Trade Policy Note Final-rev08 - Development

Box 9: The experience of the Republic of Korea
The Republic of Korea moved up the virtuous spiral, graduating in two decades from a
largely agricultural country exporting cheap labour intensive products, such as textiles and
clothing, to a fully industrialized country where manufactures represent 88% of exports and
37 % of GDP. GDP in 1960 was a mere US$82, lower than most LDCs today, while its percapita
GDP in 2005 was US$16,291 and is fast approaching US$20,000. It also has a very
high HDI. The Republic of Korea prioritized export promotion as the means of financing
higher value added industries on its way up the technological ladder. Its strategy was to use a
range of “tools” including tariffs and quantitative restrictions (QRs), local content, transfer of
technology and export performance requirements to increase bargaining power with foreign
investors, favouring those willing to transfer technology or with more effective export
distribution channels. 22
The formation of large conglomerates was actively promoted.
Building on the success in the production and export of light industry products, The Republic
of Korea established heavy industries such as steel, petrochemicals, shipbuilding, industrial
machinery, non-ferrous metal refining and electrical industries. It has now prioritized high
technology industries such as semi-conductors. There has been substantial development and
transformation in the Republic of Korea in the last 45 years. The major industries during the
1960s were labour-intensive industries such as wigs, artificial eyelashes, clothes and plywood
while in 2005 the major industries were shipbuilding, automobiles, semiconductors and steel.
The top three export items in the 1970s were textiles, plywood and wigs while in 2005 these
were semiconductors, automobiles and wireless telecom. 23
In the example given above, the Republic of Korea relied on QRs to protect infant
industries and as a “carrot” for investors. These were covered by the balance of
payments provisions of Article XVIII:B of GATT. It lost the use of this instrument
during the Uruguay Round. Countries unable to otherwise justify QRs (under balance
of payments provisions) are not permitted to impose local content or trade balancing
requirements which are prohibited under the TRIMs Agreement.
Tariff policy also has to address the question of the impact of tariffs on the cost of
inputs for export industries. For example, should industries producing inputs be given
tariff protection to foster backward linkages, or should all protection on inputs be
eliminated to reduce costs for the proces sing industry? Tariffs can be an impediment
to good export performance because they could raise the cost of inputs and make the
final products uncompetitive. For example, in the case of Pakistan, protection against
man-made fibre imports to shelter the cotton industry led to a decline in
competitiveness for exports of made up articles and clothing. 24 Tariff draw back
schemes can also be a solution, but they are often difficult to administer.
22 See Shin, Jang-Sup and Jang-Sup Chang, “Foreign Investment Policy and Human Development
Country study: Republic of Korea”, in Seih Mei Ling ed., Investment, Energy and Environmental
Services: Promoting Human Development in WTO Negotiations, University of Malaya, UNDP, and
Malaysian Institute of Economic Research (Kuala Lumpur, March 2004) http://www.um.edu.my. See
also DoHoon Kim, Presentation on Trade Promotion and Economic Development in Korea, Korea
Institute for Industrial Economics and Trade, 29 May 2006, in file with author.
23 See DoHoon Kim, op. cit. .
24 See Khan, Zubair, The Impact of the post-ATC Environment on Pakistan’s Textiles Trade, UNDP
Asia Trade Initiative on Trade and Human Development, Phase 1, technical support document, (Hanoi:
2003) (www.undprcc.lk/Publications/Publications.asp?C=4 ).
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