11 May 2018
Republic of Korea: Market Profile
Major Economic Indicators
- The Korean economy grew by 3.1% in 2017, following a 2.9% expansion in the previous year. According to the advanced estimate from Bank of Korea, the economy expanded 2.8% YOY in the first quarter of 2018. The Korean government projected a real GDP growth of 3% in 2018 given the continued growth momentum in the global economy and improving domestic consumption.
- In 2017, Korea’s exports grew 15.8% to US$573.7 billion, the highest level recorded since 1956. Meanwhile, imports rose by 17.8% to US$478.5 billion.
- China and Korea implemented their bilateral FTA in December 2015 after almost three years of talks. The FTA aimed to eliminate about 70% to 90% of import tariffs within the next 10 to 20 years.
- Hong Kong’s total exports to Korea decreased by 1.8% YOY to US$1.75 billion in the first three months of 2018, while imports from Korea grew by 13.3% YOY to US$8.31 billion.
Current Economic Situation
The Korean economy grew by 3.1% in 2017, following a 2.9% expansion in the previous year. Economic growth in 2017 was driven mainly by the increase in fixed investment due to the strong growth in facilities investment. According to the advanced estimate from Bank of Korea (BOK), the economy maintained its growth pace and expanded 2.8% year-on-year (YOY) in the first quarter of 2018. The Korean government projected a real GDP growth of 3% in 2018 given the continued growth momentum in the global economy and improving domestic consumption.
Following the impeachment of former President Park, Korea’s political situation has largely stabilised with President Moon taking office in May 2017. In a bid to tackle youth unemployment, reduce income inequality and boost economic growth, Korea’s parliament in July 2017 approved an extra budget spending of nearly US$10 billion to fund the new president’s job creation and welfare policies, which he marked as a complete paradigm shift. The stimulation package is expected to add 71,000 jobs to the public sector and another 15,000 jobs to the private sector. As part of the new administration’s redistributive economic policy, Korea’s Minimum Wage Commission raises the minimum wage by 16% for 2018, the largest increase since 2000.
Korea’s consumer price inflation (CPI) rose 1.6% YOY in April 2018, following a 1.3% YOY increase in the previous month. This was below the BOK’s 2% CPI target for 2018. The accelerated inflation in April was largely due to the increases in the prices of food and non-alcoholic beverages.
Developing new growth engines and promoting economic growth through innovation is one of the President Moon's key economic policies. As outlined in its 2018 economic policies, the government is committed to increase R&D spending and financial support for innovation across industries, including the development of Fintech and wider application of artificial intelligence (AI). In Korea’s 2018 Budget, the combined budget for R&D will reach 19.6 trillion won (US$17 billion), which will focus on investment in the “fourth industrial revolution” fields and strengthen the support for start-ups.
The joint summit between North Korean leader Kim Jung Un and South Korean President Moon was held at Panmunjom on 27 April 2018, which was the first meeting between leaders of North Korea and South Korea since 2007. In a joint declaration issued after the summit, the two leaders agreed to pursue a permanent peace regime and the complete denuclearisation of the Korean peninsula.
Korea is one of the Asian economies with high trade dependency, with total foreign trade accounting for about 80% of the country's GDP. In 2017, Korea’s exports increased by 15.8% to US$573.7 billion thanks to a recovery in global trade. China was Korea’s largest export partner and accounted for about 25% of total exports. Other major export destinations of Korea included the US (12% of share), Vietnam (8%), Hong Kong (7%), and Japan (5%). Meanwhile, Korea’s imports rose by 17.8% to US$478.5 billion in 2017. Major sources of imports to Korea were China (20%), Japan (12%) and the US (11%).
To support the export sector, the Korean government in 2016 announced plans to offer 4.8 trillion won (US$4 billion) in trade-related financing, lower export insurance premiums and expand tax incentives for SME exporters. It is reported that Korean government has set aside 372.9 billion won (US$330 million) of funding in 2017 for oversea marketing events and trade missions. In its 2018 economic policies, the Korean government has committed more support for SME exporters.
To bolster less-developed regions outside Seoul through private investment, the Korean government announced a series of pro-investment measures in 2014, which included deregulations and tax incentives. For example, development restrictions will be lifted to allow the construction of commercial facilities in green-belt areas. In 2015, the BOK enlarged the Bank Intermediated Lending Support Facility by 5 trillion won (US$4.5 billion), providing additional financial support, such as trade financing and credit loans to SMEs and tech start-ups. In 2017, a new set of measures were introduced to spur investment, which include creating a tourism brand in the Southern coastal area, allowing the distribution of draft beer made by microbreweries and using apartment complexes’ parking lots for paid parking space during daytime.
Invest Korea (IK) is Korea's national investment promotion agency, established as part of the Korea Trade-Investment Promotion Agency (KOTRA) to support the entry and establishment of foreign businesses in Korea. To promote inward foreign direct investment (FDI), the Korean government offers various incentives including cash grants and tax breaks.
The Korea’s Financial Services Commission (FSC) introduced the omnibus account system for foreign investors in stocks trading in March 2017, which is an integrated and simplified registration system for foreigners to make it easier for foreign investors to trade locally-listed stocks in the Korean stock market. In the past, foreign investors had to open an account not only in Korean banks but also in Korean securities companies to make an investment in Korean stocks and they had to handle all financial transactions themselves. The omnibus account was extended to cover bonds and derivatives trading in June 2017.
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 2017, Korea’s inward FDI flow increased 7.7% to a record high of US$22.9 billion, according to Korea’s Ministry of Trade, Industry and Energy. Major sources of FDI included the US, Japan and the EU.
In the past, Korea's trade policy placed heavy emphasis on import control and export growth promotion. The Korean government has revised its trade policy to a more neutral stance in recent years, which includes, among other things, forging free trade agreements (FTAs) with other countries. Korea has entered into FTAs with over 50 economies including the EU, the US, ASEAN, Singapore and China. The Korea-China FTA, implemented in December 2015, has significant implications for both sides, as it aims to eliminate more than 70% and 90% of import tariffs within the next 10 and 20 years respectively. Korea’s bilateral trade with China reached US$240 billion in 2017. In comparison, bilateral trade with the US and EU in the same year were, respectively, US$119 billion and US$111 billion. A Closer Economic Partnership Agreement between Korea and India was implemented in 2010.
On the other hand, Korea is negotiating FTAs with economies including Japan, Mexico and the GCC (Gulf Cooperation Council). The trilateral free trade agreement between Korea, Japan and China has been under negotiations since 2012, and the 13th round of negotiations was held in March 2018. In addition, Korea is engaged in negotiations on Regional Comprehensive Economic Partnership (RCEP), a proposed FTA among 16 countries including 10 ASEAN countries, Australia, China, India, Japan and New Zealand.
In 1997, following the amendment of the Customs Act and its Enforcement Decree, 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 Korea.
Most duties are assessed on an ad valorem basis. For non-agricultural products, about 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 or individual consumption tax, which ranges from 2% to 20%, is levied on certain luxury and durable consumer items.
The Korean government still maintains a safeguard mechanism, in which high tariffs are imposed on certain products, protecting local industries which are vulnerable to global competition. For example, certain agricultural products are subjected to duties above 100%. Meanwhile, some non-agricultural products, such as leather and footwear are taxed up to 16%.
Hong Kong's Trade with Korea
Korea was the tenth largest export market and the fifth largest import source of Hong Kong in 2017. In the first three months of 2018, Hong Kong's total exports to Korea decreased by 1.8% YOY to US$1.75 billion, while Hong Kong imports from Korea grew by 13.3% YOY to US$8.31 billion. As such, Hong Kong ran a trade deficit against Korea amounting to US$6.56 billion.
Korea's Economic Involvement in Hong Kong
Korea is actively involved in the Hong Kong economy. According to the Hong Kong Census & Statistics Department, there were 148 Korean companies which had established regional headquarters, regional or local offices in Hong Kong as of June 2017.
In 2016, Korea was Hong Kong’s 20th largest FDI contributor. Korea’s cumulative FDI investment in Hong Kong amounted to US$3.1 billion, according to the latest available figures from the Census and Statistics Department. Korean companies in Hong Kong are involved in financial services (e.g. Korea Exchange Bank, Daewoo Securities, Woori Bank and Hana Bank), logistics and transportations (e.g. Hyundai Merchant Marine and Korea Travel Service), as well as cosmetics (Laneige, Etude House and Sulwhasoo, etc.).
In the first three months of 2018, Korean visitors to Hong Kong increased less than 0.1% YOY to 418,080, accounting for 2.7% of the total.