S. Korea-China FTA could change the game for Kaesong Industrial Complex

North Korean workers sew products at the Kaesong Industrial Complex. (Yonhap News)

Agreement would recognize products made in Kaesong as South Korean, allowing for a wider range of exports

The most salient differences between the South Korea-China free trade agreement deal reached in November and the agreement initialed this week are in the sweeping recognitions of items produced at the Kaesong Industrial Complex as South Korean-made, and a major increase in the number of items. Companies working out of the complex now have a bigger pathway to export their items as South Korean, which is a boon to price competitiveness. The new status is also expected to have favorable effects on Seoul’s negotiations with the US and European Union on the complex as an outward processing zone.

According to the agreement text released by the Ministry of Trade, Industry and Energy (MTIE) on Feb. 25, products from the Kaesong Complex are to be recognized as South Korean as a rule once the agreement takes effect, with the terms applying to a list of 310 items. That number may be amended through yearly agreements, and includes not only items that are currently being produced but also some that are expected to be produced later. In contrast, South Korea’s FTA with the European Union, which took effect in 2011, recognized place-of-origin status for 276 items from the complex. Other agreements with India, ASEAN, and Peru recognized 108, 100, and 100 items, respectively.

Sweeping recognitions were also granted in terms of place of origin conditions. The previous South Korea-ASEAN FTA recognized South Korean product status only when inputs outside the place of origin (materials, wages, and transportation) did not exceed 40% of the end good price. The FTA with China, in contrast, does not include wages and transportation in the category of inputs outside the place of origin.

“The details are a bit more fleshed out than they were when the deal was announced last year,” explained Woo Tae-hee,head of the Office of FTA Negotiations in the MTIE. “We also succeeded in getting more favorable terms on place of origin recognition for the Kaesong Complex than in other FTAs.”

“Another achievement was the establishment of an outward processing committee, which opens up the possibility of future establishment,” Woo added.

The recognition of the Kaesong Complex’s inexpensive items as South Korean-made could give tenant companies a price advantage in the Chinese market. The US, Japan, and EU currently refuse to recognize completed products made at the complex as South Korean because of North Korea’s nuclear program. Five of South Korea’s previous FTAs, including those with the US and EU, stipulate outward processing zone committees as matters to be decided later. Goods exported to those partners are only recognized as South Korean-made when completed in South Korea after partial manufacture or raw material production at Kaesong. Under the current system, the maximum processing allowable for South Korean place of origin recognition is done at the complex, with the final processing into a finished good taking place in South Korea so that the item qualifies for export as South Korean-made.

From Seoul’s standpoint, the terms of the agreement with China now offer some potential leverage in Kaesong place of origin negotiations with other FTA partners like the US and EU.

While the immediate effects for South Korea from the new Kaesong terms appear positive, they also require some caution, as they could conversely be tied to recognition of outward processing zone status for China’s economic zone in North Korea‘s Rajin-Sonbong (Rason) area. Chinese businesses are currently taking advantage of the North Korean labor force in Rason for consignment processing. For now, the agreement initialed by the two sides doesn’t contain any provisions on place of origin status for the zone.

“We still haven’t had discussions on place of origin for Chinese consignment processing the Rajin-Sonbong special economic zone, but we have established regulations and possibilities for a basis for discussions,” said an MITE official.

“We’re planning to create a committee to discuss outward processing zones beyond Kaesong,” the source added. “We can expect those discussions to take shape after looking at the geopolitical situation going ahead.”

　

By Kim Jeong-pil, staff reporter

　

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