VZCZCXRO9404
PP RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHUL #0449/01 0390819
ZNR UUUUU ZZH
P 080819Z FEB 06
FM AMEMBASSY SEOUL
TO RUEHC/SECSTATE WAQDC PRIORITY 5896
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0043
RUEHKO/AMEMBASSY TOKYO 0128
RUEHIL/AMEMBASSY ISLAMABAD 0537

UNCLAS SECTION 01 OF 03 SEOUL 000449 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/EP, EAP/K AND EB/TPP/BTA 
PASS USTR FOR CUTLER AND KI 
 
E.O. 12958: N/A 
TAGS: ETRD ECON PREL KS KN XB
SUBJECT: KOREA'S FREE TRADE AGREEMENT WITH ASEAN 
 
REF: (A) 05 SEOUL 3353 
     (B) 05 SEOUL 2163 
 
Summary 
------- 
¶1.  (U) On December 13, 2005, the Republic of Korea and the 
Association of Southeast Asian Nations (ASEAN) announced the 
conclusion of a Framework Agreement for a bilateral free 
trade agreement (FTA).  Although the parties had also 
concluded negotiations for the Trade-in-Goods (TIG) and 
Dispute Settlement agreements by the time of the December 13 
Korea-ASEAN summit in Kuala Lumpur, those agreements were 
not announced.  The TIG announcement is being held up due to 
Thailand's demand that Korea not be allowed to exclude rice 
under the agreement;  Korea and Thailand are currently in 
bilateral talks to resolve this issue.  The Dispute 
Settlement Mechanism agreement announcement is being held 
back until the TIG is fully completed and announced. 
 
¶2. (SBU) The ASEAN-Korea FTA (AKFTA), when completed, will 
be a collection of stand alone agreements, rather than a 
single unified pact.  It is being negotiated and implemented 
in stages. The agreement also provides for differential 
treatment between ASEAN's more developed and less developed 
members.  It provides for long staging periods, with full 
liberalization by ASEAN's less developed members not being 
reached until 2026 -- 20 years after the expected conclusion 
of negotiations. 
 
¶3. (SBU) The Framework Agreement sets the stage for Korea 
and ASEAN to announce the subsequent TIG and Dispute 
Settlement Mechanism agreements in the first half of 2006. 
Negotiations of the Services and Investment agreements are 
scheduled to conclude by the end of 2006.  If successful, 
the ASEAN-Korea FTA (AKFTA) would be Korea's second FTA with 
a multi-national organization, following its FTA with the 
European Free Trade Association.  The Korean government is 
interested in concluding an FTA with ASEAN because of its 
strong economic ties to Southeast Asia and support for ASEAN- 
Plus-Three, as well as out of a sense of competition with 
China and Japan, which also have (in the case of China) or 
are negotiating FTA's with ASEAN.  The ASEAN-Korea pact will 
allow for preferential treatment for products manufactured 
in the Kaesong Industrial Complex (KIC) in North Korea.  End 
Summary. 
 
Korea and ASEAN Approve FTA Framework Agreement 
--Q------------------------------------------ - 
¶4.  (SBU) Econoff met with Korean Ministry of Foreign 
Affairs and Trade (MOFAT) FTA Coordination Division Deputy 
Director Ryu Ho-kwon, Embassy of Singapore Diplomatic Chief 
of Mission Gabriel Liow, and Embassy of Thailand First 
Secretary Bhavivarn Noraphallop in January 2006 to discuss 
 
SIPDIS 
the ASEAN-Korea FTA. 
 
¶5. (SBU) Ryu and Liow confirmed that Korea and ASEAN 
concluded a Framework Agreement, Dispute Settlement 
Mechanism and TIG Agreement for the FTA at the December 2005 
ASEAN-Korea Summit.  The Framework Agreement and Dispute 
Settlement Mechanism were signed by all countries, but only 
the Framework Agreement was publicly announced at the 
Summit.  The ASEAN-Korea FTA Working Group will also 
withhold announcing the Dispute Settlement Mechanism until 
the TIG Agreement is announced.  Although the TIG Agreement 
was signed by Korea and all ASEAN countries except Thailand, 
tQ TIG exclusions list must be finalized according to 
tariff line and staging times for initially-excluded 
products.  The Framework Agreement specifies that Korea and 
each ASEAN country may choose specific items to exclude from 
tariff reductions, provided that the total trade items on 
the exclusion list does not exceed three percent of the 
total trade volume or tariff lines. 
 
Kaesong Goods Considered "Made in Korea" 
---------------------------------------- 
¶6. (SBU) Korea scored a diplomatic victory when it persuaded 
ASEAN to accord goods produced in the Kaesong Industrial 
Complex the same treatment as good produced in South Korea 
under the Rules of Origin provisions of the TIG.  The 
Kaesong Industrial Complex is an industrial park located in 
North Korea where South Korean firms use North Korean labor, 
and pay the North Korean government a fixed wage per laborer 
per day.  It is considered by Seoul to be a showcase of its 
economic engagement policy with the North.  Accordingly, 
Korea has requested FTA treatment for Kaesong products in 
all its FTA negotiations (save Chile, for which negotiations 
 
SEOUL 00000449  002 OF 003 
 
 
were completed before Kaesong was established). 
 
¶7. (SBU) According to Korean press reports, several ASEAN 
members were initially reluctant to grant Kaesong goods 
preferential treatment due to concern about competing with 
its low North Korean wages.  The news that ASEAN did end up 
agreeing to grant FTA treatment to Kaesong goods therefore 
met with prominent press coverage here. 
 
ASEAN and Korea Agree to Implement FTA in Stages 
--------------------------------------------- --- 
¶8.  (SBU) Liow emphasized that ASEAN and Korea will 
implement key aspects of the FTA in stages -- but ahead of 
China and Japan, which are also currently negotiating FTA's 
with ASEAN.  Both the China-ASEAN FTA and Japan-ASEAN FTA 
will likely go into effect in 2010, while Korea wants to 
implement the first stage of its FTA with ASEAN by 2009. 
Ryu explained that implementing the FTA in stages will give 
all countries time to prepare for tariff reductions.  Liow 
suggested that bragging rights is a major factor driving the 
Koreans to push for an earlier implementation date.  He also 
claimed that Korea preferred to initially address more 
difficult FTA issues, namely goods, before services, in 
order to ensure that the FTA will be implemented. 
 
¶9.  (SBU) Under the TIG Agreement, Korea and ASEAN's six 
more-advanced countries (Brunei, Indonesia, Malaysia, the 
Philippines, Singapore and Thailand) would abolish tariffs 
on 80 percent of traded goods by volume and tariff line by 
2009, and 90 percent by 2010.  By 2016, tariffs on the 
remaining 10 percent of traded goods initially excluded in 
the TIG Agreement will be decreased or eliminated.  ASEAN's 
less developed members (Cambodia, Laos, Myanmar, and 
Vietnam) would abolish tariffs on 80 percent of traded goods 
by volume and tariff line by 2017, and 90 percent by 2018. 
By 2026, tariffs on the remaining 10 percent of traded goods 
initially excluded will be decreased or eliminated.  MOFAT 
anticipates that the liberalization schedule for services 
and investment will correspond closely with the TIG tariff 
reduction schedule.  By 2026, tariffs on 97 percent of all 
ASEAN-Korea trade by volume and tariff line should be 
eliminated. 
 
¶10. (SBU) On February 3, 2006, ASEAN and MOFAT negotiators 
met at the 10th ASEAN-Korea Summit in Jakarta, Indonesia to 
finalize the TIG exclusions list and tariff reduction 
schedule.  Negotiators also commenced negotiations on 
separate services and investment agreements, which will 
continue concurrently through 2006.  MOFAT and Thai 
negotiators also met bilaterally to resolve differences over 
the rice tariff, paving the way for Thailand to sign the TIG 
Agreement.  Pending the outcome of these negotiations, ASEAN 
and Korea plan to implement all AKFTA agreements by early 
¶2007. 
 
Rice Issue Hinders Trade-in-Goods Agreement 
------------------------------------------- 
¶11.  (SBU) During the December 2005 AKFTA Summit, Thailand -- 
one of the world's top rice producers -- opted not to sign 
the TIG Agreement after Korea refused to open its rice 
market.  At the time, Thailand believed it could delay the 
TIG Agreement unless Korea agreed to accept rice 
concessions.  However, because the "ASEAN minus X principle" 
allows other ASEAN members to sign the agreement over 
Thailand's objection, Thailand must bilaterally negotiate 
rice concessions with Korea. According to Liow, Thailand 
will press for derivative concessions rather than a rice 
tariff reduction.  He said that Thailand will ask Korea to 
waive the tender process for rice and contribute up to USD 
60 million to Thai development. 
 
¶12.  (SBU) In 2004, under Annex 5 of the Agriculture 
Agreement, the WTO ruled that Korea's rice quota could 
continue for up to ten more years, but only after individual 
WTO members had the opportunity to negotiate rice 
concessions with Korea.  Ryu and Liow stated that because 
Korea formally adopted the agreement in December 2005 to 
expand the quota on imported rice, Korea will probably not 
agree to any additional change in its rice quota, tariff, or 
offer rice concessions to entice Thailand to sign the TIG 
Agreement.  Liow added that Thailand will likely sign the 
TIG Agreement regardless of the outcome of the rice 
negotiations.  Other concessions are possible.  Thai Embassy 
officer Noraphallop admitted that Thailand would be willing 
to consider other concessions from Korea in lieu of rice, 
citing Thai fruit as a possible alternative. 
 
SEOUL 00000449  003 OF 003 
 
 
 
¶13.  (SBU) Korean and ASEAN officials are optimistic that 
the TIG Agreement will be signed by Thailand and that the 
TIG exclusions list will be finalized by April 2006. 
Thailand, however, estimates that it may take up to six 
months before it signs the TIG Agreement.  The Korean 
government hopes to take the necessary steps to ratify and 
implement the AKFTA Framework Agreement, TIG Agreement, and 
the Dispute Settlement Mechanism by July 1, 2006. 
 
Singapore Supports Multiple FTAs with Korea 
------------------------------------------- 
¶14.  (SBU) Singapore is in a unique position in that it 
already finalized a bilateral FTA with Korea, set to enter 
into force on March 2, 2006.  Nevertheless, Singapore 
strongly supports the AKFTA because it gives the small 
nation additional economies of scale, and Singapore has not 
agreed to any additional concessions under AKFTA.  Singapore 
hopes that ASEAN's FTAs with Korea, China, and Japan will 
lay the foundation for greater cooperation through the East 
Asia Summit. 
 
Comment 
------- 
¶15. (SBU) The main "innovation" of the AKFTA is the decision 
to negotiate and implement the pact in stages, broken up 
into separate agreements:  TIG, Dispute Settlement, 
Services, Investment.  The long staging periods (until 2026) 
for a relatively large segment of trade volume is striking, 
and could be problematic for future negotiations if Korean 
officials and domestic interest groups come to view this 
approach as a precedent to be applied in future agreements. 
The granting of FTA Rules of Origin treatment to goods 
produced in the Kaesong Industrial Complex located in North 
Korea gives Korea a consistent record of achieving this 
demand in its FTA negotiations, thus far, and could whet its 
negotiators' appetites -- and affect public expectations -- 
for a repeat in future FTA's. 
 
VERSHBOW