Republic of Korea

韩国

Republic of Korea: Market Profile

Major Economic Indicators

Table: Major Economic Indicators (Republic of Korea)
Table: Major Economic Indicators (Republic of Korea)

Recent Developments

  • Korea’s real GDP grew 2.7% in 2016, slightly edging up from 2.6% in 2015. The Korean economy is expected to expand by 2.5% in 2017 amid slower growth in private consumption.
  • In 2016, Korea recorded a trade surplus of US$89.2 billion; exports contracted 5.9% to US$ 495.4 billion, while imports decreased 6.9% to US$ 406.2 billion.
  • China and Korea implemented their bilateral free trade agreement (FTA) in December 2015 after almost three years of talks. The FTA aim to eliminate about 70% to 90% of import tariffs within the next 10 to 20 years.
  • Hong Kong’s total exports to Korea dropped by 0.6% to US$7 billion in 2016, while imports from Korea grew by 14% to US$25.2 billion.

Current Economic Situation

Economy

The Korean economy grew 2.7% in 2016, following a 2.6% rise in 2015. President Park’s impeachment by the Constitutional Court in March 2017 is likely to lead to continual political uncertainty in Korea. The massive corruption scandal that brought down Park also swept up top Korean companies including Samsung, presenting some downside risk to economic growth. In addition, rising Sino-Korean tensions as a result of China’s opposition to the deployment of a US missile defense system on Korean soil is expected to negatively affect inbound tourism, entertainment and retail sales. For 2017, the Bank of Korea (BOK) projects real GDP to expand moderately by 2.5% in light of slow growth in private consumption and construction investment.

In Q4 2016, GDP rose by 0.4% quarter-on-quarter (QOQ), slowing from a 0.6% expansion in the previous quarter. Private consumption growth also decelerated to 0.2% in Q4 from 0.5% in Q3. Construction investment was down 1.7% in the same period, while government spending increased marginally by 0.5%. By sector, manufacturing led the overall growth with a 1.8% expansion, with agriculture declining by 2.8% and services remained unchanged.

Korea’s consumer price inflation was at 1.0% in 2016 mainly due to sluggish domestic demand and the tumble in international oil prices. In January 2017, the BOK projected that inflation to accelerate to 1.6% in 2017 in light of the expected rise in oil and commodity prices, citing that weak domestic demand and faltering export performance will most likely cap inflation below the 2% target. 

In response to weak economic growth, the Korean government has strengthened its efforts to develop the country’s services sector, putting more emphasis on the creative industry to transform the country from a manufacturing powerhouse to a technology-driven creative economy. In supporting this initiative, Manufacturing Innovation 3.0 was launched in 2014 to upgrade industry through manufacturing innovation. The government also lent its support to businesses with an eye on high-tech fields including 5G telecommunications, cloud computing, and biotechnology. In 2017, Korea’s combined budget for R&D will reach 19.5 trillion won (US$17 billion), with a large portion allocated to securing new growth engines in the “fourth industrial revolution”, characterised by a fusion of cutting-edge technologies such as big data and Internet of Things (IoT).

External Trade

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 2016, Korea’s exports shank by 5.9% to US$495.4 billion. The slump was attributed largely to a slowdown in emerging economies, particularly China, Korea’s largest export partner which accounted for 25% of total export, with the value dropping by 9.3% during the period. In 2016, other major export destinations of Korea included the US (13% of share), Hong Kong (7%), Vietnam (7%) and Japan (5%). Meanwhile, Korea’s imports also plunged by 6.9% to US$406.2 billion amid a sharp drop in oil prices. Major sources of imports to Korea were China (21%), Japan (12%) and the US (11%).

In 2014, Korea’s Ministry of Strategy and Finance introduced several measures to support local exporters, particularly the SMEs. To further support the export sector, the Korean government in 2016 announced plans to offer 4.8 trillion won (US$4.0 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.

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.  

Investment Policy

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. In 2015, the government set a goal to increase FDI by 60% to US$30 billion by 2017 from US$19 billion in 2014 through such measures as easing regulations and focusing support on five industry sectors including cosmetics, pharmaceuticals, industrial materials, petroleum products and food processing.

In 2016, the Financial Services Commission (FSC) announced its plan to introduce an Omnibus Account in 2017, 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.

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 2015, Korea’s inward FDI hit a record high of US$21.3 billion, the second consecutive year that FDI reached over 20 billion. Major sources of FDI included the US (18% of total), Singapore (11%), the Chinese mainland (10%), Hong Kong (10%), and the Netherlands (7%), according to IK.

Trade Policy

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$211 billion in 2016. In comparison, bilateral trade with the US and EU in the same year were, respectively, US$110 billion and US$91 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 May 2012, and the 11th round of negotiations was held in January 2017. 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. RCEP countries account for some 29% of the world’s GDP and 28% of global trade, with an aim to conclude negotiations in 2017.

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, 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 sixth largest import source of Hong Kong in 2016. In 2016, Hong Kong's total exports to Korea dropped by 0.6% year-on-year (YOY) to US$7.0 billion, while Hong Kong imports from Korea grew by 14.0% YOY to US$25.2 billion. As such, Hong Kong ran a trade deficit against Korea amounting to US$18.2 billion. Major Hong Kong exports to Korea included semiconductors, electronic valves and tubes (US$2.18 billion, 31.5% of total, +0.5% YOY), telecom equipment and parts (US$1.12 billion, 16.2% of total, +3.4% YOY), computers (US$419 million, 6.0% of total, +28.6% YOY).

In the same period, Hong Kong major imported items from Korea included semiconductors, electronic valves and tubes (US$15.6 billion, 62.0% of total, +31.9% YOY), telecom equipment and parts (US$1.63 billion, 6.5% of total, -3.8% YOY) and petroleum oils (other than crude) (US$1.08 billion, 4.3% of total, -13.5% YOY).

Table: Hong Kong Trade with Republic of Korea
Table: Hong Kong Trade with Republic of Korea

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 135 Korean companies which had established regional headquarters, regional or local offices in Hong Kong as of June 2016.

In 2015, Korea was Hong Kong’s 19th largest FDI contributor. Korea’s cumulative FDI investment in Hong Kong amounted to US$3.3 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.). 

Korean visitors to Hong Kong increased 12% to 1,392,367 in 2016, making Korea the third largest source of tourist arrivals and accounting for 2% of total visitors.