Author: Daniel Rosenblatt
On August 21, 2019, South Korea and Israel announced that they had completed the negotiation of a free trade agreement. Negotiations started in June 2016, and the agreement is Israel's first with an Asian partner. Once the agreement is signed, it will undergo ratification processes in both South Korea and Israel before entering into force.
In Israel, the Ministry of Economy and Industry's Foreign Trade Administration leads FTA negotiations with support from other governmental ministries and public bodies that have unique interests, know-how, and experience in fields relevant to the agreement's content. These include the Israel Customs Administration, Bank of Israel, Ministry of Justice, Ministry of Foreign Affairs, Ministry of Finance, Ministry of Interior, and others. Engaging in FTAs is an import part of Israel’s trade policy. Israel employs trade partnerships as a tool for strengthening its own economy while deepening integration with other complementary economies around the world (identified through feasibility studies). Full-fledged FTAs, as the South Korea agreement is expected to be, can foster a positive climate for investment, ease the flow of goods (and natural resources) between state parties, and support the provision of cross-border services. To date, Israel has concluded a number of FTAs, including with the US, UK, Mexico, Colombia, Canada, and Panama, and currently is negotiating many others.
Israel and South Korea are natural trade partners – a point reflected in the approximately $2.5 billion of trade between the two countries in 2018. This largely is due to the fact that both countries promote international trade and free markets, and because their economies are complementary in many respects:
- South Korea has a forward thinking and tech-savvy population, strong corporate infrastructure, and is a center for technological and industrial production, which can serve Israeli companies as both a testbed market for new concepts and as a target for offering added value technology and services.
- South Korea is home to large multinational corporations that, by nature of their size, can lack the entrepreneurial spirit and creative mentality found in start-ups, while Israel is world-renowned for its startup culture and the outside-of-the-box thinking that it cultivates.
- South Korea is a gateway to many Asian markets, which currently are being targeted by Israeli companies.
- South Korea has high youth unemployment rates, even though the country’s youth are educated, skilled, and tech-savvy. In this regard, Israel can be beneficial in at least two ways: First, it has a perpetual need for educated and skilled labor, particularly in the high-tech sector, which can be addressed within the framework of an FTA (e.g., through a visa waiver program or, more generally, a chapter on the movement of natural persons for the purpose of employment). Second, innovation, youth entrepreneurship, and the willingness “to fail” and try again are part of Israel’s zeitgeist – a culture that South Korea can learn from and try to develop in its own territory.
With respect to trade in goods, the Israeli Ministry of Economy and Industry has published that, when the FTA goes into effect, customs duties on more than 95% of Israeli exports to South Korea will be eliminated. Goods that will enjoy such preferential treatment will include electrical machinery and equipment, mechanical machinery and appliances, fertilizers, medical equipment, cosmetics, plastic products, metals, wine, and fruit juices. Similarly, South Korean goods will enjoy eliminated duties in Israel as well, including cars and spare parts, refrigerators, medical equipment, electronics, toys and games, chemicals, and plastic products. Notably, according to reports, goods produced in the Golan Heights, West Bank, and East Jerusalem will not enjoy preferential treatment under the FTA, however, businesses negatively impacted by this arrangement will be indemnified by the Israeli government.
Furthermore, the FTA is expected to be wider than many of Israel's existing agreements and include chapters on the protection of investments and trade in services. Wider FTAs are trending in Israel and – if previous FTAs serve as an indication for what the future may bring (e.g. FTAs concluded with Colombia and Panama) – we can expect this FTA to include additional chapters as well, such as on sanitary and phytosanitary measures, technical barriers to trade, trade remedies, movement of natural persons, e-commerce, and others.
The benefits of this FTA surely will reach most parts of both the South Korean and Israeli economies. In South Korea, primary beneficiaries will include large technology companies (such as in the health, fintech, and smart mobility sectors), general industry, and the country’s educated and skilled youth. In Israel, the FTA will be enjoyed by the start-up sector through increased private-sector direct investment, the possibility of an expanded skilled workforce, procurement of added value technology, and the opening of a new testbed market. Israel’s general population likely will feel the positive effects of the FTA as well, as the cost of consumer goods falls with the elimination of import duties on cell phones, tablets, air conditioners, refrigerators, cars, and other key consumer goods.
In summary, this FTA is poised to bolster both the South Korean and Israeli economies, help lower the cost of living in each country, and expand commercial opportunities for South Koreans and Israelis in their counterpart’s market and, ultimately, around the world.