Since its previous Trade Policy Review, the general thrust of Korea's trade policy has remained relatively unchanged. Steps have been taken to facilitate trade and increase transparency. However, some protection measures continue to shield domestic producers, especially farmers, from foreign competition.
The tariff remains one of the main trade policy instruments and a significant source of tax revenue (4.6% of total tax revenue in 2007). The introduction of the 2007 version of the Harmonized System of Tariff Classification (HS), in January 2007, increased slightly the number of tariff lines (468 more lines in 2008 than in 2004). Almost all tariff lines are ad valorem, contributing significantly to tariff transparency. Nonetheless, the tariff remains relatively complex, involving a multiplicity of rates (83 ad valorem, 41 alternate duties) often involving small rate differences and decimal points. No tariff cuts occurred during the period under review. The applied MFN rate averages 12.8% in 2008 (same as 2004), which is high by OECD country standards, thereby requiring tariff concessions or drawbacks to ensure that tariffs on intermediate inputs do not feed through to become taxes on exports; these measures add to the complexity of border taxation. Peak ad valorem rates have remained unchanged and apply to agriculture (WTO definition); tariff rates range from zero to 887.4%; 86.6% of rates were 10% or below in 2008. Korea applies tariff rate quotas under its multilateral agricultural market-access commitments; in-quota tariff rates range from zero to 50%. Other measures (e.g. "autonomous" tariff quotas, "usage" tariffs, and duty concessions) that selectively reduce tariffs on inputs, often according to end-use, may constitute a potential impediment to efficient resource use and add to tariff complexity and uncertainty.1 Although 90.8% of tariff rates are bound, the predictability of the tariff is eroded by the leeway to raise applied tariffs provided by the average gap of 4.3 percentage points (9 percentage points for agricultural items) between applied and bound MFN rates. Korea has continued to use this gap to apply higher MFN duties (e.g. adjustment duties) termed as "flexible tariffs", which the authorities maintain are within WTO bindings. Korea intends to reduce or remove gradually the non-ad valorem duties and the "flexible tariffs" in line with the reduction undertakings resulting from the DDA and FTA negotiations.
Korea has streamlined and modernized its customs procedures by moving further towards an "intelligence oriented customs administration"; in light of the expanding network of its preferential arrangements, customs clearance has become more complicated, particularly rules of origin requirements of individual agreements. As regards customs valuation, an early warning system was established to block undervalued imports of agricultural goods, plants, and fisheries.
Rice remains subject to import quota restrictions under Korea's WTO minimum market access (MMA) commitments until 2014; by that date, rice imports are expected to double and cover 8% of domestic consumption. Import licensing requirements and prohibitions are maintained mostly for the protection of public morals, human health, hygiene and sanitation, animal and plant life, environmental conservation or essential security interests in compliance with domestic legislation requirements or international commitments. Korea has used anti-dumping provisions, mainly against imports of chemicals, machinery, paper and paperboard, and wood articles. It has also made use of the special safeguard provisions (SSG) under of the WTO Agreement on Agriculture.
Korea periodically restricts or monitors exports of certain products (e.g. rice) to ensure adequate domestic supplies, and thereby possibly assisting downstream processing of these products; rice has been subject to quantitative export restrictions since 2007. Direct export subsidies are maintained to reduce marketing costs for certain agricultural products (e.g. fruit, vegetables, flowers, kimchi, ginseng, and livestock) in accordance with Article 9.4 of the WTO Agreement on Agriculture. A drawback scheme provides refunds of border taxes; internal taxes are also reimbursed. Exporters benefit from export credit insurance, finance, and the promotional activities provided by state-owned institutions.
A range of measures involving grants, tax concessions or low-interest loans are used to support production and trade of a range of agricultural, forestry, fishing, and manufactured products as well as to encourage SME, R&D, and environmental-protection activities. Although tax incentives were to terminate automatically at end 2003 in accordance with sunset clauses, many were extended. SMEs, whose eligibility criteria were streamlined in 2006, are among the beneficiaries of these measures, which are especially generous for information technology activities. Agriculture receives substantial domestic financial support in line with the relevant WTO provisions. Agriculture and manufacturing benefit from the lowest electricity tariffs among different consumer groups. Farmers and manufacturers adversely affected by a bilateral free-trade agreement may seek compensation or adjustment support.
Korean industrial standards have doubled over the last five years and seem to be used increasingly as a basis for international norms. Efforts to review food labelling standards to better reflect international requirements have continued. State involvement in the economy persists as privatization efforts during the period under review have been put virtually on hold; the new Government seems committed to resuming divestment activities. Certain government procurement is still not covered by Korea's multilateral commitments under the WTO Government Procurement Agreement (GPA); in procurement from SMEs, private (non-competitive) tendering prevailed until 2007. Despite the lack of domestic price preferences, government procurement is still seemingly used as an instrument of economic policy, including regional and industrial development; new legislation has required priority to be given to environment-friendly products. Procurement has become more decentralized.
During the period under review Korea completed the implementation of its three-year Market Reform Roadmap, by establishing and revising competition laws and regulations and strengthening institutions in this area. Chaebols are subject to special regulation, including ceilings on the total amount of shareholdings in other domestic companies. Certain "collective actions with specific requirements" undertaken by SMEs remain exempt from competition legislation. Consumer protection has also been improved.
Korea's extensive range of intellectual property rights (IPRs) legislation has been further strengthened with the amendment of the copyright legislation, the reinforcement of border enforcement, and conclusion of the Korea–US Free Trade Agreement (KORUS FTA).
Korea has pursued the streamlining and modernization of its customs procedures, and reinforced border protection for intellectual property rights and origin marking falsifications (sections (ix)(c) below and (4)(vii)(e)). The Korea Customs Service (KCS) is considered to be at the cutting edge of international best practice.2 It has attracted international acknowledgement by maintaining an impressive record of technology advancement to: improve efficiency; enhance transparency; slash clearance times; enhance probity and integrity; and employ sophisticated intelligence and risk management systems.
Only consignors, customs brokers, associations or corporations for customs clearance can make import declarations. Required documentation includes the commercial invoice, price declaration, and duplicates of the bill of lading. Where applicable, a detailed packing list, import approval document, sanitary and phytosanitary certificates (most agricultural goods and processed foods), and certificate of origin for goods subject to tariff preferences should be submitted. Qualified importers (approved by Customs based on their import record) receive expedited customs clearance and more convenient methods for paying duties.3
Import clearance, including declaration procedures, and cargo management systems are fully computerized. In an effort to further streamline the clearance procedure and reduce the cost burden, the KCS has operated a web-based clearance system since October 2005.4 This handles export/import clearance operations, while the single window system (see below) covers requirement-confirmation processes, including quarantine and inspection as well as customs clearance at a single point. The KCS is linked to all 32 agencies responsible for approving certain imports (e.g. Ministry for Health, Welfare and Family Affairs and Ministry for Food, Agriculture, Forestry and Fisheries) to enable import requirements to be electronically verified. The number of tariff items needing such checks has decreased from 4,810 items in 2004 to 4,356 items in 2008, under 49 laws including the Pharmaceutical Act and Food Sanitation Act, and is to fall below 4,000 under the 2003 trade‑related regulatory reform process (Chapter II). The paperless clearance system has expanded; by mid 2007 there were 42,000 companies in the trading sector using Electronic Data Exchange (EDI).5 In 2008, cargo management was 100% paperless and import declarations 80%. In 2008, KCS processed an average of 12 million e‑customs transactions (10 million in June 2003).
As from February 2007, the KCS has operated a web-based import/export requirement‑confirmation through a single window system on behalf of 12 major government agencies handling 93% of total import verification.6 The system encompasses the import requirements administered by the Korea Food and Drug Administration, the National Fisheries Products Quality Inspection Service, and the National Veterinary Surgeon and Quarantine Service. Not all relevant government agencies have yet (as of mid 2007) joined the single window system: their doing so would further improve the efficacy of the border clearance system. Between March 2006 and December 2007, the system dealt with 74,435 cases; the number of users also increased substantially, from 827 companies to 1,255 companies. This rapid increase is due to time and cost requirements (compared with the EDI-based system discussed above) as well as its improved user convenience.7
In 2008, declarations were processed in 1.2 hours on average (1.3 hours in 2003). Prior-entry import declarations (up to five days for sea and one day for air) are allowed. Most imports (about 80%) are cleared after being taken into a bonded area; the average clearance times from port entry to release from a bonded warehouse was 3.54 days in 2007 (1.78 days for air and 5.85 days for sea cargo), down from 9.6 days (4.6 days for air and 16.2 days for sea cargo) in early 2003. A cargo selectivity system automatically selects high-risk cargo for documentary and possible physical inspection.8 The KCS operates, on request, an "on-dock" immediate clearance system at the major ports of Busan, Incheon, and Gwangyang, to allow imports of reputable companies to be released before submission of import declarations (required within ten days). Some 60% of inward cargo uses this system; goods are cleared without being moved to a warehouse outside the port.
Amongst other developments, a self-assessment system for customs duties and taxes was introduced in 2004, and an e-bidding system in customs auctions since 2006.9 As of 2008, the KCS plans to establish the web 2.0-based new generation knowledge management portal system.
Since August 2005, the KCS has applied more rigorous customs inspections on agricultural products, including especially peppers, garlic, sesame seeds, onions, carrots, and seasoning powders, to help protect local farmers and producers against increased imports due to undervalued import declarations.10 The import sample inspected to check prices was also raised to 20%. The authorities indicate that these measures were implemented not to restrict imports, but to prevent illegal importation and duty evasion from under-invoicing, and to meet the need for increased laboratory analysis under paperless customs clearance. The sample size used for analysis was lowered for qualified importers with good compliance records (including "Faithful Partner of Customs")11 as from March 2004.
According to the authorities, blended products are classified based on their intrinsic characteristics as found in the Harmonized System (HS) Convention, HS Explanatory Notes and provisions of the General Rules for Interpretation of Nomenclature. When a dispute occurs over classification of a certain product, the KCS Tariff Classification Committee, consisting of experts from the public and private sector, makes the final decision. If the committee fails to reach agreement, it requests an opinion from the World Customs Organization Secretariat.
The KCS has also expanded the scope of administrative information made public and enlarged its workforce to provide more prompt responses to enquiries made online. It has developed a Roadmap for Integrity including the signing of the Customs Business Integrity Pact in March 2005. As from 2004, the KCS has run a Customs Irregularities Reporting Centre and the Cyber Corruption Report Center, which advises Customs staff as well as other stakeholders to make a report on Customs irregularities to the KCS web site.12 A Customs Ombudsman, appointed from the private sector and assisted by one customs staff member in each Customs house, handles disputes and complaints over clearance and valuation processes. The number of disputes has been decreasing since 2005 after reaching a peak of 150, to 108 in 2006. KCS maintains an Audit Bureau and a Differentiated Management System by Companies to target suspected high‑risk importers. A Code of Conduct for the Integrity of Customs Officers has been in effect since May 2003.
Korea acceded to the revised Kyoto Convention in February 2003, subject to certain reservations13; the Convention took effect in February 2006.
Following the signature of MoUs between the KCS and the Export-Import Bank of Korea (February 2006), the Korea Trade and Investment Promotion Agency (KOTRA) (September 2006) and the Asian Development Bank (ADB) (November 2006) and the establishment of the Korea Customs UNI-PASS Information Association (CUPIA) (September 2006)14, efforts have been made to disseminate KCS advanced customs techniques worldwide.
Korea does not require preshipment inspection of imports.
Free-trade zones (FTZs)
The Customs free zones, which provided simplified customs procedures for certain activities were incorporated into FTZs (Chapter II) in 2004 (Act on Designation and Management of Free Trade Zones, 2004). They are exclusive areas outside the national customs boundary, exempt from customs requirements. They facilitate flows of goods and services, including distribution, at busy airports, seaports, and storage complexes/cargo terminals. The Minister of Knowledge Economy (in consultation with the Free Trade Zone Committee) designates such zones upon request from regional governments. Activities in the zone may be exempt from import procedures and customs duties, and receive tax relief (e.g. VAT and reduced corporate tax). Foreign cargo may enter and leave freely. Simple processing is allowed. Korean goods entering the zone are treated as exports and entitled to tariff drawback. Goods entering or processed in these zones are principally intended for export, but if sold domestically, are subject to import duties and domestic taxes, such as VAT. According to the authorities, this treatment does not constitute a subsidy specifically provided to an enterprise or industry or group of enterprises or industries; therefore, it is not subject to notification to WTO pursuant to Article 25 of the WTO Agreement on Subsidies and Countervailing Measures. The FTZs are located at the Incheon International Airport, and the ports of Busan, Gwangyang, Incheon, Masan, Iksan, Gunsan, Daebul, Donghae, and Yulchon.
According to the authorities, Korea's customs valuation legislation (sub-section 2 of the Customs Act 1949) complies with the WTO Agreement on Customs Valuation. Imports are valued at their c.i.f. price. The main method used is transaction value (based on the price actually paid or to be paid by the buyer). When this cannot be used, valuation is determined using, in order, identical goods, similar goods, domestic sales price, or computed value.
While the KCS may, in principle, set special customs valuation and documentary requirements for second-hand imports (Presidential Decree of the Customs Act), it applies the same customs valuation methods. However, as a last resort, Customs may determine their valuation using "reasonable standards", whereby prices paid are adjusted based on appraised prices from certified appraisal institutes, domestic wholesale prices, or other recognized price lists. To prevent tax evasion, the KCS tightened checks on declared values of imported used cars, including comparisons with transaction values of new cars of the same model that have been recognized as customs values, with the deduction of depreciation ("depreciated value"). According to the authorities, the transaction value is accepted where significant differences exist, unless there is reason to suspect the authenticity or accuracy of the declared value, when an alternative WTO‑consistent valuation method is used. The use of the "depreciated value" would be applied only as a last resort. Documentary requirements were also changed to include a letter of technical inspection from an automobile performance-testing institute.15
Following the launch of the process of "standardization of item names" of imported agricultural, forest, and fisheries products in cooperation with the Ministry for Food, Agriculture, Forestry and Fisheries (MIFAFF) and the Korea Forest Service (KFS), in August 2007 the KCS established SIREN, an early warning system to block undervalued imports of agricultural goods, plants, and fisheries.16 SIREN is designed to screen out undervalued products by calculating the proper import prices of the products and comparing the prices with the declared prices.17 Based on the result, under-valued products go through audit, while normal products are cleared promptly. The authorities seem to consider the "standardization" process and the SIREN as tools against fraud and for speedy clearance of normal imports and fair competition in the domestic market; these tools seem to have had a tax revenue increase and an import substitution effect estimated at W 97.5 billion and W 178.6 billion respectively.18 The operation of SIREN has resulted in considerable decrease in under-valuation and subsequent reduction in the time required for clearance of normal goods and audit workload.
Customs duties (including domestic taxes) must be paid within 15 days of acceptance of the import declaration (where security has been lodged). Late payments are subject to an additional 3% of the amount owed for the first month, and 12% for each month thereafter (up to a maximum period of 60 months). Criminal penalties (up to three years imprisonment or a fine of five times the evaded duty) apply for fraudulent declaration of dutiable value or incorrect tariff classifications.
Customs decisions can be appealed to the KCS Commissioner or to the National Tax Tribunal. The Tariff Review Commission, comprisng five customs officers and seven experts, assists the Commissioner on appeals. Decisions can be appealed to the courts.