South Korean industries and companies are seeing an opportunity to expand presence in China, the world's largest consumer market, as the country's parliament ratified free trade agreement (FTA) with China.
South Korea's National Assembly on Monday passed the ratification bill on the China-South Korea FTA, aiming to implement the free trade accord within this year. If the deal begins to take effect within this year, tariff cuts will be into the second year from next month.
Under the free trade pact, the two countries will eliminate tariffs on more than 90 percent of traded goods each within 20 years after implementation.
South Korea expected the FTA with China to raise its real GDP by 0.96 percentage points in the next 10 years. The country also predicted the FTA boosting exports, which maintained a downward trend for 11 straight months.
ANTICIPATION FOR EXPANDED PRESENCE
Above all, South Korea anticipated local companies can expand presence in China, the world's largest consumer market. Reflecting the anticipation, South Korean President Park Geun-hye's approval rating surged 5.3 percentage points from a week ago to 51.1 percent this week, according to a survey conducted right after the FTA ratification.
China has yet to sign free trade pacts with Japan, the United States and the European Union, which have a lot of multinationals. With the Sino-South Korea FTA, South Korean companies can have a chance to expand businesses ahead of U.S., Japanese and European firms.
South Korean experts forecast that the size of the Chinese consumer market would grow to 10 trillion U.S. dollars by 2020. The Sino-South Korea FTA would be an opportunity for local companies to expand presence in the fast-growing consumer market.
"China's domestic consumption market is expected to rise to 10 trillion dollars by 2020, and the free trade accord with China will affect the local stock market positively," Kim Kyung-Hwan, an analyst at Hana Financial Investment, said in a report.
Many of Chinese companies plan to increase imports from South Korea after the FTA implementation. According to a Korea Trade-Investment Promotion Agency (KOTRA) survey of 208 Chinese firms and 128 South Korean firms operating in China, 81 percent responded to import more South Korean products following the FTA taking effect.
The respondents anticipated lower import prices from lower tariff rates and reduced non-trade barriers. The FTA itself would enhance recognition of South Korean products, while streamlining customs procedures.
According to the KOTRA survey, a cosmetic product was picked as the most promising item that will benefit most from South Korea's FTA with China. South Korea's cosmetics export to China surged 86.7 percent in 2014, marking the fastest increase among export items, according to the Korea Food and Drug Administration.
The tariff rate of 6.5-10 percent imposed by China on imported cosmetics will be gradually lowered following the FTA implementation, helping the already popular South Korean cosmetics gain more popularity with lowered price.
Shares of leading South Korean cosmetics maker AmorePacific jumped 3.7 percent a day after the FTA ratification on Monday.
"The Korea-China FTA is not only an opportunity but also means a crisis for local cosmetic industry," AmorePacific chairman Seo Kyung-bae said in February. His comments indicated the fast-enhancing competitiveness of Chinese cosmetic firms as seen in other cases like Xiaomi that became the world's third-largest mobile phone maker only four years after entering the industry.
South Korea's clothing industry, which posted more than 3 billion U.S. dollars of deficit in trade with China last year, is expected to benefit from the Sino-South Korea FTA. The tariff rate of 8-10 percent imposed on imported products from South Korea will be lowered in the next 10 years after the FTA implementation.
The bilateral FTA is expected to have little impact on the South Korean auto industry as South Korean automakers sell most of cars in China produced in Chinese factories. But, South Korean auto parts makers would benefit due to the expected rise in exports of auto parts to China amid rising sales of South Korean cars.