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The Peninsula

What Renegotiating the KORUS FTA May Mean for the Future of Digital Trade in Korea

Published November 7, 2017
Category: South Korea

By Hwan Kang

The renegotiation of the U.S.-Korea FTA, or KORUS FTA, was prompted by White House concerns over the bilateral trade deficit, placing sectors in which the U.S. has significant deficits in the public spotlight. However, the renegotiation of the KORUS FTA also has potential ramifications for other areas, including digital trade. Many experts recently expressed the need for the digital trade section to be updated on par with TPP articles, even though it represents “the most robust digital trade provisions in force” as stated by the Congressional Research Service. If the digital trade section is amended, Korea will likely need to open up its  e-commerce industry to foreign competitors. What would this mean for Korea?

Possible Amendments in the Digital Trade Section

There is no guarantee on where the KORUS FTA renegotiations will go, but there are some clues as to what will be addressed. For starters, in the 2017 National Trade Estimate Report on Foreign Trade Barriers (NTE), USTR mentions restrictions in cross border data movement and facilities localization as important non-tariff barriers in current digital trade with Korea, along with electronic payment systems. In terms of what the USTR has been asserting so far with digital trade in negotiations, TPP has separate articles on restricting data localization and computer source code disclosure. The administration’s recent NAFTA objectives summary also suggests that the U.S. wants trading partners not to require data and facilities localization along with disclosure of computer source code. In sum, USTR intends to update digital trade articles to prevent data localization and computer source code disclosure, which are missing in the KORUS FTA.

Currently, Korean regulations that specifically ask for data localization include installing local facilities for cloud computing services in the public sector and restrictions on exporting mapping data. More indirect forms include data privacy laws that require consent from both the government and customers to transfer financial data outside the country, practically forcing companies to store data inside the country in the process. Although the Korean government does not ask foreign companies to disclose source code in return for business, the U.S. International Trade Administration has stated the government could ask companies to submit it for “Common Criteria certification (CC certification).” CC certification is a verification process that grants security clearance for IT products that works among member countries including Korea and the United States. These are not exactly new complaints that arose suddenly after Trump administration came into power. Therefore, it would be reasonable to think USTR will try to address these problems.

Possible Changes in the Korean Market

Data localization would have broader implications than other amendments as it relates to cutting operating cost for companies in respective countries. On a positive note, this would benefit the Korean economy. According to a 2014 report by European Centre for International Political Economy, the data localization regulation had cost Korea economy 1.1% of GDP in 2014 (USD 13 billion) and 3.6% drop in FDI (USD 180 million). The reasoning behind this analysis is that the restriction on information exchange prohibited many foreign companies from functioning efficiently in Korea, which in turn hurt Korean consumers because they would not get adequate services in time. On the other hand, it would also mean that Korean companies will have more competitors. U.S. companies would not have to worry about building separate servers for Korean customers’ personal information, bringing down the cost of entering the Korean market.

To focus on more specific parts, it would eliminate the safety nets many Korean location services had. Although many data localization regulations had been enacted in the name of security against North Korea, it is undeniable that it also works as a competitive edge for domestic companies. The most controversial one would be the restriction on exporting mapping data of Korea, which blocks all the foreign services that require navigation to function properly, or at least come out much later than in other countries as was the case of Pokémon Go. If an amendment is made on this issue, U.S. service suppliers will not have to rely only on geo-spatial data provided by the government and develop location services such as autonomous cars much more freely.

Another big change would be in the online payment system. According to the 2017 NTE report, U.S. companies cannot engage in digital trade directly with Korean consumers or in Korean won unless the Korean customer has a U.S. credit card number because they could not extract the credit data without local facilities. This causes U.S. companies to rely on Korean bank or credit card companies as the middlemen in all transactions or to trade in U.S. dollars, which is also a hindrance to Korean consumers. If an amendment is to address this issue, the Korean financial sector would have to face U.S. credit card companies or banks on equal footing. Furthermore, since the U.S. provides a more convenient online payment system without Active X or a confirmation certificate, the Korean digital market would also have to consider abolishing these requirements. Though, in the long run it may make digital Korean firms more competitive internationally.

Putting the computer source code disclosure article in the FTA would also ease entering into Korean digital market for U.S. IT companies. It is not that U.S. brands cannot come into the Korean market. However, for IT products that were acquired by the government, they have had to overcome the barrier of a separate certification process by the Korean National Intelligence Service for security reasons even if they complied with CC certification. The 2017 NTE report also says that the boundaries for subjects of certification have been vague for the U.S. businesses. With an amendment in place, the Korean government would have to violate the agreement to perform a security clearance of its own on IT products if it comes to computer source codes, which bought time for fast growing domestic IT companies trying to secure a deal with the Korean government.

Challenges and Implications

Of course, these are all based on the presumption that South Korea will agree with these propositions should they be raised by the United States. There is still lingering doubt left in Korean minds about completely opening up the market in terms of digital trade, as can be seen in the case of Uber in Korea. Some people also raise security concerns specifically in relation to the data localization issue. They believe that having the electronic data within the geographical border would somehow increase the level of data security, which is a response to the fears that rose after the Snowden incident.

It might be possible that the digital chapters in the KORUS FTA will be relatively unchanged since there is so much attention on other issues. However, the KORUS FTA has been and will probably remain as a benchmark of international digital trade rules after the renegotiation. As such, it will have implications for Korea and the rest of U.S. trade partners as digital transaction becomes the core of international trade, which is all the more reason why we should keep an eye on it.

Hwan Kang is currently an Intern at the Korea Economic Institute of America as part of the Asan Academy Fellowship Program. He is also a student of Seoul National University in South Korea. The views expressed here are the author’s alone.

Photo from Jim Mattis’ photostream on flickr Creative Commons.

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