Korea/India: World trade patterns may be in for a shake-up. The free trade agreement between Korea and India represents only a partial market opening. But it could bring major trade growth between the complementary economies. It shows Korea has options beyond its stalled deal with the US – and that India remains open to expanding its trade.
Bilateral trade between the two countries currently totals $15.6 billion, a substantial sum but less than 1 per cent of their combined gross domestic product (GDP). The agreement is expected to increase trade by a further $3.3 billion, a fairly modest goal. It is phased in only over time and excludes most of both countries’ agricultural sectors, thus avoiding political problems but reducing its comparative advantage benefits.
Nevertheless, the agreement is potentially important. Korea, as a high wage manufacturer with excellent technological capabilities, has in the past seen its companies invest in low-wage manufacturing and assembly operations in China. That becomes increasingly uneconomical as Chinese wages rise; it also risks the Korean economy becoming a mere satellite of the much larger Chinese one.
By contrast, India offers Korea an equally large reservoir of labour at lower cost, with high skill levels in some areas. A reduction of import duties should make investments in Indian manufacturing operations more lucrative.
For India, a trade deal with Korea offers the chance to access cutting-edge technology from a partner that presents little economic threat and no conceivable strategic threat.
If the two governments foster the bilateral relationship, trade and mutual investment could grow rapidly. Initially, the principal beneficiaries are expected to be Korean auto parts manufacturers and Indian service companies, but the benefits of cooperation could soon spread far beyond those sectors.
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There are also political benefits for both sides. The deal demonstrates to the US Congress, which has held up its own Korea free trade agreement for two years, that continued stonewalling can impose economic costs, as Korean companies form alternative links elsewhere.
India shows that in spite of its large Budget deficit and somewhat anti-market economic policy, the country remains ready to open its economy further to ensure that its recent rapid growth continues.
Curried kimchi sounds like an acquired taste. But both parties may come to find it delicious.