World Economy Brief
Two Years On: Achievements and Challenges in Trade Sector of Korea-India CEPA
- Author Woong Lee, Young chul Song, Choong Jae Cho
▶ As of November 2011, it has been one year and eleven months since the Korea-India CEPA entered into force in January 2010.
▶ Since then, Korea’s trade volume with India has been increasing at a faster rate than that of Korea with the world. - Korea’s exports to India in 2010 amounted to approximately USD 11.4 billion, recording a 42.7% increase from the same period in 2009, which is higher than the rate of increase in Korea’s exports to the world (28%). Korea’s imports from India in 2010 stood at USD 5.6 billion, an increase of 37% from 2009, which is higher than the rate of increase in Korea’s imports from the world (31.6%).
- As a result, India became Korea’s 7th largest trading partner in 2010, overtaking Germany.
▶ Despite an increase in the bilateral trade volume after the completion of the Korea-India CEPA, the following challenges remain. - As of November 2011, there are quite a few items for which the CEPA preferential rate is higher than the MFN rate (around 17.3% of Korea’s exports, and 1.5% of India’s exports). Therefore, the actual concession rates have been lower, and the trade imbalance has been worsening.
▶ The governments on both sides need to look into an early upgrading of CEPA preferential rates (tariff reduction) in earnest so as to address the aforementioned problems. - If both countries lower the CEPA preferential rates to the same level, the number of items for which the MFN rate is lower than the CEPA preferential rates will be reduced, which is expected to lead to a substantial increase in actual concessions and India’s exports.
- In particular, if both countries can further reduce the CEPA preferential rates it is expected to be better in terms of addressing India’s trade deficit.
- It is so because the majority of India’s export items to Korea consist of price-sensitive raw/semi-finished materials while Korea’s main export items to India are more sensitive to local demand.
▶ In addition, both Korea and India should increase the target for trade volume to USD 30 billion, set to be achieved by 2014. - Since 1993, the bilateral trade volume steadily increased by 14.5% on average annually, and should it continue at this rate, the trade volume is expected to reach USD 34 billion by 2015, and USD 68 billion by 2020 even if the effect of CEPA preferential rates are not factored in.
- With the tariff reduction effect, the trade volume would increase even more, and it is expected that the trade deficit, a main concern of India, would be reduced with a further lowering of tariff rates.
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