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n July 1st the Act on the Designation and Operation of Economic Free Zones passed into law Dec. 30th 2002 will come into effect. Once it does, it will effectively grant foreign firms within Korea¡¯s three Economic Free Zones a special legal status, exempting them from a range of labor-related requirements stipulated in Korea¡¯s Labor Standards Law. The date will also mark the inauguration of a host of foreigner-friendly facilities such as special clinics and pharmacies to be established in the zones, and the legal enforcement of English as one of the official administrative languages within the same zones. When communicating with foreigners, administrative bodies within the zones will be required to write official correspondence and issue all documentation in English, and likewise to accept all submissions in English.

  To be designated as an Economic Free Zone, a prospective area must have an international airport or port. Airports must meet a minimum freight capacity requirement of 500,000 tons annually, while ports must have a capacity of at least 10 million tons per year and be provided with a container port of a capacity of 20,000 tons or more. Currently, there are three candidates for EFZ designation: Incheon International Airport, together with the ports of Busan and Gwangyang. Applications will be accepted from local governments starting July 1st. Designated cities will be announced late this year by the Minister of Finance and Economy, after due deliberation by the Economic Free Zone Committee.

  A SPECIAL ENVIRONMENT The act defines an Economic Free Zone as a particular area developed to provide a specially enhanced business environment for foreign-invested firms and living conditions for foreign employees. The act, therefore, provides for operational support for business and upgraded living conditions within the zones.

  The act allows support for foreign-invested firms within the zones in three key areas: tax relief, financial assistance, and exemption from the need to comply with certain legal strictures, notably in regard to labor regulations. To be eligible for tax relief within an Economic Free Zone, a foreign-invested company must invest a minimum of $10 million in a manufacturing, logistical or tourism business. Beneficiaries can receive a 100-percent exemption from income and corporation taxes for the first three years of operation and a 50-percent reduction for the following two years. The same rates of reduction will be applied to local taxes: beneficiaries will enjoy a 100-percent exemption from property and acquisition taxes for the first three years and a 50-percent reduction for the following two years. There is also a three-year customs duty exemption on imported capital goods.

  LABOR LAW EXEMPTIONS Local governments will assist companies locating in the zones with plant site development, while the national government will offer to lease state-owned properties free of charge. Furthermore, the central government will fund up to 50 percent of the construction of key infrastructure projects within the zones, such as highways, and make payment in advance. Companies investing in medical, educational or residential facilities can procure the necessary funding by applying to the local government of jurisdiction.

  A range of exemptions to labor-related laws will be granted to foreign-invested firms within the zones. This measure is designed to alleviate some of the difficulties encountered by foreign firms in Korea¡¯s labor environment. In the future, foreign companies within the zones will be exempt from the mandatory hiring of special categories of workers such as veterans, the elderly or the handicapped. They will be further exempted from granting monthly paid leave for employees, or from remunerating female employees on (the optional one-day-per-month) menstruation leave. In other words, companies within the zones will be able to strictly abide by the principle of ¡°no work, no pay.¡± The act also stipulates that labor/management relations within the zones be underpinned by rigorous compliance with official procedures and directives sanctioned by law, should disputes between employers and employees arise.

  OFFICIALLY ENGLISH Initiatives to enhance living conditions for foreign residents of the zones include granting of official status to major international languages, establishment of foreign schools and health care facilities, and the provision of foreign television and radio channels on cable. In order to circumvent communication problems in dealing with the authorities, all official correspondence within the zones will be issued, received and processed in English. Legal endorsements will be available to foreign educational institutions owned by foreign corporations. Also, a wide range of existing restrictions on foreign educational will be lifted; for instance, Korean citizens will be allowed to attend the foreign schools established within the zone. Loosened regulations will permit health care to become more geared to foreign practices: foreign clinics and pharmacies will be allowed to operate, while overseas physicians and pharmacists will be granted Korean licenses provided they meet a minimum of necessary requirements. Finally, subscriptions to foreign broadcasting channels within the zones are expected to double.

  In many ways, the new zones represent a template for the economy as a whole since depending upon their performance the government plans to extend their rules, regulations and systems to the rest of the country. A closer look at the development plans of the three economic free zone candidate sites follows below.

  INCHEON
  Incheon International Airport, backbone of the Incheon EFZ bid
  Incheon, home to both a major sea and airport, is a veritable logistical hub. However, Incheon¡¯s economic free zone development plan is largely based on measures to exploit the outstanding capability of its airport. Some 43 cities with populations in excess of 1 million are accessible within a three-and-half hour flight from Incheon International Airport. With over 1 billion persons living within a radius of 1,000 kilometers, the potential of the airport to serve as the economic crossroads of Northeast Asia is tremendous.

   Ground was first broken for the project in November 1992 and the first flight took off from the completed airport March 29th 2001. Construction did not stop there. On the contrary, a phased expansion of the airport is under way, determined according to increases in the volume of traffic. Over the last year, Incheon airport handled 30 million passengers and 2.7 million tons of freight. When the process of expansion will be complete in 2020, the airport will be capable of processing 530,000 flights, 100 million passengers and 7 million tons of freight, annually.

  Incheon Free Economic Zone
  Freight-focused & open to regional HQs
  Incheon¡¯s economic free zone will be created around three pivot areas: Songdo New Town, Yeongjongdo Island (where Incheon International Airport is located), and the Gimpo land reclamation site. Songdo, occupying the heart of the future economic free zone, is designed to attract and accommodate a knowledge-industry cluster. Yeongjongdo Island will be a center for airfreight handling and high-tech manufacturing, while the Gimpo site will be dedicated to financial services and recreation.

  Songdo New Town, being constructed on land first reclaimed from the sea in 1994, will be the site of a business and industrial complex intended to host the Asia/Pacific headquarters of multinational firms, international businesses, knowledge and information industries, and cutting-edge bioindustries. Incheon City intends to back up this plan by providing an ultramodern information infrastructure, transportation facilities, green areas, recreation facilities and marine recreation amenities. Phases II and IV, to house an information technology cluster and a biocomplex, are already completed. Construction of phases I and III, scheduled for completion in 2005, will be led by the New Songdo City Development Limited Liability Co., a jointventure firm created by Posco Engineering & Construction of Korea and Gale & Wentworth, an American real estate investment company. The development company has pledged to Incheon City that it will raise $12.7 billion in foreign capital for the project. In accordance with this agreement, a 60-story international convention and trade center, four five-star hotels, a department store, an opera house, a cultural center, and a golf course are on the agenda.

  As the site of Incheon International Airport, Yeongjongdo Island will house a high added-value airfreight logistical/processing complex, where products manufactured in the vicinity can be assembled, finished and shipped to overseas markets. Taking advantage of the area¡¯s natural environmental assets, Yongyudo and Muuido Islands, to the west of Yeongjongdo, will be developed as marine tourism sites.

  The Gimpo reclamation site, in the northwestern section of the prospective free economic zone, will combine recreational and financial service functions. Sixtyfive percent of the total area will be allotted for natural green space, arranged in concentric belts. This reserved natural area will contain an ultra modern floricultural complex, a golf course, horse racing course and landscaped green areas. The central section of the Gimpo site will be distinguished by a forest of towering financial buildings, surrounded by a ring of foreign-dedicated and general residential complexes. In the outermost ring of the zone, leisure facilities including a golf course and various theme parks will be built.

  BUSAN & GWANGYANG
  Harnessing the power of two regional ports
  The Korean government is currently pursuing a development plan to elevate New Busan Port and Gwangyang Port to the status of major international ports within Northeast Asia by 2011. Bolstered by the dramatic economic growth of China, Northeast Asia is emerging as one of the world¡¯s three largest, although unofficial trading blocs alongside the European Union and the North American Free Trade Area. Busan and Gwangyang Ports are thus among the strongest contenders to become major hubs of this rising economic region. Accordingly, the Busan and Gwangyang economic free zone development plans are closely tied to the two ports¡¯ international ambitions in Northeast Asia.

  Busan Port already enjoys substantial international stature. It is the world¡¯s third-largest container port after Hong Kong and Singapore, recording an annual container throughput of 7.54 million twenty-foot equivalent units (1 TEU = 1 20-foot container) in 2000, and 9.45 million TEUs in 2003. Container throughput has also undergone remarkable growth at Gwangyang Port, climbing from 0.85 million TEUs in 2001 to 1.08 million TEUs in 2002. Under the government¡¯s plan, New Busan Port and Gwangyang Port will be developed into integrated logistical/information bases combining port functions with the city¡¯s industrial resources. Expansion of these two ports should not only help eliminate chronic freight backlogs, but also enhance Korea¡¯s overall competitiveness. Upon completion of the project in 2011, the combined docking capacity of New Busan and Gwangyang Ports will be able to accommodate a total of 84 container ships, surpassing Shanghai, their major competitor in the contest for Northeast Asia freight traffic.

  Busan Economic Free Zone
  Capitalizing on world-class port status
  With a 21-vessel capacity, Busan Port ranked as the world¡¯s fifth-largest container port in 1997 with a total throughput of 5.33 million TEUs. It subsequently rose to fourth place in 1999 with 6.44 million TEUs, a total boosted by an increased in Northeast Asian freight traffic. Since 2000, Busan has retained the position of the world¡¯s third-largest container port, with freight throughput sustaining a sharp upward trend. Volume surged from 7.54 million TEUs in 2000 to 8.07 million TEUs in 2001, and to 9.45 million last year. Container throughput demand for Busan Port is forecast to rise to 12.09 million TEUs in 2006 (5.2 million TEUs of which will be for transshipment) and 14.04 million TEUs in 2011 (7.25 million TEUs for transshipment) ¡ª a galloping annual average growth of 5.8 percent (10.6 percent in transshipment). Since 1995, the Korean government has pursued the New Busan Port development project in anticipation of a massive increase in demand. To date, the government has invested 9.15 trillion won in the development areas of northern Gadeok Island and Jedeok Bay in Jinhae. Upon completion of the project, New Busan Port will be positioned to claim international hub port status through its ability to accommodate 30 large container vessels simultaneously and handle an annual throughput capacity of 8.04 million TEUs. The northern container port is now in its first phase of construction; when finished, it will have a 13-vessel capacity, an internal road network together with a port access road.
  Busan¡¯s economic free zone will entirely encompass New Busan Port now under construction. The future new port is situated in an area of Busan closely bordering S. Gyeongsang Province, only 12 kilometers from Gimhae Airport. The area of the zone will cover some 83 million square meters, comprising sections of Gangseogu in Busan and Jinhae in S. Gyeongsan Province.

  The economic free zone will house a series of complexes to fulfill the following functions:
Logistics & distribution
Administration/commercial
Industrial manufacturing
Education/research
Maritime transportation
Residential

  Gwangyang Economic Free Zone
  Aiming for a greater share of Chinese transshipment business
  In continual expansion since 1987, Gwangyang Port currently offers an eight-container ship docking capacity and handles a throughput of 1.08 million TEUs annually. The 33 vessel berths to be completed in 2011 will give Gwangyang new international leverage. Located at the geographical center of Northeast Asia, Gwangyang¡¯s unique geographical advantages make it a serious contender for the title of the region¡¯s logistical/maritime hub. The port is a transshipment point for international cargo traffic moving between Europe, Asia, and North America. Moreover, it is situated just a stone¡¯s throw from Shanghai and other major Chinese ports. In fact, in tandem with the spectacular growth of the Chinese economy, Gwangyang¡¯s transshipment business has skyrocketed during recent years, growing by 9.4 percent in 2000, 18.7 percent in 2001, and a stunning 28.7 percent in 2002.

  The economic free zone will be developed around Gwangyang Port, encompassing sections of Gwangyang, Yeosu and Suncheon, and occupying a combined area of 6.7 million square meters. The zone will accommodate three main complexes: a logistical, industrial and a mixed residential/educational/research complex.

  The logistical complex will encompass an area stretching from the port¡¯s immediate vicinity to sites to the east and west of Gwangyang Steel Mill. Gwangyang Port¡¯s 3.6-million square meter surrounding area is slated for development into a maritime logistical and transshipment center, housing some of the world¡¯s most prominent logistical firms. While aiming to win the largest possible share of Chinese transshipment freight, the center will also offer manufacturers and shippers high added value services such as repackaging. Gwangyang Steel Mill, POSCO¡¯s no. 2 mill, boasts an annual crude steel production capacity of 1.6 million tons, making it the world¡¯s largest single-mill producer. The 800,000-square meter area around Gwangyang Steel Mill is currently being developed as a maritime distribution base under a joint project with Mitsui of Japan, thereby enabling Gwangyang Port to function also as an entrepot trade point for industrial raw materials including coal and iron ore.

  A 10-million square meter reclaimed land site in Yulchon, west of Gwangyang Bay has been allotted for the industrial complex. Consisting of three subcomplexes, construction will take place in stages under a three-phase development plan. Phase I (Yulchon Complex I) will house petrochemical, steel and related target industries to be strategically coordinated with the existing industrial presence in the vicinity; i.e. Yeosu Chemical Industrial Complex, one of the world¡¯s largest chemical industrial complexes, and nearby Gwangyang Steel Mill, the world¡¯s largest steel plant. Phase II (Yulchon Complex II) will be dedicated to logistical and logistical equipment manufacturing firms and will be complemented by the construction of Yeosu Airport and Container Port. The final phase (Yuchon Complex III) will be earmarked for domestic and international advanced technology and logistical industries.

  The residential/education/research complex will occupy sections of the Namgadeograe and Yonggang Zones and house foreign schools and clinics as well as premium hotels and shopping centers and other amenities for the convenience of international residents to enhance the quality of life within the zone.

  When bidding for economic free zone designation among Korea¡¯s local governments begins July 1st, it will mark a new chapter in the country¡¯s drive to truly globalize its economy. The three logistical hubs of Incheon, Busan and Gwangyang are the current favorites as their bids are in concord with the national government¡¯s vision of making Korea the economic hub of Northeast Asia. Should they be successful, the radical nature of the business and living environments they aim to create may well portend the future shape of the Korean economy and society.

by Shin Seung-Hoon (shshin@kotra.or.kr)