South Korea and China have made a small but clear breakthrough in the latest round of negotiations for a bilateral free trade agreement (FTA), reaching an agreement on how they will pursue liberalization of their service and investment markets, the South Korean government said Friday.

"Regarding the service and investment sectors, (the two

countries) reached an agreement in principle on the way of market liberalization that had been one of the largest remaining issues,"

the Ministry of Trade, Industry and Energy said in a press release.

The 12th round of South Korea-China FTA negotiations was held in Daegu, 300 kilometers south of Seoul, from Monday through Friday.

The talks marked the first of their kind since a summit between the countries' heads of state earlier this month in Seoul, in which the two repeated their call for the conclusion of the FTA negotiations before the end of the year.

Under the latest agreement, the countries will first introduce a positive list approach for their bilateral trade in investment and service areas, in which they will list items and areas that will be liberalized.

But they have "agreed to switch to a negative list approach"

within a certain period following the implementation of the proposed FTA, the ministry said. In a negative list agreement, all items and services will be liberalized except only those named.

The ministry said the two sides have also made significant progress in areas of regulation and cooperation.

"The sides have come to a complete agreement on the text of a chapter that deals with competition and electronic commerce while also making significant progress on the text for the environment chapter," it said.

"They have also made meaningful progress in the areas of customs procedure, economic cooperation and government procurement."

South Korea and China began their FTA negotiations in May 2012.

China is already South Korea's largest trading partner, accounting for nearly one-quarter of South Korea's overall exports in 2013. (Yonhap)