Overseas Market Profiles

Major Economic Indicators

Source: IMF, Bank of Korea
* IMF estimate
^ January-March

Recent Developments

• Rebounding from the financial tsunami, Korea’s GDP gained by 6.1% year-on-year (YoY) in 2010. The IMF estimated that Korea’s GDP will grow by 4.5% in 2011.
• Despite the Bank of Korea (BOK) having raised its administered interest rate twice this year, inflation hit a two-year high in the first quarter of 2010. BOK is under pressure to raise the interest rate again.
• Resulting from the global trade recovery and booming demand from the emerging markets, South Korean exports grew by 29.9% YoY in the first quarter of 2010. Meanwhile, strong domestic consumption helped South Korean imports, which increased by 25.6% over the same period of time.
• FDI from Asia into South Korea increased 86% in 2010. Asia took over Europe as the largest FDI source of South Korea in 2010, accounting for over half of the country’s inward FDI.

Current Economic Situation

Riding on the global economic revival, South Korea’s economy posted a 6.1% growth in 2010, an eight-year record high. After the rapid economic growth in 2010, IMF expected South Korea’s economy will only grow by 4.5% in 2011. Despite the earthquake in Japan leading to concerns of supply chain disruptions, which might affect South Korean manufacturing activities, impact on the overall South Korea’s economy is expected to be limited.

On the other hand, inflation is becoming an important economic issue for the country. The Consumer Price Index (CPI) in South Korea was reported at 4.5% in the first quarter of 2011, hitting a two-year high. The Bank of Korea (BOK) has already raised the interest rate twice to curb inflation this year. Inflation is likely to remain at high levels, due to the supply chain disruptions caused by the March-11 earthquake of Japan and more importantly, strong domestic consumption. BOK will be under mounting pressure to raise its administered interest rate again.

South Korea is one of the Asian economies with high trade dependency, with total foreign trade accounting for almost 90% of the country's 2010 GDP. The performance of Korea’s economy is closely related to its export performance. Exports of South Korea increased by 28.3% YoY to US$466 billion in 2010, surpassing the level before the financial tsunami of 2008-2009. Remarkable growth was primarily a result of the improving global economy and rising demand from the emerging markets. In 2010, exports to Latin America, China and ASEAN increased by 39.4%, 35.2% and 30.9% respectively. Major destinations for South Korean products included the Chinese mainland (25.1% share), the US (10.7%), Japan (6.0%), Hong Kong (5.4%) and Singapore (3.3%). Among all major export items, semiconductors (63.3%), automobile parts (62.6%) and automobiles (39.3%) showed the strongest growth in 2010.

Meanwhile, South Korean imports grew by 31.6% in 2010, which was supported by its strong domestic consumption. Total retail sales in South Korea increased by almost 10% in 2010. Major sources for South Korea included the Chinese mainland (16.8%), Japan (15.1%) and the US (9.5%).

Both imports and exports of South Korea are expected to show strong growth in 2011. In the first quarter of 2011, South Korea’s exports and imports increased by 29.9% and 25.6% respectively. Exports of petroleum products and ships showed a stronger growth while exports of consumer electronics were relatively weak.

To promote inward FDI, the Korean government announced that the cash assistance for overseas companies investing in the country from 15 billion won will be increased by at least twofold, starting from 2011. It is also planned to set up a special district for foreign investment focused exclusively on the service industry in September 2010.

In 2010, total FDI in South Korea increased by 13.8% to US$13.1 billion. Over half of the FDI was from Asia. It increased by 86% YoY. Meanwhile, FDI from the EU dropped by almost 40% to US$3.3 billion.

Source: Ministry of Knowledge Economy

Trade Policy

In the past, South Korea's trade policy placed heavy emphasis on import control and export growth promotion. South Korea has revised its trade policy to a more neutral stance in recent years, which includes, amongst other things, reaching Free Trade Agreements (FTAs) with other countries. In addition to the existing FTAs with Chile, Singapore and the European Free Trade Association (Switzerland, Norway, Iceland and Lichtenstein), South Korea has reached an FTA in services with ASEAN in 2007 and India in 2009. The framework agreement of FTA between South Korea and the EU was formally signed in May 2010 and is expected to enter into force in the course of 2011 after the ratification by all EU members is completed. The US-Korea FTA was first signed on 2007 and a renegotiated version was signed in late 2010, which is still subject to parliamentary ratification. South Korea is also pursuing FTAs with other countries, such as Japan and Canada.

In 1997, following the amendment of the Customs Act and its Enforcement Decree, South Korea simplified import procedures and required documentation. Most goods can now be imported without licences, except items restricted for health or security reasons. All of Hong Kong's leading export products can be freely imported into South Korea.

Most duties are assessed on an ad valorem basis. For non-agricultural products, over 90% of goods are charged at tariff rates between 0% to 10%. Tariff rates for leading export items from Hong Kong range between 0% and 13%.

In addition to tariffs, imports are also subject to other taxes, including a value-added tax (VAT). The VAT rate on imports is 10% of the CIF value plus customs levies. In addition, a special excise tax, which ranges from 5% to 20%, is levied on certain luxury and durable consumer items.

In spite of the aforementioned changes, the South Korean government still maintains a safeguard mechanism, which allows the government to impose a maximum of 100% tariff on goods which might disrupt the local markets. For example, jewellery is taxed at up to 65% and perfume is taxed at up to 35% (comprising regular tariffs, special excise tax and value added tax).

Hong Kong's Trade with South Korea

South Korea is the 8th largest export market and the 6th largest import source of Hong Kong in 2010. In line with global trade recovery, Hong Kong's total exports to South Korea were up 24.4% YoY to US$6,881 million in 2010. During the period, Hong Kong ran a trade deficit against South Korea amounting to over US$10.3 billion. Imports by Hong Kong increased by 29.8% to US$17,143 million.

Trade with South Korea remained strong in 2011. Hong Kong's total exports to South Korea were up 23% YoY to US$1,944 million in the first quarter of 2011 while Hong Kong's total imports from South Korea increased by 29% to US$4,681 million.

Major Hong Kong exports to South Korea in the first quarter of 2011 included: semiconductors, electronic valves and tubes (US$458 million, 23.6% of total, +29.0% YoY), telecommunications equipment and parts (US$280 million, 14.4% of total, -0.2% YoY), and parts and accessories of office machines (US$168 million, 8.6% of total, +99.3% YoY).

On the other hand, Hong Kong mainly imported the following from South Korea in the same period: semiconductors, electronic valves and tubes (US$1,839 million, 39.3% of total, +18.7% YoY), petroleum oils (other than crude) (US$519 million, 11.1% of total, +136.2% YoY) and telecommunications equipment and parts (US$427 million, 9.1% of total, +44.5% YoY).

Source: Census & Statistics Department, Hong Kong

South Korea's Economic Involvement in Hong Kong

South Korea is very involved in the Hong Kong economy. In 2010, Korean companies had established 19 regional headquarters, and 43 regional offices in Hong Kong. According to the Consulate General of the Republic of Korea in Hong Kong, there are about 500 Korean companies operating locally in Hong Kong. The number of Koreans residing in Hong Kong amounted to about 4,800 as at the end of April 2011. Korean companies in Hong Kong are involved in financial services (Korea Exchange Bank, Woori Bank, and Hana Bank, etc), logistics and transportations (Hanjin Shipping, Hyundai Merchant Marine, and Korea Travel Service, etc.), and cosmetics (Laneige, Sulwhasoo, etc.), among others.

South Korean visitors to Hong Kong increased by 15.2% YoY to 259,535 in the first three months of 2011.