ASEAN – South Korea Economic Relations: The Way Forward

South Korea began sectoral dialogue relations with ASEAN in 1989, later becoming a Full Dialogue Partner a few years later in 1991. Since then, cooperation between the two sides has expanded to cover a wide range of issues from political-security, socio-cultural, to the economy.The 13th ASEAN-ROK Summit in 2010 marked a new elevated relations between ASEAN and South Korea from that of comprehensive cooperation to a strategic partnership.A few years ago, in 2014, ASEAN and South Korea celebrated the 25th Anniversary of ASEAN-Republic of Korea Dialogue Relations.

At the 18th ASEAN-ROK Foreign Ministers’ meeting in 2015, the ASEAN-ROK Plan of Action 2016-2020 was adopted to further deepen ASEAN and South Korea’s strategic partnership. Furthermore, the ASEAN-ROK relationship is based on the so-called 3SP’s: (1) Shared Peace in political and security area; (2) Shared Prosperity in economy; and (3) Shared Progress in socio-cultural area. In the area of economy, many initiatives have been agreed and implemented. Nevertheless opportunities to improve the current economic relations remain.

ASEAN – South Korea Trade Relations

The trade volume between ASEAN and South Korea has risen significantly from USD 8.2 billion in 1989 to USD 122 billion in 2015.[1] South Korea ranks as ASEAN’s fifth largest trading partner after China, Japan, the European Union (EU), and the United States. Meanwhile, ASEAN has become South Korea’s second largest trading partner after China, surpassing the US, the EU and Japan.

ASEAN and South Korea’s trade relations became closer rafter the implementation of the ASEAN-Korea Free Trade Area (AKFTA) which was based on three major agreements: (1) the ASEAN-Korea Trade in Goods Agreement that came into force in June 2007, (2) the ASEAN-Korea Trade in Services Agreement that came into force in May 2009, and (3)the ASEAN-Korea Investment Agreement that came into force in June 2009.

Aside from the AKFTA, South Korea stands to benefit from the ASEAN Economic Community (AEC). The AEC will allow South Korean companies based in the Southeast Asian region to have better access to the large ASEAN market and to enjoy significant tariff reductions in the region. Furthermore, it will also allow South Korean companies to be a part of the regional supply chain.

However, the current downturn in the global economy may hamper trade relations between ASEAN and South Korea. Regardless of the significant increase in trade volume between them over the past few decades, it should be noted that a moderate decrease was witnessed in 2013 after reaching USD 135 billion. The future of international trade for the coming years remains gloomy especially when advanced countries continue to face stagnation while China experiences its own economic slowdown. The situation may worsen as a result of rising protectionism and anti-globalization sentiments.Taking into account these developments, ASEAN and South Korea will likely struggle to expand trade volume and meet the target of USD 200 billion by 2020 as agreed by the Leaders during the 2014 Commemorative Summit.

The low utilization of FTA has also become a hurdle for both sides to expand their trade since only a few companies are utilizing it. As of 2013, the ratio of AKFTA utilization for South Korea’s export to ASEAN stood at only 38%.[2] Some Korean companies have argued that tariff liberalization in AKFTA has only been done partially and that the tariff schedule is relatively complex. Moreover, the low utilization of FTA can be attributed to the lack of awareness among the business sector and the practical difficulties with regard to the administrative process found under the AKFTA.[3]Hence, from the perspective of South Korean companies, it is hard for them to participate in the FTA without the proper information and knowledge on the agreement.[4]

Leaders must address these issues in order to maximize the potential benefits of the AKFTA. The utilization of FTA will only be improved if the private sector’s involvement in the FTA is high. This can only occur if the private sector is well-informed of the economic incentives and benefits that the AKTFA brings. At the end of the day, it is the business sector that drives the economic activities and hence their involvement is critical. In this regard, the role of the ASEAN-Korea Business Council (AKBC) that was launched in December 2014 is important to further strengthen cooperation between private sectors – as well as the micro, small, and medium enterprises or MSMEs -  in ASEAN and South Korea. Although the AKBC has only been in existence for 2 years, it should seize the timely opportunity to play a bigger role in improving business ties among private sectors in ASEAN and South Korea.

ASEAN – South Korea Investment Relations

ASEAN is South Korean’s second largest investment destination after the US. Foreign Direct Investment (FDI) from South Korea has tripled from USD 1.5 billion in 2008 to USD 4.5 billion in 2014.[5]Among all ASEAN Member States, South Korean FDI is mainly concentrated in Indonesia, Singapore and Viet Nam which accounts for 63% of total South Korean FDI in the region in 2015.

The rise of South Korea’s outward FDI to ASEAN has been accompanied by the expansion of Korean businessesin the region. The number of South Korean companies that have been established in ASEAN has risen rapidly over the years. Many South Korean multinational companies such as LG, Lotte Group, Hyundai, and Samsung now have a heavy presence in the region.The motivations of these companies to actively expand their businesses in ASEAN are varied. Korean manufacturing companies are attracted by the low wage cost found in ASEAN since it is relatively costly to produce products in their home country. Meanwhile some South Korean companies invest in extractive industries, seeking to secure access to natural resources since ASEAN is known as a resource-rich region. Infrastructure companies are also interested in investing in ASEAN to increase their market share and win contracts.[6] In addition, market-seeking is also one of reasons South Korean companies have expanded their business since ASEAN is home to 630 million people with a growing middle income class.

Despite the growing interest of South Korean companies in the region, South Korean FDI is still relatively smaller when compared to other ASEAN Dialogue Partners. South Korea is ASEAN’s fifth biggest investor after the EU, Japan, the US, and China in 2015.[7] In addition, when compared to its nearest neighbour, Japanese companies have already been in the region long before South Korean companies entered the region. For example, Japanese companies such as Honda, Toshiba, and Sumitomo already have a strong market share in ASEAN as a result of establishing themselves much earlier. Therefore, South Korean companies need to make more efforts in order to penetrate ASEAN markets.[8]

Figure 1. FDI Flows in ASEAN, by selected economies and regions, 2015 (Millions of USD)

 

Source: ASEAN Secretariat (2016b)

On the other hand, while ASEAN is an important investment destination for South Korean companies, the Associatation and its Member States still need to ensure that it provides a good investment climate that allows South Korean companies to expand their business in the region. Some Member States are known to have complicated bureacracies and regulations that discourages foreign companies from investing in the region.

Furthermore, the ASEAN-Korea Investment Agreement should also be seen as an opportunity for ASEAN companies themselves to invest and expand their businesses in South Korea because currently ASEAN FDI to South Korea is rather limited. While many South Korean companies have strong presence in the region, it is hard to find ASEAN companies opening their branches in South Korea. Only a few ASEAN-based companies have opened branches in South Korea, such as Indonesia’s Bank Negara Indonesia (BNI), Singapore’s DBS bank, and Thailand’s Doi Chaang Caffé.

ASEAN – South Korea Development Cooperation

One of the greatest challenges facing ASEAN is the development gap found between the ASEAN-6 (Brunei Darussalam, Indonesia, Malaysia, the Philippines, Singapore and Thailand) and the CLMV countries (Cambodia, Lao PDR, Myanmar, and Viet Nam). In order to overcome the problem, ASEAN launched the Initiative for ASEAN Integration (IAI) at the 4th Informal Summit of ASEAN Leaders in 2000 and adopted the Hanoi Declaration on Narrowing the Development Gap for Closer ASEAN Integration in 2001.

In implementing the initiative, ASEAN does not work alone, instead inviting Dialogue Partners and international organizations to support programs under the IAI. As an ASEAN Dialogue Partner, South Korea is no exception in supporting ASEAN to narrow the development gap.

Between 2003 and 2007, South Korea has contributed USD 5 million to support 5 IAI projects. This was followed by South Korean’s commitment to contribute a further USD 5 million each for the IAI for the period of 2008 – 2012 and 2013 – 2017.[9]

In addition to that, South Korea is one of ASEAN’s aid donor. In terms of official development assistance (ODA), Southeast Asia received the largest share of Korea’s ODA in cumulative terms from 1987 to 2013 amounting to USD 2.56 billion. The importance of the region is also seen in Korea’s 2016-2020 Mid-term ODA Strategy where the Korean Committee for International Development Cooperation (CIDC) has selected 24 priority partner countries including six ASEAN Member States, namely Cambodia, Indonesia, Lao PDR, the Philippines, Myanmar and Viet Nam.[10]

However, South Korea’s contributions lag behind other major donor countries such as Japan and China in terms of presence in the region and the size of the development assistance. South Korea’s “four great power diplomacy” which focuses on the US, China, Japan, and Russia has meant South Korea tends to neglect its attention from the Southeast Asian region for some period of time. When it finally realized the importance of the region and started paying greater attention, Japan and China had already become a massive player in the region, including through their development assistance.

Although other Dialogue Partners have made bigger contributions to ASEAN, it should not be seen to make South Korea any less important for ASEAN. South Korea can play an important role by sharing its knowledge and experience in economic development. It managed to transform itself from a poor country with GDP per capita of only USD 64 after the Korean war to become a member of the OECD (Organisation for Economic Cooperation and Development).South Korea’s transition from ODA beneficiary to aid donor has proven that Korea’s development policy is one that is worth learning from. Though some adjustments are needed due to the different economic and political situations found in Southeast Asia, South Korea’s development story is arguably one of greater value when compared to other Dialogue Partners. In other worders its succesful development story can be a good lesson learned for ASEAN Member States, especially those facing the middle income trap problem like Indonesia, , and/or struggling with their economic development.

The Way Forward

Taking into account the issues mentioned above, collective efforts from both ASEAN and South Korea are needed in order to deepen economic cooperation. Leaders should work closely together to ensure that the AKFTA is able to be fully utilized by both sides. In order to improve its utilization, private sector and MSMEs must be aware of the benefits from the existing trade and investment cooperation.Therefore, Leaders must more actively promote the AKFTA to private sectors and MSMEs. Having said that,  the responsibility of providing information about the FTA should not be the government’s alone but also other stakeholders such as academics and business associations.

Moreover, as the regulator who set up the framework, Leaders need to ensure that trade and investment between ASEAN and South Korea will be beneficial for both sides. While there will always be a surplus and deficit in any trade relationship, Leaders need to ensure equal benefits. The AKFTA should not only be seen as an opportunity for South Korean businesses to enter the ASEAN market but also as an opportunity for ASEAN companies to penetrate the South Korean market. It is important for ASEAN Leaders to encourage their private sector as well as SMEs to actively expand their businesses in South Korea. In relation to this, the role of the ASEAN-Korea BAC (Business Advisory Council) is also important to further strengthen business relations between the business sectors in ASEAN and South Korea. It should also be used as a platform for the business sector to voice their concerns and aspirations to the Leaders in order to have policies that could support the business activities in ASEAN and South Korea.

In general, South Korea should create a better strategy and make more efforts in strengthening economic ties with ASEAN Member States. With Japan being one of ASEAN’s largest sources of ODA and China being ASEAN’s largest trading partner, it should find ways to make its economic cooperation “stand out” among the East Asian countries. Although the South Korean government has decided to give more focus on the socio-cultural issues in ASEAN, it should be done without neglecting the economic cooperation. The South Korean government needs to prove that it is still a reliable economic partner.

From ASEAN’s point of view, in order to have closer economic engagement with South Korea, ASEAN should prove that the region is still an attractive and favourable place for South Korean’s trade and investment. However, ASEAN should improve its business climate by developing infrastructure and reducing complex regulations. It will be beneficial for ASEAN to further deepen its relation with South Korea since ASEAN needs to diversify its economic interdependence.

In the end, ASEAN and South Korea’s economic cooperation should go beyond a “good and steady economic relations”. Amidst the rise of protectionism, global economic slowdown, and anti-globalization sentiments, economic relations should be based on the interest and needs of both South Korea and ASEAN. In addition to that, shared prosperity should also become a strong foundation for economic cooperation between ASEAN and South Korea for the years ahead.



[1]ASEAN-Korea Centre (n.d.), ‘ASEAN and Korea, ‘A Partnership of Trust and Happiness’’, retrieved from: <https://www.aseankorea.org/eng/ASEAN/ak_overview.asp> and ASEAN Secretariat (2016a), ‘ASEAN Community in Figures 2016’, retrieved from: <http://asean.org/storage/2012/05/25Content-ACIF.pdf>.

[2]Inkyo Cheong (2014), ‘Korea’s Policy Package for Enhancing its FTA Utilization and Implications for Korea’s Policy’, ERIA Discussion Paper Series, retrived from:<http://www.eria.org/ERIA-DP-2014-11.pdf>.

[3]ASEAN Secretariat (2010), ‘The Seventh – ROK Consultation’, retrieved from:    <http://www.asean.org/storage/2012/10/Joint-Media-Statement-AEM-ROK-7-Final.pdf>.

[4]Inkyo Cheong (2014),op. Cit.

[5]The Korea Times (2017), ‘ASEAN seeks Korean role in economic integration’, retrieved from: <http://www.koreatimes.co.kr/www/news/biz/2016/07/488_210518.html>.

[6]ASEAN Secretariat (2016b),ASEAN Investment Report 2016, retrieved from:<http://asean.org/storage/2016/09/ASEAN-Investment-Report-2016.pdf>.

[7]ASEAN Secretariat (2016a), op. Cit.

[8] Viet Nam News (2016), ‘ASEAN-Korea trade blooms’, retrieved from: <http://vietnamnews.vn/economy/345620/asean-korea-trade-blooms.html>.

[9] ASEAN Secretariat (n.d.), ‘ASEAN-Republic of Korea Dialogue Relations’, retrieved from:     <http://asean.org/?static_post=asean-republic-of-korea-dialogue-relations>.

[10] Kwon Yul (2015), ‘Korea’s ODA to Southeast Asia’, Korea Institute for International Economic Policy.

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