Breaking the Mold of the Asia-Latin America Relationship

Korea

Korea
Breaking the Mold of the Asia-Latin America Relationship

Table of Contents
Acknowledgments/ v Introduction/ 1 Bilateral Trade: Small But Booming/ 3 With Some Hope of a More Balanced and Diversified Relationship/ 5 But Important Barriers Still Remain in Relation to Tariffs and Non-tariff Measures/ 11 and Transport Costs/ 15 Some Important But Still Limited Initiatives to Address These Obstacles/ 17 Investments are Following Trade, but Only on the Korean Side/ 19 Cooperation is on the Rise/ 25 Summing Up: Taking Opportunities to Break the Mold/ 29

iii

Acknowledgments

orea: Breaking the Mold of the Asia-Latin America Relationship was commissioned by IDBs president Luis Alberto Moreno for the KoreaLAC Business Forum, organized jointly by the IDB and Ministry of Strategy and Finance of Korea, in close collaboration with the Korea Export and Import Bank (KEXIM), the Korea Trade-Investment Promotion Agency (KOTRA) and the Federation of Korean Industries (FKI), to be held in Seoul, Korea on October 20th and 21st, 2011. It is the product of a collaborative research effort within the Trade and Integration Sector (INT) of the IDB, under the general supervision of Antoni Estevadeordal, Sector Manager. The report was coordinated and written by Mauricio Mesquita Moreira, INT Research Coordinator, in collaboration with Cecilia Heuser, INT Research Fellow. Kyungjo An was responsible for the Korean version and Cristbal Vsquez managed the editing of the document.

Introduction

hinas meteoric emergence in the last decade and its profound impact on the economic performance of Latin America and the Caribbean (LAC) has eclipsed the importance of the regions other Asian partners. Yet, LACs governments can only ignore them at their own peril. These countries remain a major source of opportunities for trade and investment and Korea is a case in point. It has a one trillion dollar economy, with an impressive growth record (a 7% annual average growth since the early 1960s) and a population of nearly 49 million, sitting on a very limited pool of natural resources. It is clearly another important market for the regions commodities, but not just that. The complementarity between the two economies goes beyond natural resources and extends to the manufacturing sector, where Korea has already upgraded beyond labor-intensive and basic capital-intensive sectors, offering less of a competitive threat to the bulk of LACs industries. At the same time, its US$ 20 thousand per capita income offers opportunities for more sophisticated and diversified exports, something that is already visible in the current pattern of bilateral trade, which is one of the most diversified among LACs Asian partners. Korea is also an important source of foreign direct investment with a worldwide stock of approximately US$120 billion, US$ 20 billion of which was invested just in 2010. LAC has been one of the beneficiaries of these flows, accounting for a still small but growing share of the total. Breaking with the pattern of other Asian investments, manufacturing has frequently been the target of Koreas investments in the region, providing the basis for a more balanced and diversified relationship. Apart from trade and investment, Korea is also a major source for policy lessons, which can be drawn from its remarkable and no less than spectacular growth trajectory. In less than 30 years, the country went from a broken-down economy, ravaged by civil war and with half of the per capita income of the average developing country, to a highly sophisticated developed economy exporting a wide array of technology-intensive products and backed by a highly educated workforce and a world class private sector. This report draws attention to these opportunities and the challenges of fully exploiting them. It highlights the fact that there is more to Asia than
1

Korea: BreaKing the mold of the asia-latin america relationship

just China and that the relationship with Korea has the contours of what can be a model for a sustainable Asian-LAC relationship. But it also points to the obstacles that still hold back bilateral tradecurrently standing at US$ 44 billion or only 2.5% of LACs tradeand that call for decisive action to address both traditional and non-traditional trade barriers. More trade will bring more investment and more cooperation, which eventually, in a virtuous circle, would create even more opportunities to trade.

Bilateral Trade: Small But Booming

ver the past two decades, bilateral trade between LAC and Korea has expanded rapidly, growing at an annual average rate of 16.1%. This is a faster rate of growth in trade than LAC experienced with East Asia (15.1%),1 the U.S. (9.8%), the European Union (E.U.) (7.4%) and Japan (7.7%). Only trade with China grew at a more rapid pace (27.5%). Despite this remarkable dynamism, Koreas share of LACs trade is still fairly small. Since 1990, its share has risen from a little over 1% to 2.5%, whereas Chinas share reached the 13% mark in the same period. LACs share of Koreas trade, though, is higher (5.1% in 2010) and not very different from the regions share of Chinas trade (see Figure 1). As is the case for trade with other Asian economies, resource complementarity seems to be the main driver of the trade between LAC and Korea. As shown in Figure 2, Koreas scarcity of natural resources is even more severe than that of the other large Asian economies, in marked contrast with LACs abundance. Yet, resource complementarity cannot, by itself, explain the timing of the recent trade boom, which started roughly two years after LACs bilateral trade with China took off. Neither can trade liberalization, since both economies began to open up much earlier, in the late 1980s and early 1990s. It is true that Korea has signed important preferential trade agreements with countries in the region (see below), but they were limited to a small number of countries and were put into effect well after the take-off. The explanation probably lies in Chinas emergence, both because of its impact on the price of LACs

with China 250 US$ billions 200 150 50 0 1990 1995 2000 Year with Japan 60 S$ billions 50 40 2005 2010 5 0 15 10 %

Figure 1/
LACs Bilateral Trade 19902010

(Continues on next page)

7 6 5 %

East Asia includes Indonesia, Malaysia, Singapore and Thailand.

US$ billion

200

10 % 5 0 1990 1995 2000 Year 2005 2010

Korea:150 BreaKing the mold of the asia-latin america relationship

50 0

Figure 1/
US$ billions

LACs Bilateral Trade 19902010 (Continued)

with Japan 60 50 40 30 20 10 1990 1995 2000 Year with Korea US$ billions 40 30 20 10 0 1990 1995 2000 Year Trade Volume share of LACs trade LACs share of CHN/KOR/JPNs trade 2005 2010 5 4 3 2 1 % 2005 2010 7 6 5 4 3 %

Source: IDB-INT using data from COMTRADE, ECLAC, OECD and MOFAT Korea.

commodities and its positive effect on the growth of LAC and Korea. Higher growth in both economies fed LACs demand for Koreas manufacturing goods and boosted Koreas demand for LACs natural resources at higher prices.

Figure 2/
Selected Natural Resources Per Capita: China, Japan, Korea and LAC

0.018 0.016 0.014 0.012 0.010 0.008 0.006 0.004 0.002 0.000 Latin America Agricultural land (km2) (2008) Korea Japan China

25,000 20,000 15,000 10,000 5,000 0 Water (m3)

Forest, land (km2)

Forests (km2) (2010)

Fresh water (m3) (2007)

Source: WDI.

With Some Hope of a More Balanced and Diversified Relationship

his recent bilateral trade boom has been concentrated in a few LAC countries and products, reflecting differences in the size of the economies and in their natural resource wealth. Concentration is relatively high in both LACs exports to and imports from Korea. In the case of the former, which have been growing 11% a year in the last two decades (25% in 2010), the top 5 exporters, three of which are in the Southern Cone, are responsible for 83% of total exports (Table 1), whereas the top 10 products, mostly raw materials, account for nearly 60% of all exports (Table 2). Although high, these levels of geographic and product concentration are lower than is the case for LACs exports to China, with figures for the top five exporters and top ten products around 84% and 78% respectively. Figure 3 examines two different indicators of concentrationone of which takes into account the whole distribution of exports (HHI)which corroborate this fact. These indicators show not only that the levels of concentration are much lower than for the regions exports to China, but also that they are closer to those of the traditionally more diversified exports to the E.U. and U.S. Table 1/
Top Five LAC Exporters to Korea, 20072011*

Country
Brazil Chile Mexico Peru Argentina
Source: IDB/INT using data from MOFAT Korea. * Data for 2011 reflects information from January to August.

Share (%)
30.2 29.2 9.5 8.1 5.9

LACs exports to Korea are more diversified not only in terms of products, but also across sectors. Figure 4 shows that the concentration on resource-based goods is less dramatic than in the regions exports to other Asian countries, with manufacturing accounting for nearly 30% of LAC exportstwice the share of the regions manufacturing exports to China.
5

Korea: BreaKing the mold of the asia-latin america relationship

Table 2/
Top 10 LAC Exports to Korea, 20082009

Products (HS2002, 6 digits)

Copper ores and concentrates Refined copper: cathodes and sections of cathodes Iron ores and concentrates Semifinished products of iron or nonalloy steel Tankers Oil-cake, solid residues resulting from extraction of soya-bean oil Zinc ores and concentrates Iron ores and concentrates (agglomerated) Natural gas (liquefied) Vessels for the transport of both persons and goods
Source: IDB/INT using COMTRADE data.

Share (%)
13.4 10.6 6.6 4.9 4.4 4.1 4.0 3.3 3.2 3.1

Cum. Share (%)

13.4 24.0 30.6 35.5 39.9 44.0 48.0 51.4 54.5
57.6

Figure 3/
Concentration of LACs Exports. CR4 and HHI, 20082009

0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00 0.10 0.12 0.57 0.52 0.42 0.36 0.33 0.22 0.07 0.05 0.06 0.02 HHI China East Asia Japan Korea CR4 USA EU

Source: IDB/INT using COMTRADE data. Note: HHI refers to the Herfindahl-Hirschman normalized concentration index, which ranges from 0 (diversified) to 1 (concentrated). CR4 refers to the aggregated share (in decimals) of total exports held by the top 4 exported products. Products were defined at the HS6 level of aggregation.

In the case of bilateral imports, which have been growing an average of 22% a year (35% in 2010) for the last two decades, the share of the regions imports of the top five importers (67%) is lower than that of the top five exporters. Mexico is the leading importer, reflecting the size of its domestic market and its preferential access to the U.S. market. The degree of product concentration is not that different from that for exports, but the composition, as expected, is radically different, made up of mostly manufacturing products (Tables 3 and 4).

With some hope of a more Balanced and diversified relationship

China

Japan 1.6%

Korea 4.9%

Figure 4/
Composition of LACs Exports to Korea and Selected Markets, 20082010

11.7% 52.8% 20.5% 52.2% 27.2% 50.2% 16.3%

15.0%

19.0%

28.7%

Mining

Agriculture

Manufactures

Fuels

Source: IDB-INT using COMTRADE data. Data for Korea is 20082009.

Countries Mexico Brazil Peru

Chile

Share (%)
26.4 21.1 8.9 8.7 2.4

Table 3/
Top Five LAC Importers from Korea, 20072011

Colombia

Source: IDB/INT using data from MOFAT Korea. Data for 2011 reflects information from January to August. Tax havens are excluded.

Table 4/
Products (HS2002, 6-digit)
Parts of transmission apparatus, radar apparatus or television receivers Monolithic integrated circuits Vehicles with spark-ignition engine (1,500 cc3,000 cc) Liquid crystal devices Petroleum oils, oils obtained from bituminous minerals (light oils) Transmission apparatus incorporating reception apparatus Parts of electrical apparatus for line telephony or line telegraphy Vehicles with spark-ignition engine (1,000 cc1,500 cc) Parts and accessories of the automatic data processing machines Petroleum oils, oils obtained from bituminous minerals (other)
Source: IDB/INT using COMTRADE data.

Share (%)
19.0 7.0 6.9 6.5 5.8 3.1 2.8 1.5 1.3 1.3

Acc. Share (%)

19.0 26.0 32.9 39.4 45.3 48.3 51.1 52.6 54.0

Top 10 LAC Imports from Korea, 20082009

55.2

Korea: BreaKing the mold of the asia-latin america relationship

Overall, these figures suggest that LACs pattern of trade with Korea parallels that with China and other Asian countries, but not without some qualifications, particularly with respect to export diversification. Given the increasing concern among LACs governments about the risks of excessive specialization in the export of a few basic raw materials, these differences, however small, are significant and raise the hope that trade with Asia may become more diversified in the future. There is no reason, though, to be complacent with the status quo. As shown in Figure 5, there seems to be a trend toward further concentration and specialization indicated by both increasing LAC surpluses in agriculture and mining and growing deficits in manufacturing. Figure 5/
LACs Net Exports to Korea by Product Category, 19952009
US$ billions

5 0 5 10 15 20 1995 1998 Agriculture 2001 Mining 2004 2007 Manufactures 2010

Source: IDB INT using COMTRADE data.

Moving away from the typical pattern of trade between LAC and Asia is particularly important in light of Koreas growing trade imbalances with the majority of the countries in region. The ill effects of the trade imbalances are further exacerbated by the deepening of a commodity-for-manufacturing relationship (Figure 6). As the recent trade tensions with China show, sizeable and growing imbalances can have important political economy implications, which can eventually undermine integration between the two economies.

With some hope of a more Balanced and diversified relationship

BRB NIC PRY SLV MEX JAM COL VEN GTM CRI URY LAC ECU GUY BRA HND PER ARG CHL PAN DOM BOL 100 80 60 40 20 0 20 40 60

Figure 6/
Accumulated Trade Balances as a Share of Total Trade. Selected LAC Countries, 20002009 (%)

Source: IDB/INT using COMTRADE data.

But Important Barriers Still Remain in Relation to Tariffs and Non-tariff Measures

here is little doubt that bilateral trade between LAC and Korea has benefited substantially from the far-reaching liberalization of trade which has occurred in both economies since the late 1980s and early 1990s. Korea has drastically reduced non-tariff barriers (NTBs) and lowered the average import tariff from 25% in the early 1980s to the current level of 11.2%.2 LACs average import tariff, in turn, dropped from 40% in the eighties to less than 9% during the same period while at the same time widespread NTBs were virtually eliminated. However, important obstacles remain. Table 5 shows that exporters from LAC are still constrained by significant tariffs in the Korean market, particularly in agriculture, where unduly high average tariffs are compounded by significant tariff escalation (i.e. the higher the amount of processing, the higher is the tariff levied on the good), hindering the regions ability to add value and sophistication to its raw materials (Figure 7). Table 6 reveals that there are also problems on Latin Americas side, with Korean manufacturers still facing two-digit tariffs in some of LACs main markets. Table 5/
Average Tariffs on Exports, Selected LAC Countries

Sector
Overall Agriculture Manufacturing Mining

Argentina
12.54 14.27 7.43 5.79

Brazil
7.82 8.06 7.83 3.96

Colombia
10.78 14.09 5.48 0.08

Mexico
8.24 26.83 7.33 2.28

Peru
6.69 10.77 9.75 2.67

Source: BID-INT using data from TRAINS and COMTRADE data. Note: Averages are weighted using exports to the world. Trade and tariff data is for 2009.

Sector
Overall Agriculture Manufacturing Mining

Argentina
10.38 13.44 10.38 10.87

Brazil
12.33 14.02 12.42 9.15

Colombia
9.58 15.64 9.61 9.95

Mexico
5.95 13.16 5.93 5.95

Peru
2.44 1.41 2.47 2.29

Table 6/
Average Tariffs on Korean Imports, Selected LAC Countries
2

Source: BID-INT using data from TRAINS and COMTRADE data. Note: Averages are weighted using exports to the world. Trade and tariff data is for 2009.

Mesquita Moreira, Industrialization, Trade and Market Failures. Macmillan, 1995 and Koreas Trade Policy review and WTO tariff data.

11

12

Korea: BreaKing the mold of the asia-latin america relationship

Figure 7/
Koreas Tariff Escalation by 2-digit ISIC Industry, 2008
Percent
Fo

70 60 50 40 30 20 10 0
od , an bev d er to ag ba e Te cc s xti o les an d lea W th oo er d an d fu rn Pa itu pe re rp rin pu tin bli g a sh nd ing Ch No em nm ica et ls all ic pr min od er uc al ts Ba pr sic od m uc Fa et ts br als an ica d te m d ac m Ot hin et he er al rm y an uf ac tu rin g

First stage of processing

Semi-processed

Fully processed

Source: WTO Korea Trade Policy Review 2008.

3 TRQs are a protection mechanism that raises import tariffs after a certain volume of imports is reached. See Korea Trade Policy Review, 2008, WTO.

High tariffs are also compounded by non tariff barriers (NTBs), which on the Korean side mainly take the form of tariff rate quotas (TRQs) to LACs agricultural exports, with in-quota tariffs ranging from 0 to 46% and off-quota rates as high as 750% (see Table 7).3 On Latin Americas side, there are concerns about the use of nonautomatic import licenses, reference prices and discriminatory taxes against Asian exports, particularly in Mercosur countries, as well as concerns about the growing use of anti-dumping measures. However, Table 8 shows that Korea has not been the main target of these measures and that the number of new anti-dumping investigations actually decreased in the last decade.

But important Barriers still remain in relation to tariffs and non-tariff measures

13

Products
Live animals1 Dairy, eggs, honey and edible products Products of animal origin Live trees & other plants Edible vegetables Edible fruits and nuts, peel of citrus/melons Coffee, tea, mate & spices Cereals Milling industry products Oil seeds/misc. grains / med.plants / straw Lac, gums, resins, etc Animal or vegetal fats, oils and waxes Sugar & sugar confectionary Preps of vegetables, fruits, nuts, etc Misc. edible preparations Beverages, spirits and vinegar2 Residues from food industries, animal feed Oils & resinoiods, perfumery, cosmetic or toilet preps Albuminoidal sub, starches, glues, enzymes Silk, inc. yarns & woven fabrics thereof
Source: Trade Policy Review Korea 2008, WTO. 1 Unit are birds or heads. 2 Units are liters.

Quota (tons)
466,051 406,782 9,968 1,983,500 282,213 70,370 16,246 93,924 278,150 1,299,490 170 668 18,806 4,907 114 10,333,800 52,868 57 456,920 10,159

Average out Average in- of quota quota tariff tariff

0.0 28.6 6.5 8.0 29.1 46.4 40.0 8.2 9.6 18.5 20.0 40.0 20.0 40.0 20.0 30.0 4.7 20.0 8.0 6.8 58.9 105.0 21.8 18.0 455.1 311.0 388.9 397.7 431.2 496.8 754.3 630.0 114.0 63.9 754.3 270.0 49.0 754.3 360.4
51.1

Table 7/
Korean Tariff-Rate Quotas (TRQs) for Selected Agricultural Products

Argentina

1995 (1), 1998 (1), 1999 (2), 2000 (1), 2001 (3), 2002 (1), 2004(2) 1993 (1), 2000(2), 2001 (1), 2004 (1), 2007 (1), 2010 (3) 2000 (3) 1995 (1), 1998 (1), 2001 (1) 1992 (3), 1993 (4), 1999 (1), 2000 (1) 1994 (1), 1995 (1)

Table 8/
Year and Number of Anti-Dumping Investigations Launched against Korea, Selected LAC Countries

Brazil Chile Colombia Mexico Peru

Source: World Bank Global Anti-dumping database.

and Transport Costs

t has been shown that because of trade liberalization, crumbling infrastructure and the characteristics of the goods being exported, transport costs for LAC are often as high as or higher than traditional trade barriers such as tariff and non-tariff barriers.4 Transport costs are particularly relevant for the regions trade with Asia because of the distance involved and the composition of the regions exports, which include heavy products such as high weight-to-value natural resources, whose freight costs are a significant part of the final CIF (cost plus insurance plus freight) price. Unfortunately, transport cost data are not readily available for both sides of the bilateral trading relationship. There is, however, reliable information for some LAC countries on the transport costs of their imports from Korea. As can be seen in Figure 8, ad-valorem freight rates for imports from Korea (measured as freight expenditures divided by the value of imports) are in most cases close to or even higher than tariff rates.

14 12 10 Percent 8 6 4 2 0 Argentina Brazil Tariff rate Colombia Freight rate Peru

Figure 8/
Tariffs and Ad Valorem Freight Expenditures on LACs Imports from Korea, 2009

Source: INT-BID using COMTRADE and INTrade data. Averages are weighted using Koreas trade data.

Mesquita Moreira, Mauricio; Christian Volpe and Juan Blyde: Unclogging the Arteries: The Impact of Transport Costs on Latin American Trade. IDB and Harvard University Press, Washington DC, 2008.

15

Some Important But Still Limited Initiatives to Address These Obstacles

n the last five years, there have been important initiatives to address these issues, such as Koreas free trade agreements (FTA) with Chile in 2004, and with Peru this year. Table 9 shows the key statistics for the Korea-Chile liberalization schedule, which is quite comprehensive, involving goods, services and investment. But, it also includes some notable exemptions. Koreas elimination of agricultural tariffs is limited to 70% of the goods, with just 15.6% of them being granted duty free status in the first year. Chile, on the other hand, agreed to the gradual elimination of 99.8% of its tariffs on manufacturing goods, but only granted duty free lines to 30.6% of them in the first year and excluded some of Koreas most important exports, such as refrigerators and washing machines.5 A rigorous and comprehensive evaluation of this agreement has yet to be made, but since the agreement was signed bilateral trade has grown at an average annual rate of 22.3%, which is particularly impressive when compared to the growth of Chiles and Koreas trade with the rest of the world (15.2% and 10.6% respectively). Over 90% of Chiles exports are concentrated in copper, ores slag, wood pulp, organic chemicals and meat, whereas Koreas exports are mainly vehicles, mineral fuels, electrical equipment and plastic products. Table 9/
20
96.1

Years after the Agreement Grantor Korea

Chile

Beneficiary
Chile Korea

Tariff Lines
11,322 7,957

5
93.0 75.5

10
96.0 94.8

15
96.0 98.5

FTA Korea-Chile, Schedule of Reductions

98.5

Source: INTrade, BID.

Perus FTA with Korea is as comprehensive as Chiles, involving goods, services and investments. Under this agreement, complete tariff elimination will take place on most items over the next 10 years, except for approximately 100 agricultural products, such as rice, onion and garlic, that were excluded from this rule. Korea will eliminate tariffs on 87% of the products right away (for example: minerals, tires, coffee, sugar and bicycles), and Peru will do the same in respect to 69% of all products (for example: TVs, large vehicles and

Inkyo Cheong and Jungran Cho. Journal of Korea Trade Vol. 13, No. 2, May 2009, 109126.

17

18

Korea: BreaKing the mold of the asia-latin america relationship

Arirang News Korea, 08/01/2011. http:// www.arirang.co.kr/ News/News_View. asp?code=Ne2&nseq=118738

7 Korea-Peru Free Trade Agreement. Joint Feasibility Study. May 2008. Available at: http://www. acuerdoscomerciales.gob.pe

automobile parts).6 Since the agreement just recently came into effect (August 2011), it is too early to evaluate its impact, but some estimates project a 15% increase in Perus exports to Korea and a 27% gain in Koreas exports to Peru.7 Although important, particularly for showing the political will to improve the status quo, the regional coverage of these agreements is still too limited to make a significant dent on the existing barriers. This picture can change if the agreements being negotiated with Mexico and Colombia go ahead and, particularly if the preliminary evaluations of FTAs with MERCOSUR and Central America, currently underway, come to fruition. Government initiatives, though, do not have to be restricted to FTAs, whose complexity usually means extended periods of negotiation and implementation, particularly in the current volatile global environment. Policy measures to improve trade facilitation and reduce transports costs can be implemented much faster and reap sizeable benefits. Customs cooperation and changes in the regulatory environment to boost competition in transport services are examples of initiatives that could be rapidly implemented.

Investments are Following Trade, but Only on the Korean Side

he recent boom in trade between LAC and Korea has been followed closely by a considerable amount of Korean foreign direct investment (FDI), in sharp contrast with the regions recent experience with China. As can be seen in Figure 9, Chinas investments only took off in the late 2000s and even then these investment flows were significantly lower than those of Korea, despite a trade volume that was nearly five times higher at the end of the period. This performance put Korea behind only Japan in the ranking of Asian investors in LAC, accumulating 5.1 billion in FDI in the last seven years, an amount that is close to three times that of Chinas (Figure 10).

1500 US$ millions 1000 500 0 2003 2004 2005 2006 China Year 2007 2008 Korea 2009 2010

Figure 9/
Korea and China, FDI in LAC, 20032010

Source: IDB with data from Korea Eximbank and Ministry of Commerce of China.

30 25 20 15 10 5 0

Figure 10/
26.5

Japan, Korea and China Foreign Direct Investments in LAC. Cumulative Flows, 20032010 (US$ billion)
5.1 1.8

Japan

Korea

China

Source: IDB-INT with data from Jetro, Korea Eximbank,Ministry of Commerce of China.

19

20

Korea: BreaKing the mold of the asia-latin america relationship

As is the case with trade, Korean FDI flows are less geographically concentrated than Chinas (Table 10). The Southern Cone also comes on top, with Brazil (nearly half of the flows), Peru and Colombia being among the most important destinations, but Mexico bucks this trendwith a volume of investments only second to Brazil. Central American countries such as Guatemala and Honduras also appear among the top ten recipients in the last decade. As a share of total LAC FDI inflows, Koreas share is still modest, but has been increasing steadily, reaching 1.1% in 2010. LAC represents a slightly more relevant destination for Koreas FDI outflows, with an average of over 5% a year for the past decade, excluding tax havens. The bulk of Koreas investment went into mining, with an accumulated share over the last ten years of approximately 36%, with manufacturing coming in second with 20%. Services played a minor yet relevant role, and investment in agriculture was virtually nonexistent. All in all, these numbers paint a more diversified picture across sectors than those presented for China (which might also explain the differences in geographic allocation). This impression is reinforced in a country by country analysis. Over 95% of Korean investments in Peru were allocated to mining, but in Brazil (see Box 1) and Mexico (Box 2) manufacturing attracted 21% and 60% of the inflows respectively, helping form the basis for a more balanced and diversified bilateral relationship.8 On a negative note, Koreas robust investments in LAC are far from being matched by the regions investments in Korea. These investments

box 1/ Hyundai establishing its Manufacturing Footprints in brazil

earlier this year, hyundai motor company, the largest automaker in Korea, started construction of a new plant in piracicaba, sao paulo, which is to become its first in latin america. total investment by hyundai on this project amounts to 600 million dollars, and it was accompanied by an effort by local authorities who have provided support to the project in the form of tax incentives and infrastructure investments among others. this plant will have complete vehicle production facilities, and it is expected to be up and running by the second half of 2012, although not immediately to its fully planned capacity of 150,000 units per year. all cars produced in this plant will be flex-fuel (ethanol-gasoline) to address the characteristics of the local markets. in addition, 8 parts suppliers will enter the market with hyundai to provide for the plants needs, creating 3,800 in total.
8

Korea Eximbank.

Source: Hyundai Motor (http://worldwide.hyundai.com) and press.

Table 10/
2001
5.26 0.00 1.36 18.82 0.00 0.00 0.00 0.49 2.01 0.00 8.85 0.00 17.87 0.01 0.00 16.64 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 48.43 0.00 0.00 0.00 0.00 0.00 86.92 113.72 76.80 33.32 0.60 0.86 0.62 0.12 0.50 2.68 7.76 4.50 3.46 0.28 61.64 0.00 0.00 0.00 45.70 21.14 25.34 71.05 53.08 0.00 0.00 0.00 0.00 0.00 18.48 10.20 5.10 6.77 9.06 0.00 0.00 119.98 1.03 0.00 94.10 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 4.50 9.82 3.30 14.27 0.11 17.10 5.70 10.00 2.00 0.00 304.98 0.60 0.00 82.15 0.00 0.09 0.00 5.00 0.20 1.70 1.35 7.29 5.30 0.00 0.25 0.27 5.80 0.12 3.63 1.75 0.00 0.00 0.10 0.01 0.49 4.86 21.93 0.02 13.08 1.13 2.00 4.04 6.13 6.73 0.12 55.15 10.05 0.00 40.14 0.00 4.23 0.14 0.00 5.50 11.51 0.60 4.31 26.30 2.63 6.05 3.07 6.98 19.89 174.66 110.20 264.79 635.09 131.53 4.33 3.92 0.65 0.97 0.15 0.00 0.31 3.87 9.86 1051.15 18.93 26.31 0.00 5.00 0.60 3.20 0.00 0.01 64.01 2.65 0.00 48.27 0.00 2.97 0.00
(Continues on next page)

Country
6.66 0.00 0.00 3.44 0.00 0.00 3.00 0.00 0.00 0.00 0.00 0.23 0.00 5.09 4.13 7.24 2.73 2.03

2000

2002

2003

2004

2005

2006

2007

2008

2009

2010

Argentina

1.28

Belize

0.00

Koreas Outward Foreign Direct Investment in LAC (flows, million US$), 20002010

Bolivia

10.20

Brazil

28.51

Chile

1.00

Colombia

11.00

Costa Rica

0.00

El Salvador

3.23

Guatemala

10.45

Haiti

0.00

Honduras

0.51

Jamaica

0.00

Mexico

21.32

Nicaragua

0.81

Paraguay

0.00

Peru

25.02

Puerto Rico

0.00

Uruguay

0.00

investments are folloWing trade, But only on the Korean side

Venezuela

0.06

21

22

Table 10/
2001
88.59 0.10 0.40 0.40 0.30 0.60 0.50 229.34 196.41 216.06 462.87 395.95

Country
0.10

2000

2002

2003

2004

2005

2006

2007
736.64 0.60

2008
1295.70 1.00

2009
528.67 0.70

2010
1287.89 1.10

LAC

113.66

Koreas Outward Foreign Direct Investment in LAC (flows), 20002010 (Continued)

2.70 4.40 7.90 4.90 3.80 7.30 3.50

Share of LACs total inflows

Share of Koreas total outflows

3.70

6.40

3.10

6.70

Korea: BreaKing the mold of the asia-latin america relationship

Source: Korea Eximbank. LACs total does not include tax havens.

investments are folloWing trade, But only on the Korean side

23

Box 2/ Samsung Electronics Mexico

samsung electronics started its operations in mexico in 1988 with the construction of an electronics complex in tijuana, Baja california. samsung electronics mexico, the local subsidiary, established its corporate offices in mexico city in 1995 mainly dedicated to four product lines: tv, video and audio, white line, information systems, and telecommunications. in 1996, samsung electronics opened a local production plant in the industrial park el florido in tijuana. this plant required an initial investment of 200 million dollars and it generated 2,300 jobs. unlike traditional maquiladoras in the area, this vertically integrated plant sourced its materials locally, some of them through Korean suppliers that settled in the area to accommodate the new demand generated by the plant. around 75% of its production was initially meant for the american market through nafta. earlier in 2011 the company announced an additional investment of us$ 70 million to expand this plant. in 2003 a second plant devoted to the production of refrigerators and air conditioning devices was opened in Queretaro, a city 120 miles northeast of mexico city, with a capacity of 500,000 units a year. in this instance the intended market was not just the u.s., but also central and south america. announcements of further investments in this plant were made in 2008, 2009 and 2010, totaling 180 million dollars and creating over 3,000 new jobs. samsung electronics mexico is now based in mexico city, with a presence in veracruz, guadalajara, culican and monterrey and production plants in tijuana, for monitors and tvs, and Queretaro, for its white line, employing over 6,000 workers.
Source: Samsung Electronics (http://www.samsung.com/us/news) and the press

have been minimal, amounting to just US$ 47 million in the last decade, about 0.05% of total inflows into Korea, and 0.06% of outflows from LAC. The largest investors, excluding tax havens, were Uruguay, Chile and Brazil (see Table 11). These low levels of investment clearly undermine the ability of Latin American and Caribbean firms to penetrate the dynamic Korean market and to exploit opportunities to diversify their exports. Table 11/
Accumulated OFDI Flows to Korea, Selected LAC Countries, 20002009

Country
Uruguay Chile Brazil Belize Venezuela Total Share of LACs outflows Share of Koreas inflows
Source: INT-IDB using data from OECDstat. Tax havens are excluded from totals.

(million US$)
21.10 8.70 4.10 2.10 1.50 46.80 0.02 0.04

Cooperation is on the Rise

n line with other experiences of integration, the boom in trade and investment between LAC and Korea has been followed by a number of technical and political cooperation initiatives. In the best spirit of South-South cooperation, these initiatives involve most governments in the region and cover more than 20 areas, ranging from science and technology to criminal justice (see Table 12). However numerous and diverse, these initiatives probably just scratch the surface of a rich pool of opportunities for Korea and LAC to learn from each other. Korea can provide valuable lessons coming from its successes in mass and elite education, information technology, transport infrastructure and clean energy technologies. LAC can provide success stories in agriculture, mining, aeronautics and biofuels, just to name a few. Moving forward, cooperation between the two economies could be expanded and strengthened in areas which can have a direct impact on trade and eventually on investments such as customs procedures and technical and sanitary and phytosanitary standards, which could help bring trade costs down and avoid costly disputes. FTAs are naturally good vehicles for addressing those issues, but they are not the only ones. Bilateral cooperation would also benefit from a stronger institutional framework. Memorandums of understanding (MOUs) and protocols have been the institutional vehicle of choice for the overall majority of the cooperation initiatives. Although these are versatile instrumentsfor one thing, they do not normally require parliamentary approvalthe lack of clearly defined and legally binding objectives (including the sources of funding) often means several years of delayed implementation, if not a complete failure of implementation. One last point is about evaluation. Despite the innumerous agreements signed between Korea and LAC, there is hardly any quantitative information that would allow for an objective assessment of their impact. One has to rely on the often subjective assessment of government officials to have a sense of how effective these initiatives have been. An effort to collect data and assess results would help countries design more efficient cooperation mechanisms to maximize scarce resources.

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26

Table 12/
El Salvador Guatemala Nicaragua Colombia Costa Rica Paraguay Uruguay Mexico Ecuador Panama Chile Peru Brazil

Honduras

Korea-LAC Bilateral Agreements and Cooperation Initiatives

X X X X X X X X X X X X X X X X X X X X X X

Cultural

X X

Consular (diplomatic, business, journalism visas) X X X X X X X X X X X X X X

Consular (general visas)

X X

X X

X X X

Investment promotion and protection X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X

Trade

X X X X X

X X

Technology & Science

EDCF

Korea: BreaKing the mold of the asia-latin america relationship

Air Traffic

Extradition

Economic

ADT

Customs

(Continues on next page)

Table 12/
Panama Guatemala Costa Rica Nicaragua Honduras El Salvador Colombia Paraguay Uruguay Ecuador Mexico Chile Peru Brazil

Korea-LAC Bilateral Agreements and Cooperation Initiatives (Continued)

X X X X X X X X X X X X X X X X X X X

Volunteers

Tourism

Fishing

Economic and social development

FTA

Criminal Justice

Nuclear energy

Driving License

Telecomunications

Antarctic

Energy and mineral resources

Taxation

cooperation is on the rise

Source: Ministry of Foreign Affairs, Korea (MOFAT), and ministries of foreign affairs of LAC countries.

27

Summing Up: Taking Opportunities to Break the Mold

ACs booming trade with Korea is a powerful reminder that the regions opportunities in Asia are not just limited to China. A country such as Korea has the economic size and resource endowments to also sustain a robust trade and investment relationship with the region. As in the case with China, the complementarity in resources endowments has been, and is bound to be for the foreseeable future, the main driver for bilateral trade and investments. However, fundamental aspects of the two economies provide the basis for this relationship to go beyond the canonical Asia-LAC model of commodities for machines. Koreas high per capita income offers opportunities to add value to food and mining products and the greater degree of specialization of its industry in cutting edge technologies suggest more opportunities for intraindustry trade and lower risks of trade frictions. The fact that LACs exports to Korea show a greater degree of diversification than those to other countries in Asia is one sign that this is not just a theoretical possibility. However, the consolidation of these promising trends will hinge critically on the governments abilities to bring down the remaining barriers to trade, which are still significant on both sides of the relationship, but are particularly damaging for LACs agricultural exports. The Korea-Chile and Korea-Peru FTAs and other initiatives of this nature being currently negotiated are hopeful signs that the political will is there and that these barriers will eventually come down. This agenda, though, should not be restricted to traditional trade barriers or FTAs and should include trade facilitation and transports costs, which, despite being usually underestimated by trade analysts, are one of the major drags on LACs trade, particularly with distant countries like those in Asia. The figures on bilateral investment are another good reason to believe that LAC and Korea can go beyond the canonical model. Koreas investments have been following exports closely and with a level of diversification not seen in other LAC-Asia relationships. It has not been just about natural resources. There seems to be a clear interest from Korean manufacturers to take advantage of the proximity to LAC consumers, which, in turn, helps LAC to diversify its manufacturing base and exports, while diffusing tensions brought about by the trade imbalancesalmost a fixture of the commodities-for-machine model. It is worrisome, though, that that there is so
29

30

Korea: BreaKing the mold of the asia-latin america relationship

little LAC investment activity in Korea, despite the obvious attractiveness of its market. LAC firms bear the main responsibility for creating new export opportunities and foreign direct investment, for its capacity to generate information and overcome trade barriers, is a well-tested strategy for meeting this challenge. Of course, the well of opportunities opened up by a deeper LAC-Korea relationship would not be entirely exploited without efforts to boost cooperation in public policy. There is already a critical mass of initiatives in place, but they far from exhaust the possibilities available. Moreover, more binding and better-documented agreements, to allow for the evaluation of the results, would increase the efficiency of these initiatives. Closer and more intense cooperation would not only help to improve public policies and diffuse knowledge, but it is also likely to provide another boost to bilateral trade and investment.