Bridges Weekly Trade News Digest • Volume 11 • Number 12 • 4th April 2007
Us And South Korea Conclude Free Trade Agreement
The US and South Korea concluded a free trade agreement (FTA) on 1 April, barely in time for the Bush administration to submit the accord for Congressional approval under its fast-track authority on trade.
If ratified by legislatures in both countries - likely to prove harder in the US - the FTA is projected to have the potential to boost bilateral trade by as much as USD 29 billion. It would liberalise trade in most industrial products, including automobiles and textiles, and further open up services markets and public procurement contracts. Many US farm products will get greater access to Korea’s traditionally-protected market, with the notable exception of rice.
However, some see the high-profile bilateral agreement as yet another blow to the multilateral trading system.
Trade officials reached the deal after two days of virtually continuous negotiations in Seoul. They agreed to extend the deadline for the talks repeatedly after missing the original target of 30 March.
The conclusion of the talks left President George W. Bush only an hour and a half before midnight in Washington to send Congress a letter notifying his intent to sign an FTA with Korea. Had this deadline been missed, it would have been too late for any pact to undergo an obligatory 90-day review before the end-June expiry of the administration’s ‘trade promotion authority’ mandate to submit agreements to Congress for a yes-or-no vote without specific changes.
Bush’s letter to Congress said that the accord would "generate export opportunities for US farmers, ranchers, manufacturers, and service suppliers, promote economic growth and the creation of better paying jobs in the United States, and help American consumers save money while offering them greater choices."
In a televised statement, South Korean President Roh Moo-hyun called the FTA a "stepping stone for the country to make a leap toward becoming an advanced economy."
Negotiators from the two sides had in recent weeks met repeatedly to try to bridge remaining differences, principally on automotive trade, agriculture, and pharmaceuticals.
"Neither side obtained everything it sought," Deputy US Trade Representative Karan Bhatia said of the final compromise. "But I believe both sides can be confident that this agreement is in the best interests of the people of each country."
Rice excluded, Seoul yields on beef
Washington agreed to exclude rice from the FTA — a major demand of South Korea on behalf of its politically influential, and heavily protected, farmers. Bhatia said that US negotiators had pushed for rice to be included almost until the end, and would raise the issue again in the future.
Seoul responded to US demands on beef trade by consenting to eliminate its 40 percent tariff on beef over the next 15 years. More significantly, it suggested that it may relax its stringent import restrictions on US meat, pending a May ruling by the World Organisation for Animal Health (OIE) that is expected to declare US beef safe. South Korean Agriculture Minister Park Hong-soo said that after the ruling, his government planned "to engage in negotiations that could rewrite existing import rules for American beef." The restrictions date back to an import ban that Seoul put in place three years ago after a mad cow disease scare in the US. Although they were not officially part of the negotiations, US officials had maintained that Congress would not approve the FTA unless beef exports fully resumed (see BRIDGES Weekly, 13 December 2006).
One of Washington’s main bones of contention in the negotiations was the lopsided balance of bilateral automotive trade. South Korean manufacturers sold over 700,000 cars in the US last year, while only 5000 automobiles went in the opposite direction. The US blamed this on Korean duties and tax measures. Seoul has agreed to eliminate an 8 percent tariff on US cars, and will abolish taxes that have discriminated against larger US cars. The US will immediately remove duties on Korean cars with small engines (less than three litres), and phase out tariffs on larger cars over the next three years as well as those on trucks over the next ten. According to the US trade representative’s office, the accord includes an expedited dispute settlement process for auto-related measures that would allow tariffs to "snap back" to the regular pre-FTA level in the case of a violation.
Many types of Korean textiles appear set to eventually receive duty-free access to the US market, although they may need to be made of US or Korean fabric and yarn to qualify. The FTA includes a special textile safeguard that could be used to temporarily protect domestic manufacturers in the event of import surges.
The US trade representative’s office claimed that the FTA "contains provisions on pharmaceutical market access that go far beyond what has ever been obtained in other FTAs," including a review mechanism for Korea’s drug pricing and reimbursement system.
There appears to be some ambiguity about the status of goods produced at the Kaesong industrial complex in North Korea, which is run by South Korean firms as a cornerstone of Seoul’s policy of engaging Pyongyang with an ultimate view to reunification. Bloomberg reports that the two sides agreed to discuss goods made there "at a later stage." The daily Chosun Ilbo indicated that the Korean trade minister and president said that Kaesong products would in principle be eligible for treatment as South Korean, under a provision in the FTA for an ‘outward processing zone’. However, Bhatia insisted that there was nothing in the FTA that would "allow goods processed or made in North Korea to enter the US."
The accord would eliminate tariffs on 95 percent of industrial goods within three years, and phase out most of the remaining ones within ten. Korea will immediately lift tariffs on US farm exports including wheat, cotton, bourbon whiskey, and orange juice, and remove duties on several other products over a five-year transition period. Milk powder, soybeans for food, and cheese will benefit from expanded import quotas. Washington said that Korea "vastly improved" access to its services sector for US companies, for instance, by allowing foreign ownership of financial services and telecommunications enterprises. As is typical for US trade agreements, the Korea FTA appears to contain strong protections for foreign investors, intellectual property rights, and trademarks.
Mixed welcome in US, Korea
Although the ten-month negotiations have been marked in Korea by vociferous protests from farm groups, a Chosun Ilbo survey showed that the recent deal was supported by 58.5 percent of those polled, while 30 percent were against it. President Roh’s unpopular government is receiving rare political accolades for securing the accord, and members of the pro-business opposition party in the legislature have promised to back the deal.
Support in the US Congress may prove more difficult. Leaders in the Democratic majority have indicated that they would be willing to support trade deals if the administration compromised with their concerns, primarily on labour and environment issues. However, some influential members of the party have expressed opposition to the Korea FTA, generally arguing that it does not do enough to secure agriculture and automotive exports.
Max Baucus, the Montana Democrat who chairs the Senate committee with jurisdiction over trade, described the outcome as "entirely unacceptable." "I will oppose the Korea Free Trade Agreement, and in fact I will not allow it to move through the Senate, unless and until Korea completely lifts its ban on US beef," he vowed. Baucus’ home state is a major producer of beef.
Michigan Representative Sander Levin, chair of the House trade subcommittee, said that the agreement failed to "assure elimination of the barriers against US automotive products and the opening of Korea’s iron curtain around their market." The Democrat, whose state is the declining bastion of US auto manufacturing, promised to oppose the deal unless changes were made to rectify this during the 90-day Congressional review period.
However, tweaking the concluded agreement may not be possible. "There is no wiggle room [for modifications]," a US official told Bridges. "We believe that the auto agreement is very strong. It tears down all tariff and non-tariff barriers." The same official expressed hope that Levin would change his position. The two sides are currently finalising the legal texts of the FTA in both languages.
US auto manufacturers said that they were disappointed with the deal. The American Farm Bureau, for its part, indicated that it would not consider supporting the FTA until Korea puts in place "commercially viable trade for US beef based on World Organization for Animal Health (OIE) guidelines."
Other business groups were considerably more enthusiastic. John Engler, president of the National Association of Manufacturers, said that "initial reports indicate that many manufacturers will benefit from the most significant trade agreement in decades."The FTA with Korea, the world’s tenth-largest economy, would be the US’ most commercially significant since the 1994 North American Free Trade Agreement (NAFTA) with Canada and Mexico. Washington’s recent trade accords have been with smaller economies, such as Colombia, Panama, and Peru. Korea is also far richer than the US’ recent FTA partners, with a per capita GDP estimated at over USD 24,000 in purchasing power terms.
The conclusion of talks between the US and South Korea has prompted both Japan and Canada to consider restarting trade negotiations with Seoul. The prospect of even more bilateral FTAs has sparked renewed fears for the health and viability of the multilateral trading system, especially at a time when the Doha Round WTO negotiations remain deadlocked.
ICTSD reporting; "S. Korea, US reach free trade agreement," YONHAP NEWS, 2 April 2007; "S. Korean man attempts self-immolation against FTA with US," YONHAP NEWS, 1 April 2007; "Negotiators extend deadline for South Korea trade pact," NEW YORK TIMES, 31 March 2007; "FTA shifts focus of S. Korea-US alliance to economy from military," YONHAP NEWS, 2 April 2007; "US, South Korea agree trade deal," CNN, 2 April 2007; "S.Korea, US will renegotiate beef import rules in June: agriculture minister," YONHAP NEWS, 2 April 2007; "South Korea, US seal trade deal at last miniute," REUTERS, 2 April 2007; "US and S Korea reach landmark trade deal," FINANCIAL TIMES, 2 April, 2007; "Korea, U.S. Still at Odds Over Kaesong Goods," CHOSUN ILBO, 4 April 2007; "Praise, for a change, for Seoul’s Roh on trade deal," REUTERS, 3 April 2007; "US and South Korea in Landmark Trade Deal," 3 April 2007; "US Reaches Free-Trade Agreement With South Korea," BLOOMBERG, 2 April 2007; "South Korea trade deal gets mixed response in US," REUTERS, 3 April 2007; "A tangled trade web," FINANCIAL TIMES, 3 April 2007.