By Gene Choi

South Korea and six Central American countries under the Secretariat for Central American Economic Integration (SIECA) officially announced on June 19, 2015 that they will begin negotiations for the Korea-Central America Free Trade Agreement (FTA). Although the date for the first round of negotiations has not been set and the WTO has not been officially notified, Honduran president Juan Orlando Hernandez and Republic of Korea (ROK) president Park Geun-hye agreed to begin negotiations as soon as possible, during Hernandez’s visit to South Korea on July 20. This is the first time SIECA as a group (Panama, Guatemala, Nicaragua, El Salvador, Honduras, Costa Rica) has sought to establish a free trade agreement with another country, and the first time South Korea has negotiated an FTA with any Central American country. More importantly, the proposed FTA will set the ROK apart from competitors, such as Taiwan and China, who have only negotiated bilateral FTAs with some of these countries.

Trade between South Korea and the SIECA members is not yet notably large, with a trade volume totaling $5 billion in 2014. ROK exports to SIECA members are 0.66 percent of total ROK exports, and imports from SIECA are 0.24 percent of total ROK imports.

A report by the Korea Trade-Investment Promotion Agency (KOTRA) states that such low trade growth has been caused by high tariffs in key sectors. For example, ROK’s major exports to SIECA countries are ships, automobiles, textiles, cargo trucks, and mobile phones, but Honduras, El Salvador, Costa Rica, and Nicaragua have 10-30 percent tariffs on automobiles and auto parts imports, Panama has a 15 percent tariff on steel construction material imports, Guatemala has a 10 percent tariff on textiles, and Costa Rica and Nicaragua respectively have 13 and 20 percent tariffs on mobile phone imports. Likewise, while major SIECA exports to South Korea have been sugar products and coffee, South Korea has maintained a 42 percent tariff on agricultural products according to the ROK Ministry of Foreign Affairs (MOFA).

Despite these constraints, however, figures have doubled over the past 10 years, and demographic trends in SIECA countries are growing to be conducive to both economies. According to the Latin American Development Bank (CAF), Korea-Central America trade has increased 16 percent annually in the past 20 years. Perhaps the greatest potential benefit to SIECA countries is not only the rise in exports, but also the increase in foreign direct investment, which the governments have exerted great efforts to attract in recent years. According to the Korea International Trade Association (KITA), 200 South Korean companies have already invested in the region and have created 150,000 jobs for the local workforce. SIECA’s geographic location between the United States and South America allows for Korean companies to not only trade goods but also invest in the region as a bridgehead to enter even greater markets in the north and south. With the FTA implemented, not only will employment increase within SIECA members, but there could be opportunities to attract more FDI in order to shift their agriculturally-dominant economies into a more industrialized one in the long term.

The Korea-Central America FTA has several implications for the South Korean economy as well, especially at a time when Korean exports are sluggish. First, because Korea would be the first country to sign a trade pact with all six countries at once, South Korean firms will be able to gain a competitive edge if negotiations succeed in reducing tariffs in key areas. As for Korea’s major competitors, China has only signed an FTA with Costa Rica, and Taiwan with Panama, El Salvador, and Honduras. Furthermore, SIECA countries have a combined population of 46.5 million with a large, growing middle class that has high demand for South Korean consumer products such as automobiles, mobile phones, medical and pharmaceutical products, and computers.The ROK Ministry of Trade, Industry and Energy (MOTIE) expects Korea’s GDP to increase by 0.03 percent, with Korean exports to the region are projected to increase by between 10 and 51 percent, and imports by 34 to 69 percent. Finally, small and medium-sized Korean companies operating in Central America will not only have the perks of low-cost and skilled labor but could also be able to expand their output and gain greater market access to the United States, Latin America, and even Europe.

This is not to say, however, that the FTA will create a massive growth engine for South Korea’s export sector, nor that SIECA countries will systemically transform into an advanced economy. Although the figures are growing, it is incontrovertible that both economies are limited in size and population. There also remains the challenge of negotiating tariff reductions, especially South Korea’s politically-sensitive agricultural sector. As the Korea-U.S. FTA negotiations revealed, tariff reductions in agricultural products occurred in limited areas and were not eliminated completely, stalling negotiations and ratification for years. Instead, what is significant here is that a mutually beneficial trade structure between South Korea and SIECA members in terms of their traded goods, and therefore that there is clearly an opportunity for economic growth. At a time when trade competition is severe and export opportunities are few, cooperation can be a way to coexist.

Mr. Gene Choi is a researcher with the Korea Chair at CSIS.