VZCZCXRO8239
PP RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHUL #1981/01 1650835
ZNR UUUUU ZZH
P 140835Z JUN 06
FM AMEMBASSY SEOUL
TO RUEHC/SECSTATE WASHDC PRIORITY 8440
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0798
RUEHKO/AMEMBASSY TOKYO 0867
RUCPDOC/DEPT OF COMMERCE WASHDC 1499

UNCLAS SECTION 01 OF 04 SEOUL 001981 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/K AND EB/TPP 
COMMERCE FOR 4431/MAC/OPB/EAP/DUTTON 
PASS USTR FOR CUTLER, WEISEL, AUGEROT AND KI 
 
E.O. 12958: N/A 
TAGS: ETRD PREL KS XC
SUBJECT: KOREA-ASEAN FTA: TRADE IN GOODS AGREEMENT FINALIZED 
 
REF: SEOUL 449 AND PREVIOUS 
 
SUMMARY 
------- 
 
¶1. (SBU) Korea and the Association of Southeast Asian 
Nations (ASEAN), with the exception of Thailand, finalized 
and signed the Trade in Goods (TIG) part of their free trade 
agreement (FTA) on May 16 in Manila.  The agreement will 
liberalize 90 percent of tariff lines, amounting to 90 
percent of trade volume by 2010.  Liberalization follows two 
tracks: a "Normal Track," which accounts for 90 percent of 
goods and trade volume, and a "Sensitive Track," which 
applies to 6-7 percent of goods and 7 percent of trade 
volume.  The Sensitive Track is further broken down into a 
"sensitive list" and a "highly sensitive list," each with 
its own staging periods and exclusions.  The remaining three 
percent are taken up by tariff lines fully excluded from 
liberalization. 
 
¶2. (SBU) Korea succeeded in cajoling ASEAN members into 
granting preferential treatment to some goods processed in 
the Kaesong Industrial Complex (KIC) located in North Korea 
(in which South Korean firms manufacture goods and parts for 
the South Korean market using cheap North Korean labor). 
However, such preferential treatment will apply to less than 
half of the products manufactured in the KIC -- more 
restrictive treatment than Korea was able to obtain in its 
FTAs with Singapore and the European Free Trade Association 
(EFTA).  End summary. 
 
THE NORMAL TRACK 
---------------- 
 
¶3. (SBU) Kim Min-cheol, Country Coordinator for the Korea- 
ASEAN FTA in the Ministry of Foreign Affairs and Trade 
(MOFAT), provided Econoff with a detailed briefing on the 
provisions of the FTA on June 13.  He explained that for 
purposes of the FTA, ASEAN is divided into two groups -- the 
six, more developed, original ASEAN members (ASEAN 6) and 
the four lesser developed members: Cambodia, Laos, Myanmar, 
and Vietnam (CLMV).  Obligations and staging periods differ 
somewhat among the two groups, with the CLMV countries 
enjoying longer phase-in periods for liberalization. 
 
¶4. (SBU) According to Kim, the bulk of goods traded among 
Korea and the ASEAN members are to be liberalized according 
to what the TIG part of the FTA defines as the "Normal 
Track."  This box contains 90 percent of tariff lines 
comprising 90 percent of the trade volume between Korea and 
the individual ASEAN members.  Each ASEAN member will 
maintain its own concession list -- there is not a common 
ASEAN list.  Korea and the ASEAN 6 countries will eliminate 
tariffs included in the Normal Track by 2010, except for 
Indonesia and the Philippines, which will be allowed to wait 
until 2012 to fully eliminate tariffs on 5 percent of their 
Normal Track tariff lines.  Vietnam will have until 2016 to 
eliminate its Normal Track tariffs, with Cambodia, Burma, 
and Vietnam having until 2018. 
 
¶5. (SBU) Korea will eliminate 70 percent of its Normal Track 
tariffs (i.e. 70 percent of 90 percent) upon the agreement's 
entry into force, while the ASEAN 6 countries will eliminate 
50 percent of their Normal Track tariffs upon 
implementation.  For tariffs not immediately eliminated, 
staging periods are calculated by formula, based on the 
respective products' initial MFN applied tariff rate, with 
higher tariffs being eliminated over a longer period of time 
than lower initial tariffs.  All tariff lines are based on 
HS six-digit categories. 
 
THE SENSITIVE TRACK 
------------------- 
 
¶6. (SBU) The Korea-ASEAN TIG Agreement contains extensive 
provisions for according special treatment to politically 
sensitive items.  Sensitive Track goods are placed in one of 
two boxes: the "sensitive list" or the "highly sensitive 
list."  Korea and ASEAN 6 countries must reduce tariffs on 
items in the sensitive list to (note: not "by") 20 percent 
by 2012, and to 0-5 percent by 2016.  The CLMV countries 
have longer staging periods of 2016 and 2020, respectively. 
 
¶7. (SBU) The highly sensitive list contains five boxes: 
 
 
SEOUL 00001981  002 OF 004 
 
 
-- Box A: Tariffs cut to 50 percent by 2016 (Korea and ASEAN 
6) or 2024 (CLMV); 
 
-- Box B: Tariffs cut by 20 percent (same time periods); 
 
-- Box C: Tariffs cut by 50 percent; 
 
-- Box D: Goods receive a Tariff Rate Quota (TRQ); 
 
-- Box E: Total exclusion. 
 
¶8. (SBU) There are three basic restrictions on placing items 
in the highly sensitive list.  First, each party may place a 
maximum of 200 items on this list.  Second, parties may 
place a maximum of 40 items in Box E (total exclusion). 
Third, none of the items placed on the highly sensitive list 
can account for more than three percent of the import volume 
(2004 baseline) for that item from the other party.  For 
example, if automobiles took up more than three percent of 
Indonesia's imports from Korea, Indonesia could not place 
autos on the highly sensitive list.  However, this factor is 
not dynamic, but rather fixed at 2004 levels, so even if 
import volume rises above the three percent threshold, the 
party would not have to subsequently liberalize tariffs for 
that item. 
 
¶9. (SBU) According to Kim, it is essentially left up to each 
party's discretion as to which items are placed on the 
various lists.  He did admit, however, that there was some 
negotiation designed to prevent a party from placing a given 
item on the highly sensitive list.  For example, while 
Malaysia has put automobiles on its total exclusion list, 
Korea convinced it to open up the CKD (automobile knockdown 
kit) market. 
 
AGRICULTURE 
----------- 
 
¶10. (SBU) All of the 200 goods that Korea placed on its 
highly sensitive list are agricultural or fisheries items. 
(ASEAN members included various industrial and chemical 
goods on their list.)  In addition to the 40 excluded items 
in Box E, Korea also placed five items whose tariff is less 
than 50 percent in Box A (tariff reduced to 50 percent), 
thus providing those goods with a de facto exclusion. 
According to Kim, Korea originally intended to place many 
more such items in Box A, but the ASEAN members strenuously 
objected to Korea using Box A as a de facto exclusion list, 
and they succeeded in forcing Korea to limit such items to 
five. 
 
¶11. (SBU) Nevertheless, Korea will have to open up its 
agriculture markets more under this FTA than under its 
previous agreements.  Kim said that Korea has 445 tariff 
lines (HS six digit) for agricultural and fisheries 
products.  Since "only" 200 can be placed on the highly 
sensitive list and "only" 45 completely excluded, over half 
of the agricultural/fisheries tariff lines will have to be 
opened to some extent. 
 
KAESONG INDUSTRIAL COMPLEX 
-------------------------- 
 
¶12. (SBU) According to Kim, Korea had to negotiate very hard 
to wring any concessions on goods processed in the KIC out 
of the ASEAN members.  Unlike Korea's previous FTA partners 
with which it negotiated preferential treatment for goods 
processed in Kaesong -- Singapore and EFTA -- ASEAN had 
economic interests opposed to granting preferential 
treatment, as Kaesong presents direct competition for the 
low-wage, light industrial goods that form ASEAN members' 
competitive advantage. 
 
¶13. (SBU) Kim said the final deal on Kaesong was not reached 
until the May 16 Korea-ASEAN trade ministers' meeting, where 
Korean Trade Minister Kim Hyun-chong reportedly made a 
forceful intervention on behalf of the Kaesong provisions 
with his counterparts. 
 
¶14. (SBU) The resulting compromise was that the same 
"outward processing" language that Korea used in the EFTA 
FTA to secure preferential treatment for Kaesong goods, 
which uses a content requirement of at least 60 percent 
South Korean content for an "outward processed" good to be 
considered originating, was also included in the Korea-ASEAN 
 
SEOUL 00001981  003 OF 004 
 
 
TIG Agreement.  However, an additional hurdle was placed on 
Kaesong-processed goods.  Korea provided ASEAN with a list 
of 232 goods that are currently being processed in Kaesong, 
or will be by the end of 2006.  From this list, each ASEAN 
member separately will choose 100 of these to which it will 
grant preferential treatment. 
 
¶15. (SBU) Additionally, the ASEAN members will develop a 
common list of approved Kaesong items, notionally by the end 
of August.  After that, there will be 10 individual Kaesong 
lists plus one common list.  For each individual ASEAN 
member then, the number of Kaesong goods to which it 
individually accords preferential treatment will equal 100 - 
- whichever goods are on the common ASEAN list, plus 
additional goods it selects so that the total comes up to 
¶100. 
 
¶16. (SBU) In addition to the numerical limitation of 
approved Kaesong items, the agreement also provides ASEAN 
members the right to review the situation at any time and 
elect to stop providing preferential treatment to Kaesong. 
ASEAN members also enjoy a special safeguard provision for 
Kaesong goods that is not subject to dispute settlement and 
can by used virtually unconditionally. 
 
THAILAND OPTS OUT 
----------------- 
 
¶17. (SBU) Thailand opted out of the TIG Agreement.  While 
the Thai delegation cited political confusion in Bangkok as 
the reason for being unable to sign at the May 16 trade 
ministers meeting, the real underlying reason was Thailand's 
unwillingness to accept Korea's exclusion of rice, 
Thailand's chief export. 
 
¶18. (SBU) According to Kim, Thailand can join the TIG at any 
time in the future, and Thailand is still a part of the 
remaining FTA negotiations on services and investment. 
However, he noted that Thailand would essentially have to 
join the TIG on a "take it or leave it" basis, which would 
put Thailand at a disadvantage.  Kim said that Korea does 
plan to try to entice Thailand to sign the TIG by sweetening 
its offers in the service negotiations, but Kim left no room 
for the possibility of giving Thailand any concessions on 
rice, including by increasing the Thai country specific 
quota under Korea's 2004 rice agreement with the WTO. 
 
SERVICES AND INVESTMENT 
----------------------- 
 
¶19. (SBU) With the TIG Agreement finalized, Agreements on 
Services and Investment remain to be completed to finish the 
Korea-ASEAN FTA "package."  Each agreement is considered a 
stand-alone agreement, however. 
 
¶20. (SBU) Negotiations on services and investment are 
ongoing, with a target completion date of the end of 2006. 
Kim admitted that Korea's "ambition is not so high" in the 
services and investment areas, where Seoul is pursuing a 
basic WTO-plus agreement -- with the "plus" being relatively 
minor.  The negotiating parties are using each other's 
revised GATS offers as the basis for services concessions. 
The Korea-ASEAN Investment Agreement is being modeled on the 
ASEAN Investment Agreements (AIA's) the ASEAN members have 
concluded amongst themselves. 
 
COMMENT 
------- 
 
¶21. (SBU) The Korea-ASEAN Trade in Goods Agreement, while 
not nearly as comprehensive as a U.S.-style FTA, represents 
a fruitful conclusion to a complicated, multi-party 
negotiation, and probably helped to increase Korea's 
negotiating experience and prowess.  The agreement also has 
economic significance, providing for substantially opened 
trade between Korea and its fourth-largest trading partner 
(counting ASEAN as a single entity). 
 
¶22. (SBU) The agreement is expected to be uncontroversial in 
Korea, and should easily pass the National Assembly in time 
for entry into force by August.  This is despite the fact 
that it will open Korea's agricultural markets more than 
Seoul's previous FTAs.  In this regard, Korea's ASEAN 
negotiation team is benefiting from the fact that the Korea- 
ASEAN FTA is being almost completely drowned out, both in 
 
SEOUL 00001981  004 OF 004 
 
 
terms of media interest and interest group attention, by the 
U.S.-Korea FTA negotiations. 
 
VERSHBOW