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Issue Report

Collection of full-length papers and in-depth analysis of economic and management issues.

The CEPA And Inter-Korean Trade & Investment

The CEPA And Inter-Korean Trade & Investment

LIM Soo-Ho

Oct. 25, 2007

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ABSTRACT

As prospects for a peaceful resolution of North Korea’s nuclear threat improve, economic sanctions on North Korea are likely to diminish in the near future. That is prompting South Korea desires to secure an inter-Korea free trade agreement that would favorably position the South for economic opportunities in the North. Indeed, widening of trade and investment was a key part of the second North-South summit on Oct. 2-4, 2007.

A new framework would unify disparate systems and fill gaps in areas. Furthermore, South Korea would need to obtain international recognition of customs exemptions on transactions made with North Korea.

This report suggests that the two Koreas conclude a Closer Economic Partnership Agreement (CEPA), which is tantamount to a free trade agreement. The 2003 CEPA signed between mainland China and Hong Kong is a good example for the future shape of inter-Korean relations, as it assisted both in the revival of the Hong Kong economy and in the integration of the two economies.

A North-South CEPA would focus on phased liberalization of trade in products and services, as well as liberalization of trade and investment, to realize the terms & conditions of the “Addendum on Exchange and Cooperation” to the “Basic Agreement on Inter-Korean Trade & investment.”

With respect to South Korea's WTO obligations, while in principle, the WTO only agrees to free trade agreements between members, many precedents exist where agreements were concluded between members and non-members, and such precedents may apply to a CEPA between the two Koreas. In addition, South Korea may be able to avoid the enforcement of the WTO’s “practical requirements” banning restrictions on all trade between signatories by including provisions that allow a 10-year grace period.

By optimizing trade & investment and spurring changes in the North Korean economy, the CEPA between the two Koreas would likely be a stepping stone towards economic integration of the two countries. Through these steps, the South can also counterbalance growing Chinese influence on the North’s economy, which could possibly develop to an undesirable excessive level.

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