And This is Called Free Trade? On China South Korea’s FTA

From Reuters’s Answers ON:

China and South Korea wrapped up FTA negotiations this month; negotiations that had started back in May of 2012. The agreements made between these two leading Asian economies means the eventual elimination of tariffs covering approximately 90% of the goods in their bilateral trade.

This FTA between China and South Korea is a comprehensive agreement where it will not only impact the trade environments, but also provide benefits to consumers, enterprises, and countries; ultimately a benefit to the entire continent…

Depending on the industry and product, excluding highly sensitive protected goods, all products under this FTA will achieve a 0 import duty until the tariff elimination period is completed. This tariff elimination is expected to provide commodity exporters with price competitiveness in the import market.

Nice. But not so fast…. There's a catch-22 (bold and italics mine)

In order to enjoy this preferential tariff treatment, the key for enterprises will be to master the rules of origin and get familiar with the validation policies of their governments. The Korea-China FTA establishes rules that determine whether products qualify for originating status and can therefore enjoy the benefits of the agreement.

Product specific rules have two main components for determining the status: Regional Value Content (RVC) and a Change in Tariff Classification (CTH). If products fail to meet these rules, they may be ineligible for preferential treatment. For instance, in the agricultural industry, fresh produce and fishery products must meet “wholly obtained or produced” status, whereas processed products are required to comply with a change in tariff heading (known as CTH).

Most steel, petrochemical and electronic products are subject to similar tariff requirements, namely a change in the first four or six digits of the HS code. Some exceptions allow a minimum RVC of 40%. Passenger vehicles (HS 8703) face even more complications; they must satisfy both a CTH and a minimum of 60% RVC threshold in order to receive preferential tariff treatment in China.

Customs validation policy is another critical point in the process of Certificate of Origin (COO) utilization. During the import clearance phase, governments normally focus on documentation review as a first step of authority verification. For example, they may inquire as to how a company arrived at preferential determination in the form of requesting the decision steps of HS codes classification, the conditions of direct transportation and the validations of the COO information. In addition to the document review, the South Korean government is very strict with audits and is known as being one of the most aggressive FTA validation countries in the world.

Auditors require importers to link the certification for origin to exporter sales orders, sales orders to production, production to purchasing information and purchasing information to supplier origin status evidence.

Here is my understanding of SK-China’s FTA: 

Enterprises can avail of preferential treatment ONLY if they conform with government’s prescribed rules, and pass the bureaucracy’s filters: trade mandates such as documentation, and rigid trade conditions such as RVC. 

So firms that comply will benefit, while firms that don’t comply will either be discriminated upon or restricted from trade. So from here, "free trade" will be bestowed to the “insiders”. 

And such government rules essentially “protect insiders” against those firms which have NOT been compliant.

Apparently, such rent seeking formula of trade is "free trade" by government standards. This can be seen in the Orwellian fashion: war is peace, freedom is slavery, ignorance is strength. Add to this: crony capitalism is free trade. And this is also why genuine free trade has been getting such a bad reputation.

Economist Carmen Elena Dorobăț rightly described of the politics of modern Free Trade Agreements  (bold mine)

Anyone reading modern day trade agreements would not be surprised to discover that they focus less and less on reducing import duties, and more on developing national industries, promoting exports, and ensuring domestic policy space. Their true purpose, a position of middle-of-the-road protectionism, is concealed under vague terms such as ‘freer, fair trade’, ‘gradual liberalization,’ ‘reciprocal concessions,’ or ‘development packages.’ However, the benefits of international trade do not lie in moderation and degree of reciprocity. True free trade is a policy of no trade barriers, to be pursued unilaterally by each and every country. If markets were released from the heavy hand of governments, international free trade would follow at one stroke.

The inherent incompatibility between free trade and increasing domestic government control will thus continue to hinder the dreams of WTO supporters, and the more distant ideal of free trade. Sadly, the golden days of Richard Cobden — who together with Michel Chevalier managed to sway the British Parliament and the French Emperor away from spending money on armaments and toward a free trade agreement — are long lost. All that is needed for flourishing international trade is a sound monetary system and the freedom of private enterprise. However, in a world where states have open-ended budgets for military campaigns and total control over the money supply, the bureaucratic structure in Geneva will only serve political interests.