Trade Facilitation and Customs Reform in Korea Junsok Yang The Catholic University of Korea 1

Trade Facilitation in Korea Why Trade Facilitation? How? –Regulatory Reform – “ e-customs ” and “ e-trade ” Political Economy of TF Overall Lessons 2

Why Trade Facilitation? Long Term Factors –Korea is dependent on trade Trade volume is greater than 100% of GDP 3

Why Trade Facilitation? Long term reason –Export competitiveness requires timely and inexpensive imports 4

Why Trade Facilitation? Long Term Reasons –Completion of UR –Bad reputation of Korea Customs Service 5

Why Trade Facilitation? Short Term Reasons –Asian financial crisis Need to make markets more market consistent and efficient Need to increase export earnings (which require imports of raw and intermediate materials) –Regulatory Reform ( ) Cut half of all regulations –Make Korea a ‘ logistics hub ’ of North Asia –E-Government project Increased trade contributed significantly to post- crisis recovery 6

How? Regulatory Reform Use of IT – “ e-customs ” and “ e-trade ” Mutually complementary –In fact, both are necessary –Regulatory reform is a pre-requisite (necessary condition) to successful use of IT 7

Trends in customs clearance before the financial crisis Unified List (1980s) –Lists all import requirements in one document Reform of Import Clearance System (1996) –From permit to self-declaration system –KCS moved toward post-entry investigation –Post clearance payment of duty 8

Regulatory Reform for Customs Clearance Regulatory Reform of –Cut existing regulation by one-half –Establishment of Regulatory Reform Commission and examination of new and existing regulations (including customs regulation) 9

Number of Regulations: Customs Administration 10

Regulatory Reform for Customs Clearance Additional regulatory reform from 2003 to make Korea a ‘ logistics hub ’ –Task force of 172 people including KCS, government and private representatives Large and small enterprises, customs brokers and related agencies, academics, NGOs –Examine existing laws and regulations from the “ customer ’ s ” point of view Monthly payment of taxes for good firms 3S program (Slim, Specialization, Service-Oriented) –More officials, more authority for people “on site” Deadlines for clearance –15 days for regular / 5 days for on-dock “immediate” delivery One stop service centers for clearance delays –Savings of 2.2 trillion won (1.9 billion USD) 11

Savings from Reduction in Clearance Time (9.6 days to 4.5 days), billion won ItemsSavings Reductions in warehousing costs320.2 Increased cargo processing capacity at ports Streamlining the process for cargo in transit and transshipments17.3 Increased volume of cargo in transit and transshipments148.2 Increased availability of empty containers, lessening the need for “excessive imports” 73.9 Increased use of automatic notification procedures for cargo unloading Streamlining the process for express consignments hour, around-the-clock clearance at Incheon Airport54.0 Elimination of fees for arrivals outside normal working hours1.6 Reduction in warehousing (storage) fees

Costs as Percentage of Sales for Firms in Korea, US and Japan 13

Evolution of Korean Trade and Customs Administration (Green line: exports, Green line: imports, Yellow line: number of traders; Red line: number of customs officers) 14

E-customs and E-trade First Stage (1980s – 2003) –EDI / VAN established ( ) Preparation from 1980s World’s first 100% electronic clearance system Open only to limited number of firms –Technical (non-Internet based EDI) and trust reasons –Paperless customs clearance system ( ) –Establishment of infrastructure ( ) Second Stage (2003- ) –KCS: “ e-customs ” –Private and Public cooperation: “ e-trade ” 15

Timeline of Introduction of IT to Customs / Cargo Clearance DateEvent 1989Korean government initiates “Comprehensive Trade Automation Plan” 1990Comprehensive Trade Automation Task Force created within KITA 1991enacts “Trade Automation Act”; Korea Trade Network (KTNET) is established by KITA 1992Korea Customs Service designates KTNET as sole customs automation service provider 1994initiates electronic customs clearance system for exports 1996initiates electronic customs clearance system for imports KTNET provides logistics service through MFCS realizes a 100% electronic customs clearance system (VAN/EDI) 1997EDI/VAN service expanded to include the Internet 1999E-commerce law passed; Electronic signature law passed 2001External trade law amended to define and allow e-trade 2003National e-Trade Committee, chaired by the Prime Minister, is established 2004BPR/ISP for e-Trade Process Innovation 2005Korean government enacts ‘e-Trade Facilitation Act’ ‘e-LC service’ is launched for the 1st time in the world 2006e-Trade Service Project,2 nd stage is completed 2008 uTradeHub is launched e-Trade Service Project. 3 rd stage is completed 16

First Stage EDI/VAN to Internet –1996: EDI-based Cargo Selectivity System –2001: 100% of procedures for export and import declaration were automated Saved 81% of export related paperwork costs and 79% of import related paperwork costs Limited use to 352 firms with good records – but system underutilized, so in 2000 raised the number of eligible firms to

Second Stage Customs “ e-customs ” and “ u-customs ” –E-Government Initiative Reinforce Korea as a “connected” nation Emphasize G2G and B2G –Invisible and ubiquitous customs –Internet based single window (from 2004) Currently 14 agencies are connected –Customs network expanded to include traders and related industries (e.g. transportation and logistics) ERP networks established 18

E-Customs KCS initiative “ E-customs, U-Customs, World Best Customs ” –Internet portal site and UNI-PASS (2005) Customs clearance –Internet based single-window 14 agencies linked through the window –Continuous cooperative projects and innovation IATA e-freight project RFID technology for real-time tracking Enterprise Resource Planning with larger firms 19

UNI-PASS Korean Customs e-clearance system Unified Service –One Stop Service Export / import clearance Duty payment, drawback and requirement confirmation Global standards –Access to real time cargo processing information –Ubiquitous connection –Non-stop cargo flow 20

Components of e-clearance 21

UNIPASS Trade Community 22

UNI-PASS Diagram 23

Results of UNI-PASS and e-clearance Operated by CUPIA Single Window handles 92% of work related to export / import confirmation 35 types of cargo tracking information available Cost savings estimated at 3.8 trillion won (3.3 billion USD) 110,000 participants –Government agencies, firms, shippers, customs brokers, warehouses, etc. Interested in exporting UNI-PASS 24

Cost Savings from e-clearance Time and cost saving 690 billion Won Introduction of the internet and the Single Window 19.9 billion Wo n Reduction in and predictability of cargo processing time billion Won Saving warehouse fees and improving efficiency of port operation billion Won Other ripple effects billion W on Total billion Won 25

Second Stage Ministry of Knowledge Economy and KITA: e-trade – “ e-trade ” is “ trade whose transactions take place wholly or partially through information processing equipment … and electronic information network. ” Encompasses customs clearance, financial payments, transportation and insurance Encompasses traders, government, transportation firms, financial institutions 26

E-Trade KITA and KTNET Private Initiative: UTradeHub –With backing from Ministry of Knowledge Economy 2003: National e-Trade Committee (Public – Private Initiative) Legal infrastructure in place –Electronic documents and security CTradeWorld Portal Site on line in 2004 UTradeHub on line in 2008 Linking B2G and B2B –Expected savings: 2582 billion won 27

UTradeHub 28 e-Trade Document Repository Messaging Hub MarketingForeignExchangeG4Ce-ServiceLogisticsCustomsSettlement Single Window Owner / Trading Co.  KFTC  SWIFTNet  The Bank of Korea  Banks  Foreign Exchange Network Financial Institution OverseasBranchOverseasBranch Int’l Financial Settlement Foreign Chamber of Commerce Global u Trade Hub Global Networking BilateralConnectionBilateralConnection ForeignCustomsForeignCustoms Fo rei gn B uy er  Shipper / Airliner  Forwarder  CY,Bonded Warehouse  KLNET  KILC  National BPR/ISP Logistics  Korea Customs Service  Customs Broker Customs  Union / Association  KCCI  Quarantine Station  Insurance Company  Private Institution License & Certificate  e-Market Place  e-Biz Site  Trade Information Site Trade Leads & Overseas Ads  Credit Evaluation Co.  Korea Export Insurance Corporation Credit Evaluation Data Warehouse Forei gn Suppl ier PortalGateway

The future Closer ties between service provider (“customs”) and customer (“businesses”) –Enterprise Resource Management –Increased use of RFID tracking Strategy to Advance Global Customs Administration –Increase cooperation between customs authorities and border control authorities world-wide Authorized Economic Operator (AEO) approval –Facilitate trade to / with FTA partners increase protection against IPR piracy and harmful products –Win-win partnership between customs and customers 29

Korean SMEs and Trade 3 million SMEs in Korea –99.9% of total number of firms –87.5% of total employment But SMEs account for only 32% of total exports … –And the percentage has been falling SMEs tend to export less processed goods than larger firms and have less manpower and expertise to deal with customs clearance Latest initiatives aim to reduce burdens to SMEs –FTA tariff database –Assistance with rules of origin documentation for SMEs –Assist SMEs with new products for export 30

Political Economy of Trade Facilitation What made Korea favorable to TF? –Importance of trade (perceived and actual –Korea ’ s desire to open and advance Korea ’ s economy OECD accession, UR –Bad perception of KCS –Desire for reform –Environment favorable to regulatory reform –IT ‘ wiring ’ of Korea –Logistics hub of north Asia as a policy goal –Increasing use of benchmarks Strong political and bureaucratic support for these initiatives 31

Results of TF Number of regulations by customs –156 (1998) to 51 (2008.2), 35 (2012.9) Cost and time savings –KCS Uni-Pass e-clearance system: billion won Import clearance time: 2 days (1990s) to 1.5 hours Export clearance time 1 day to 1.5 minutes –KITA e-trade system: billion won Doing Business Indicator –8 th of 183 countries (2011) 32

Doing Business Surveys Colombia (2011) Documents to Export Signatures to Export3n.a. n.an.a. Time to Export (days) Cost to Export (US$)n.a Documents to Import Signatures to Import5n.a. Time to Import (days) Cost to Import (US$)n.a Rankn.a.28/17513/17812/1818/183 99/183 33

Observations Tying customs clearance network to firms ’ internal network for interconnection and synergy –Enterprise Resource Planning; –UTradeHub “ user solutions ” Not only form submission, but real-time tracking of forms and cargo –Drastic cuts in time required for documentation Process often slows to wait for paper forms from other countries Firms still feel need for customs brokers –Some technical details are still difficult for SMEs –Still some need for physical visits –Form of “ outsourcing ” –Reduced costs of customs brokers Allow volume processing 34

Lessons for Other Countries: General TF Trust must be built between customs and the private sector –Real progress did not take place until trust (but verify) risk-based approaches were implemented Reforms require close cooperation between regulatory agencies and the private sector –Enough trust built up to allow ERP Adoption of IT must be a part of comprehensive customs procedure reform –Regulatory reform more important than “e” Usefulness of e-trade will increase exponentially when more countries join, and more countries use international standards 35

Lessons for Other Countries: E- Customs and E-Trade 1.Adopting IT to cargo clearance must be a part of a comprehensive customs procedure reform 2.Legal framework must accompany the adoption of IT and e-trade 3.Single network and single standard may be more useful than variety 4.Keep it simple 5.The e-trade system and paperless trade system is meant to be used by the widest number of people 6.Trust must be built between SMEs and government agencies 7.Usefulness of e-trade will increase exponentially when more countries join 36

TF and the Current Economic Crisis Trade can contribute to recovery from crisis –But increased competition in international markets mean firms must lower costs – including customs clearance costs IT can lower costs –Including costs due to corruption 37

Thank you 38

Notes For further information, please refer to the following papers: – "Case Studies on Regulation Reform in APEC Countries: Study on Korean Customs and Border- Related Trade Reforms" (in process) World Bank and APEC –Small and Medium Enterprises (SME) Adjustments to Information Technology (IT) in Trade Facilitation: The South Korean Experience by Junsok Yang, ARTNeT Working Paper Series, No. 61, January 2009 Available at: –Introduction to UNI-PASS Accessible from –UNI-PASS Accessible from 39