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 during the same period is only projected to reach $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, which had drifted for nearly eight years, 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 Korea-China FTA Phase 2 negotiations 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, amid economic slowdown and reduced foreign investment, there is a need to restore the image of an "open China" by demonstrating 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 areas such as expanded service openness, artificial intelligence (AI), biopharmaceuticals, green industries, cross-border payments in yuan, and digital currency cooperation. This suggests that China is calculating how to improve investment conditions for its companies in Korea while navigating U.S. containment and tariff risks.
Korea, facing instability in its export structure and the challenge of industrial diversification, aims to secure institutional access to the Chinese market by expanding the negative list approach, which allows for principle-based openness with exceptions in the fields of services, content, finance, and professional services. Additionally, Korea seeks to proactively enter emerging industries such as AI, edtech, and healthcare, which have gained competitive strength since 2015, while establishing communication channels to manage supply chain risks like the urea water solution crisis. The resolution of the 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 repeatedly emphasizes "promoting practical cooperation," it remains to be seen whether the openness it advocates will translate into actual institutional changes. As is well known, China continues to adhere to its fundamental framework of protecting and controlling its domestic industries in key issues such as government procurement, intellectual property rights, and market entry on the negative list. In contrast, the Korean government aims to create a free and open service trade and a predictable investment environment through this negotiation. Although not as visible as tariff reductions, the focus is on how to enhance the predictability of local business operations for Korean companies.
The core issue lies in "how to open" rather than "what to open." In this context, Korea's concerns regarding China's aggressive stance can be summarized in three main points.
First, China is the second-highest country, after India, among 42 major OECD countries in terms of restrictions on foreign capital entry in the service sector. Even if openness is specified in the FTA agreement, the effectiveness of actual opening may be diminished if "invisible regulations" come into play during the operational phase. 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 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 Korea-China FTA Phase 2 negotiations represent a cornerstone for restoring bilateral relations and an opportunity to carve out new pathways for 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 substantial content of the negotiations is neglected in favor of the broader picture of improving relations, the outcomes may remain symbolic while the risks persist. Being drawn solely by the allure of market opening could lead the negotiations to prioritize symbolism over substance and speed over safety. Politically expedient agreements may shine briefly, but poorly designed norms can burden businesses and industries for a long time.
Therefore, Korea's negotiation strategy should focus on how to refine the content of actual openness and the associated risks.
The key lies in refining the methods of opening 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 "substantial openness." Second, supply chain 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 solution and rare earths, as well as the establishment of a permanent hotline, are essential. Furthermore, enhancing the effectiveness of investor protection and dispute resolution mechanisms, along with ensuring predictability in data movement and curbing arbitrary law enforcement in the cultural content and data sectors, should be key negotiation objectives.
Ultimately, the success of the Korea-China FTA Phase 2 negotiations depends on the actual operational feasibility of the market rather than the breadth of openness. It hinges on how meticulously safeguards are designed to protect Korean companies and industries throughout this process. What is needed now is a negotiation strategy that prioritizes direction over speed and content over timing, grounded in a sober recognition of reality. This second phase of negotiations could significantly influence not only the future of Korea-China economic relations but also Korea's overall foreign economic strategy, serving as a litmus test for the overall direction of Korea-China relations.
* This article has been translated by AI.
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