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US$100 billion trade relationship between India and Korea is possible by 2020

Sunday, July 21st, 2013
PROF AHN

Prof. Choong Yong Ahn is a former chairman of the presidential Regulatory Reform Committee (2010-12). He is also the Foreign Investment Ombudsman, in which post he is responsible for resolving grievances raised by foreign investors in Korea, and a distin­guished professor at the Graduate School of Interna­tional Studies at Chung-Ang University. He has also served as the president of the Korea Institute for Inter­national Economic Policy (KIEP), Chair of the APEC Economic Committee, and President of the Korea International Eco­nomics Association.
He has co-edited two books on India–Korea ties. The first, published in 2011, is titled “India- Korea: Dialogue for a 21st Century Partnership.” The second, published in 2012, is called “Korea-India: Deepening Partnership for the 21st Century.” Recently, he sat down with Dr. Lakhvinder Singh to discuss the future of India-Korea ties. Here are excerpts from the interview.

This year, as you know, Korea and India are celebrating the 40th anniversary of diplomatic ties. How do you view the last forty years of the countries’ relationship?


Korea-India ties have developed tremen­dously from being an ordinary, distant re­lationship to a strategic partnership. Today, India and Korea have a very unique relation­ship in terms of having very like-minded institutions such as a market economy and political democracy and common values on peaceful international relations. As for their world economic rankings in 2011, India ranked 10th and Korea, 14th.


Are you satisfied with the last forty years of this relationship or have the two nations been too slow and missed many great opportunities?
Overall, the bilateral relationship has developed significantly. After World War II, Korea viewed India as a remote nation with a non-alignment movement doctrine. Therefore, we did not find many converg­ing points. But since India adopted an economically open-door strategy in the mid-eighties, the two countries started to show great interest in each other. I think they now share democratic values and an outward-looking economic orientation to­ward open market economies. India has a big population and a huge landmass. In a sense, Korea, relative to India, is at the opposite extreme with far less land and a smaller population. Given the great dif­ference in factor endowments, both can complement each other.
I think India-Korea cooperation can greatly benefit not only the two countries but the world at large. Improving India- Korea economic ties can also strengthen se­curity interests in Asia and worldwide. The two countries should maximize their mu­tual strengths due to the great inborn diver­sity of their economies. From my personal perspective, when I attended junior high school, I admired Rabindranath Tagore, a very famous Indian poet. I used to recite and memorize many of his poems, especial­ly “Lamp of the East,” which is about Korea. It reads, “In the golden age of Asia / Korea was one of its lamp-bearers / And that lamp is waiting to be lighted once again / For the illumination of the East.” His message that Korea will emerge again left a deep impres­sion on my young mind.


Today, Korea’s future is very bright and Korea is a leading nation. So Rabindranath Tagore‘s prediction has come true. How do you feel?

Every time I attend bilateral gatherings, especially Korea-India dialogues, I always bring with me the first page of Tagore’s poem. My admiration and respect for Rabi­ndranath Tagore and India have no bounds. My favorite noraebang (karaoke in Japa­nese) song is “Indian Fragrance,” which was composed more than half a century ago.


Now let’s get to some specifics on India-Korea economic ties. The first question is about the Korea-India CEPA. Two years have passed since CEPA was signed and implemented. How do you see the success of CEPA thus far?

Very good question. Since CEPA became operational between the two countries, bilateral economic relations have grown multiple-fold. I’ll give you some statistics. The bilateral trade volume has increased al­most two-fold, from US$11.2 billion in 2007 to $20.5 billion in 2011. Last year, for the first ten months, trade recorded $15.8 bil­lion, slowing down a bit due to the global recession. Thus as a whole, CEPA has had positive effects. But a major point I‘d like to make is that CEPA should have been more fully used on both sides.


What are important areas in which CEPA can be improved? Give us some examples.


Looking forward, the first thing we need to address is the timely and deepening har­monization between the actually imple­mented tariff rate vis-a-vis the agreed tariff rate of CEPA. As you know, CEPA negotia­tions took four years to conclude. So by the time CEPA was implemented, in many in­stances the CEPA preferential rate was high­er than the most favored nation (MFN) rate. Thus, the two countries need to upgrade the Korea-India CEPA as early as possible, in­cluding faster and wider reduction of tariffs and further elimination of non-tariff barri­ers between the countries. For this purpose, the two sides need to conduct regular offi­cial consultation meetings to address these issues. With the improved CEPA, we should be more ambitious about expanding bilater­al trade and investment volume. We should aim for the virtual elimination of tariff and non-tariff barriers in a shorter time frame. Five to ten years are too long.


By 2015, trade relations between the two countries are expected to reach $40 billion. They are saying that if this trade growth rate continues, our countries could have a $100 billion trade relationship by 2020. What is your view on this? Is a $100 billion trade relationship possible by 2020?


Certainly, it is a feasible target. By 2020, we could even go beyond that. But to achieve this target, we need to improve and strengthen CEPA. We also need to expand concession items included in CEPA. Cur­rently, Korea and India depend on the Chi­na market too much. In the long term, this will be risky in the event that the Chinese economy slows down or falls into severe uncertainty. Thus, we need to diversify trad­ing partners. India and Korea are perfect candidates for the mutual diversification of exports.


What are the comparative advantages of trade between our two countries?


Given the substantial difference in indus­trial structure, export items, and factor en­dowments, Korea and India should use their respective comparative advantages to in­crease mutual trade in each other’s market. Korea has the advantage of a strong manu­facturing base and overseas SOC develop­ment experience. Similarly, India can take advantage of its highly skilled but still low wage human resources and abundant natu­ral resources. For example, within the IT sector, Korea has a comparative advantage in hardware, whereas India has more of a comparative advantage in software-related areas. Both countries are energy scarce and depend heavily on imported oil. Both have developed competitive energy sub-sectors. Trade and investment in green energy, in­cluding civilian nuclear energy, is another area for cooperation.

A main complaint among Indians is that CEPA is more favorable trade balance is in favor of Korea.


To some extent, the trade imbalance has occurred in favor of Korea. It is also an out­come of the structural characteristics of the two economies. To remedy this imbalance, Korea and India should lower the CEPA tar­iff rate below the MFN rate with increased concession items. An early considerable re­duction of the CEPA rate is likely to lead In­dia to increase its access to Korea’s market. Major Korean export items to India include auto parts, wireless telephone parts, and electric and electronic products, a major portion of which is supplied to Korean com­panies operating in Korea.
What more do you think Korea can do to open the service sector to Indians?


Unlike other FTAs, CEPA includes the opening of service sectors on the movement of natural persons, skilled and independent workers, and professionals. This was not included in the Korea-U.S. FTA. Both sides need to further open their service sectors. Korea needs many English-speaking tal­ents in IT software development, R&D, and skill-intensive areas. Given Korea’s serious unemployment rate, the unskilled workers’ movement has not been fully opened.


Turning the discussion to broader regional perspectives, currently, Korea depends in part on China for its market expansion. In your future scheme of things, how do you see the future of Korea’s trade partnerships?


As you said, Korea currently depends heavily on the Chinese market, which ac­counts for nearly 30 percent of Korea’s to­tal exports. But China’s economic growth is likely to slow down in the year to come as its economy starts to mature. To avoid the risks involved with excessive dependence on one specific country, Korea has to look for new markets. In this regard, India and other Southeast Asian countries offer viable alternatives to Korea. India has a large pop­ulation and a huge domestic consumption market, given the rising per capita income. Korea should pay serious attention to the Indian market. Today, India and China are growing neck-and-neck. The ADB said that India’s GDP is expected to be bigger than China’s by 2050. Thus, recognizing the Indi­an market potential and long-term perspec­tive for expanded East Asian integration, including India, Korea’s external economic experts and businessmen must pay more at­tention to developing closer ties with India.
Korean companies have been investing in India for some time now. Lately, Indian investment has also begun coming to Korea. Still, Indian businessmen have not been very attracted to investing in the Korean market. What kind of incentives can be given to Indian companies to invest in the Korean market? Would you like to suggest some important investment areas for Indian companies?
Korea continues to attract foreign direct investment by offering a host of incentives including the exemption of corporate in­come tax, tariff exemption, cash grants, reduced leasing costs for industrial sites, etc., in addition to its geographic location. Look at the Ssangyoung Motor case – why Mahindra & Mahindra acquired the motor company for investments. If you look at the Korean IT industry, shipbuilding industry, steel-making industry, and chemical indus­try, there are many great opportunities for India’s foreign direct investment into Ko­rea. There is a lot of room for Indian manu­facturing companies to invest here and develop industrial technologies to bring necessary parts and components back to In­dia and export them overseas.


Most of the Indian foreign investment has gone to Europe or the USA. Korea got only $1 billion. This is less than 0.05 percent of In­dia’s total outbound foreign investment. So there is a problem. Indian companies have, so far, not looked at Korea as an investment destination. If we are looking for some spe­cific investment areas, maybe just one or two areas, that would be very advantageous for Indian companies, what would you suggest?


Indeed, India’s investment to Korea has been marginal. However, there exist many investment opportunities in Korea. To name just a few, IT and its related fusion sectors, machinery, metallic sectors, chemicals, and green energy sectors. We are looking for joint ventures and R&D areas. India has highly competitive software in the IT sector. The list is endless.


I’d like to ask you a specific question regarding the education sector. What are the possibilities of cooperation in this sector?


The potential for cooperation in the education sector is huge. Korea is trying to attract Indian students to its higher educa­tional institutions. Korean students are also urged to enroll at India’s counterparts in IT, engineering, and the humanities. In fact, these days, many Korean students are head­ing to India for higher learning.


More and more Koreans students are going to China to study. India is not able to attract so many students. Any reasons?


Basically it is the function of job market opportunities. Many Korean students feel their job prospects are higher if they study in China, the U.S., Japan and the EU. But in the future, I believe more and more Korean students will go to India as trade and eco­nomic relations between the two countries grow and deepen. As forecast in the ADB study, India will grow even bigger than Chi­na by 2050.


Koreans complain about many things while doing business in India. What are some important areas in which you would like to recommend improvements for the Indian government?


For example, there is huge expectation from the POSCO project.The slow speed of the POSCO project in India has disappointed many Koreans. I don’t know which government agency in India is directly responsible for business permits and necessary land purchases. It ap­pears that local government authorities, the central government’s ministry, other NGOs, and landowners have their respective voic­es when it comes to business permits and land acquisitions. There seems to be a lack of coordination between different Indian government agencies. I sincerely hope the POSCO project will come through as early as possible.


In light of the POSCO project, what are the main problems and obstacles hindering the growth of relations between the two countries?


First, both countries should get over any psychological barriers they may feel due to the geographical distance. For many Kore­ans, India is still a faraway country. Simi­larly, many Indians think Korea is remote to the east. We need to overcome these feel­ings of geographical distance first. Second, we need to increase mutual understanding to reap the great potential, still unrecog­nized and emerging, of India-Korea coopera­tion in the years to come. Third, we need to expand our university exchange programs to give people an accurate picture of Ko­rea and India and of how they could ben­efit from each other by engaging in more business and people-to-people exchanges. Through this, we can better build confi­dence in each other.


People-to-people cooperation should be increased?


Yes, for sure. It is very important. With­out people-to-people cooperation, there is not much hope for a great leap in promot­ing the bilateral relationship.


So far, India-Korea cooperation in the international arena has been very low.


You are right. But there are many im­portant international bodies where the two countries can work together. India and Korea are important players in many multi­lateral processes such as ASEAN, ASEAN+6, the East Asia Summit, APEC, and G20. Both countries also share the vision of a common Asian Economic Community. They are also important players as the middle powers of the G20. So I believe the bilateral coopera­tion between the two countries is moving in the right direction at the international level also.


Coming back to the strategic partnership between the two countries in the last three years or so, Indians have shown some interest in Korea’s defense industry and defense cooperation. What is your take on this? What kind of potential do you see in this sector?


India is surrounded by a huge ocean. Ko­rea is a peninsula state as well. Korea is also confronting a most hostile enemy, North Korea. It keeps us in a state of full alert in terms of defense and security. Between the two countries we share many naval and maritime security interests, including logis­tics cooperation and sea lanes of communi­cation both at the bilateral and multilateral level. Korea has a huge modern defense in­dustry that is producing world-class defen­sive weapons systems. Thus there is huge potential for cooperation in this sector. I think we’ve already begun to see coopera­tion in this area, as last year India bought military hardware from Korea. Collabora­tions could be feasible in space technology and civilian nuclear technology. Being an economist and not a military specialist, I cannot comment in detail. But I can see po­tential for cooperation in this sector.


To close, would you like to suggest some ideas for strengthening cooperation between the two countries?


The most critical point is the trust-build­ing process between India and Korea at the government level as well as people-to-people level. I think it can be done rather quickly because we share many common values, such as a political democracy and market economy, which is very unique as upper-middle powers in Asia. We do not have any historical legacies. Unlike China and Japan, we are free of historical and ter­ritorial issues. Actually, we enjoy even a his­torical linkage. One of the Korean kings of Korea’s Three Kingdoms era married an In­dian princess. This is a tremendous histori­cal bond from which the two countries can work together for the peace and prosperity of Asia and the world

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