WT/TPR/S/137 Trade Policy Review 
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IV. TRADE POLICIES BY SECTOR 
(1) INTRODUCTION  
1. Manufacturing accounted for a substantial, albeit declining, 26.6% share of Korea's GDP in 
2003.  The sector is heavily outward oriented, gene rating almost all of Kore a's merchandise exports.  
Information and communications equipment (mobi le phones, PC equipment, and semi-conductors) 
comprise Korea's single largest export category. 
2. Korea is a dualistic economy when it comes to protection.  Relatively low manufacturing 
protection, except for a few pockets of moderate pr otection (e.g. textiles, clothing, and footwear), 
contrasts with high levels of protection and low mark et orientation in agriculture, the most distorted 
sector.  Korea's net agricultural support exceeds the sector's GDP contribution (3.6% in 2003), and is 
among the highest in the OECD.  The average Produ cer Support Estimate (PSE) for agriculture was 
60% in 2003 (equivalent to add itional farm incomes of W 20.2 trillion), and was highest for rice 
(74%) and oilseeds (89%).  Most assistance invol ves market price support from trade barriers and 
price stabilization schemes.  These substantially di stort agricultural trade and production, and force 
Korean consumers to pay much higher prices (on average well over double world levels in 2002, or 
three times higher for rice).  MFN tariffs averaged  52.2% on agricultural products in 2004 (more than 
seven times higher than on non-agricultural goods). 
3. Agricultural protection also undermines Korea' s economic efficiency and tends to penalize 
efficient exporters, including manufacturers.  Alth ough self-sufficiency goals and other "non-trade" 
concerns underpin agricultural protection,  the resulting higher food prices are borne 
disproportionately by poor consumers.  The measure s used are an economically inefficient and costly 
means of achieving food security, and have contri buted to surplus produc tion of key commodities, 
like rice and dairy products. 
4. Services accounted for 69.7% of GDP in 2003 (u p from 65.3% in 2000).  Korea is continuing 
to de-regulate and privatize the key energy markets of  natural gas and non-nuclear electricity, albeit 
slowly.  State monopolies are being relaxed, and majority state-owned enterprises (Korea Gas 
Corporation (KOGAS) and Korea Electric Power Corporation (KEPCO)) structurally unbundled to 
facilitate further privatization and market orie ntation, based on third-party access and sectoral 
regulation to safeguard competition.  However, dela ys persist, and final a rrangements, including the 
regulators' independence, remain unclear as plans change and many crucial details remain obscure.  
Restrictive caps still apply to foreign equity (30% for KOGAS, 40% for KEPCO, 30% for KEPCO's 
five subsidiary power generation companies, and 50% for power distribution and transmission 
generally).  Prices are regulated based on rate of  return (on assets) criteria, which encourages 
inefficiency.  Significant cross subsidies betwee n users, although being reduced, also create 
inefficiencies.  
5. A major policy priority and achievement has been  the rehabilitation of the financial sector.  It 
has been considerably restructur ed, especially in banking, where policy reforms have been focused 
since the Asian financial crisis.  Government-led financial restructuring, involving public funds of 
W 161 trillion (one quarter of current GDP) has re- capitalized institutions, mainly banks, and cleaned 
up loan portfolios.  Non-performing loans (NPLs) ha ve fallen in the sector, from 10.4% at end 2000 to 
3.6% at end 2003.  However, while relatively low for banks (under 3%), NPLs are much higher for 
non-banks (averaging 6.4% at end 2003), reflecting significant but une ven and incomplete progress in 
non-bank restructuring.  Privatization is well a dvanced, especially of banks, where state ownership 
has fallen to about 20%, almost pre-crisis levels  (compared with 60% at end 1998).  Full foreign 
equity is allowed in banks, subject to special perm ission;  it has risen, on average, from under 10% at Republic of Korea WT/TPR/S/137 
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end 1998 to 30% at end-Septembe r 2003.  The financial sector has returned to profitability, although 
recent exposures to household credit on real estate a nd credit cards have reduced it, and required the 
Financial Supervisory Commission to strengthen pruden tial measures further.  Further restructuring of 
the non-bank sector, notably investment trust companies and credit card companies, would strengthen 
the financial sector. 
6. The telecommunications market has been de-re gulated and fully privatized;  the State's 
remaining share in Korea Telecom (KT) was sold in May 2002.  Foreign equity is unrestricted in most 
services, but is capped at 49% for KT and other basic telecommunications providers.  Weaknesses in the regulatory regime have hampered effective competition in basic telecommunications.  These 
weaknesses include:  the apparent non-independence of the regulator (the Korea Communications 
Commission);  inappropriate use of the fully distributed cost method (FDC) for setting access prices;  and requiring approval instead of a price cap re gime to regulate key prices, including in the 
competitive mobile market.  The Government is a ddressing these issues, and plans, for example, to 
introduce a marginal cost-based m easure for access pricing (long run average incremental cost, or 
LRAIC) in 2004.  Licensing restrictions for new en trants in basic telecommunications could perhaps 
be further eased, including introduction of a class licensing system. 
7. Korea maintains foreign-content quotas on terrest rial and cable television, as well as annual 
screen quotas on cinema movies.  Terrestrial radio and television broadcasting is closed to foreign 
investment, which is capped at 49% for cable television and 33% for satellite broadcasters. 
8. Greater private sector involvement in transport is envisaged, especially in port development.  
Legislation to restructure the highly-indebted a nd inefficient state-owned monopoly (Korail) was 
passed in 2003, and its services unbundled.  Based on this legislation, the Korea Railway Network 
Authority was established in 2004 to handle construc tion activities, and train operations are to be 
transferred to the Korea Rail Corporation in January 2005.   An independent Civil Aviation Safety 
Authority was established in 2002 to st rengthen aviation safety and security.   
(2) A
GRICULTURE  
(i) Overview 
9. Despite receiving relatively high levels of pr otection, agriculture’s GDP share has continued 
to fall.  The share (including forestry and fishing) declined from 4.9% in 2000 to 3.6% in 2003 (Table IV.1);  it also accounted for a declining sh are of total employment (9% in 2003).  The sector's 
labour productivity is little more than one third of the national average.  Agriculture's low productivity 
reflects several factors, including Korea's small-scale farming and lack of capital investment, which 
hampers its overall efficiency and productivity.   
Table IV.1 
Share of GDP by sector, 2000-03 
(Per cent, W billion) 
 Share in GDPa 
 2000 2001 2002 2003b 
Agriculture, forestry and fishing 4.9 4.5 4.1 3.6 
Non-agriculture 95.1 95.5 95.9 96.6 
Mining and quarrying 0.4 0.4 0.3 0.3 
Manufacturing 29.4 27.6 26.9 26.6 
   Table IV.1 (cont'd)WT/TPR/S/137 Trade Policy Review 
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 Share in GDPa 
 2000 2001 2002 2003b 
Services 65.3 67.5 68.7 69.7 
Construction 8.4 8.6 8.6 9.6 
Electricity, gas, and water 2.6 2.7 2.6 2.7 
Wholesale and retail trade, restaurants and hotels 10.8 10.8 10.4 9.8 
Transport, storage, and communications 7.0 7.5 7.5 7.5 
Financial intermediation 6.9 7.7 9.1 9.1 
Real estate, renting and busin ess activities 13. 2 12.7 12.8 12.8 
Public administration and de fence; compulsory social 
security 5.7 5.9 5.9 6.1 
Education 5.0 5.2 5.4 5.6 
Health and social work 2.4 3.0 2.9 3.0 
Other services 3.3 3.4 3.5 3.5 
a At current basic prices (i.e. excluding product taxes a nd subsidies).  Figures may exceed 100% due to rounding.   
b Preliminary.   
Source:  Information provided by the Korean authorities.  
(ii) Policy developments 
10. Agricultural liberalization is very sensitive politi cally in Korea.  Protection  is centred on self 
sufficiency policies aimed at addressing food secur ity concerns, especially for rice, and other "non-
trade" objectives..1  Korea believes that any multilateral agricu ltural liberalization must be sufficiently 
gradual to take account of the sector's "multifunc tionality".  Key agricultural commodities of rice, 
apples and pears were permanently excluded from the Korea–Chile free-trade agreement (KCFTA), 
and tariff reductions deferred on many food items until after the cu rrent multilateral negotiations.  
However, these policies reduce Korea's economic ef ficiency and penalise Korean, especially poor, 
consumers through higher prices. 
11. Agricultural policy is directed towards achievi ng balanced national development.  Direct 
payments are being expanded and farm income support strengthened.2  Agricultural investment and 
improved technology are also sought, to enhan ce productivity and thus competitiveness, and to 
provide consumers with safer and higher quality food .  A key policy priority is to reduce high farm 
debt (W 27.6 trillion in 2002), which has escalated on average to well over 80% of farm income.  Farm debt is being restructured at lower interest  rates for poor farmers (Act on Special Measures for 
Debt Reduction of Farmers and Fishermen of 2001).  
12. According to the authorities, Korea has full y implemented its multilateral commitments on 
agriculture, and provides assistance well within WTO obligations.  N onetheless, Korean agriculture 
receives "high support" and has "very low levels" of market orientation.
3  Producer support (as 
measured by the OECD's percentage PSE) was 60% in 2003 (down from 68% in 2002);  almost 
double the OECD average (32%).  The decline was due mainly to steep rises in world prices for 
several commodities.  Support levels varied substa ntially, from 19% for eggs to 74% for rice and 89% 
                                                      
1 Self-sufficiency ratios on crops averaged 27% in 2003, down from 30.4%.  They varied widely 
between commodities in 2003, ranging from 99% for rice and potatoes, 46% for barley, 7% for soybeans, 0.8% 
for corn, 0.1% for wheat, and 11.8% for other crops.   
2 The Government's long-term plan is to raise the share of direct payments to 20% of the agricultural 
budget by 2013.  The share is projected  to increase in 2004 from 7% to 8.4%. 
3 OECD (2003b), p. 173, and OECD, OECD (2004b). Republic of Korea WT/TPR/S/137 
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for oilseeds;  disparities have generally widened (Tab le IV.2).  Korea's total agricultural support (net 
of specific sectoral budget receipts) of W 24.3 tr illion in 2003 as a share of GDP (3.9%) was among 
the highest of OECD members.  Over 90% of assi stance is market price support (W 18.5 trillion in 
2003), paid for by consumers paying higher prices.  In 2003, Korean agricultural commodity prices 
averaged two and a half times world levels (consum er nominal assistance coefficient, NAC, of 2.42), 
and total transfers from consumers (including on imports) amounted to W 24.2 trillion.  Producers' 
gross farm receipts, on average, were more th an doubled (equivalent to W 20.2 trillion additional 
income) by support (producer NAC of 2.53).  Such high levels of support within its WTO 
commitments suggests that multilateral disciplines ha ve had little impact on reforming Korea's farm 
policies, and considerable scope exists to increase assistance without exceeding commitments. 
Table IV.2 
Agricultural support by commodity, 1986-88 and 2000-03 
(W billion and per cent) 
 1986-88 2001-03 2001 2002 2003a 
Grains other than wheat and maize       
PSE (won billion) 222 218 272 214 170 
Percentage PSE 73 77 77 77 77 
Producer NAC 3.71 4.37 4.37 4.42 4.32 
Percentage CSE -71 -66 -71 -67 -59 
Consumer NAC 3.42 2.99 3.43 3.07 2.46 
Rice       
PSE (won billion) 4, 541 7,985 9,002 8,094 6,860 
Percentage PSE 82 78 81 80 74 
Producer NAC 5.62 4.68 5.16 5.07 3.82 
Percentage CSE  -82 -77 -80 -79 -72 
Consumer NAC 5.58 4.43 4.96 4.81 3.52 
Oilseeds       
PSE (won billion) 157 253 244 260 255 
Percentage PSE 79 89 88 89 89 
Producer NAC 4.78 8.76 8.31 9.25 8.73 
Percentage CSE -42 -39 -42 -40 -34 
Consumer NAC 1.72 1.64 1.73 1.67 1.53 
Milk       
PSE (won billion) 328 1,014 964 1,114 965 
Percentage PSE 73 68 66 70 68 
Producer NAC 3.85 3.13 2.94 3.35 3.11 
Percentage CSE -73 -67 -65 -69 -66 
Consumer NAC 3.77 3.03 2.86 3.26 2.97 
Beef and veal       
PSE (won billion) 508 1,451 1,384 1,536 1,433 
Percentage PSE 54 69 65 73 68 
Producer NAC 2.26 3.24 2.88 3.71 3.14 
Percentage CSE -52 -67 -64 -72 -66 
Consumer NAC 2.17 3.09 2.75 3.54 2.98 
Pigmeat       
PSE (won billion) 311 789 326 1,351 692 
Percentage PSE 33 32 14 55 26 
Producer NAC 1.50 1.57 1.17 2.21 1.35 
Percentage CSE -32 -30 -12 -54 -24 
Consumer NAC 1.50 1.54 1.14 2.17 1.32 
Poultry       
PSE (won billion) 138 292 306 331 240 
Percentage PSE 50 37 37 41 32 
Producer NAC 2.14 1.58 1.58 1.70 1.47 
Percentage CSE -49 -34 -34 -38 -29 
Consumer NAC 2.09 1.51 1.51 1.62 1.41 
 Table IV.2 (cont'd)WT/TPR/S/137 Trade Policy Review 
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 1986-88 2001-03 2001 2002 2003a 
Eggs       
PSE (won billion) 2 106 134 41 144 
Percentage PSE 1 13 16 6 19 
Producer NAC 1.01 1.16 1.19 1.06 1.23 
Percentage CSE 11 -11 -14 -4 -17 
Consumer NAC 0.92 1.13 1.16 1.04 1.20 
Other commodities       
PSE (won billion) 3, 468 9,355 8,530 10,051 9,484 
Percentage PSE 71 62 59 66 59 
Producer NAC 3.93 .. .. .. .. 
Percentage CSE -63 -60 -57 -64 -58 
Consumer NAC 2.74 2.49 2.30 2.80 2.36 
All commodities       
PSE (won billion) 9, 675 21,465 21,162 22,990 20,242 
Percentage PSE 70 64 63 68 60 
Producer NAC 3.42 2.79 2.69 3.16 2.53 
Percentage CSE -66 -62 -59 -67 -59 
Consumer NAC 2.94 2.63 2.47 3.00 2.42 
.. Not available. 
a Provisional. 
Note: NAC – Nominal Assistance Coefficient;  PSE – Producer S upport Estimate;  CSE – Consumer Support Estimate.  A negative 
percentage CSE indicates that the domes tic price exceeded the world price. 
Source:  OECD (2004), OECD Agricultural Poli cies 2004; At a Glance , Working Party on Agricultural Policies and 
Markets, Document AGR/CA/ APM/(2004)2/FINAL, 3 June 2004 , Table III.13, pp. 126-7.   
13. Market price support, mainly for rice, is im plemented through domes tic price stabilization 
schemes, including government purchases and public st ockholding, supported by trade barriers.  Rice, 
the staple crop, benefits mainly from an quantita tive import restriction.  High tariffs, including 
alternate duties and possibly prohibitive out-of-quota ra tes, also apply to a many other commodities.  
At 52.2% (including out-of-quota rates and ad valorem  parts of alternate duties) in 2004, the average 
applied MFN tariff on agricultural products (WTO de finition, which includes processed food) is much 
higher than 6.7% for non-agricultural imports.  Mo reover, the average fill ratio of tariff quotas is 
about 70%;  tariff quotas, are either utilized, administ ered or allocated by state-trading entities or 
industry associations, such as the Agricultural and Fishery Marketing Corporation (AFMC) and the 
Jeju Citrus Grower's Agriculture Cooperative (CCGAC ).  This raises potential conflicts between their 
importing interests and those of their farm constituents. 
14. Publicly funded purchase and stock-holding sch emes support agriculture by stabilizing prices 
at higher levels.  Such schemes have been operate d either directly by the Government, such as by 
MAF on rice and AFMC mainly on red peppers, garlic, onions and anchovies, or by several 
cooperatives, especially on crops such as maize, barley and soyb eans, run by the NACF.  The 
Government froze the purchase price for rice, barley , maize and soybeans in 2002 and, according to 
the authorities, in 2003.   Rice stocks, which had risen from 19.1% of consumption in 2001 to 28.1% 
in 2002, decreased to 21.7% (1.1 million tonnes) in 2003.4   
15. The significance of direct product-specific pa yments relative to consumer-funded market 
price support increased, from 1% of producer sup port in 1986-88 to about  9% in 2002.  These 
payments amounted to W 1.8 trillion in 2003 (W 1.2 trillion in 2001);  total government payments, 
including provision of general support services,  amounted to W 5.6 trillion in 2003 (up from 
                                                      
4 Per capita annual rice consumption has declined almost continually, from 107 kg. in 1995 to 85.6 kg. 
in 2003.   Republic of Korea WT/TPR/S/137 
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W 4.6 trillion in 2001) (Table IV.3).  Direct pa yments, if sufficiently de-linked from production, are 
far less distorting than market price support, wh ich being output-based, distort trade and production 
most by contributing to over-production.5  Korea has no output-based direct payment schemes per se, 
but instead makes such payments based on overall fa rming income, area planted or animal numbers, 
and input use or constraints.  Nevertheless, wh ile likely to be less distorting than output-based 
assistance, such subsidies still stimulate production an d input use, thereby distorting agricultural trade 
with potentially adverse effects on the environmen t, even though accompanied by new schemes to 
help reduce these harmful effects.  Direct payments  based on area, input use and overall farm income 
each accounted for 3% of Korea's PSE in 2003;  al most all area payments are contingent on having 
environmentally-friendly farming practices.6  Such schemes include Direct Payments for 
Environmentally Friendly Farming for reduced fertilizer and pesticide use.7  Government-provided 
general farm services  include mainly infrast ructure, public stockholding, and research and 
development.   
Table IV.3 
Direct payments to agriculture, 1986-88 and 2001-03 
(W billion) 
Type of payment 1986-88 2001-03 2001 2002 2003a 
Specific      
Based on output 0 0 0 0 0 
Based on area planted/animal numbers 0 424 260 458 555 
Based on historical entitlements 0 0 0 0 0 
Based on input use 69 564 538 621 534 
Based on input constraints 0 47 18 21 103 
Based on overall farming income 28 480 432 407 600 
Total 97 1,515 1,248 1,507 1,792 
General services      
Research and development 52 362 272 420 393 
Agriculture schools 5 51 48 51 54 
Inspection services 21 123 117 120 131 
Infrastructure 374 2,307 2,287 2,192 2,441 
Marketing and promotion 0 33 31 40 29 
Public stockholding 394 654 557 676 730 
Total 845 3,530 3,313 3,498 3,779 
TOTAL  942 5,045 4,561 5,005 5,571 
a Provisional. 
Source:  OECD (2004), OECD Agricultural Policies 2004:  At a Glance , Document AGR/CA/APM(2004)2/FINAL, 
3 June 2004, p. 68.  
16. The MAF budget was increased by 6.5% in 2003 to  W 8.7 trillion (7.1% of the Government's 
total budget).  A ten-year "blueprint" for developing  agriculture was finalized in late 2003, aimed at 
gradually reducing direct price support and introducing or expandi ng existing "green box" measures 
(e.g. public stockholding for food security purpo ses, decoupled income support and structural 
adjustment assistance provided through producer retirement programmes).  It plans to raise total 
agricultural investment to W 119 trillion to boos t rural farm and non-farm incomes, and to 
compensate farmers for reduced protection.8 
                                                      
5 Output-based assistance measures are also relativ ely ineffective in transf erring income to poor 
farmers or in achieving environmental objectives. 
6 OECD (2004b), p.66. 
7 The Government plans to support a rise in environmentally friendly production to 5% of total output 
by 2005 (2.7% in 2001) through the introduction of several policy measures.     
8 KOIS, 12 November 2003. WT/TPR/S/137 Trade Policy Review 
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17. Farmland ownership was deregulated from 2003 (Farmland Act, 2002), including removal of 
the five-hectare limit outside of the Farming Prom otion Area (which accounts for almost half of all 
arable land).  It also allowed agricultural corpor ations to own farmland.  Foreigners, regardless of 
residence status, may own farm land (excluding rice and barley growing land) provided, as for 
nationals, they are directly involved in farming. 
(iii) Selected activities 
(a) Rice 
18. Rice is heavily assisted;  the domestic price was well over three times world levels in 2003 
(consumer NAC of 3.52).  The Government's current  rice policy was released in April 2002.  Core 
goals included reducing national production to below 5.2 million tonnes annually, cultivation of 
alternative crops, development of high quality rice,  and encouraging greater rice consumption.   
19. Policy measures are directed at redressing the over-supply by managing production more 
efficiently and improving rice quality.  Stocks rose by about 50% during 2000-02, but declined by 
almost 25% in 2003.  The goal is to restore demand-and-supply balan ce by 2005.  Rice area cultivated 
was targeted to fall by 5% in 2003 to 1 million h ectares.  About one third of rice farms are below 
0.5 hectares and only about 4% exceed  three hectares.  The age structur e of farmers continues to rise; 
56% are over 60 years old.  Efforts to raise rice  quality include setting a higher price band for better 
quality rice (W 4,500/kg. in 2003 compared with a standard price of W 2,300/kg.), distributing improved seed varieties, and enhanced processing a nd marketing using Rice Processing Complexes.   
20. A set aside programme was introduced in 2002, covering 27,500 hectares in 2003 (budgeted 
cost of W 81 billion).  Farmers were paid W 3 milli on/hectare for setting aside paddy fields.  A direct 
payment scheme for rice income stabilization was im plemented in 2002.  Farmers are paid 80% of 
revenue losses when the price falls below a base price (set as the five-year average market price) from 
a predominantly government-financed fund.
9  The authorities indicate that no payments were made in 
2003 since the rice price remained above the base level;  the scheme's budgete d allocation for 2004 is 
W 95.5 billion.   Direct income support for paddy fields continued in 2003, at an estimated cost of 
W 405 billion (W 394 billion in 2002).  Minimum basi c annual grants are payable to farmers, subject 
to meeting certain practices, including on envir onmental conservation;  farmers who do not meet 
environmental standards receive lower subsidies.  
21. The quantitative restriction on rice imports w as set at 205,228 tonnes of milled rice in 2004 
(179,575 tonnes in 2003).  Imports are subject to a 5% tariff.  Korea has met its multilateral quota 
commitments;   MAF exclusively controls rice imports for use by food processors.  According to the 
authorities,  Korea has imposed no mark-ups on imported rice.  It is currently negotiating with WTO 
Members post-2004 trade restrictions for rice (Chapter  II).  Rice (and barley) are closed to foreign 
direct investment.  
(b) Beef 
22. The beef tariff quotas were replaced with a ta riff-only regime from 2001.  Beef imports attract 
a tariff of 40% in 2004 (41.2% in 2001).  Despite  rising consumption, prod uction fell by about one-
third during 2000-03.  The Calf Breeding Stabiliza tion Scheme, introduced in 2001,  assists beef 
producers.  Some 90% of cattle farms particip ate, covering almost 600,000 head.  The scheme 
operated a stabilization price of W 1.2 million/calf and deficiency payments of up to W 250,000 per 
calf in 2003.  The authorities indicate that no pa yments were made in 2003 since the calf price 
                                                      
9 Participating rice farmers pay 0.5% of the base price for their contracted production. Republic of Korea WT/TPR/S/137 
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remained above the base price.  Despite the remova l of tariff quotas, beef assistance remains high 
(PSE of 68% in 2003).  Foreign direct investment of less than 50% is permitted (since March 2001) in 
cattle raising and meat wholesale. 
23. Measures costing W 2.4 trillion by 2010 were impl emented after beef liberalization, aimed at 
improving herd quality and increasi ng cattle numbers to 2.25 million.10  Cattle imports are more 
competitive, costing W 1.66 million per head (includi ng customs and quarantine costs) compared with 
W 2.6 million for a domestic animal. 
(c) Dairy 
24. Dairy production is heavily assisted (PSE of 68% in 2003).  Tariff quotas restrict imports:  
relatively high in-quota tariff rates of 20% or 40%  apply to dairy products, with much higher out-of-
quota rates, of 49.5%, 89% or 176%.   
25. Surplus milk rose in line with production, from 8% of production in 2000 to 12% in 2002.  
Production, and stocks, however, fell by 7% and 35% r espectively, in 2003, reducing stocks to 9% of 
production.  Since 2002, the privately owned Dairy Promotion Institution has purchased surplus milk 
from farmers under a graded price system aimed at bala ncing supply and demand at stable prices.  It 
sells milk to cheese and other processors through ope n bidding or forward cont racts.  Reform plans 
include the possible introduction of planning produc tion quotas and gradual price decreases for above-
quota production to achieve international pri ces by 2006, and to reduce annual production by 
150,000 tonnes.11  Affected farmers are to be compensated. 
(d) Other 
26. The Government plans to extend compensation payments to non-competitive fruit growers 
adversely affected by the free-trade agreement w ith Chile.  MFN tariffs of 45% on Chilean grapes 
imported during Korea's off-season (1 November to 30 April) are to be  removed progressively over 
ten years;  in 2004 the rate is 41.4%.  Details of the compensation scheme are still to be determined.  
The total allocation for compensation from 2004 to 2010 was raised from W 800 billion to 
W 1,200 billion.  
27. The Government announced in 2001 that it woul d invest W 700 billion in the agri-fishery 
sector to strengthen competitiveness and improve incomes.  Measures in cluded an increase in 
agricultural export estates from 15 to 144 to develop e xports of kimchi, ginseng, flowers, pork, and 
chicken, and development of a W 100 billion agri cultural investment fund by 2003 to develop bio-
foodstuffs and foster venture capital in agriculture.  No meaningful working plans have been 
established to date, and investment under the venture capital fund was W 10 billion in 2002. 
28. The tobacco industry was de-regulated in 2001 when the monopoly on importation and sale of 
tobacco products held by the state-owned entity,  the Korea Tobacco and Ginseng Company (KT&G), 
was abolished.  Foreign equity limits in KT&G, which increased from 25% to 35% in 2001 and to 
49% in 2002, were abolished in December 2002, along with the maximum individual shareholding 
limit of 7%.  Tariffs of 10%, applied to tobacco prod ucts in July 2001, rose in three equal increases to 
40% in July 2004.  Imported tobacco leaf is du tiable at 20%.  The Government established the 
Tobacco Growers' Fund to assist tobacco farmers to adjust to the deregulated market (Tobacco 
Business Act, 2001);  it is financed by a levy of W 10 per packet on the sale of cigarettes. 
                                                      
10 KOIS, 23 April 2001. 
11 MAF (undated). WT/TPR/S/137 Trade Policy Review 
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(3) FISHING  
29. In 2003, the total value of fish caught was W 4.8 billion.  About 50% is caught in adjacent 
waters and 22% in distant waters.  Korea's large fi shing fleet includes many distant-water vessels that 
operate overseas.  The sector's GDP contribution dec lined from 0.9% in 2000 to  0.7% in 2002, and the 
fishing population has fallen.  Most fishermen are employed in traditional small-scale fisheries based 
on coastal communities.  Declining catches have been largely offset by increased aquaculture 
production, which accounted for one thir d of fish production in 2003.  
30. Korea has suffered serious resource depletion;  many fish species are over exploited.  It is 
implementing a coastal and offshore fishery restruct uring project aimed at establishing a sustainable 
fishery system (Fishery Act, 1995).  The scheme pr ovides for reducing the number of fishing vessels, 
re-adjusting fishing zones, and de veloping environment-friendly fishing methods.  Some 2,500 fishing 
vessels (mainly offshore) have been de-commissioned, almost half of these since 2000.   All fishing 
vessels must be licensed, including coastal vessels below ten metres in length, and the number of licences has been reduced.   
31. A total allowable catch (TAC) has been set for Korean waters.  A pilot project was launched 
in 1999 and a full-scale scheme implemented in 2002;  the TAC was set at 231,650 tonnes.  It covers 
five types of fishing (seine, trap, diver, gill net a nd community) and nine fish species.  The TAC is to 
be maintained and enforced scientifically.  The TAC Committee and the Central Committee for 
Fisheries Coordination sets TACs for each species, based on an annual assessment of fish stocks by 
the National Fisheries Research and Development In stitute:  70% of quotas are allocated equally to 
fishermen, and the rest on a "first come first ser ved" basis.  Quotas are not tradeable.  Community-
based self-regulation of coastal fisheries has also been encouraged since 2000. 
32. Access to Korean waters by foreign fishing vessels is controlled by bilateral fishing 
agreements;  vessels must be licensed.  Quotas for foreign vessels are approximately equal to the 
TAC, which applies only to domestic fishermen.  In 2003, there were 1,232 licensed Japanese vessels 
and 2,531 Chinese vessels.  Korean vessels also ope rate in foreign waters under similar agreements, 
including with Russia, China, Japan, Tuvalu, So lomon Islands, Kiribati, and Papua New Guinea. 
33. Fishing subsidies were W 674 billion in 2002.   These financed mainly:  fisheries 
infrastructure; resource enhancement; research ; aquaculture, deep-sea fishery and processing 
development; and support for fishing activities.   Aquaculture has generated some negative 
environmental consequences, such as water pollu tion.  Under the Farming Ground Management Act 
of 2000, mariculture grounds are left idle for cer tain periods to facilitate sustainable production, 
sanitary inspection, and cleaning. 
34. Foreign investment in coastal and offshore fishing ventures is generally limited to less than 
50%.  In coastal fishing, permission is required from the local government.  Foreigners wishing to 
invest more than 50% must obtain permission from the Ministry of Marine Affairs and Fisheries. 
35. Fish and fish products are subject to rela tively high tariffs of either 10% or 20%. 
(4) P
OLICY DEVELOPMENTS IN THE ENERGY SECTOR   
36. With limited natural resources, Korea imports 97% of its energy requirements.  Primary 
energy consumption has risen rapidly, almost fivefold, since 1980.  Total energy demand is projected to rise by 3.1% annually until end 2010.  The main  energy sources are oil (47.6% in 2003), coal 
(23.7%), nuclear (15.1%), and LNG (11.2%).  Industry is the main user (55.5%);  residential and 
commercial demand accounts for 21.4% of the energy market, followed by transport (21.1%).  LNG Republic of Korea WT/TPR/S/137 
 Page 91 
 
 
and nuclear sources are forecast to expand further at the expense of oil and coal, with most electricity 
growth from nuclear power.   
37. MOCIE sets energy policy.  The Government re gulation of the energy sector has traditionally 
focused on ensuring a stable supply to facilitate ec onomic growth.  This has changed since the mid-
1990s towards deregulation and priv atization aimed at achieving co mpetitive energy markets.  
Policies have pursued energy diversification ai med at lessening oil dependency to below 45%, 
including by expanding renewable sources.  The gover nment role is changing from direct intervention 
to indirect coordination based on minimum interventi on, and the sector is being restructured.  Current 
objectives of energy policy are to maintain a stable energy supply, increase market efficiency through 
competition, and establish environment-friendly energy systems.  Establishing sustainable energy 
development based on market-led pr inciples is envisaged by 2010. 
(i) Petroleum and petroleum products 
38. Korea's oil dependence declined from 54% in 19 90 to 46% in 2003.  All oil is imported, 
mainly from the Middle East (79.5% in 2003).  Diversifying oil imports is a policy goal.  Korea was the world’s sixth largest oil consumer in 2002 a nd the third largest oil importer in 2001.  Korea 
exports some refined petroleum products, mos tly sulphur-rich diesel and fuel oil.   
39. The oil industry was deregulated in 1998.  Imported crude oil is dutiable at a tariff of 3% and 
refined products at 7%.  There are no non-tari ff restrictions on imports of refined products.  
Surcharges applied to imported crude oil and dom estically produced refined products finance the 
Energy Project Special Account.
12  Five private companies dominate the oil refining industry, 
accounting for over two thirds of the market.13  Daehan Oil Pipeline Corporation (DOPCO), which 
owns the pipeline delivering oil products to Seoul, was privatized in 2000.   
40. The state-owned Korea National Oil Company (KNOC) handles oil and gas exploration, 
development and producti on, and maintains Korea's emergency oil reserves.14  Most exploration is 
offshore, where seven concession blocks have been  established.  MOCIE issues concessions for oil 
and gas exploration, which also specify future tax treatment in the event of discovery.  All 
concessions issued to date (four blocks) have gone to KNOC. 
(ii) Other energy 
(a) Natural gas 
41. Korea is the world's second and fourth largest importer of LNG (liquefied natural gas) and 
LPG (liquefied petroleum gas), respectively.  All LNG is imported, although small quantities (some 
400,000 tonnes annually) of natural g as will be produced from the East Sea gas reserve in 2004.  SK 
Gas and LG-Caltex Gas import just over half of Ko rea's LPG requirements, while domestic refineries 
produce the rest.  LNG is used mainly for heating (37.6%) and generating electricity (35.1%).   
                                                      
12 The surcharge applies to all refined sales, incl uding imports, at a specified rate not to exceed 
W 36 per litre (The Act on Petroleum Businesses). 
13 The top five in market share are SK Corp (29.3%), LG Caltex Oil (24.1%), S-Oil (10.3%), Hyundai 
Oilbank (9.9%), and Incheon Oil Refinery (6%).  LG Caltex is 50% foreign owned by Caltex, S-Oil 35% owned 
by Saudi Aramco, and Hyundai Oilbank 50% owned by International Petroleum Investment Corporation (IPIC).  
14 Since Korea became a member of IEA in March 20 02, it is required to hold reserves of at least 
90 days of net oil imports.  At end-2003, Korea's emergency oil reserves equalled 106 days. WT/TPR/S/137 Trade Policy Review 
Page 92 
 
 
42. The Korean gas industry lacks competition.  The highly indebted (US$5.5 billion in 2003) 
majority state-owned enterprise, Korea Gas Corporation (KOGAS), has a monopoly over the wholesale trade, including imports, storage, tran smission, and wholesale distribution of LNG by 
pipeline.  It supplies natural gas to private city  gas companies that have territorial monopolies and 
supply retail users through their distribution pipelin es.  Wholesale gas tariffs must be approved by 
MOCIE, and retail gas prices by local governments.  Price regulation is essentially by rate of return on 
assets.
15 
43. The Government announced the restructuring and further privatization of KOGAS in 1999, 
when it was partially privatized (Natural Gas Industry Restructuring Plan).16  The plan provided for an 
independent regulator, the Gas Committee, and a Gas Exchange to facilitate a competitive gas market 
by instituting an open access regime, including third-party access to LNG terminals for a fee 
(Box IV.1).  However, the plan slowed in 2000 an d subsequent efforts have also lost momentum, 
owing largely to labour opposition.  Legislation to  provide for KOGAS's restructuring, including 
separation of its importation and wholesale activities into three affiliated trading companies, has not 
been passed.17  The Government announced in 2003 that it would revise the original plan, including 
how to spin-off the three subsidiaries, and review whether to allow new entry.18 
Box IV.1:  Original gas sector reforms 
Original plans announced in 1999 to  reform the gas sector included: 
- separating KOGAS's wholesale and import businesses  into three trading companies by April 2002; 
- privatizing two of the trading companies and keeping the other in the hands of KOGAS until fully 
privatized; 
- establishing an independent regulator by end 2002; 
- privatizing the four KOGAS subsidiaries (Korea Gas Maintenance Engineering Co Ltd,  Korea Gas 
Engineering and Construction Co Ltd, Korea Marine Co Ltd and Korea LNG Ltd) and outsourcing 
services by end 2002; 
- final privatization of KOGAS by end 2002; - open access to all KOGAS facilities (terminals  and transmission networks) by 2003; 
- a three-phase introduction of competition in natural gas retail services; 
 - competitive supply to large consumers  - city-gas supply business to be split between operating facilities and sales 
 - supply competition to small consumers 
- introducing supply service by LNG tank-lorries to areas not being supplied by the distribution 
network. 
Source:  OECD/IEA (2002), The Republic of Korea 2002 Review,  p. 102.
 
 
(b) Electricity 
44. The majority state-owned Korea Electric Po wer Corporation (KEPCO)  generates 94% of 
power and handles distribution and transmission.  A few independent gas-fired producers, including 
co-generation facilities, supply electricity to KEPC O under long-term contract.  Most electricity is 
                                                      
15 OECD (2004a), p. 131. 
16 KOGAS is 38.82% privately owned.  The Government  owns 26.86% and the Korea Electric Power 
Corporation 24.46%.  Fourteen provincial/city governments hold the remaining equity, with the largest share 
held by Seoul City (3.99%).  The maximum permitted aggregate foreign ownership of KOGAS is 30%, and individual share ownership (foreign or domestic) is capped at 15%. 
17 Legislation covered revisions to the KOGAS Law and the City Gas Business Law, and the enactment 
of the Energy Commission Law to establish the sector regulator. 
18 OECD (2004a), p. 131. Republic of Korea WT/TPR/S/137 
 Page 93 
 
 
coal generated (28.4%) in 2003, followed by nuclear (28%), gas (25.9%), oil (8.3%) and hydro 
(6.9%).  Thermal electricity is mainly genera ted from imported bituminous coal, supplemented by 
domestic anthracite coal, which KEPCO must purchase at nearly twice the price of imported, better quality, coal.  The Government compensates KEPC O for the added costs from the Electric Power 
Industry Basis Fund:  the subsidy was W 182.7 billi on in 2003 (W 78 billion in 2000).  KEPCO is 
also required to negotiate minimum purchases of natural gas from KOGAS at high prices under "take or pay" arrangements until 2006.
19  A reference price system implemented in 2002 subsidises excess 
costs of power generated from alternative renewable energy (e.g. solar and wind).  
45. MOCIE approves electricity tariffs and controls entry and exit through licensing.  Prices are 
regulated essentially based on rate of return ( on capital).  Government policy has traditionally 
supported low (non-commercial) electricity prices by setting reduced rates of return on KEPCO's 
assets.20  Cross subsidies between alternative users dist ort prices, with agricultural and industrial users 
the main beneficiaries.21  KEPCO must meet certain "non-comm ercial" objectives, such as:  supplying 
low-cost electricity to fishing u sers and remote areas (estimated subsidy in 2000 of W 150 billion);  
supporting the domestic coal industry (see above);   supporting areas adjacent to power plants 
(W 63 billion);  and supporting the LNG industry.  In 2001, funding of these costs (estimated at 
W 1 trillion) was transferred from KEPCO to the newly established Electric Power Industry Basis 
Fund.  The Fund is financed by a tax of 6.5% on re tail electricity users.  Electricity prices are being 
readjusted aimed at reducing cross-subsidies. 
46. The electricity sector is being progressively deregulated and privatized to allow greater 
competition, according to the Basic Plan for Restruct uring the Electricity Industry announced in 1999.  
The ten-year plan provided for the separation, and privatization, of generating capacity and 
distribution facilities from KEPCO, which would rema in the sole transmission company.  KEPCO's 
state equity had fallen from over 70% to 54.0% by the end of 2003.  Maximum permitted foreign 
equity is 40% (increased from 30% in November 2000), and the largest shareholder must be domestic 
and own no more than 3% equity.   
Generation 
47. KEPCO's monopoly on non-nuclear power ge neration was abolished in 1999, and 
competition was introduced to power generation in  2001 when its power gene rating operations were 
spun off into six wholly-owned subsidiaries (Act on Promotion of Restructuring of the Electric Power 
Industry, 2000).  The five thermal power ge nerating subsidiaries are to be privatized.22  The Basic 
Plan for Privatization of KEPCO's generation subsidiaries was announced in April 2002.23  The initial 
subsidiary to be privatized, Korea Southeast Power Corp, was to be completed in early 2003.  Another 
subsidiary was to have been privatized in 2003 and the remaining subsidiaries no later than 2005.  
However, the programme has lagged, and privati zation of Korea South East Power Corp, through 
                                                      
19 These contracts require KEPCO to pay for a certain amount of gas whether taken or not, and for 
KOGAS to make available defined volumes of gas.  
20 KEPCO's return on equity has also fallen, from 11.5% in 1980 to around 5% in 2001 and 2002 
(OECD, 2004a, p. 128). 
21 MOCIE estimates, for example, that household and commercial users pay substantially above cost, 
while industry pays 80% of the cost, and farmers pay 57% (OECD, 2004a, p. 130). 
22 The sixth subsidiary, the Korea Hydro and Nuclear Po wer Corporation, is to remain a subsidiary of 
KEPCO for security reasons.  
23 Foreign investors can participate.  However, fo reign equity in KEPCO's five subsidiary power 
generation companies is capped at 30% (40% for KEPCO).  Foreign investment in power distribution and 
transmission must be less than 50%, and the largest sh areholder must be Korean.  Two combined heat and 
power plants providing heating in Anyang and Buchon were privatized in 2000. WT/TPR/S/137 Trade Policy Review 
Page 94 
 
 
international bidding, was unsuccessful in 2003.  This looks like being de layed further, and the 
deregulation plan is now uncertain.24 
48. A cost-based electricity trading pool, the Korea Power Exchange, was created in April 2001, 
and a two-way bidding pool has been tested since July 2003.  The regulator, the Korea Electricity 
Commission, was formed within MOCIE in  2002 (Electricity Business Act, 2002).   It is responsible 
for licensing electricity businesses and settling di sputes between operators, aimed at facilitating a 
competitive electricity market.  Third-party access by generators to transmissi on networks is provided 
for in the legislation.  However, it specifies no access pricing regulations, a nd appropriate cost-based 
rules for determining inter-connection fees,  for example, need to be established.25  A regulated third-
party access system for transmission, requiring non- discriminatory access, was introduced to facilitate 
trade between generators and large customers, using rate of return on assets to determine the 
transmission fee.26  The electricity market, including KELCO, is also subject to general competition 
legislation administered by the Korea Fair Trade Commission.   The division of regulatory roles  and 
responsibilities between the Electricity Commissi on and the KFTC is still to be determined.    
Distribution 
49. KEPCO distribution subsidiaries were to be fo rmed by end-2002, and privatized along with 
wholesale and retail competition being phased in by 2009.  The plan included six regionally 
franchised power distribution companies and open access to power transmission grids.   However, 
authorities indicated that this is being re-consid ered.  A Joint Study Group established in 2003 was 
examining options for efficiently splitting KELCO' s distribution activities.  The Government would 
announce a revised plan based on the Group's re port, which was due by late May 2004.  
(c) Coal 
50. Korea's production, mainly of high-cost anthr acite coal, declined to 3.82 million tonnes in 
2001.  It is used mainly for power generation (68%) and household use (30%).  The state-owned 
Korea Coal Corporation individually produces most co al (40%).  The industry has been substantially 
rationalized, with many mine closures and job reducti ons.  The Government plans to finalize the Coal 
Business Rationalization Project by 2005, including divesting its coal interests and reducing annual 
production to 3 million tonnes.  Korean investment  in overseas coal joint ventures is encouraged, 
including through direct participation by the Korea Resources Corporation, and provision of loans.  In 
2003, 19 projects existed in six countries.  The govern ment target is to procure 30% of coal imports 
from such projects by 2010 (26.8% in 2003).  
51. Domestic coal production is supported by direct production subsidies (US$108.2 million in 
2004);   tariffs on coal imports of 1% and 5%;  a 10% discriminatory VAT on imported coal27;  low-
interest investment loans to coal producers by Ko rea Resources Corporation;  and requirements for 
KEPCO to buy domestic coal at well above import prices (see above).   
(5) POLICY DEVELOPMENTS IN THE MANUFACTURING SECTOR  
52. Manufacturing as a share of GDP declined to 26.6% in 2003 (29.4% in 2000).  Its 
employment share also fell to 19.0%.  High labour  productivity is reinforced by substantial capital 
                                                      
24 The Government is considering gradually priva tizing Korea South East Co rp through initial public 
offerings. 
25 OECD (2002). 
26 OECD (2004a), p. 129. 
27 A 10% VAT is levied on imported bituminous coal while domestic anthracite coal is exempt. Republic of Korea WT/TPR/S/137 
 Page 95 
 
 
investment.  It is heavily export oriented.  A bout 80% of exports in 2003 were heavy industry 
products, comprising mainly electrical and elec tronic machine products, cars, machinery and 
precision equipment, chemicals, iron and steel, and sh ips.  The single most important export in 2003 
was information and communications equipment (1 7.9%), especially mobile phones (6.9%) and PC 
equipment (7.6%), followed by semi-conductors (10. 1%).  Manufacturing output grew by 5.2% in 
2003 (8.2% in 2002). 
53. Korea's industrial vision for 2010 is to become one of the world’s top four "industrial 
superpowers", based on strengthe ning its global position in traditional basic industries of semi-
conductors, cars, petrochemicals, steel, machinery,  and shipbuilding, but also further expanding 
exports of digital electronics and other "strategic" industries, such as electronic medical equipment, 
bio and environmental industrial pr oducts, and aviation goods.  Polic ies are directed at improving 
competitiveness and developing high-value-added advanced technology products based on innovative 
strategies.  The policy objective is to achieve av erage annual growth in manufacturing of 6.1% until 
2010, when the sector's GDP share is projected to fall to 27.4%.  A particular concern is that 
significant manufacturing industries may relocate o ffshore, especially to China, where production 
costs are lower.   
54. The Government identified ten strategic industries in August 2003 as growth engines.28  
These essentially involve the manufacture of hi ghly innovative, R&D intensive high-technology 
products and related services.  The National Science and Technology  Council will have responsibility 
for developing the necessary technology, manpower, and infrastructure.  Targeted investment is 
W 3.5 trillion (0.5% of GDP), of which about ha lf will be directly government funded.   
(i) Textiles and clothing 
55. The traditional textile industry is being rationalized, due to increased competition 
domestically and in third markets from low cost expo rters, such as China and Viet Nam.  Production 
shrunk by some 20% between 2000 and 2003.  Woven and textile fabric s are the main export.  Total 
textile exports declined from 10.1% of Korean merchandise exports in 200 1 to 7.5% in 2003. 
56. Textiles and clothing exports are restricted by  quotas imposed by the European Union, the 
United States, Canada, and Turkey under the WT O Agreement on Textiles and Clothing (ATC).  
MOCIE issues export quotas to these markets under th e Textile Quota Operation System (Article 43 
of the Overseas Trade Act) by commissioning private export associations (Korea Trade Association and the Korean Apparel Industry Association) to  allocate quota to exporters.  Korea expects its 
exports to decline after the liberalization of textile  trade, due to fiercer competition from lower labour-
cost countries,  and is endeavouring to improve co mpetitiveness and to develop high-quality products.   
(ii) Motor vehicles 
57. The automobile industry, dominated by Chaebols,  has undergone substantial rationalization.   
After declining in 2001, production growth rebound ed to 5% in 2003 (8% in 2002).  The Daewoo 
Motor Company, after bankruptcy in 1999, was ta ken over by General Motors in October 2002 to 
form GM Daewoo.   
                                                     
 
28 These are bio-medical products, next-generation computer displays, next-generation semi-
conductors, next-generation batteries, future automobiles,  intelligent robots, digital TV and broadcasting, next-
generation mobile communication, intelligent home networks, and digital contents and software solutions (OECD, 2004a, pp. 82-3). WT/TPR/S/137 Trade Policy Review 
Page 96 
 
 
58. A special excise tax applies to motor vehi cles to minimize environmental pollution and 
enhance energy savings, and not to discriminate against imports, according to the authorities.  The 
three-tiered rate structure based on engine capacity w as reduced to two tiers in 2004;  the highest rate 
of 10% applies to cars with engines exceeding 2,000 cc (5% for smaller engines).29  While this tax is 
non-discriminatory and applied equally to imports, it falls mainly on foreign cars, which generally 
have larger engines.  Provincial and city government s also levy an automobile tax, with the maximum 
rate applied to cars with engines over 2,000 cc.  A ccording to Korean officials, this tax is levied 
equally on imports.    
59. Average tariffs on fully processed transport e quipment remained unchanged in 2004 at 6.1%;  
they range from free to 10% (8% on passenger cars).   Used car imports are subject to the same 
ad valorem  duty as new vehicles, and no special customs va luation procedures are used (Chapter III).    
60. Automobile standards and certification procedur es have been simplified.  Self-certification 
replaced type approval from 1 January 2003 for registered manufacturers, whereby they declare their vehicles meet all safety regulations.  To be re gistered by the Ministry of Construction and 
Transportation, manufacturers must produce over 2,500 vehicles annually, have acceptable testing 
facilities for meeting safety regulations, and be able to provide after-sale service.  Recalls for 
defective vehicles are mandatory.  Fines apply for violating safety regulations and for concealing or 
falsely reporting defects.   
61. Motorcycles exceeding 125 cc engine capacity are subject to a flat ad valorem  special excise 
tax of 5.0%, which is applied equa lly to imports.  No other domestic taxes apply.  Tariffs of 8% 
currently apply to new and used imports, which are subject to no special customs procedures.  
Motorcycles are banned from highways in Korea for safety reasons. 
(6) S
ERVICES  
62. In 2003, services, including construction, and electricity, gas and water, accounted for 69.7% 
of GDP (up from 65.3% in 2000), and about 72.1% of employment.  The largest sectors in 2003 were real estate, renting and business activities (12.8%), wholesale and retail trade, restaurants and hotels 
(9.8%), and construction (9.6%).  The potential gains from enhanced competition through market 
opening and regulatory reforms appear greatest in  the services sector, given its lower level of 
productivity.  For example, labour productivity in se rvices is around 60% of that in manufacturing, 
and the difference is widening.
30 
63. Korea participated in the WTO negotiations  on basic telecommunications and financial 
services.  It has an MFN exemption for computerized flight reservation services.  The Government 
submitted initial services offers under the current WTO negotiations in March 2003, and would like to 
see meaningful liberalization in the maritime transport sector.31  
64. The Korea–Chile Free Trade Agreement (KCFTA) covers trade in services.  Provisions relate 
to foreign investment, cross-border trade in servi ces, telecommunications, and temporary entry for 
business persons, subject to negative lists of reserva tions for cross-border trade in services and foreign 
investment.  The authorities indicate that the cove rage of services liberalization in the KCFTA is 
broader than Korea's WTO commitments.  For ex ample, it has made substantial concessions in 
educational and legal services, which are not in its GATS undertakings.  Also neither country may 
                                                      
29 A temporary reduction of 20% is being applied from March 2004 until the end of the year. 
30 OECD (2004a), p. 10, p. 34. 
31 WTO document TN/S/W/11, 3 March 2003. Republic of Korea WT/TPR/S/137 
 Page 97 
 
 
impose specific performance requirements, such as on exports, as a condition for investment in 
services.    
(i) Financial services 
65. Financial sector reform after the 1997 Asian financ ial crisis was central to Korea's recovery.  
Restructuring focused initially on the banking sector, where the greatest systemic risk to the financial 
sector existed.  Bank restructuring has occurred relatively quickly, assisted by substantial public 
funds.  Non-bank financial restructuring is far l ess advanced.  Reforming non-bank institutions is 
important to the financial system’s stability; they account for almost half of total financial sector assets.  Key reform areas include restructuring an d privatizing investment trust companies (ITCs), 
improving soundness of insurance companies and securities houses, and enhancing non-bank 
supervision.   
66. Substantial financial consolid ation has strengthened the capita l position of institutions and 
international competitiveness.  Some 700 institutions have disappeared since 1997, with almost 650 
closures, over 160 mergers;  there have been about 70 new entrants (Table AIV.1).  Consolidation of 
non-banks has also been significant, though uneven.  Several major bank mergers have occurred, such 
as Kookmin Bank with Housing and Commercial Ba nk (November 2001) and Seoul Bank with Hana 
Bank (December 2002).  Two financial holding co mpanies, Woori Finance Group and Shinhan 
Financial Group were also formed in 2001.  In 200 3, the number of commercia l banks had fallen to 19 
(33 in 1997).  On the other hand, the number of  non-bank financial institutions had increased 
substantially, with 19 new securities companies, 8 ITCs and 6 insurance companies being established 
during 1997-03.  Financial sector employment has declin ed by about one third, with most job losses in 
banks.  Financial sector profitability rebounded in 2001 to W 11.0 trillion, after losses of 
W 11.1 trillion in 2002.  Bank and non-bank profita bility increased, helped by stronger capital 
positions, reduced bad loans, and buoyant consumer demand.  However, profitability dropped sharply 
in 2003 by two thirds for banks and by almost 90% for non-banks, due mainly to losses on unsecured 
household credit by credit card companies and fro m exposure to the collapse of SK Global.  
Commercial bank interest rate spreads, although fluctuating since 1999, have generally narrowed, 
from around four percentage points in 1999 to about two percentage points in 2003, suggesting a more 
competitive market.    
(a) Financial restructuring  67. Government-led financial restructuring occurre d immediately after the crisis in 1998, and 
from September 2000.  Total public funding for financ ial sector restructuring to end-September 2003 
was W 161 trillion, equivalent to one  quarter of GDP (Table IV.4)
32;  the Government directly 
contributed W 19 trillion.  Just over half of total public funding was for bank restructuring;  most 
(one-third) was used by the Korea Deposit Insura nce Corporation (KDIC) to re-capitalize financial 
institutions, including insurance and securities compan ies, and about one quarter by the Korea Asset 
Management Corporation (KAMCO) to purchase distressed assets and reduce exposure to non-
performing loans (those classified as substandard or below (SBLs)).  A substantial share of public 
funds (40%) have also been used to repay deposits  in non-bank institutions; no such repayments have 
been made on bank deposits.  Use of public funds declined rapidly, to W 5.8 trillion in 2003 (until 
end-September).  KAMCO's mandate to purch ase bad loans ended in November 2002.   
                                                      
32 As at end 2003, some one third of these funds had been recovered.  The long-term recovery rate is 
expected to be 56%.   WT/TPR/S/137 Trade Policy Review 
Page 98 
 
 
Table IV.4 
Use of public funds for financial sector  restructuring, as at end-September 2003 
(W trillion) 
Korea Deposit Insurance Corporation (KIDC) 
Institution Repayment 
of deposits Re-
capitalization Compensation 
for losses Asset 
purchases KAMCO Government Total 
Aggregate injection of funds from end-1997 to end-September 2003  
Banks 0 22.2 13.8 8.1 24.6 18.1 86.7 
Non-banks 29.2 25.4 3.3 0.9 14.5 0.9 74.3 
Merchant banks 17.2 2.7 0.2 0 1.6 0 21.7 
Securities companies 0 6.8 0 0 1.8 0.9 9.5 
Insurance companies 0 15.9 2.9 0.3 1.8 0 21.0 
Investment trust 
management 
companies 0 0 0 0 6.6 0 6.6 
Mutual saving banks 7.3 0 0.2 0.6 0.2 0 8.2 
Credit unions 4.7 0 0 0 0 0 4.7 
Others 0 0 0 0 2.4 0 2.4 
Total 29.2 47.6 17.1 9.1 39.1 19.0 161.0 
Injection of funds during January 2002 to end-September 2003 
Banks 0 0.1 0.1 1.1 0.1 0 1.4 
Non-banks 3.5 0 0.6 0 0.2 0 4.3 
Merchant banks 0 0 0.2 0 0 0 0.2 
Securities companies 0 0 0 0 0 0 0 
Insurance companies 0 0 0.4 0 0 0 0.4 
Investment trust 
management 
companies 0 0 0 0 0.2 0 0.2 
Mutual saving banks 0.8 0 0.1 0 0 0 0.9 
Credit unions 2.7 0 0 0 0 0 2.7 
Others 0 0 0 0 0.1 0 0.1 
Total 3.5 0.1 0.8 1.1 0.3 0 5.8 
Source:  Korean authorities.  
68. The incidence of SBLs in the financial sector h as been reduced substantially, from 10.4% at 
end 2000 to 4.3% at end-Septem ber 2003 and, according to the authorities, to 3.6% at end 2003 
(Table IV.5).  This reflected KAMCO's purchases of  SBLs (mainly from banks), greater market-based 
lending, and enhanced supervision.  The extent of  provisioning of SBLs has increased over the same 
period, on average, from 46% to 63%.  SBLs for banks fell from 8% of total loans at end 2000 to 2.3% at end 2002 (12% end 1999), but rose to 3.3%  by end-September 2003, before falling to 2.6% 
by end 2003.
33  For non-bank institutions, the share  remains much higher, on average, but  has fallen 
continuously from 23.6% at end 2000 to 9.2% at end-September 2003 and, according to authorities, 
6.4% at end 2003.  The incidence of SBLs is hi ghest for securities firms and ITCs (25% at end-
September 2003, down from 52.6% at end 2000).  Insu rance companies have a much lower incidence 
of SBLs (3.7% at end-September 2003,  down from 8.5% at end 2000).   
                                                      
33 The target set by the FSC was 5% by end 2001 and 3% by end 2002.  During 2003, banks resolved or 
otherwise cleaned up SBLs totalling W 31.7 trillion;  abou t one third of these were written off.  At end 2003, 
only two domestic banks had SBL ratios exceeding 3%.  The FSC expected all banks to keep ratios below this 
level for 2004, and planned supervisory action to enc ourage this (FSC/FSS Pres s Release, 9 March 2004, Bank 
Loans Classified as Substandard or Below Rise Modestly in 2003 ). Republic of Korea WT/TPR/S/137 
 Page 99 
 
 
Table IV.5 
Substandard and below loans (SBLs) by selected type of financial institution, 2000 to end-September 2003 
Institution/category 2000 2001 2002 2003a 
Banks 
Total loans outstanding (TLO) (W trillion) 526.1 551.2 648.2 710.6 
Substandard and below loans (SBLs) (W trillion) 42.1 18.8 15.1 23.2 
SBLs/TLO (per cent) 8.0 3.4 2.3 3.3 
Net SBLs (net of provisioning) (W trillion) 17.1 9.6 8.0  
Net SBLs/TLO (per cent) 3.4 1.8 1.3  
All non-banks 
Total loans outstanding (TLO) (W trillion) 95.3 148.7 169.6 153.3 
Substandard and below loans (SBLs) (W trillion) 22.5 20.3 16.7 14.1 
SBLs/TLO (per cent) 23.6 13.7 9.8 9.2 
Net SBLs (net of provisioning) (W trillion) 10.9 7.3 7.8  
Net SBLs/TLO (per cent) 13.0 5.4 5.0  
Insurance companies 
Total loans outstanding (TLO) (W trillion) 44.5 45.2 50.7 53.5 
Substandard and below loans (SBLs) (W trillion) 3.8 2.5 2.1 2.0 
SBLs/TLO (per cent) 8.5 5.5 4.1 3.7 
Net SBLs (net of provisioning) (W trillion) 1.4 1.3 0.9  
Net SBLs/TLO (per cent) 3.3 3.0 1.8  
Securities firms and international trust companies 
Total loans outstanding (TLO) (W trillion) 7.6 8.9 6.8 8.4 
Substandard and below loans (SBLs) (W trillion) 4.0 4.6 2.6 2.1 
SBLs/TLO (per cent) 52.6 51.7 38.2 25.0 
Net SBLs (net of provisioning) (W trillion) 1.5 1.7 0.7  
Net SBLs/TLO (per cent) 29.4 28.3 14.3  
Total 
Total loans outstanding (TLO) (W trillion) 621.4 699.9 817.8 863.9 
Substandard and below loans (SBLs) (W trillion) 64.6 39.1 31.8 37.3 
SBLs/TLO (per cent) 10.4 5.6 3.9 4.3 
Net SBLs (net of provisioning) (W trillion) 28.0 16.9 15.8  
Net SBLs/TLO (per cent) 4.8 2.5 2.0  
a End September. 
Source:  Korean authorities.  
(b) Private ownership 
69. Post-Asian crisis re-capitalizati on substantially raised state owne rship of the financial sector.  
Public bank ownership especially increased, from 17% pre-crisis to almost 60% at end 1998.  Since 
then, however, the Government has divested so me major bank holdings, including selling 51% of 
Korea First Bank (to foreign interests) in January 2000.  KDIC also divested substantial bank equity 
under the 2002 Plan for Selling Government-Held Bank Shares.  This plan involved selling its stake in 
the Woori Financial Holding Company, which ha d combined four state-owned banks (Hanvit, 
Kyongnam, Kwangju, and Peace), Chohung Bank, Se oul Bank, and Jeju Bank, as well as minority 
interests in the Korea Exchange Bank and the Kookm in Bank.  In January 2002, the KDIC listed the 
Woori Financial Holding Company on the Korean Stock Exchange and sold a stake of 11.8%.  In 
April 2002, 51% ownership of the Jeju Bank was so ld to Shinhan Financial Group.  Seoul Bank was 
also sold to Hana Bank in 2002, and Chohung Bank to Shinhan Financial Group in August 2003.  In 
September 2003, Lone Star, a U.S. private equity fund, acquired a 51% stake in Korea Exchange WT/TPR/S/137 Trade Policy Review 
Page 100 
 
 
Bank.  The Government sold a 9.1% stake in the Kookmin Bank in December 2003.  In April 2004, 
KDIC sold a 21.66% stake in Hana Bank.  At en d-September 2003, state ownership of banks had 
fallen to about 20% (Table IV.6).  The Govern ment plans to divest further bank holdings. 
Table IV.6 
Government and foreign ownership of commercial banks, end 2003 
(Per cent) 
Type of ownership Commercial bank  
Government Foreign 
A. Nation-wide banks   
Choheung - 2.27 
Woori (formerly Hanvit Bank) Woori Financial Group - KDICa (86.84) - 
Korea First KDIC (48.49), Government (2.95) 48.56 (New Bridge Capital) 
Korea Exchange Ex-Im Bank (14.0), Bank of Korea (6.18) 71.04 (Lone Star 51.0, Comerz Bank 14.8) 
Kookmin - 73.56 (ING 3.78) 
Shinhan - 41.93 of SFH (BNP Pariba 3.5) 
KorAm - 89.59 (Carlye Consortium 36.7) 
Hana KDIC (21.66) 43.16 (Alliance 8.16) 
B. Local banks   
Daegu - 31.31 (SSB SMALL 5, Templeton 2.8)  
Pusan - 38.46 (Capital Research and Management 
Company 10.4) 
Kwangju Woori Financial Group – KIDCa (86.84) - 
Jeju KDIC (31.96) - 
Jeonbuk - 0.25 
Kyongnam Woori Financial Group – KIDCa (86.84) - 
a Woori (100%), Kwangju (99.99%), and Kyongnam (99.99%) are ow ned by the Woori Financial group.  The KDIC owns 86.84% 
of Woori Financial group. 
Source:  OECD (2004), 2004 Economic Review – Korea , p. 89;  and information provided by the Korean authorities. 
70. Overseas bank ownership has also increased post- crisis, following relaxation of 50% foreign 
equity caps on commercial banks in 1999.  Foreign ownership of up to 100% is possible, subject to 
special permission from the Financial Supervisory Commission (FSC).  Foreign ownership shares of 
between 4% and 10% must be repor ted to the FSC, and its  approval is needed to surpass levels of 
10%, 25% and 33%.  Foreign owne rship of banks has increased from under 10% at end 1998 to 30% 
at end-September 2003;  a few banks are majority foreign owned.   
71. State ownership of non-bank institutions also ro se following the crisis.  For example, faced 
with insolvency, the two largest ITCs, Korea a nd Daehan, were nationalized in 1999 and the third 
(Hyundai) was placed under control of the FSC fo llowing a failed self-rescue plan.  The Government 
sold an 80% equity stake in Hyundai ITC in Febr uary 2004, and plans to sell its holdings in Korea 
ITC (98.68%) and Daehan (96.68%) during 2004.  The State has also divested equity in insurance companies.  In December 2002, the state-owned Ko rea Life Insurance, which has about 16% of the 
insurance market, was fully sold to  the Hanhwa Group.  Daishin Life Insurance was also sold.  KIDC 
planned to sell equity in other faile d insurance institutions, such as  Hasni Life Insurance.  There is no 
restriction on foreign ownership of  non-bank institutions, including securities companies and ITCs.   
(c) Regulatory and supervisory framework 
72. Financial sector regulation and supervision is the responsibility of the Financial Supervisory 
Commission (FSC), and its executive body, the Fina ncial Supervisory Service (FSS).  The Securities 
and Futures Commission (SFC), located within the FSC, supervises and regulates the securities and 
futures markets.   Republic of Korea WT/TPR/S/137 
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73. The FSC introduced a "pre-emptiv e", risk-based supervisory approach in October 2002.  It 
also operates a system of prompt corrective actions (PCA), which allows more proactive and aggressive action against financial institutions show ing early signs of distress or mismanagement.  
Criteria for taking such actions have been strengthened.  
74. Prudential regulations apply e qually to domestic and forei gn financial institutions, in 
accordance with internationally accepted standards.   Korea adopts the BIS Core Principles for 
Banking Supervision.  Bank capital adequacy requireme nts became fully consistent with BIS rules in 
January 2000, and Korea applied the revised Basle Accord capital requirements for market risks in 
January 2001.  Banks have exceeded the 8% mi nimum capital adequacy ratio (11.3% at end-
September 2003).  The minimum capital adequacy ratio  for mutual savings banks was raised from 4% 
to 5% in 2002.  Regular on-site examinations and off-site surveill ance of banks and other financial 
institutions are conducted based on risk assessment.  Where problems are detected, the FSC issues 
management recommendations, requirements or orde rs, depending upon the severity of the case.   
75. The FSC requires banks and other creditors to closely monitor credit risks of corporate 
borrowers.  It introduced a continuous credit ri sk assessment scheme in 2001 to require semi-annual 
assessments of debtors.  Corporate transparency , including more rigorous accounting and corporate 
governance, has been improved, through increased fo cus on external, independent auditors and 
insisting on higher standards of professional condu ct.  The FSC has establi shed general accepted 
accounting principles and disclosure requirements that closely reflect internationally accepted 
accounting standards.  Revised accounting and corpor ate disclosure requirements proposed by a task 
force in November 2002 called for greater acc ountability from management, including personal 
certification of accuracy of financial statements. 
Banks 
76. At end 2003, 39 foreign banks in Korea opera ted 61 branches.  Although the authorities 
confirmed that entry of foreign bank subsidiari es in Korea is unrestricted, none operate.  Market 
penetration by foreign banks rose from 6.1%  of assets in 2000 to 7.3% in 2003.   
77. Banks, including foreign branches, must be aut horized and licensed by the FSC in accordance 
with the Banking Act.  There is no limit per se to the number of banking, including foreign, licences, 
provided the prudential requirements for a licence are met, and it is seen as potentially contributing to 
the public interest of maintaining a stable financial system.  The entry, including location or type of 
services offered, of foreign bank branches in Kore a is unrestricted.  The licensing requirements for 
foreign subsidiaries are the same as for domestic  banks, and less stringent for foreign branches.   A 
separate licence must be obtained for each foreign br anch;  a foreign subsidiary would, however, be 
able to operate any number of branches without the need for separate licences.  Foreign branches must 
have minimum operating funds of W 3 billion main tained in Korea, and meet the minimum BIS 
capital adequacy ratio required for domestic ba nks.  Foreign bank branches are also advised to 
allocate at least 25% of any increase in their won-de nominated loans to SMEs (35% if using the Bank 
of Korea's discount window).
34   
78. A foreign bank branch locating in Korea must have permission from its own regulatory 
authority and be conducting banking business at home under appropriate su pervision, be from a 
reputable foreign bank, and have the necessary exper tise in international banking business.  It must 
also have proper risk management procedures, a vi able and sound business plan, and be able to supply 
the FSC with data needed for supervision.   
                                                      
34 The share is 45% for domestic nationwide commercial banks, and 60% for regional banks. WT/TPR/S/137 Trade Policy Review 
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Non-bank financial institution 
79. The prudential and supervisory framework of non -bank institutions is similar to that for 
banks.  Merchant banks and mutu al savings banks must be approved and licensed by the FSC, and 
credit unions require approval.  Credit-specialized finance companies must be registered and have a 
business licence from the FSC.  They must meet certain minimum capital requirements.  Non-bank 
financial institutions, except for credit unions and mutual credit facilities, must extend a minimum 
share of their loans to SMEs (25% for merchant banks, 50% for mutual savings banks, and 30% for 
leases from specialized finance companies). 
Investment trust companies (ITCs) 
80. ITCs must be licensed by the FSC, including fo reign companies wishing to establish a branch 
or office in Korea.  An ITC must have an operating fund of at least W 3 billion;  sufficient facilities and personnel (five or more fund professionals);  a sound business plan;  international good standing;  
and be conducting such business overseas. 
Securities sector 
81. Securities and securities-related businesses, such as dealing, brokerage, and underwriting, 
must be licensed by the FSC.  Foreign branches or other business offices must be approved by the 
FSC according to the type of business.  Without such a licence, the foreign branch cannot conduct 
business with Korean residents.  Foreign branches or other business offices must have an operating 
fund of at least W 1 billion.  To be licensed, fore ign securities companies must also have adequate 
experience and facilities, and have a high international credit rating.   
Insurance 
82. Separate supervisory regimes apply to life insura nce and general insurance.  Foreign insurers, 
including foreign branches, may be licensed to opera te in Korea.  Foreign branches must maintain 
funds of at least W 3 billion, if wanting to do business with both Koreans and foreigners, or W 500 million if with mainly foreigners (W 100 milli on if only for foreigners).  The FSC has adopted 
the EU-based solvency margin ratio.  The market sets insurance premiums (both life and non-life). 
83. Korea has liberalized the insurance market.  At end 2003, there were 23 life insurance 
companies, of which three were foreign branches a nd five were foreign subsidiaries.  There were 
26 non-life insurers, of which 11 were foreign bran ches.  Bancassurance (life and non-life insurance 
policies provided by banks and other financial in stitutions) was introduced in August 2003, initially 
limited to designated branches;  the proportion of insurance policies sold from a single insurer has 
also been restricted.  It is to be fully operational by end-April 2007.   
Consumer credit 
84. The FSC introduced several additional pruden tial measures during 200 2 and 2003 following 
rapid rises in consumer credit and household inde btedness, largely financed by credit cards.
35  These 
measures included increased minimum mandatory provisioning ratios for household loans and 
mandatory credit checks on borrowers for mortgage lo ans using real estate as collateral.  Tighter 
                                                      
35 Between 1998 and 2002, total household credit increased 2.4-fold, rising from 38% to 62% of GDP 
(OECD, 2004a, p. 92).  The introduction of tax incentiv es to encourage credit card us e as means of reducing tax 
evasion also, it seems, had the unintended side-e ffect of increasing consumption and debt levels.  Republic of Korea WT/TPR/S/137 
 Page 103 
 
 
controls on credit card use were also introduced to address the rising delinquency rates, which had 
more than doubled in 2003 to 14.3%.   
85. The Government introduced credit rehabilitation pr ogrammes to enable debtors to arrange re-
scheduling and other agreed re-financing options.  The Consumer Rehabilitation Law, enacted in 
2004, assists debtors to gain relief through court me diation without having to declare bankruptcy.  A 
rescue plan was also arranged for LG Card, the largest credit card company, in 2004.  It was 
supported by 15 creditor financial institutions, in cluding nine banks, and the state-owned Korea 
Development Bank, also a major cred itor of LG Card, has a key role.36 
Deposit insurance 
86. Korea operates a partial deposit protection syst em providing limited coverage of up to 
W 50 million per depositor (increased from W 20 milli on on 1 January 2001).  It is administered by 
KIDC.  In 2002, payment claims amounted to W 2. 4 trillion, and premiums totalled W 0.9 trillion.  
Eligible financial institutions are banks, securities companies, insurance companies, merchant banks, 
mutual savings banks and, until recently, credit unions (Depositor Protection Act).37  At end 2002, 
there were 1,555 insured financial institutions, in cluding 40 domestic foreign branches.  Insured 
institutions pay annual premiums of 0.1% of initia l capital for banks, 0.2% for securities companies 
and 0.3% for other institutions.  
(ii) Communications 
87. Korea's comprehensive legislative framework  governing communications has not changed 
greatly during the period under review.  
(a) Telecommunications 
88. Korea's telecommunications market especially for mobile services has continued to expand 
during the period under review.  The number of fi xed line telephone subscribers fell slightly, from 
23.0 million in 2001 to 22.8 million at end-March 2004.   The teledensity per population is  about 55%; 
about 92% of households have at least one fixed tele phone line.  Penetration of cellular phones is also 
very high, with some 73% of the population current ly having a mobile phone.  As at end-March 2004, 
there were 77 Internet Service Providers (ISPs) a nd 35 million subscribers (74% of population).   
89. Telecommunications has traditionally had a "relatively high degree of government 
intervention and insufficient competition".38  The sector has been gradua lly deregulated and opened to 
competition, including from foreign providers, si nce the mid 1990s.  All telecommunication markets 
are open to new entrants (since 1998).  The Govern ment no longer has any commercial interest in 
telecommunications after fully privatizing the domi nant carrier, Korea Telecom (KT), in May 2002, 
when it sold its remaining 28% equity.  The ceiling on foreign ownership of KT was also raised from 
33% to 49%, as for other facility-based service providers (FBTs).39  The individual ownership limit of 
15% was removed in August 2002.  No foreign owne rship limits apply to special telecom service 
providers (STs) or to value-added telecom ser vice providers (VATs).  Korea has unilaterally 
liberalized its foreign ownership regime beyond its  WTO obligations (Table IV.7).  Since the last 
                                                      
36 OECD (2004a), p. 96. 
37 From January 2004, credit unions  were removed from the deposit insurance scheme and placed under 
the Deposit Protection Fund operated by the Credit Unions Cooperative. 
38 OECD (2003a), p. 81.   
39 Foreign ownership of KT was 48.99% in December 2003. WT/TPR/S/137 Trade Policy Review 
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Review of Korea, the telecommunications sector has developed at a remarkable pace, reflecting the 
rapid spread of high-tech services and greater competition.40  
Table IV.7 
Facilities-based telecommunications liberalization 
Item and carrier Before 1998 WTO obligation Current situation 
Limits on individual ownership 
   KT 
   Other carriers  
1% 
Wireless 33%;  Wired 10%  
3% from 1998 
33% for both from 1998  
No limit from August 2002 
 
Limits on total foreign ownership 
   KT 
    Other carriers   
Prohibited 
 Wireless 33%; Wired banned  
20% from 1998; 33% from 2001
 33% from 1998; 49% from 2001  
49% from direct foreign 
ownership and foreign-deemed judicial persons 
Largest foreign shareholder 
   KT 
      Other carriers  
Prohibited 
 Prohibited  
Prohibited 
 Allowed from 1999  
Prohibited but no limit if 5% 
or under  No limit 
Mergers and acquisitions in 
telecom service carriers 
   KT    Other carriers  
 
Prohibited Transfer to non-basic 
telecom carriers prohibited  
 
Not applicable Not applicable  
 
Merger of FBT or acquisition of part of whole of FBT 
business requires permission 
from Ministry of Information and Communications 
Resale    Voice 
 
   Other  
Prohibited 
 
Not applicable  
49% from 1998; 100% from 
2001 
100% from 1998  
100% from 2001 
100% from 1998 
Source: Ministry of Information and Communications.  
Market structure 
90. There are 33 FBT licences, 390 ST licences and 6,363 VAT licences.  Two carriers supply 
local calls (KT and Hanaro Telecom);  four comp ete in the national long-distance market (KT, 
Dacom, Onse, Hanaro), five in the international market (KT, Dacom, Onse, Hanaro, and SKTelink), and three in mobile services (SK Telecom, KTF, an d LT Telecom).  KT is by far the dominant carrier 
in non-mobile services, it has 95.4% of the local market, 77.1% of the long-distance and 39.7% of the international markets;  it is the only integr ated operator providing all three services.   
Regulatory regime 
91. Despite a number of reforms to liberalize te lecommunications and introduce competition, 
several regulatory weaknesses in key areas may still hamper effective competition in facilities-based 
services.  Areas requiring tighter regulatory safegua rds include creating an independent regulatory 
authority with adequate powers, having an appr opriate cost-based interconnection framework on 
access pricing, and introducing a price cap regime.
41  The Government is addressing many of these 
shortcomings. 
92. Although the regulatory body, Korea Communicati ons Commission (KCC), is responsible for 
ensuring fair competition in telecommunications, th e Ministry of Information and Communications 
(MIC) appears to have retained most regulatory r esponsibility (Telecommunications Basic Act, 1997).  
The KCC, which is located within  the MIC, seems to be largely advisory, with minimum regulatory 
                                                      
40 OECD (2004a), p. 131. 
41 OECD (2000), p. 5. Republic of Korea WT/TPR/S/137 
 Page 105 
 
 
power.42  KCC therefore appears to fall short of be ing an independent regulator with sufficient 
authority over licensing, pricing, and other regulat ory safeguards to ensure a competitive market:  the 
MIC seems to perform the major regulatory role as well as being responsible for telecommunications 
policy and industry promotion.  This lack of sep aration of functions, at least potentially, raises 
efficiency and conflict of interest concerns.  The OECD has recently recommended that the KCC 
should be transformed into an independent regulat or to clearly differentiate MIC's policy from its 
regulatory responsibilities.43  Korean authorities believed that the KCC was sufficiently independent 
and had adequate regulatory powers to be an effective regulator.     
93. Both the MIC and the Korea Fair Trade Commission (KFTC) have responsibility for 
controlling anti-competitive behaviour in telecomm unications;  the sector is not exempt from the 
Monopoly Regulation and Fair Trade Act.  Resp ective legislation calls for consultations and 
coordination between the MIC and the KFTC, such as in situations of unfair competition and when 
enacting legislation with possible anti-competitive effects.  The MIC and KFTC share jurisdiction 
over mergers and acquisitions.  The precise anti-comp etitive and regulatory roles of the MIC and the 
KFTC are unclear.  According to Korean officials,  the MIC is responsible for competition policy in 
the telecommunications sector, and consults clo sely with the KFTC when necessary, such as on 
mergers and acquisitions, to avoid inconsistent outcomes.   
94. The MIC licenses FBT providers.  Only Kor ean domestic entities can apply for an FBT 
licence;  domestic entities and individuals, including foreign with a local presence, can become ST or VAT providers.  Different entry lim itations apply to each category of  provider.  FBT providers are 
subject to authorization, ST providers to re gistration and VAT providers to notification.
44  F B T  
licences are differentiated by type of service, so th at providers wishing to offer local, long-distance, 
and international calls require multiple licences.  The licensing regime is an open tendering system 
with a priori  no limit on the number of licences.  Licence requests are open twice per year, in March 
and September.  MIC must decide whether to grant a licence within 30 days of the application.  Criteria used in deciding whether to issue an FBT licence include the appropriateness of the 
applicant’s plan and the scale of  the proposed telecom facilities, as well as financial and technical 
capacities.  The data requirements for FBT licences seem excessive, according to the OECD:  it has 
suggested  that it could be beneficial for Korea to st reamline its licensing procedures to reduce entry 
barriers, based on a priori  examination of applicants, including introducing a generalized class 
licensing system or establishing minimum standards.
45  Officials indicate that Korea is considering 
adopting a class licensing system. 
95. Lump sum payments up-front by FBT applicants of fees of 1-3% of total turnover for 
five years  were abolished in 2002.46  All wireline FBT operators with revenue exceeding W 30 billion 
must contribute annually 0.5% of the previous year 's revenue to R&D development.  The contribution 
is limited to the operator’s net profit.  FBT provide rs requiring spectrum must make an up-front lump 
sum contribution toward the spectrum allocation price. 
                                                      
42 OECD (2000), p. 11. 
43 OECD (2004a), p. 136. 
44 Registration means that operators must register with the regional MIC office and meet certain criteria 
(e.g. minimum number of personnel and certain financial re quirements, such as capital of at least W 3 billion for 
exchange-based ST providers).  Notif ication means simply notifying the regional MIC office of the business 
activity. 
45 OECD (2000a), p. 17;  OECD (2003a), p. 81;  and OECD (2004a), p.10. 
46 OECD (2003a), p. 81. WT/TPR/S/137 Trade Policy Review 
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96. There are no satellite licences.  Any company may own a satellite to provide licensed 
telecommunication services.  KT owns the Koreasat .  Korea Orbcom is licensed to provide satellite 
data communications services.   
Interconnection, access pricing and unbundling of the local loop  
97. Legislation requires FBT carriers to provide interconnection to the network, including 
collocation of facilities to achieve interconn ection and local loop unbundling (roaming) 
(Telecommunications Business Act).  It prohibits setting charges for the provision of facilities for 
roaming, interconnection, and collocation that, for example, "unduly" discriminate in providing these facilities.  MIC reviews and sets interconnection ch arges for individual FBT operators.  KCC permits 
interconnection agreements between market dominant and FBT opera tors based on these 
interconnection charges, and also accepts other inte rconnection agreements between FBT operators.  
KCC is also responsible for reso lving interconnection disputes among FBT carriers.  The KFTC also 
regards "unjustifiably refusing,  discontinuing or limiting access to essential facilities" as abuse of 
dominant market position, and can therefore take act ion against any unfair refusal to provide access.  
98. FBT providers designated by the MIC must pr ovide interconnection, if requested.  The 
criteria used to designate such carriers are that th ey have essential facilities needed by other providers 
to operate services, or their market share is above 50% and total market revenue for the previous year 
exceeded levels set by the MIC (W 3.5 trillion fo r local and mobile calls, W 1.1 trillion for long-
distance calls, and W 500 billion for international calls).  Currently only KT and SK Telecom are 
designated for mandatory interconnection.  They ar e not required to publish standard interconnection 
offers, but are to form interconnection agreements with operators, when requested, within 90 days.  
Principles for interconnection and determining access prices are included in the Interconnection Order 
issued by the MIC.  Korea appli es the "representative cost system" for fixed-line services, whereby 
the interconnection charge set for the dominant pr ovider, KT, is applied to other fixed-line FBT 
carriers.  Korea applied the "individual rate system" to mobile services from April 2002, whereby interconnection charges set for the dominant mobile carrier, SKT, are re-adjusted by MIC for other 
mobile operators.  This reduced access prices by 23%, with major savings to consumers.
47 
99. All FBT providers must maintain separate acc ounting systems for each service, based on the 
Government's accounting separation methodology.  The fully distributed cost method (FDC), is used 
for determining access prices.  It uses average hi storical costs and distributes common costs among 
services according to set accounting standards, and in cludes a set rate of return on investment.  This 
methodology overstates interconnection charges.  It is an inappropriate basis for ensuring a 
competitive market since it allows inefficient costs to be passed on to operators through higher access 
prices.  Efficient interconnection requires prices to be  set according to marginal costs, such as the long 
run average incremental cost (LRAIC).48  Korea plans to replace FDC with LRAIC in 2004.  It is 
currently examining alternative options, and dete rmining interconnection charges for individual 
operators.  
100. Amendments to the Telecom Business Act in January 2001 secured the legal ground for local 
loop unbundling.  In April 2002, MIC issued guidelines and standards for sharing of KT's wire network;  these were revised in November 2003 to reduce user fees.  Some 1,000 loops have been 
used and this is expected to expand.  Restrict ed number portability for local services was introduced 
in 2003, and Busan and Seoul are to be added in July and August 2004, respectively.  Guidelines on 
carrier pre-selection for long-distance calls were implemented in March 2002. 
                                                     
 
47 OECD (2003a), p. 81. 
48 OECD (2000), p. 23. Republic of Korea WT/TPR/S/137 
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Price regulation 
101. MIC operates a price permission system for market dominant carriers who are designated 
annually.  Proposed price changes must be permitted by the MIC.  Such price permission also applies 
if the operator's market share (based on annual sal es) is the largest and its  annual sales exceed a 
specified limit (W 3.5 trillion for local or mobile call market).  Currently only KT's local calls (both 
fixed and usage charges) and SK Telecom's mobile calls are covered.  The OECD has suggested that 
such price controls on mobile calls could be remove d, and that price-cap regulation could be instead 
be used in markets where KT was dominant.49  MIC was considering introducing a reserved 
notification system to automatically approve pri ce changes, unless opposed by MIC within a specified 
time period.  However, officials indicated this had been postponed given the fragile competitive 
nature of the mobile market. 
Universal service obligations 
102. All service providers (including mobile services)  must contribute to providing universal 
services.  These are defined as basic services that an yone in Korea can use, regardless of time or 
place, with a "rational" charge (Telecommunications Business Act).  MIC has determined these to be 
local calls, emergency calls, and discount-rate phone services for disabled, low-income households, 
and for remote areas.  KT is responsible for pr oviding these services, subject to reimbursement of a 
share of costs from other providers.  A Virtual F und was adopted in January 2000, whereby operators 
shared the costs of such services according to respective net revenues 
(b) Broadcasting and audio-visual 
103. The MIC is responsible for radio manageme nt policy aimed at ensuring the efficient 
management of the broadcasting spectrum.  To this  end, it plans broadcasting transmission, manages 
the spectrum, establishes radio and television statio ns, and sets broadcast technical standards.  The 
Ministry of Culture and Tourism determines polic y on broadcast content.  The Korea Broadcasting 
Commission (KBC) regulates the transmission and programming of broadcasting programmes, and conducts research to support broadcasting func tions.  The Broadcasting Reform Committee 
recommended the formation of a Telecommunicati ons and Broadcasting Committee to combine the 
regulatory functions of both sectors;  this is still being considered.   
104. Any broadcaster (terrestrial, satellite or cable, including cable relay) must be licensed by the 
MIC, based on recommendations by the KBC.  Th ere are 33 licensed terrestrial TV channels.  
Terrestrial radio and television broadcasting are cl osed to foreign investment.  Foreign ownership 
ceilings of cable television providers were raised  to 49% (foreign ownershi p is prohibited in news 
coverage).  Legislation does not recognize separ ate DSL operators; FBT carriers provide these 
services.  DSL and CATV operators can provide  telephony services to business and residential 
customers by being a licensed FBT or a registered special service provider.  CATV operators may also provide value-added (no voice) communications, such as internet services;  internet access 
services are to be included in FBT operations from June 2004.  Competition is reduced by having 
exclusive monopolies among CATV system operators for each of Korea's 77 CATV broadcasting zones.   
105. Satellite broadcasters are subject to a limit on foreign equity of 33%. 
                                                     
 
49 OECD (2003a), p. 81, and OECD (2004a), p. 134. WT/TPR/S/137 Trade Policy Review 
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Foreign content quotas 
106. Korea applies quotas on foreign content (Broad casting Law).  Free terrestrial television 
stations can only transmit foreign programmes for up to 20% of their monthly broadcasting time.  
Annual quotas also restrict broadcasts of foreign ma terial to 75% for movies, 55% for animation, and 
40% for popular music.  Foreign content on cable TV is  limited per channel to mainly 50% of airtime, 
with annual quotas of 70% applying for movies, 60%  for animation, and 40% for popular music.  
Foreign re-transmission satellite channels are lim ited to 10% of total number of operating channels, 
and Korean firms wishing to re-broadcast satellite transmissions of foreign programmes must have a 
contract with the foreign programme provider to ob tain approval from the KBC.  Korea continues to 
operate an annual screen quota on foreign movies, whereby cinemas must show domestic movies for 
at least 146 days, reduced to 106 days under certain  conditions (Promotion of the Motion Pictures 
Industry Act).  
(c) Information technology (IT) 
107. Achieving an advanced IT society remains a key government objective.  Substantial public 
investment is being made to upgrade the comm unications infrastructure to enable advanced 
information technologies (e.g. e-commerce and e-govern ment) to be implemented in the private and 
public sectors, to improve efficiency and global  competitiveness.  Information and communication 
networks to build an information society based on the Korea Information Infrastructure (KII) are 
promoted by the Informatization Promotion Co mmittee and the Informatization Promotion Fund 
(Framework Act on Informatization Promotion, 199 5, and the Act on Promotion of Information and 
Communication Network Utilization and Information Pr otection, 1986).  Korea is ranked first in the 
world for the number of broadband internet users ( 21 per 100 persons).  The IT industry accounted for 
15.6% of GDP in 2002.   
108. The Government's Third Master Plan for In formatization Promotion (2002-06) was launched 
in April 2002 (the so-called e-Korea Vision 2006).  It  provided a blueprint for continued infrastructure 
development for the next generation Internet, and for Korea to emerge as the IT hub in North East 
Asia.  An informatization white paper was released in 2002 by the National Computerization Agency 
calling for Korea to establish itself as the global lead er in advanced e-technology.  The goals include 
achieving universal access to the broadband inte rnet by 2005 and 90% of the population using the 
internet by 2006. 
(iii) Transportation 
109. There have been no major changes in Korea' s transportation policies during the period under 
review.  The main mode of domestic transport rema ins road, followed by sea (especially for freight), 
while international transport is mainly by water (cargo) and air (passengers).  Ensuring efficient and 
modern transport modes is a key government priori ty, particularly given Korea's prime location as a 
transit hub in North East Asia.  
110. The National Inter-modal Transportation Plan (2 000-19) provides the basis for transportation 
policy.  The National Transportation Committee is responsible for planning transportation policy and 
expenditure.   The First Five-year Transportation Infrastructure Investment Plan (2000-04) provides 
for most expenditure on roads and railways. 
(a) Maritime transport 
111. The Ministry of Marine Affairs and Fisheries is responsible for shipping and port policy, 
maritime safety and development,  including enhancing shipping co mpetitiveness.  A key government Republic of Korea WT/TPR/S/137 
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objective is to develop Korea as a logistical hub of North East Asia, where sea trade has expanded 
rapidly in line with the Chinese and other regional economies.  Korea relies heavily on shipping, and 
operates a large coastal and international fleet.  The Government has taken significant steps to further 
deregulate and liberalize the shipping industry.  Since 1999, Korean flag vessels no longer have 
priority over international carriers for transporting bu lk cargo.  Licensing of foreign shipping branches 
in Korea was also relaxed, and forei gn ownership of Korean vessels allowed    
112. Regulations were revised in 2002 to allow Ko rean carriers serving foreign routes to operate 
between domestic ports.  This was expected to reduce transportation costs by allowing substantial 
cargo previously transported by land to be shipped domestically, such as from Seoul-Incheon to 
Busan and Gwangyang.  Foreign flagged vessels are a llowed to use Korean ports subject to the same 
conditions as Korean flagged vessels.   Cabotage is reserved for Korean  vessels.  In 2003, foreign 
carriers were allowed to carry their own cargo or  empty containers between Busan and Gwangyang 
ports.  Foreigners can participate in coastal tran sportation of goods and p assengers between North and 
South Korea as a minority (less than 50%) joint vent ure with a South Korean shipping company.  
Registration procedures for ocean-going transport ha ve been relaxed, and are applied equally to 
domestic and foreign shipping companies.  Carri ers must be incorporated, have equity above 
W 500 million and cargo capacity of at least 5,000 tonnes.  
113. Korea currently has 51 designated ports, of which 28 are "trade" ports.  Cargo capacity 
expanded from 418 million tonnes in 1999 to 487 m illion tonnes in 2002.  Busan port dominates, 
handling almost one quarter of Korea's total cargo a nd about 80% of all containers.  The next busiest 
ports are Gwangyang and Incheon, with Gwangyang due to become relatively more significant.  
Korea is rapidly expanding cargo and port facilities, including container terminals, with six large port 
developments worth W 3 trillion under construction, and three more planned at a cost of 
W 922.6 billion.  The main policy is to develop Busan and Gwangyang ports in to major container-hub 
ports.  By 2011, Busan is expected to increase from 21 to 30 berths, and Gwangyang from 8 to 33.   
114. Current ports contain substantial private, in cluding foreign, investment (Table IV.8).  
Hutchison Port Holdings (HPH) from Hong Kong, for example, owns Hutchison Korea Terminal 
(100%) at Busan, and is heavily involved (80% equi ty) with Hanjin Shipping and Hyundia Merchant 
Marine in Korea International Terminal at Gwangyang.  The Government is increasingly turning to the private sector to develop port infrastruct ure and provide services under various concession 
agreements, such as build-operate-transfer (BOT) or  build-transfer-operate (BTO) contracts, which 
normally run for 40 to 55 years after port construction (the Port Private Investment Project) 
(Table AIV.2).  Under these arrangements, the co ncessionaire receives returns on investment as 
dividends after the borrowed capital is repaid, which is within the first 10 to 15 years of operation.  
The Government provides construction aid if the to tal investment costs exceed projected net income 
from charging market-based port-usage fees.   It  can also grant concessionaires minimum revenue 
guarantees for up to 15 years, provide protection agai nst currency exchange rate risks, and offer tax 
incentives, such as reduced company tax.
50  The first stage of Busan New Port to build a container 
terminal by 2006 was launched with two thirds private investment (24.5% foreign equity by CSX 
World Terminals).  Additional private investment to develop two further container terminals is 
planned at Busan, and HPH is involved in the expansion of Gwangyang port.  Singapore's PSA 
Corporation has invested (60% equity) in the expansion of Incheon South Port.  Annual port 
development investment is projected to averag e W 3.3 trillion between 2002 and 2011, of which about 
half is expected to be private. 
                                                      
50 The revenue guarantee declines progressively from 90% of projected revenue for the first five years 
of operation to 80% for the next five  years and to 70% for the last five years.  The exchange rate protection 
covers losses on borrowed foreign cap ital from currency fluctuations exceed ing 20%.  The guarantees are met 
by providing either financial assistance or adjusting port-usage charges.    WT/TPR/S/137 Trade Policy Review 
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Table IV.8 
Foreign investment in major ports 
Corporation Location Size Foreign invest or (%) Major domestic investor Stage 
Incheon Container 
Terminal Incheon South 
Port 900 m PSA (60) Samsung Corporation, 
Sungwang Under 
construction 
Korea International 
Terminal Gwangyang Port 1,950 m HPH (80) Hyundai merchant marine, 
Hanjin Shipping Operating 
Dongbu Pusan Container 
Terminal Busan Port 826 m Evergreen (30) Dongbu Construction, 
Shinyoung Operating 
Hutchison Korea 
Terminal Busan Port 2,147 m HPH (100) - Operating 
Pusan Newport Company Busan New port 3,200 m CSX WT (24.5) Samsung Corporation and 
19 other companies Under 
construction 
Source:  Ministry of Marine Affairs and Fisheries. 
115. The Ministry of Maritime Affairs and Fisheries administers ports.  They are state owned and 
rented free of charge to the Korea Container Termin al Authority, which in turn rents port facilities to 
private terminal operators.  The Port Authority Ac t of 2002 transferred the operation of Busan Port 
and Incheon Port to an independent public port authority, aimed at improving efficiency.  The Busan Port Authority was established in January 2004, an d the Incheon Port Authority is being formed.  
116. The Government does not intervene directly in providing shipping services, but provides 
various financing and tax schemes to assist shipping  companies.  It plans to introduce a tonnage tax 
system, and a ship investment company system desi gned to provide tax incentives to private investors 
in ships for lease to shipping co mpanies.  Most maritime auxiliary services including tug services, 
freight forwarding and maintenance and repair services are provided by the private sector;  pilots must 
be Korean. 
(b) Air transport 
117. The Ministry of Construction and Transporta tion (Air Transport Policy Bureau and Civil 
Aviation Bureau) is responsible for air transport policy and licensing a rrangements.  Korean air traffic 
has grown substantially.  In 2002, air passengers  and cargo carried to and from Korea rose by 11.6% 
and 11.4%, respectively.  There are eight inte rnational and eight domestic airports.  Incheon 
International Airport opened in Ma rch 2001, and is expected to deve lop into a mega regional hub.  
Phase 2 of construction is to be co mpleted in 2008.  With the exception of Incheon Airport, airports 
are managed and operated by the Korea Airports Corporation.  Korea has two privately owned 
national flag carriers, Korean Air and Asiana Ai rlines.  Both carriers operate international and 
domestic services.  Cabotage is prohibited (Aviation Act, Article 149).   
118. International air services are governed by bilate ral air service agreements (ASAs).  These are 
negotiated primarily by the Ministry of Constr uction and Transportation.  Korea has 82 ASAs 
(May 2004), and plans to nego tiate additional agreements.  It also intends to progressively liberalize 
bilateral arrangements.   
119. Foreign ownership of Korean airline operators  providing scheduled or non-scheduled services 
is limited to less than 50%.   Operators must also  register aircraft in Korea.   The Government intends 
to replace the current approval-based airfare system with a filing-based system.  Korea has an "open 
skies" agreement with the United States.  It also  has a number of liberal arrangements concerning 
cargo operations with various  aviation partners.   Republic of Korea WT/TPR/S/137 
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120. The Civil Aviation Safety Authority was formed in August 2002 within the Ministry to 
strengthen aviation safety and security.   
(c) Land transport 
121. The Ministry of Construction and Transportatio n is responsible for land transport policy. 
Roads handle over 90% of Korea's domestic transport requirements. 
Road 
122. Korea has almost 100,000 kilometres of road, w ith 24 expressways and 56 national highways.  
Seven new expressways are to be built by 2020.  The state-owned Korea Highway Corporation is 
responsible for national road constr uction and maintenance, and also manages toll expressways.  It is 
supervised by the Ministry’s Road Bureau, which is  the responsible for formulating road policies and 
plans.  Private investment in roads is being enc ouraged under BOT or BTO contracts, and several are 
currently under negotiation (Private Fund Prom otion Law and the Private Capital Inducement 
System).   
123. Market access to the passenger road transportati on sector is regulated.  The main barriers to 
entry apply to major "route" buses and taxis where new entrants are subject to an economic needs test.  
Local governments set bus and taxi fares based main ly on costs.  Bus companies receive partial 
subsidies for losses in the form of matching centr al-local government funds, and along with taxi 
operators, are partially exempt from fuel taxes.  Th e State is not involved in the trucking (cargo) 
sector.  The Trucking Transport Business Act was am ended in January 2004 to tighten entry barriers 
by moving from a registration to a permit system.  The Ministry grants permits to new entrants or for 
incumbents to expand operations using an ec onomic needs test, aimed at matching demand and 
supply.  Cargo charges have been deregulated since 1998, except for rescue/salvage and special 
towing services.  These charges must be reported (filed)  to the Ministry.  Trucking operators are also 
partially exempt from fuel taxes.  No foreign i nvestment restrictions apply to the trucking sector. 
Railway 
124. Korea has national railways and subways in major urban centres, such as Seoul.  There are 
65 railroad routes, covering over 3,000 kilometres.  About one-third is multi-tracked and about one-
quarter electrified.  Rail accounts for 6.8% of domes tic passengers and 6.3% of freight (13.1% and 
8.5% in 1999, respectively).  Korea is expanding inv estment in rail aimed at raising track coverage to 
almost 5,000 kilometres and having over 80% multi-tr acked and electrified.  The Government's goal 
is to raise the market share of railways to 19% fo r passengers and 20% for freight by 2119.  Korea's 
first high-speed train service, linking Seoul and Bu san, and Seoul and Mokpo, began operating in 
April 2004.  The Korea High Speed Rail Constructio n Authority constructed the state-owned system, 
which, according to officials, is commercially run by the state-owned railway, Korea National 
Railroad (Korail);  phase two is  to be finished by 2010. 
125. Legislation was passed in 2003 to restructure th e highly-indebted and inefficient state-owned 
monopoly (Korail) (Korea Rail Corporation Act of De cember 2003).  Korail also continues to run the 
conventional railway network monopoly.  Train far es, including freight rates, are set with the 
Ministry's approval, based on the inflation rate and co st structures of Korail.  It is planned to grant 
Korail greater autonomy in setting fares based on a price cap system.  The state-owned monopoly has WT/TPR/S/137 Trade Policy Review 
Page 112 
 
 
recorded large operating losses, which amounted to W 647.8 billion in 2000.  Without major reforms, 
debt levels were projected to rise to W 28 trillion by 2020 (W 8.4 trillion in 2001).51   
126. Plans announced at the time of the last Review  to deregulate and privatize the state railway 
monopoly slipped substantially due to difficulties in passing the necessary legislation.  However, the 
Government remains committed to railway restructur ing broadly in line with the 2001 Basic Plan for 
Korea Railway Industry Restructuring;  under which the restructuring of Korail was a significant first 
step.  Legislation to deregulate the state monopoly for eventual privatization was passed in June 2003 
(Railway Industry Restructuring Act).  Korail's  construction and operation activities have been 
separated.  The Korea Railway Network Authority,  established in January 2004, combined Korail's 
construction activities with those of the Korea High Speed Rail Construction Authority (Korea Rail 
Network Authority Act of June 2003).  Train operati ons, including of the high-speed network, are to 
be transferred to the Korea Rail Corporation in January 2005.   The Rail Policy Bureau was established 
within the Ministry in March 2004 to facilitate the sector’s restructuring.  
127. In the longer term, the plan is for passenger a nd freight services to be separated and supplied 
by independent corporations.  Alt hough the initial target for this was 2006, it has been deferred and is 
being reviewed following the delay in esta blishing the Korea Rail Corporation.   
                                                      
51 KOIS, 25 December 2001. Republic of Korea WT/TPR/S/137 
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