Over the last 20 years, Korea has become one of Latin America and the Caribbean’s (LAC) most dynamic trade partners. Bilateral trade quadrupled, reaching US$43 billion in 2018, and foreign direct investment from Korea in LAC has both increased and diversified.
Korea is the Asian economy with the largest network of free trade agreements with LAC countries, with a total of eight signed agreements.
However, the opportunities for strategic alliances between LAC and Korea are far from exhausted. Trade flows are still much lower than their potential and companies have myriad business opportunities at their fingertips.
Trade between Korea and LAC revolves around just a handful of countries. In 2018, just four economies (Chile, Mexico, Brazil, and Peru) accounted for nearly 90% of total LAC exports to Korea.
Latin American exports to Korea are heavily concentrated in products from the extractive industries, which represented 60% of exports in 2017, followed by agricultural goods (24%) and industrial manufactures (16%).
Reviving trade and investment between Korea and the region through a new generation of cooperation initiatives is, therefore, a priority, according to a new IDB study, Stepping Up Cooperation: Policy Options for Latin America and Korea.
According to the report, if a set of reforms aiming to reduce trade costs is implemented, Latin American exports to Korea could grow 43% from the US$16.2 billion recorded in 2018, while Korea’s sales to LAC could increase by 63% from US$26.7 billion in 2018. The countries that could increase their exports the most are Brazil, mainly for sales in food, textiles, and agriculture, and Chile in agriculture and mining.
The study highlights three major trade costs which continue to constitute a serious obstacle to building closer ties: tariffs, transportation, and logistics.
Specifically, there are immediate opportunities for exporters from Latin America in products that are highly complementary to imports from Korea. According to a conservative estimate, the value of this market of almost 200 products is estimated at US$45 billion, but only 36% of this potential is currently being exploited. For example, Korea imports US$1 billion in gold but not from LAC, whose global gold exports are worth US$3.2 billion.
Trade agreements with Korea
Korea has an extensive network of trade agreements in force with Chile, Peru, Colombia, Costa Rica, El Salvador, Honduras, Nicaragua, and Panama. However, completing this network with agreements with other countries would help reduce the remaining tariffs and eliminate the most harmful nontariff barriers. The largest LAC economies should, therefore, fast-track negotiations toward broad-reaching free trade agreements with Korea.
These agreements are important because the tariffs that LAC faces in Korea are as high as 27% on average. Trade in agricultural goods is particularly restricted by high tariff barriers, which average almost 88% and have a major impact on Mercosur countries as they specialize in agricultural products such as soybeans, corn, cane sugar, and meat.
Transport and logistics costs
According to the Logistics Performance Index (LPI), LAC countries show significantly lower performance than Korea in all components, particularly in infrastructure and customs efficiency. High-quality transportation infrastructure and more agile customs are essential to accelerating the transit of goods and preventing higher storage costs and delays.
This suggests that investment in infrastructure and trade facilitation-oriented reforms such as implementing Single Windows for Foreign Trade are priorities if Latin America is to increase trade in Korea.
Foreign direct investment (FDI)
FDI flows increased significantly between 2000 and 2015 due to investments by Korean firms such as Kia Motors or Samsung. However, investments in LAC have been waning, and by 2018, flows of Korean FDI to LAC had fallen by 5% from 2015 levels.
Despite these challenges, the composition of FDI flows in the region has been maturing. Manufactures accounted for 27% of Korean FDI in LAC at the start of the 21st century but grew to 43% in 2015–2018.
Korea–LAC Business Summit
A fundamental pillar of economic relations between LAC countries and Korea has been development cooperation. Just as signing trade agreements has boosted economic relations over the last 20 years, a new generation of cooperation policies and initiatives could help return trade and investment flows to their initial dynamism.
In this sense, cooperation partnerships like the ones the IDB and Korea have been promoting over the last 15 years have become strategically important. Since Korea joined the IDB in 2005, it has contributed financial resources, knowledge, innovative ideas, and new approaches to tackling the development challenges the region faces.
Korea and the IDB have organized high-level meetings such as the 5th Korea–LAC Business Summit, which the IDB organized in Seoul on October 7-8, 2019, in partnership with the Korean Ministry of the Economy and Finance, the Export-Import Bank of Korea (Korea Eximbank), and the Korea Trade-Investment Promotion Agency (KOTRA).
The summit was attended by nearly 1,000 senior government officials, businessmen, and academics from Korea and Latin America, and aimed to expand and strengthen trade relations between the two parties, as well as foster a better understanding of trade and investment opportunities.