China-South Korea FTA: New Opportunity for Shandong


CHINA and South Korea signed a free trade agreement (FTA) on February 25, 2015, marking the conclusion of negotiations on an FTA with the largest trade volume and the most comprehensive content. Shandong Province and South Korea are separated by a narrow stretch of sea; with its deep cooperation with Korea, favorable infrastructure and talent advantages, the province has bright prospects.


Close Neighbor

As Zhang Hui, Mayor of Weihai, once said, “A crow cawing in Weihai can be heard in Inchon.” Shandong and South Korea are almost at the same latitude. Only 90 nautical miles separate the two at their closest point. 

Thanks to such geographical advantages, China and South Korea have formed not only increasing economic and trade contacts, but also a harmonious industrial balance. Since establishing diplomatic relations in 1992, the two countries have witnessed comprehensive and mushrooming growth. Bilateral trade reached US $274.2 billion in 2013, equal to the combined trade volumes of South Korea-U.S., South Korea-Japan and South Korea-EU that year, and 55 fold that of the two countries’ 1992 figure. Central to this fruitfulness is the exchange and cooperation between Shandong Province and South Korea.

Shandong was China’s first province to establish economic and trade contact with South Korea. As a result, almost half of South Korea’s investment in China is in Shandong. The trade between Shandong and South Korea accounts for more than 10 percent of the two countries’ total trade. Statistics from Qingdao Customs show that, in 2014, the value of Shandong’s total exports-imports to South Korea was RMB 201.68 billion, a year-on-year growth of 10.4 percent. South Korea has become Shandong’s second largest source of foreign investment.

By the end of 2013, the province had more than 4,700 Korea-invested enterprises. Some of South Korea’s largest enterprises, such as Samsung and LG, have made strategic investments in Shandong. More than 90 percent are trading in three cities, Qingdao, Yantai, and Weihai, and 85 percent operate in the secondary industry, such as communication and electronics. The two sides’ cooperation has gradually advanced from simple trade cooperation to high-end strategic and technical cooperation.  

In addition, cultural and educational exchanges between the two countries have become increasingly dynamic. Among their 154 pairs of sister cities, 21 involve Shandong. Based on its unique regional advantages, fine investment climate and convenient transport, the province has become a “promised land” to South Koreans.

According to Zhang Hui, each week 30 passenger ferries operate between Weihai and cities in South Korea. It only takes 45 minutes to fly from Weihai to Inchon. Business from South Korea has played an important role in Weihai’s development, and Korean culture has become a dominant feature of the city. It is the same with neighboring Qingdao and Yantai. An estimated 100,000 Koreans live and work in Shandong, and each year the province receives about one million South Korean tourists.


Bridgehead of China-South

Korea Trade

As the bridgehead of trade to South Korea, Qingdao established a bonded port area in 2008. This was the first step towards making the city the pilot China-South Korea FTA. One year later, construction of the Yantai Bonded Port Area was approved, making Shandong China’s second province owning two bonded ports, after Guangdong Province. Shandong’s openness ranks one of the top nationwide.

Moreover, Weihai, a city close to Yantai, has attracted considerable investment from Korean companies. An industrial cluster of computer peripheral devices with Korean enterprises at the core has grown to a considerable size in the city.

The province fought fierce competition to become the forerunner in certain sectors during negotiations for the China-South Korea FTA. In 2013, Shandong put forward a framework plan to build a China-Japan-South Korea economic cooperation demonstration plot on the Shandong Peninsula. The construction was finally carried out in seven local cities, namely Qingdao, Dongying, Yantai, Weifang, Weihai, Rizhao, and Binzhou.

On June 25, 2014, the National Development and Reform Commission released a general blueprint for the Qingdao West Coast Economic New District, which vows to accelerate cross-border settlement of domestic currency (RMB and KRW). On August 15, 2014, construction started on the China-South Korea Trade Cooperation Zone north of Qingdao West Coast Economic New District, putting the city one step ahead in boosting China-South Korea trade.

According to Zhang Jianguo, deputy director of the management committee of the Qingdao International Economic Cooperation Zone, the Qingdao China-South Korea Trade Cooperation Zone will highlight trade facilitation and pioneer such sectors as mutual recognition of AEO (Authorized Economic Operator) certification, financial cooperation, service trade, service outsourcing, and intellectual property protection, building it into a portal for Korean consumer goods to the Chinese market.

As the provincial capital, Jinan is unwilling to lag behind. In June 2014, an implementation plan to build a pilot demonstration area of China-Japan-South Korea industrial cooperation in Jinan was unveiled. It will cover housing industrialization cooperation, cutting-edge industry cooperation, and bonded transactions.


Deep Integration Anticipated

With its geographic advantages and long-term cooperation ties with South Korea, Shandong is at a vantage point of the China-South Korea FTA. 

Inside the Weihai Economic and Technological Development Zone is a distribution center for Korean food and commodities, the first of its kind in China. It has attracted 76 trade companies, with an import volume of more than RMB 100 million there. According to their FTA, within 20 years, China will eliminate tariffs on 91 percent of import items from South Korea, which account for 85 percent of the import volume. In South Korea the figures for tariff elimination are an anticipated 92 percent and 91 percent, respectively.   

Furthermore, qualitative leaps are also expected in people-to-people exchanges, transportation, and cultural exchanges. For enterprises, free flow of production factors will force business transformation and industrial upgrading, adding to Shandong’s new advantages in an open economy. Bearing in mind the substantial drop in prices of Korean products, industry integration is Shandong’s best bet.

“Along with the deep integration with the Korea manufacturing industry, both sides will see an urgent need for producer services. As the customs frontier of the China-South Korea FTA, Shandong is the foothold of Korean commodities in China,” said Sun Jianbo, deputy director-general of the Department of Commerce of Shandong Provincial Government. According to Sun, as regards forming a strategic emerging industrial system, improving the business environment and acting according to international conventions, the FTA has furnished the province with hard-won opportunities, helping local enterprises to rebuild and upgrade their role in the global value chain.

So how can Shandong take advantage of this new opportunity? According to Guo Shuqing, governor of Shandong Province, this year the province will jump on the Belt and Road Initiatives bandwagon as well as the China-South Korea FTA and the China-Australia FTA, so constantly improving its capacity for international competition and cooperation. The province will propel cooperative ties with South Korea in industrial development, industrial park establishment, and investment.

So far, Weihai is the only Chinese city mentioned in the China-South Korea FTA. According to Mayor Zhang Hui, delivery of the FTA, especially the partnership with Inchon Free Economic Zone, has afforded Weihai a significant development opportunity. “This ‘test field’ is both an opportunity and a challenge to us. We will make bold explorations and innovations in various aspects, and make great efforts to succeed,” said Zhang.

For future development, Weihai will strengthen contacts with Inchon and explore new cooperative mechanisms. By conducting a number of pilot projects and introducing policy incentives, it will satisfy the need of both countries’ companies for greater openness. The two cities will quicken the building of E-ports, improve clearance facilitation and the operating mechanism of joint land and water transportation to increase interconnectivity between China and South Korea. In addition, Weihai will explore and make innovations to the opening-up of such services and investments as  e-commerce, service outsourcing, tourism, culture, creativity, health maintenance, and medical cosmetology.  

As major trading cities with South Korea, Qingdao and Yantai will also boost their own economic and trade cooperation and industrial transformation advantages, based on the opportunities the China-South Korea FTA offers.