from Asia Program, Greenberg Center for Geoeconomic Studies, Renewing America and Renewing America: International Trade and Investment

Why U.S.-Korea Trade Deal Matters

The new U.S.-Korea Free Trade Agreement has the potential to measurably spur the economy and reassure a top U.S. ally, but President Obama needs to take firmer steps to boost a flagging trade agenda, write CFR’s Edward Alden and Scott Snyder.

December 6, 2010

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The new and improved U.S.-Korea Free Trade Agreement announced on December 3 is certainly better for U.S. commercial interests than the first draft that was concluded in 2007. But like the consumer who decides to hold out for the next generation of the iPad rather than buying this Christmas, the question will be: Was it worth the wait?

On the positive side, the new deal negotiated by U.S. Trade Representative Ron Kirk does more than its predecessor to help out the U.S. auto industry, which has been rebounding after its near-death experience in the 2008 financial crisis. U.S.-Korea auto trade has been wildly imbalanced for decades, with South Korea selling nearly 500,000 cars in the United States last year compared with just 7,500 U.S.-made car exports to Korea. And auto trade represents a significant portion of the overall trading relationship, so the imbalance is no small matter.

The KORUS FTA is an essential step toward the president’s goal of doubling U.S. exports during the next five years. Passage of the FTA would also provide strategic reassurance to South Korean allies in the face of its growing economic dependence on China and lends credibility into U.S. efforts to expand trade liberalization through the Trans-Pacific Partnership (TPP) negotiations.

Following his mid-November visit to Seoul, President Obama received strong criticism for his failure to close KORUS from critics who felt that the failure underscored the administration’s weakness on the international stage following the Democratic loss of control of the House of Representatives in the November midterm elections. At that time, President Obama declared that, "I’m not interested in trade agreements just for the sake of trade agreements. I want to make sure that this deal is balanced."

The revised agreement keeps U.S. tariff protection in place a bit longer; it exempts 25,000 U.S.-made cars each year -- four times the number in the 2007 version -- from Korean safety standards that have been used to block imports; and it provides extra safeguards in the event of a surge of Korea auto exports to the United States. The deal also gives U.S. carmakers extra time to adopt any new Korean regulations in the sector. In addition, the revised agreement delays tariff reductions on Korean autos by five years and on Korean trucks by seven years, and provides an additional ten-year safeguard against elimination of tariffs in the event that surges in Korean exports damage U.S. producers.

These are positive amendments. But the United States paid a big price for the wait. Korea is its seventh largest trading partner, making this the biggest bilateral trade deal since the 1993 North American Free Agreement with Mexico. Instead of locking up the Korea deal well ahead of its rivals, the new deal will now likely be approved at roughly the same time as free trade agreements between Korea and the European Union and Korea and Canada, though Canada and Korea are still wrestling over both auto and beef trade. This has robbed U.S. producers of a jump-start they would otherwise have enjoyed.

Further, by waiting so long to reengage with Korea on substantive negotiations, the Obama administration sent a signal to the rest of the world that advancing trade was not a high priority. That was unfortunate, unnecessary, and probably unintended by the administration.

Both South Korea and the United States will face challenges with ratification. The Korean government will have to defend its decision to renegotiate the agreement under pressure from the United States; for the Obama administration to gain passage in Congress it will have to strong-arm Sen. Max Baucus of Montana, chairman of the Senate Finance Committee. Baucus has complained there was no additional help for the U.S. beef industry -- even though beef exports to South Korea have risen sharply in the past two years.

Polls show that free trade is a particularly tough sell during times of economic difficulty, and a recent Pew poll shows negative public perceptions of an FTA with South Korea. Yet unlike many other FTAs under consideration, South Korea’s tough labor laws virtually eliminate the risks of offshoring by American companies and a KORUS FTA will likely result in increased South Korean investment in the United States.

The administration should follow up this agreement with signals of its strong reengagement on trade by sending up for ratification another pending free trade deal with Panama, and engaging with Colombia and the Congress to allow that long-stalled deal to move as well.


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