Korea Institute for Industrial Economics and Trade: "Korea-Japan FTA Will Widen Trade Deficit with Japan"

Approach as a Tool for Supply Chain Cooperation and Trade Policy

Top Export to Japan, Petroleum Products, Already Has Low Tariffs

Imports from Japan Will Increase, but Limited Impact on Exports

Institutional Measures to Prevent Economic Conflicts Between the Two Countries

Must Be Approached as an Economic Cooperation Policy Package

A national research institute has pointed out the need for preparation, stating that the Korea–Japan Free Trade Agreement (FTA) could significantly expand Korea’s trade deficit with Japan if concluded. As protectionism has been on the rise since the 'Trump tariffs', the necessity for a Korea-Japan FTA has recently gained traction. Additionally, with President Lee Jae-myung’s first official visit to Japan since taking office, the need for economic cooperation between the two countries has grown.

On the 13th, the Korea Institute for Industrial Economics and Trade published a report entitled “Industrial Economy Issue – Anticipated Impacts and Implications of Promoting the Korea-Japan FTA,” summarizing these points.

Recently, amid the strengthening of protectionism, discussions continue over South Korea's necessity to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). However, high levels of market opening for agricultural and marine products have been identified as major hurdles.

The report also pointed out that, among CPTPP member countries, only Japan and Mexico have not signed an FTA with South Korea. For this reason, the level of tariff concessions is expected to be a key standard for negotiations if a Korea-Japan FTA is promoted.

Last year, Korea’s exports to Japan were $29.6 billion and imports were $47.59 billion, accounting for 4.3% and 7.5% of Korea’s total worldwide exports and imports, respectively. Currently, import tariff rates between Korea and Japan are applied based on the Regional Comprehensive Economic Partnership (RCEP), which went into effect in February 2022. The degree of market opening under RCEP is relatively low.

Over the past three years, Korea’s weighted average import tariff rate on Japanese products was 2.67%, and among the top 100 import items, the tariffs for the top 15 items ranged from 1.5% to 8.0%. Of the top 100 import items, 54 are currently subject to tariffs. If a Korea-Japan FTA is concluded, import tariffs are expected to decrease on products such as petrochemicals, plastics, and electrical machinery.

The report predicted that, if the Korea-Japan FTA is promoted, the market opening for goods will likely follow the CPTPP’s comprehensive and progressive level, while sensitive sectors would be excluded or negotiated separately. The report analyzed that, with a Korea-Japan FTA at the CPTPP level, imports of automobiles, petrochemicals, and electronics would likely increase.

In the past three years, the value of exports to Japan subject to tariffs averaged $11.02 billion per year, amounting to 37.1% of the total $29.74 billion. Export gains due to tariff reductions are expected to be limited for Korean products, except for certain chemical and plastic goods, raising the likelihood that the trade deficit with Japan will expand. Petroleum products, in particular, already have low tariffs under 1%.

The report explained that, while there is potential to expand exports to Japan in some food items, market opening in agricultural and marine product sectors—which include these foods—remains a sensitive issue for Korea, making further liberalization difficult.

The report recommended that “it is necessary to prepare for the negative impacts of a widened trade deficit if the Korea-Japan FTA is concluded,” but also suggested that “the economic impacts of the agreement should be considered comprehensively, with attention not only to changes in the trade balance but also to effects on consumer and corporate behavior, and overall economic welfare.”

Furthermore, it stated, “If the Korea-Japan FTA is concluded, it should be approached as an institutional mechanism for stable and higher-level economic cooperation between the two countries, beyond just trade balances.” Like the US-China rivalry, the report argued, the FTA should be utilized as a means of deepening bilateral economic cooperation to overcome challenges faced by both countries. Policy recommendations through the FTA include: integration of high-level talent in the labor market, expansion of currency swap agreements, forming an economic security council, joint development of critical resources, procurement and stockpiling, semiconductor supply chain cooperation, and joint construction of decarbonization infrastructure.

There was also analysis that the Korea-Japan FTA could serve as a buffer for potential future economic conflicts between the two countries. The FTA, the report said, should be used as an institutional measure to prevent incidents like the “radical line incident” and trade disputes.

Reporter: Kim Dae-hoon daepun@hankyung.com