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Small and medium companies welcome KORUS FTA

It seems that small and medium enterprises in Korea are welcoming the ratification of the Korea-U.S. Free Trade Agreement (KORUS FTA). Since over 80% of small and medium manufacturers in Korea work under a supply contract with larger conglomerates, it looks like the chances for those manufacturers to advance into the U.S. market along with the conglomerates will also increase. It is expected that the FTA will harden the bases of those manufacturers in the competitive global market by getting them through the door.

Korea-U.S. Free Trade Agreement

Experts forecast that Korea’s exports to the U.S. will gradually increase since tariff rates will decrease or be completely eliminated, leading to more price competitiveness for car parts, textiles, telecommunications devices, and electronics. Currently, the tariff rate on products from small and medium Korean enterprises is up to 17%, around 2.5% higher than the average tariff rate in the manufacturing industry. This has been why the total sales of small and medium companies were only 16.8% exports, while the total sales of conglomerates were over 60% exports.

When tariff rates decrease, the exports of small and medium enterprises in Korea will rapidly increase and improve. That’s why over 68% of small and medium enterprises answered that the KORUS FTA should be quickly ratified in a survey conducted by the Korea Federation of Small and Medium Business. According to a survey of American companies conducted by KOTRA, over 57% of the responding companies said they will expand the size of imports from Korean companies when the tariffs are eliminated.

One of the Korean industries that will benefit from the KORUS FTA is car parts

One of the Korean industries that will benefit from the KORUS FTA is car parts. (Photo: Gonggam Korea)

One of the Korean industries that will benefit from the KORUS FTA is car parts. Depending on the type of car parts including bolts, nuts, brake pads, and airbag, the tariff rates, currently up to 12.5%, will immediately eliminated. It is expected that the size of exports of car parts will increase up to USD 30 billion from USD 23 billion in 2011.

Exports from Korea to the U.S. are projected to rapidly increase once the price of Korean products is reduced, since the quality of Korean products is guaranteed. One of the other advantages for small and medium auto-parts manufacturers in Korea is that they will be able to sell parts for repairs if they continue supplying car parts for cars manufactured in the U.S. Because of this reason, KOTRA listed the three kinds of car parts, brake pad, cold forging parts, and bolts and nuts in the Top ten promising items for small and medium companies to export through the KORUS FTA.

When it comes to the Korean textile industry, 90% of exports are from small and medium enterprises. When the 4.3 to 17.2% tariffs on textile items such as polyester thread and socks are eliminated, the price competitiveness of the Korean products will greatly improve compared to products from Japan, China, India, and Vietnam. It is expected to contribute to an increase in exports to the U.S. as American buyers will turn their attention from China where the labor costs are no more economical to Korea.

Experts also prospect that the brand value of Korean textiles will improve along with technical cooperation as trade between the two countries increases.

The Korean mechanical industry is expected to benefit from the KORUS FTA. The relatively high tariff rate of 9% on ball bearings will gradually decrease over ten years, and it will constantly contribute to increases in Korea’s exports to the U.S. since the price of Korean ball bearings is more expensive than Chinese products by 50% and cheaper than Japanese products by 20%.

However, the benefits from the KORUS FTA for electronics and IT products do not have such a positive outlook. Most experts forecast that there wouldn’t be any change since most of the Korean conglomerates including Samsung and LG operate local factories in Mexico and the tariffs on semiconductors and mobile phones have already been eliminated.

They say, however, that items from small and medium companies such as curling irons and control panels are expected to secure competitiveness once the tariffs on those items are eliminated.

Other items that are expected to benefit the Korean small and medium enterprises through the KORUS FTA include petrochemical products and government procurement.

“Because the Korea-U.S. FTA was ratified with some difficulty, we should maximize the effects we get from the FTA,” said Kim Ki-moon, chairman of the Korea Federation of Small and Medium Business (Kbiz). “We, small and medium enterprises, will also get many advantages from the FTA and try to minimize the damage we may get.”

Kbiz plans on reinforcing marketing campaigns in the U.S. for Korea’s most promising export items. It is also going to support the globalization of small and medium Korea companies by fostering ‘Small Giants,’ export-centered small and medium enterprises.

Although the benefits from the KORUS FTA may not be seen in the short term, the perspectives of the FTA in the long run are very positive, experts say. “The KORUS FTA will give Korea the world’s third largest economic territory following Chile and Mexico,” said Baek Seung-ju from the Ministry of Strategy and Finance.

* Adapted from Gonggam Korea

Translated by Jessica Seoyoung Choi Staff Writer

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