Xinhua Insight: China-ROK FTA promises more competition, integration

The China-ROK Free Trade Agreement (FTA) comes into effect this weekend, but Lee Jun Il isn't sure what it will mean for him.

When asked how it will affect his shop in east China's Weihai, the young man from the Republic of Korea (ROK) blinked and said, "No idea."

Although 20 percent of trade between the two countries will become tariff-free on Sunday, the impact of the FTA will only be felt in the long run. It will take ten years to remove tariffs on about 70 percent of bilateral trade, and an additional decade to finally remove 90 percent of the tariffs.

However, the FTA's importance reaches beyond trade as it promotes competition and cooperation between businesses in China and the ROK, and it will be a step toward regional integration, analysts say.

"It would be oversimplifying to view the FTA just as a trade agreement. As ROK businesses have a stronger presence in China, and vice versa, both will eventually grow stronger," said Liu Wen, professor of Northeast Asia studies at the Weihai branch of Shandong University.

PILOT CITY

When Lee's uncle, Jang Ho Chi, crossed the Yellow Sea to open the shop in 1999, it was only a dark corner piled with packs of ROK instant noodles in the basement of a building in central Weihai.

Now the well-lit shop covers 170 square meters on the first floor, brimming with customers looking for milk, food and snacks from the ROK. < "I'm very optimistic about our business because Chinese people love and trust ROK goods," Lee said in fluent Chinese. Lee recently joined his uncle in running the shop after studying Chinese at Shandong University for four years.

Lee and Jang are among 40,000 Koreans living and working in Weihai, a city of about two million people at the eastern tip of Shandong Peninsula, 240 nautical miles, or a one-night cruise, away from the ROK port city of Incheon.

Weihai is a transportation hub between China and the ROK. More than 350,000 Chinese and South Koreans passed through the city's passport control in 2015. A one-hour flight takes off for Incheon four times a day. Five ship lines run 30 shuttles between Weihai and the ROK ports of Incheon and Pyengtaek each week.

The first passenger ship started shuttling between Weihai and Incheon in 1990, two years before China and the ROK established ties. Trade with the country has flourished in Weihai since then. In the city, where primary schools have signs in both Chinese and Korean, more than 1,700 companies specialize in trade with the ROK.

As one of two pilot cities for the FTA (the other is Incheon), Weihai simplified customs procedures so that South Korean goods can pass through within three hours. It is the only port where food items with a short shelf life, such as fresh milk, can be imported and transported to other parts of China without going bad along the way, said Yu Mingtao, deputy chief of the FTA's Weihai coordination office.

"Traders enjoy the speed of air freight at shipping prices," he said, adding that this is the result of simplified customs procedures combined with a well-developed logistics system.

Experiments in Weihai will shape the follow-up talks and the future of the FTA, Liu said.

IMPROVING COMPETITIVENESS

Modern commercial complexes, include an ROK-run Lotte department store, cluster at the heart of Weihai. Yet Dishang Tower dwarfs them.

Dishang Group started as a humble local textile import and export company, but is now one of China's top clothing traders. Liu said Dishang's success serves as a good example of how the FTA can improve the competitiveness of Chinese companies.

The company learned its first lessons in global trade and doing business in a foreign market by exporting to the ROK, said Zhang Shizhe, deputy general manager of Dishang.

After years of development, it spent 25.1 million U.S. dollars to become the biggest shareholder of mid-tier South Korean fashion brand Avista in late 2012, allowing Dishang to learn from the ROK company's marketing and design.

As more ROK companies with better products, higher efficiency and lower prices come to China under the FTA, local companies will have to improve and learn from them.

"For Chinese companies, it will be a catalyst for them to adapt to global standards. For South Koreans, it's an opportunity to expand further into the world's largest market. Ultimately, both sides will benefit," Zhang said.

Talent will also be able to move more freely between the two countries, making the industry more dynamic, he added. Dishang is building a 30,000-square-meter design complex near the campus of Shandong University's Weihai branch, where veteran designers from leading ROK institutions will work with budding Chinese novices.

Dishang expects its exports to the ROK to grow by at least 50 percent after the FTA removes tariffs on clothing.

China is not expecting to earn a trade surplus through the FTA. Since the two countries established ties in 1992, the ROK has always maintained a large trade surplus, peaking at 91 billion dollars in 2013. As the world's largest trading nation, China is also much less dependent on bilateral trade than the ROK, Liu said.

"South Korea, with its population of 50 million people, has limited market potential. The real challenge is in the Chinese market and the global market," she added. Chinese companies need to improve by competing, cooperating with ROK counterparts and investing in them when necessary in order to become more competitive in the global market.

China is the ROK's largest trade partner. Bilateral trade stood at 240 billion U.S. dollars in 2014 and is expected to reach 300 billion U.S. dollars in 2016.

BIG MARKET FOR ROK

In 2013, ROK banker Lee Yong Gun left Woori Bank's Beijing office to help build Weihai's first and only foreign bank. Lee said he is happy in Weihai, not just because Korean food and baths are easily found, but also for the ease of doing business.

Every day, new customers come to open accounts at Woori's Weihai branch (Woori Weihai). Woori is the only bank where one can use either the yuan or won to settle trade without having to change the currencies into dollars first, said Lee, deputy head of the branch.

Many of Woori Weihai's new clients are ROK companies setting up new branches in the city, including giants such as Samsung Electronics, Samsung Heavy Industries, Hyundai Heavy Industries, Lotte Group and Kumho Asiana Group.

The FTA promises not only to open the Chinese market further for ROK imports, but also to offer even greater opportunities in services and manufacturing. Follow-up negotiations for the FTA will create ways to facilitate business in the two countries, such as easier visa policies and more consistent standards and regulations.

Woori Weihai now settles about 23 million U.S. dollars in bilateral trade every month, up 35 percent from last year. Banks from other Chinese cities are even asking to work with Woori Weihai to address their own clients' needs for China-ROK trade settlement.

The ROK congress ratified the FTA on Nov. 30, only six months after it was signed. This impressed observers

Before the ratification of the FTA in the ROK, President Park Geun-hye reportedly told lawmakers that if they failed to ratify the deal in time, they would regret it forever.

The FTA is expected to save billions in tariffs for Korean companies, bolster ROK's GDP by about one percent and create 53,000 jobs for the country, according to estimates from the ROK's Ministry of Strategy and Finance. Endite