Merchandise Trade

• South Korea has been a member of the World Trade Organization (WTO) since January 1,1995, and a member of the General Agreement on Tariffs and Trade since April 14, 1967.


• South Korea has adopted an export-oriented growth model. Total exports contribute 45.2% to GDP.


• In the past, South Korea's trade policy placed heavy emphasis on import control and export growth promotion. The South Korean government has revised its trade policy to a more neutral stance in recent years, which includes forging free trade agreements (FTAs) with other countries. South Korea has entered into 17 FTAs covering more than 50 countries, including with the European Union (EU), the United States, the Association of Southeast Asian Nations (ASEAN), Singapore and Mainland China. South Korea is also engaged in negotiations for a further 10 FTAs, including with Ecuador, Mexico, the Gulf Cooperation Council, Indonesia, Mercosur, Israel and Japan.


• In terms of trade barriers, South Korea continues to pursue economic liberalisation and deregulation, with low levels of bureaucracy and streamlined trade procedures easing the overall trading process and lowering import costs. Customs duties can be adjusted every six months, within the limit of the basic rate. South Korea also has a flat 10% VAT on all imports, with a special excise tax of 10-20% levied on the import of certain luxury items and durable consumer goods. Tariffs and taxes must be paid in South Korean won within 15 days after goods have cleared customs. Average import tariff rates currently stand at 4.8% and are the third highest in the East and South East Asia region, behind Cambodia and Laos.


• The South Korean government maintains a tariff quota system designed to stabilise certain domestic commodity markets. Some of the major barriers to trade involve the rice industry, with the Ministry of Agriculture, Food and Rural Affairs implementing a number of measures to support domestic rice production, including rice farmer income subsidies and a hefty rice import tariff. In January 2015, the Government of South Korea implemented a 513% tariff on over-quota imported rice. Imports of rice have a quota of 409,000 tonnes a year. Products such as crude oil are also subject to tariffs, significantly increasing the costs of imported inputs for businesses.


• The trilateral FTA between South Korea, Japan and Mainland China has been under negotiation since 2012, and the 15th round of negotiations was held in April 2019. In addition, South Korea is engaged in negotiations concerning the Regional Comprehensive Economic Partnership, a proposed FTA among 16 countries, including the10 ASEAN countries, Australia, Mainland China, India, Japan and New Zealand.


• In 1997, following the amendment of the Customs Act and its Enforcement Decree, South 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 South Korea. Most duties are assessed on an ad valorem basis. For non-agricultural products, about 90% of goods are charged tariff rates from 0% to 10%. Tariff rates for leading import items from Hong Kong (for example, electrical machinery) range between 0% and 13%.


• In addition to tariffs, imports are also subject to other taxes, including VAT. The VAT rate on imports is 10% of the cost, freight and insurance value plus customs levies. A special excise tax or individual consumption tax, which ranges from 2% to 20%, is also levied on certain luxury and durable consumer items.


• The South Korean government maintains a safeguard mechanism in which high tariffs are imposed on certain products, protecting local industries that are vulnerable to global competition. For example, certain agricultural products are subject to duties above 100%. Some non-agricultural products, such as leather and footwear, are taxed up to 16%.


• In July 2014, an individual consumption tax was imposed on imported coal used for power generation. The purpose of the measure was to tackle excessive electricity consumption and rationalise the domestic energy price structure. At the same time, taxes for other alternative imported fuels, such as liquefied natural gas, kerosene and propane, were lowered. Trade bureaucracy in South Korea is generally relaxed, with the country having an increasingly open attitude to imported goods.


• In January 2015, the state-run Export-Import Bank of Korea announced that it will provide a total of USD51 billion in loans and investment and USD22 billion in loan guarantees to finance industrial activities and international development projects involving South Korean companies (which may be favoured over international ones) amid a diminishing quantitative easing trend in the United States and continuous depreciation of the Japanese yen. Financing priority will be given to large projects overseas that are related to engineering, procurement and construction. The amount will total USD25 billion.

Sources: WTO – Trade Policy Review, Fitch Solutions

Trade Update

Indonesian and South Korea took a key step toward a bilateral agreement that is expected to help boost trade between the two nations by about 50% by 2022. The countries will move forward with 'legal scrubbing' and translation before the official signing of the Indonesia-Korea Comprehensive Economic Partnership Agreement.
 

Multinational Trade Agreements

Active

1. South Korea-Mainland China FTA: This FTA was implemented on December 20, 2015 and 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. South Korea's bilateral trade with Mainland China – South Korea's top trading partner – reached USD268.6 billion in 2018. The FTA aims to enhance economic cooperation between the two sides through the facilitation of productive competition and make a substantial contribution to the economic integration of East Asia and the Asia Pacific region.


2. EU-South Korea FTA: This agreement came into force on July 1, 2011 and aims to eliminate duties for industrial and agricultural goods in a progressive step-by-step approach. The majority of import duties had already been removed when the FTA came into force. On July 1, 2016 import duties were eliminated on all products except for a limited number of agricultural products. In addition to eliminating duties on nearly all goods, the FTA addresses non-tariff barriers to trade with specific focus on the automotive, pharmaceutical, medical device and electronics sectors. The agreement also creates new opportunities for market access in services and investments and includes provisions in areas such as competition policy, government procurement, intellectual property rights, transparency in regulation and sustainable development. South Korea is the EU's 10th largest export destination.


3. South Korea-Australia FTA (KAFTA): KAFTA came into force on December 12, 2014. South Korea is Australia's fourth largest trading partner, and under this agreement tariffs on 84% of Australia's exports to South Korea were eliminated. Tariffs on 96% of current exports will be eliminated within 10 years and by the time the agreement is fully implemented, tariffs on 99.8% of Australia's current exports to South Korea will be eliminated. Products representing about 0.2% of Australia's current exports to South Korea will be excluded from the agreement, namely rice, milk powder, honey, abalone, ginger, apples, pears and walnuts.


4. South Korea-United States FTA (KORUS): This agreement came into force on March 15, 2012. Under KORUS, almost 80% of consumer and industrial products exported to the United States from South Korea became duty free on March 15, 2012 – this was subsequently expanded to 95% by 2017. Most remaining tariffs will be eliminated in the medium term. KORUS eliminates tariffs and quotas for a broad range of agricultural products, with almost two-thirds (by value) of South Korea's agricultural imports from the United States becoming duty free. For services, KORUS provides meaningful market access commitments that extend across virtually all major service sectors, including greater and more secure access for international delivery services and the opening up of the South Korean market for foreign legal consulting services. In the area of financial services, KORUS increases access to the South Korean market and ensures greater transparency and fair treatment for United States suppliers of financial services. KORUS addresses non-tariff barriers in a wide range of sectors and includes strong provisions on competition policy, labour, the environment, transparency and regulatory due process.


5. South Korea-India FTA: A closer economic partnership agreement between South Korea and India came into force on January 1, 2010. The agreement aims to enhance economic cooperation between the two countries through the facilitation of productive competition. The agreement will gradually remove tariffs on more than 90% of traded goods within two decades. In June 2017, a memorandum of understanding between the Export-Import Bank of Korea and the Export-Import Bank of India was signed in Seoul for export credit of USD9 billion for infrastructural development in India and for the supply of goods and services by India and South Korea as part of projects in third-party countries.


6. ASEAN-South Korea Free Trade and Economic Integration Agreement: This FTA, which came into force on October 14, 2010, allows 90% of the products being traded between the ASEAN and South Korea to enjoy duty-free treatment. The agreement is significant given the high trade flows between the countries.

Under Negotiation

• South Korea-Japan FTA (KJFTA): KJFTA will be of benefit to businesses, owing to the high trade volumes between the two countries, and will create potential for businesses to explore new markets in the region. The scope of the KJFTA can be categorised into three main areas: trade liberalisation and market access through concessions for trade in goods and services, enhanced cooperation for non-trade areas, and institutional arrangements centred on a dispute settlement mechanism. Japan is an important trading partner, accounting for 5.1% of South Korea's total exports and 10.2% of total imports in 2018.


• Regional Comprehensive Economic Partnership (RCEP): This is intended to be an FTA between the 10 member states of ASEAN and six states – Australia, Mainland China, India, Japan, South Korea and New Zealand – with which ASEAN has existing FTAs. The agreement will speed up the economic integration of the states and increase South Korea's export competitiveness in the global market. South Korea already has an FTA with ASEAN, and RCEP will expand the breadth of South Korea's export market diversification. Some progress was reported in the latest round of negotiations that took place in Melbourne, Australia from June 22 to July 3, 2019, but there is still some way to go before agreement is reached on the outstanding 11 chapters.

Sources: WTO Regional Trade Agreements database, The Hindu Business Line, Fitch Solutions

Foreign Direct Investment

• Value Added Tax: 10%
• Corporate Income Tax: 10-25%

Sources: National Tax Service Korea, Fitch Solutions

Important Updates to Taxation Information

• The South Korean government announced a series of new tax measures in August 2017 that would come into effect for fiscal years starting after January 1, 2018. The main focus of the 2018 Corporate Income Tax (CIT) Law reform is to encourage job creation by reforming the existing tax credits for corporate investment. The most important of these measures for businesses is the addition of a new CIT rate of 25% for taxable income of more than KRW300 billion.
   
• The 2019 CIT Reform aims to embrace the base erosion and profit shifting (BEPS) initiatives taken by the Organisation for Economic Co-operation and Development (OECD). In line with this, the government has abolished a number of incentives and benefits offered to foreign companies in order to attract foreign direct investment. The new rules apply for financial years starting from January 1, 2019.
   
• South Korea's 2020 tax reform bill states that when a qualified in-kind contribution is made to form a new Korean holding company or convert an existing Korean company to a Korean holding company, any capital gains tax on the contribution will be paid in instalments over three years, beginning in the fifth year of the in-kind contribution. This rule applies to in-kind contributions/share transfers occurring on or after 1 January 2022.

Business Taxes

Sources: National Tax Service Korea, Fitch Solutions
Date last reviewed: May 10, 2020

Foreign Worker Permits

South Korea is increasingly opening itself to immigration in the face of falling fertility rates and labour shortages. By 2002 unauthorised workers represented 70% of South Korea's total foreign labour force. Since 2002 South Korea has taken a number of steps to overhaul its labour migration system. This has resulted in gradually loosening controls and a declining unauthorised population. In 2003 the South Korean government introduced the Employment Permit System (EPS), a guest worker scheme that provides a framework for the entry of foreign labour. The EPS is divided into two subsystems:

• The General EPS which is based on memoranda of understanding drawn up between the South Korean government and sending countries (16 countries as of 2019).
• The Special Case EPS which grants foreign nationals of South Korean ancestry visiting worker status so they can get a job in South Korea.

Skilled workers, including researchers and language teachers, are welcome to temporarily work and live in South Korea. When they have valid employment contracts, skilled workers can easily acquire work visas and can renew their visa status. Certain skilled international workers, including technology workers, can move to South Korea through an express procedure. Under the General EPS, South Korean employers can enter into employment contracts with foreign workers who pass a South Korean language proficiency test and are deemed to be in good health.

Localisation Requirements

Employers who wish to employ low-skilled foreign labour must first demonstrate that they have spent at least 14 days (seven days in some cases) attempting to find South Korean workers by requesting help from public employment centres. 

Any foreigner planning on a long-term stay or permanent residency must register as a foreigner or file a domestic residence report within 90 days of arrival.

Visa/Travel Restrictions

There are 16 visa statuses that allow employment in South Korea:

• short-term employment (C-4)
• professorship (E-1)
• foreign language instructor (E-2)
• research (E-3)
• technology transfer (E-4)
• professional employment (E-5)
• arts and performances (E-6)
• special occupations (E-7)
• employed trainee (E-8)
• non-professional employment (E-9)
• vessel crew (E-10)
• residency (F-2)
• overseas Koreans (F-4)
• permanent residency (F-5)
• working holiday (H-1) and
• working visit (H-2)

Foreign workers brought in under the General EPS receive E-9 non-professional employment visa status, while those under the Special Case EPS are given H-2 visiting worker status. H-2 visa holders do not need an employment contract before entering South Korea and there are no restrictions on employment sectors and workplace changes for them. E-9 visa holders need an employment contract, are tied to their employer and are restricted to certain sectors, including agriculture, construction, fishing and manufacturing. Family members of low-skilled foreign workers are not allowed to settle in South Korea.

Sources: Korean Immigration Service, Fitch Solutions

Sovereign Credit Ratings

Sources: Moody's, Standard & Poor's, Fitch Ratings

Competitiveness and Efficiency Indicators

Sources: World Bank, IMD, Transparency International, Fitch Solutions

Fitch Solutions Risk Indices

Source: Fitch Solutions
Date last reviewed: May 10, 2020

Hong Kong’s Trade with South Korea

Export Commodity	Commodity Detail	Value (US$ million)
Commodity 1	Electrical machinery, apparatus and appliances; and electrical parts thereof	2,895.5
Commodity 2	Telecommunications and sound recording and reproducing apparatus and equipment	986.8
Commodity 3	Office machines and automatic data processing machines	891.1
Commodity 4	Miscellaneous manufactured articles	488.4
Commodity 5	Articles of apparel and clothing accessories	239.9

Import Commodity	Commodity Detail	Value (US$ million)
Commodity 1	Electrical machinery, apparatus and appliances; and electrical parts thereof	18,462.2
Commodity 2	Telecommunications and sound recording and reproducing apparatus and equipment	1,614.6
Commodity 3	Office machines and automatic data processing machines	1,555.0
Commodity 4	Petroleum, petroleum products and related materials	1,136.1
Commodity 5	Essential oils, resinoids and perfume materials; and toilet, polishing and cleansing preparations	975.6