5
14%
B5
Abt
10.0
%
Subtotal
52.4
%
Subtotal
Abt
17.6
%
E-8
22.1
%
Subtotal
74.5
%
B7
Abt
0.1%
Subtotal
Abt
17.7
%
Red
8,5%
B10
72.0%
Tota
l
85.5
%
Outsid
e
of
Conce
ssions
List
14.5%
Tota
Abt l
Abt
90%
Outsid
e
of
Conce
ssions
List
10.0%
SEN
2.4%
Note: 1) The table is prepared according to the schedule of concessions of the
countries concerned.
2) E-5 and E-8 of Korea mean “to be abolished within 5 and 8 years
respectively”. RED indicates “to be reduced to 1-5% within 8 years” and SEN
means “to be reduced by 50% within 10 years.”
3) B5, B7, and B10 indicate “to be abolished within 5, 7, and 10 years”
respectively.
4) Tariff reductions differ between the two FTAs in that in the case of the
Korea-India CEPA, it will be 1/n, meaning, E-5 would indicate 1/5 reduction
while in the case of the Japan-India CEPA, it will be 1/(n+1), thus, B5 would
mean 1/6 reduction.
Source: KITA, “impact and Implications of the Japan-India CEPA for Korean
Business,”p. 9.
(3)Trade Imbalance to be addressed
Despite the steadily increasing trade volume, the trade imbalance continues to
worsen. In particular, India‟ trade deficit vis-a-vis Korea has been increasing
sharply since 2003. India‟ trade deficit vis-a-vis Korea was around USD 300
million in 2000, and it rapidly rose from 2004 onwards,reaching over USD 5
billion in 2010. Genuine efforts by both Korea and India are needed to address
the trade imbalance.
12
Proceedings of Eurasia Business Research Conference
16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey, ISBN: 978-1-922069-54-2
<Table 15> Trade Balance Deficit between Korea and India
(Unit: USD million)
연
도
금
액
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
341
302
135
1,6
20
1,7
82
2,4
86
1,8
92
1,9
76
2,3
96
3,8
71
5,7
61
4,7
60
(4) Challenges in Investment and Services Sector
It is a matter of concern that both India-ROK bilateral trade as well as
investment seem to be stagnating. Korean infrastructure companies like
DOOSAN had significant market share in the power sector but the entry of
Chinese companies is challenging their continued presence.
It is important that the major Korean corporations fully comprehend the
trends in India and vigorously compete with the Chinese companies. The
Koreans would not be able to thrive in India if they keep on pursuing a mere
seller-buyer relationship in India.
As India is facing an un-sustainable trade deficit, it would be difficult for
the country to keep on importing at the cost of the development of its own
indigenous manufacturing sector. Koreans should seize the opportunities being
created by the Indian Government‟s concentration on boosting manufacturing in
India. New industrial estates are being planned along the Delhi-Mumbai
Industrial Corridor (DMIC) which would come up on the side of the new
Delhi-Mumbai railway line being constructed with Japanese assistance.
As we move forward, it is important to create attractive destination in India
for investment by Korean medium sized industries i.e. from $ 100 million to $ 1
billion turnover. An innovative way would be to create a Korean exclusive
economic zone with Korean social environment i.e. Korean restaurants, schools
and, of course, golf courses. It is encouraging to note that KOTRA is already
thinking on these lines and there is a proposal to have such a Korean industrial
zone in the State of Rajasthan.
India is competitive in service sector, IT related services, pharmaceuticals
and organic & inorganic chemicals. Concerted efforts must be made to boost
their exports to ROK. For IT enabled services and software exports, ROK needs
to be more open in its corporate culture. Most of the Chaebols have their own
in-house IT companies and very few operations are out sourced. This mindset
needs to change and IT services should be sourced from the most efficient and
13
Proceedings of Eurasia Business Research Conference
16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey, ISBN: 978-1-922069-54-2
competitive provider.
In pharmaceutical sector also, Indian companies have not been able to
make headway due to the time involved and high costs of getting local FDA
approvals. It would be helpful if the Korean FDA accepts the credentials of an
Indian manufacturer if that company obtains FDA approval in a country like USA
which has stringent standards comparable to those prevalent in ROK.
In their perspective planning, the Korean companies must examine
shifting of significant manufacturing activity to India. India offers a huge and
growing internal market and would also be a manufacturing hub for exports to
South Asia, Gulf countries and the African continent. For bulky equipment like
transformers, boilers, transmission towers etc. India is a natural place for
manufacturing to service the huge power sector in the middle-east and west Asia.
Hyundai Heavy Industries, DOOSAN etc. are already thinking on these lines.
It would be important for Korean companies to leverage India‟s well
trained manpower-both skilled labor and engineers. There is huge potential for
mobilizing Indian companies in the Gulf countries. Indian architects and
designers, with their fluent knowledge of English, would be an asset to Korean
companies in speedy execution of projects with a smooth interface with their
English speaking customers.
IV. Policy Recommendations for Korea-India CEPA
1. ROK side
1). Early Upgrading of the Korea-India CEPA Preferential Rates
To address the aforementioned problems in the Korea-India CEPA, the CEPA
preferential rates need to be upgraded in the near future (namely, the
acceleration of the CEPA preferential rate reduction). If both Korea and India
reduce the CEPA preferential rates to the same level, the number of items for
which the MFN rate is lower than the CEPA preferential rate is expected to be
reduced considerably, leading to greater concessions and an increase in India‟s
exports to Korea.
The simulation of an increase in trade volume and welfare in relation to tariff
reduction through the “MART “program offered by the World Bank‟ WITS (World
Integrated Trade Solution) revealed that the effect of India‟s tariff reduction
vis-à-vis Korea‟ exports would be greater than that of Korea‟s tariff reduction
vis-a-vis India‟s exports. While a 10% tariff reduction on all items except for
agricultural and fishery products will increase Korea‟ exports to India by USD
180 million, it will lead to an increase of USD 600 million in the case of India.
Whereas the welfare effect accruing to India from the dead weight loss will
increase by USD 55 million, it will result in an increase of USD 18 million in the
case of Korea.
14
Proceedings of Eurasia Business Research Conference
16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey, ISBN: 978-1-922069-54-2
Korea‟ weaker tariff reduction effect than that of India is attributable to the
different nature of trade on both sides. In the case of Korea‟ export items to India,
the majority consist of auto parts, parts of wireless telephones and electric and
electronic products, ships, and steel products (35.2% of the total exports to
India). As these items are supplied to Korean companies operating in India, they
are more sensitive to local demand than tariff rates. On the other hand, India‟s
top export items to Korea, namely, oil and oil products, and cotton products (60.2%
of the total exports), have high price elasticity.
Tariff reductions are expected to help address India‟ trade deficit and improve
the welfare effect for both Korea and India. A 20% tariff reduction on all items
except for agricultural and fishery products will result in an increase in terms of
trade effect to the tune of USD 350 million and USD 1.1 billion for Korea and
India respectively, which would help cut India‟ trade deficit by USD 750 million. A
50% tariff reduction would accrue, in terms of trade effect, USD 880 million and
USD 2.8 billion for Korea and India respectively, which would lead to a fall of
USD 1.92 billion in India‟ trade deficit. A 20% tariff reduction will yield the welfare
effect worth USD 35 million to Korean consumers and USD 1.1 billion to Indian
consumers. A 50% tariff reduction will considerably increase the welfare effect to
the tune of USD 82 million and USD 2.3 billion for Korean and Indian consumers
respectively.
<Table 16> Simulation Result via SMART by World Bank WITS
(All items except for agricultural and fishery products)
(unit: USD)
India's Import Commodities from Korea(With Tariff Reduction)
Welfare
Effect(Indian
Trade Effect(Increase in
Tariff Reduction
Consumers)
Korea's Exports)
10%
U$ 175,932,111
20%
U$55,141,591
U$ 351,864,221
50%
U$106,131,026
U$ 879,660,584
U$229,026,764
Korea's Import Commodities from India(With Tariff Reduction)
Welfare Effect(Korean
Trade Effect(Increase in
Tariff Reduction
Consumers)
India's Exports)
10%
U$ 558,383,268
20%
U$17,770,726
U$ 1,116,766,536
50%
U$34,956,796
U$ 2,791,914,284
U$81,773,964
Note: The simulation result has been obtained on all items except for
agricultural and fishery products of both Korea and India as of 2009. As the
Korea-India CEPA entered into force in 2010, the tariff reduction effect has
been simulated as of 2009.
Source: The authors' own calculations using SMART.
15
Proceedings of Eurasia Business Research Conference
16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey, ISBN: 978-1-922069-54-2
2). Target Trade Volume to be Raised
Korea and India set the target at achieving USD 30 billion in trade by 2014
when the Korea-India CEPA entered into force in January 2010. This target is
relatively low, given the combined trade potential of Korea and India, and an
expected increase in trade resulting from the tariff reduction.
Korea and India should, in all earnest, look into raising the trade volume target
to a higher level. A forecast based on the average growth rate of trade volume
(14.5%) over the past 13 years (1993-2010) puts the bilateral trade volume at
approximately USD 34 billion by 2015, and USD 68 billion by 2020. However,
the projected figures are based solely on the average growth rate excluding the
tariff reduction effect of the CEPA.
2.
India‟s side
1) Trade
CEPA has specifically provided for cooperation in bringing the small and
medium scale enterprises of the two countries together to encourage
collaboration. It is envisaged that the best practices would be shared in the
areas of technology transfer, quality improvement, general management and
access to finance and technology.
The 10th India-Korea Dialogue in November 2011 between Seoul Forum
for International Affairs (SFIA) and Indian Council for Research on International
Economic Relations (ICRIER) focused on the theme „India-Korea CEPA:
Prospects and Challenges.‟ In a paper „India Korea Trade and Non Tariff Barriers‟
the authors make the following points :
1. India‟s top ten exports to Korea comprise of 61% of its total exports to
Korea and most of these products already have low tariff rates. Any
further lowering of tariffs would therefore not be helpful to Indian exports.
2. Non tariff barriers between India and Korea have not received due
attention. Technical regulations and sanitary and phyto-sanitary
measures of ROK have been addressed broadly in CEPA but it has not
led to any speeding up of clearances since no specific measures have
been prescribed.
3. For addressing issues like anti-dumping measures, countervailing duties
and safeguard measures also, no specific measures have been
prescribed.
16
Proceedings of Eurasia Business Research Conference
16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey, ISBN: 978-1-922069-54-2
4. The goods being imported into Korea are „subjected to excessive
government intervention and regulation.‟ Korea also imposes stringent
technical specifications there by creating difficulties for foreign exporters.
Rice, which is important for Indian exports, is subject to import quota
restrictions in South Korea.
The authors conclude as follows:“Lower tariffs are likely to have an impact on the Korean and Indian
manufacturing units in India. Korean investments in India were made at a time
when Indian tariffs were high. These investments were typically of the tariff
hopping variety .With lower tariffs, it is possible that domestic products will be
substituted by imports.”
In fact, this is a very disturbing conclusion for the Indian economy where
manufacturing is only about 15% of the GDP and the country has an
un-sustainable balance of payments gap of almost $ 200 billion.
In an article “India-Korea Trade and Investment Relations” in the book
„India-Korea :Dialogue for a 21st Century Partnership „(1) the authors have
examined the non-tariff barriers to trade of both the countries. The authors
inter-alia point out that:-
“…………… Korea has non-transparent and onerous labeling
requirements with frequent changes for health foods which create lot of difficulty
and enhance the cost of compliance, …….. A relatively high threshold is
maintained/imposed for procurement of construction services by sub-central and
government enterprises. … The lack of transparency in the regulatory system,
the lack of a mechanism to raise concerns regarding these and market access
issues in the financial sector are major concerns in the financial services. In the
telecommunication sector, where Indian companies may be interested, Korea
imposes a number of restrictions on foreign service providers. ……. Other
barriers faced by foreign suppliers in the Korean market include government
assistance to targeted domestic industries like the semiconductor industry, a
weak legal regime to protect intellectual property, lack of data protection…….”(2)
2)
Investment
There have been decent flows of investments on both sides in each
other‟s economies. Korean investments into India are officially of the order of $ 2
17
Proceedings of Eurasia Business Research Conference
16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey, ISBN: 978-1-922069-54-2
billion but would actually be more than $ 3 billion if monies routed
companies through tax havens like Mauritius and Singapore are
account. Established companies like Hyundai Motors India,
Electronics and LG Electronics have invested their profits generated
local capacity expansion and this amount also would be substantial.
by Korean
taken into
Samsung
in India for
Indian investment into ROK is also of the order of one billion dollars.
The major investments are by Aditya Birla Group in Alcan Taihan Aluminum; by
Mahindra Group in Ssangyong Motors and by Tata Motors in Daewoo group‟s
commercial vehicles division at Gunsan. One major difference in approach by
the corporates of the two countries is that while Indian investment is mainly
through acquisition of faltering Korean companies, the Korean investments are
largely in Greenfield projects.
An area for immense scope for Korean investment into India is in
infrastructure as India is planning to attract hundreds of billions of dollars of
private investment to improve its roads, ports, power generation, urban transport
and irrigation capacity. This offers a lucrative opportunity for Korean companies
to take a major stake in India‟s infrastructure sector. Some companies like
DOOSAN in power sector, Hyundai Rotem in urban transport and Samsung E
&C in bridges are already active participants in India‟s quest to build world class
facilities. Korean companies have the technology and experience which would
be of value to India.
With steady depreciation of rupee against most foreign currencies, the
Korean companies operating in India are facing pressure on their margins. The
only way out is increasing indigenization and enhancing the value added in India.
In this direction, Hyundai Motors India has been a pioneer with more than 85%
indigenisation. In a unique business model Hyundai Motors Korea has
encouraged their more than fifty Korean vendors to establish production lines in
India itself with assured long-term supply contracts to Hyundai Motors India.
As the Korean investment in India is now stagnating, both the Governments as
well as industry associations of the two countries need to jointly address the
impediments to FDI. The proposed $ 12 billion investment by Pohang Steel
Corporation (POSCO) for a 12 million tonne steel plant in the State of Odesha
has run into environmental bottlenecks, land acquisition problems and delay in
issue of mining license for iron ore. This is an economically and technically
viable project and will be beneficial for both sides.
3. Korea's trade deficit with India in pharmaceuticals
With the Korea-India CEPA, the possibility of the influx of competitive Indian
pharmaceutical products into Korea is potential risk factor to Korea's
pharmaceutical industry with a high level of dependence on the domestic market
18
Proceedings of Eurasia Business Research Conference
16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey, ISBN: 978-1-922069-54-2
and generic drugs.
Korea has a trade surplus with India in most categories, especially in
manufacturing. However, it has been showing a steady trade deficit in the
pharmaceuticals industry. In 2011, India recorded a trade surplus with Korea in
terms of pharmaceutical products (SIC 283 : Drugs) in the amount of USD86
million. For these reasons, the Korean pharmaceutical companies had raised
objections during the Korea-India CEPA negotiations over concessions. The
Japan-India CEPA had been delayed mostly for the same reason.
.
Korea has abolished customs taxes for 371 products out of 429 products
based on HS 10 unit with the CEPA taking effect in 2010. However, India
postponed the abolishment for all products for five to eight years. Although
Korea has immediately abolished customs duty for almost all products, India
postponed the abolishment of customs tax for products that are mass produced
in Korea, such as antibiotic raw materials for eight years.
V. Conclusion
India‟ more active interest in The Republic of Korea over the past several
years is rooted in New Delhi‟s larger “Look East” policy adopted in the early
1990s following decades of limited engagement there. Trade and investment ties
are by far the most important elements in this “Look East” policy, and this applies
particularly to the growing Korean-Indian relationship, and bilateral trade
between the two countries has increased significantly, at about 22 percent
annually, over the past few years.
While still a small percentage of each other‟ total export trade, there is
considerable scope for the expansion. Korea, the world‟ 11th largest economy,
possesses the advanced technology industries that the rapidly growing Indian
economy will need to maintain its robust economic growth rate. The two
countries are now in the process of strengthening the institutional mechanisms
for increased trade and investment.
2. Prospects for Korea-India CEPA
Bilateral trade volume between Korea and India has shown to have a
tendency to increase gradually since operationalisation of the Korea-India CEPA.
However, there still remain many uncertainties such as the existence of items for
which the CEPA preferential rate is higher than the MFN rate , low concession
rates and deteriorating trade imbalance against India.
The most effective measure for solving these uncertainties would be
accelerating the tariff reduction by negotiating an early upgrade of the
Korea-India CEPA and increasing items for trade concessions. In the case of the
Indian-Singapore FTA, after it came into effect in 2005, India gave additional
concessions to Singapore by adding 275 items to the list of concessions through
re-negotiations in 2007.
Setting a more ambitious target, trade volume between Korea and India would
further enhance their trade relations.
19
Proceedings of Eurasia Business Research Conference
16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey, ISBN: 978-1-922069-54-2
In sum, The 1990s and the first decade of the new millennium have
witnessed a healthy growth in both trade and investments between India and
ROK. The policy framework is fully conducive to promote and assist bilateral
economic engagement. Comprehensive Economic Partnership Agreement of
2010 now needs to be revised and updated to take into account new
developments and challenges. The two economies have significant
complementarities- with ROK a master of manufacturing and India having an
edge in services, information technology and human resources.
The global economy is in stress. Growth in India is faltering. Relative
competitiveness of products from different countries is fluid and dynamic. The
private sectors in both the countries would need to be nimble-footed, far sighted
and aggressive to keep ahead of the curve. The two countries have the
resources, willingness and capacity to continue on a high growth path and the
future for growing bilateral economic cooperation is bright.
References
Ahn C.C., " Korea-India Economic Cooperation : Performance and Issues",
Korea-India Forum 2009, KOTRA
Cho C.J. et al, Trade Policy toward South Asia after Korea-India CEPA,
KIEP, 2010, pp.43~46 and pp.63~70
Cho C.C., "Two Years In : Achievements and Challeges in the Trade
Sector of the Korea-India CEPA", Deepening Partnership for
the
21st
century,
Seoul
Forum,
KIEP,
2012,
pp.161~181
Department of Commerce, India, India-Korea Joint Study Group Report
Full Text, 2009
IMF, Direction of Trade Statistics(DOTS), 2012
Korea International Trade Association(KITA), Trade Statistics DB
KIEP, "The Strategy of Cooperation and Competition Based on Comparative
Analyses of Pharmaceutical Industries of Korea and India", World
Economy Update, Vol.3 No.47, KIEP., 2013
KITA, "Impact and Implications of the Japan-India CEPA for Korean
Business", 2011.
Korea-India CEPA, Agreement Full Taxt
Nisha Taneja, et al, "India-Korea Trade and Non-Tariff Barriers",
Korea-India : Deepening Partnership for the 21st century, Seoul
Forum, KIEP, 2012, pp.137~159
Ramesh C.Paudel, “Liberalisation reform and export performance of India”,
ASARC Working Paper 2014/03, April 7,2014
Saon Ray and Neetika Kaushal, "Investment in the Indo-Korea CEPA",
Deepening Partnership for the 21st century, Seoul Forum,
KIEP, 2012, pp.215~244.
Skand R. Tayal and Sandip Kumar Mishra, "India and the Republic of Korea :
A Growing Strategic Partnership", Indian Foreign Affairs Jounal,
20
Proceedings of Eurasia Business Research Conference
16 - 18 June 2014, Nippon Hotel, Istanbul, Turkey, ISBN: 978-1-922069-54-2
Vol.7, No.3, 2012, pp.321~330.
Walter Andersen, "Korea : an Important Part of India's "Look East" Policy",
Working Paper Series, 2008
Woong Lee, Young Chul Song and Lee Jung Mi, The 40 year Anniversary of
Korea-India Amity : Evaluation and Prospects of Trade Sector,
Studies in Comprehensive Regional Strategies 13-05, KIEP, 2013
Choong Jae Cho and Yoon Jung Choi, The 40 year Anniversary of
Korea-India Amity : Evaluation and Prospects for Investment
Cooperation, Studies in Comprehensive Regional Strategies 13-06,
KIEP, 2013
WTO, WTO Tariff Profile, 2012
21