In January, following President Lee Jae-myung's visit to China, the Korea-China Free Trade Agreement (FTA) Phase 2 negotiations were officially reactivated under an agreement between the two leaders to achieve "meaningful progress within the year." The 13th round of service and investment follow-up negotiations began in Beijing in January, followed by the 14th round in Seoul in April and the 15th round in Beijing in June, with negotiations continuing on a bimonthly basis.
The Korea-China FTA, which took effect in 2015, focused on goods trade in its first phase, while the second phase addresses more sensitive and structural areas such as services, investment, and finance. Given the scale of economic exchanges between the two countries, this appears to be a natural evolution of their economic cooperation. In fact, Korea-China goods trade is expected to exceed $300 billion annually from 2021 to 2024, while service trade between the two countries remains at only $30.1 billion, accounting for less than 9% of total trade. This stark imbalance highlights both untapped potential and structural bottlenecks, making the need for negotiations evident.
Although the two countries began follow-up negotiations in the service and investment sectors in March 2018, they remained effectively frozen due to the THAAD conflict, the Korean Wave restrictions, and escalating U.S.-China strategic competition. The resumption of negotiations, after nearly eight years of stagnation, is noteworthy not only for its economic benefits but also for the political necessity of managing strained bilateral relations and strengthening economic ties amid U.S.-China competition. In this context, the Phase 2 negotiations of the Korea-China FTA serve as a test for a new adjustment in Korea-China relations beyond mere trade issues.
However, there is a clear difference in the positions of the two countries. For China, there is a need to restore the image of an "open China" as its economy slows and foreign investment declines, claiming that its service market is sufficiently open following its World Trade Organization (WTO) accession. Reflecting this, President Xi Jinping presented a "four-point cooperation proposal" during the summit, expressing hope that Korea would provide greater convenience in expanded service openings, as well as in cooperation on artificial intelligence (AI), biopharmaceuticals, green industries, cross-border payments in yuan, and digital currency. This suggests that China is calculating how to improve investment conditions for its companies in Korea while navigating U.S. containment efforts and tariff risks.
South Korea aims to secure institutional access to the Chinese market through a negative list approach that expands the principle of openness and exceptions in the service, content, finance, and professional services sectors, amid concerns over the instability of its export structure and the need for industrial diversification. Additionally, South Korean companies seek to proactively enter emerging industries such as AI, edtech, and healthcare, which have gained competitive advantages since 2015, while also establishing communication channels to manage supply chain risks like the urea water crisis. The resolution of Korean Wave restrictions in the cultural and content sectors, normalization of game license issuance, and easing of K-content distribution regulations are also of national interest.
In this regard, the positions of the two countries diverge. While China emphasizes "promoting practical cooperation," whether its notion of openness translates into actual institutional changes remains a separate issue. As is well known, China continues to adhere to its fundamental framework of protecting and controlling its domestic industries on key issues such as government procurement, intellectual property rights, and market entry under the negative list. In contrast, the South Korean government aims to create a free and open service trade and a predictable investment environment through these negotiations. Although less visible than tariff reductions, the focus is on enhancing the predictability of local business operations for South Korean companies.
The core issue lies in "how to open" rather than "what to open." In this context, South Korea's concerns regarding China's aggressive stance can be summarized in three main points.
First, China is the second-highest country among 42 major nations, following India, in terms of restrictions on foreign capital entry in the service sector. Even if openness is specified in the FTA agreement, the actual implementation phase may see "invisible regulations" that could diminish the practical effects of openness. There are also concerns about deepening economic security risks. The anti-espionage law and data security law allow for constant control under the guise of "national security," raising fears that South Korean companies could become targets of arbitrary law enforcement. Additionally, the "sandwich" risk arising from escalating U.S.-China tensions is a clear concern, as sensitive issues may collide with the U.S. containment framework against China.
The Phase 2 negotiations of the Korea-China FTA represent both a cornerstone for restoring bilateral relations and an opportunity to carve out new pathways for South Korea's service industry, but they also come with significant threats. This is especially true for issues that intertwine economics, security, industry, and diplomacy. If the focus on improving relations overshadows the substantive content of the negotiations, the outcomes may remain symbolic while the risks persist. Being lured solely by the temptation of market openness could lead the negotiations to prioritize symbolism over substance and speed over safety. A politically expedient agreement may shine briefly, but poorly designed norms can burden businesses and industries for a long time.
Therefore, South Korea's negotiation strategy should focus on how to refine the norms surrounding substantive openness and the associated risks.
The key lies in refining the methods of openness rather than merely expanding the level of openness. First, even if market access is permitted in the agreement, procedural safeguards must be included to ensure "practical openness." Second, supply chains and economic security should be central to the negotiation agenda. Institutional safeguards, such as advance notification and consultation obligations for items that may face sudden export controls like urea water and rare earths, as well as the establishment of permanent hotlines, are essential. Furthermore, enhancing the effectiveness of investor protection and dispute resolution mechanisms, along with ensuring that intellectual property rights protection, data movement predictability, and curbing arbitrary law enforcement are key negotiation goals in the cultural content and data sectors.
Ultimately, the success of the Korea-China FTA Phase 2 negotiations depends on the realization of the market's actual operational potential rather than the breadth of openness, and how well safety nets are designed to protect South Korean companies and industries during this process. What is needed now is a negotiation strategy that maintains a focus on direction over speed and content over timing, based on a sober recognition of reality. This Phase 2 negotiation could serve as a litmus test for the future of Korea-China economic relations and South Korea's overall foreign economic strategy, as well as for setting the overall direction of Korea-China relations moving forward.
* This article has been translated by AI.
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