Improvements in Korean System

Countries

MFN Tariff Rates (%)

Average Maximum

Indonesia 5.1 150.0

Malaysia 2.7 50.0

Philippines 3.8 30.0

Thailand 3.3 30.0

Singapore 0.0 0.0

Source: WTO, International Trade and Market Access Data (October 12, 2016)

3) Demand for Liberalization of Chinese Oil Market

As mentioned above, China’s current transportation diesel price system is a risk factor for stable exports of petroleum products. The control on prices by the Chinese government has long been a controversial issue in relation to China’s desire for market economy status (MES⁵¹) from the WTO, in which China participated in 2001.⁵² However, if China is given market economy status at the end of 2017, it may have a negative impact on Korea’s petroleum products exports to China.

With protracted low oil prices, the prices of transportation diesel in China have stayed at international price levels, but if oil prices increase in the future, the Chinese government may go back to its previous price restriction policy.

Therefore, in future negotiations concerning the Korea-China FTA, the Korean government should take the price system of China as a non-tariff barrier, strongly requesting that the Chinese government liberalize prices.⁵³ Also at the RCEP negotiations, China’s current restriction on prices should be made public and shared with all member states. As most of the RCEP participating countries are WTO members and retain market economy status, China’s current price system would be of common interest. Then if problems arise through multilateral discussions, the Chinese government may feel a high level of pressure at the follow-up FTA meetings.

Transportation diesel, gasoline and diesel, which are supplied in abundance from both domestic facilities and imported from China, are categorized as sensitive tracks. However, in 13 years, after tariffs are eliminated in 2030, the price competition over transportation diesel in the two countries may become fiercer. A result drop in the prices of gasoline and diesel may be beneficial to consumers, positively benefiting the Korean economy.

However, from the perspective of Korean oil refinery companies, it is likely to be detrimental under the current tariff system. As observed in Chapter 3, the tariffs on crude oil imports are different between Korea and China.

China’s crude oil imports are non-tariff, but Korea imposes 3% on the production of petroleum products for domestic use. Therefore, if China exports gasoline and diesel to Korea through tariff-free access, it may put Korean oil refinery corporations at a disadvantage in terms of unit import price. As unveiled by China’s 13th Five-Year Plan (FYP), China will focusing on lowering production costs through the restructuring of oil refinery facilities and improving quality to a high level. Thus, around 2030, there may not be much difference between the productivity and quality of oil refinery facilities in Korea and Chain. In the transportation diesel market in Korea, the most important factor will become price competitiveness, which means that the elimination of domestic crude oil tariffs ought to be pursued as soon as possible. Also, considering the government’s tax losses, additional taxes should be implemented on sales of petroleum products or existing taxes increased to substitute for lack of crude oil tariffs.

2) Reinforced Inspection on Quality of Petroleum Products

Despite the Korea-China FTA, the recent installations of the Terminal High Altitude Area Defense (THAAD⁵⁴) in Korea have prompted China to raise non-tariff barriers against Korea. Batteries of exported Korean electric cars that had international certification failed to pass the certification test in China. The certification process on Korean medical devices and cosmetics has also become more stringent. Thus, China is keeping Korean imports in check.⁵⁵ This was possible because the Korea-China FTA descriptions of non-tariff barriers have yet to be established. It is therefore critical to discuss these recent cases at the follow-up FTA meetings to break down non-tariff barriers in the future, and it is crucial to build non-tariff barriers in response to China’s unilateral measures before negotiations end.

The regulations on the quality of petroleum products should be taken into consideration as well. As China’s exports of gasoline and diesel overseas are increasing and the sulfur content limit has gone from 50ppm to 10ppm, the likelihood of penetrating the Korean market from next year is high. As the quality standard of Korea is less than 10ppm, more and more transportation fuel from China will be imported into Korea. However, Tables 5-3 and 5-5 show that some differences exist in other items, in addition to the sulfur content, with respect to the quality standards of gasoline and diesel. This makes it difficult to conclude that products exported to China from next year will completely coincide with Korean standards. However, if the products are compliant with international standards and no substantial defects are found in vehicle performance or gas emissions, the usual outcome is to allow imports to avoid confrontations in trade. Even so, the non-tariff policies recently taken by China toward Korea have created a need for the Korean government to pursue stringent regulations.

In this regard, setting up quality standards as part of a non-tariff barrier in response to China’s reinforced non- tariff barriers is a prerequisite for maintaining a reliable FTA system between the two countries.

54 Terminal High Altitude Area Defense

55 “China’s non-tariff barriers on automobile batteries; what is the Korean government doing?” Hankyung (September 2, 2016)

“China, blocking exports by raising issues,” MBC News (July 1, 2016)

Table 5-4. Comparisons of Quality Standards of Automobile Gasoline between Korea and China

Categories Korea China (China V)

Octane Value

(RON) More than 91 More than 89

Sulfur (mg/kg) Less than 10 Less than 10 Lead (g/L) Less than 0.013 Less than 0.005 Oxygen (weight%) Less than 2.3 Less than 2.7

Aromatic

(volume%) Less than 22 (19) Less than 40 Olefin (volume%) Less than 16 (19) Less than 24 Benzene (volume%) Less than 0.7 Less than 1

Note: Regarding the content of olefin, the following standard of ( ) should be applied. In this case, the content of aromatic should apply the following standard of ( ).

Source: Notice on quality standards, inspection methods, and inspection commission regarding petroleum products (July 24, 2015); The International Council on Clean Transportation, China V Gasoline and Diesel Fuel Quality Standards (January 2014)

Table 5-5. Comparisons of Quality Standards in Automobile Diesel between Korea and China

Categories Korea China (China V)

Cetane Number (Cetane Index)

More than 52 More than 51

Sulfur (mg/kg) Less than 10 Less than 10 Flash Point (℃) More than 40 More than 55 Kinematic Viscosity

40℃ (mm2/s) 1.9 - 5.5 3.0 - 8.0

Ash Content

(weight %) Less than 0.02 Less than 0.01

Source: Notice on quality standards, inspection methods, and inspection commission regarding petroleum products (July 24, 2015); The International Council on Clean Transportation, China V Gasoline and Diesel Fuel Quality Standards (January 2014)