Bumpy road for US-Korea FTA talks
Asia Times, Jun 3, 2006
Bumpy road for US-Korea FTA talks
By Bruce Klingner
Negotiations for a US-South Korean free-trade agreement will begin on Monday, with strong political support from both countries’ presidents tempered by skepticism in the legislatures and cautious public support. Both sides recognize the political and economic benefits of an FTA and will push negotiators to complete an agreement by next March so that both sides can approve the deal by the following July.
President Roh Moo-hyun’s willingness to face down strong domestic opposition to resolve long-standing bilateral trade disputes will provide further positive momentum for the initial negotiating rounds. That said, the negotiations will be contentious and could be derailed by several core issues. Although talks will focus on trade, the degree of public and legislative support will be affected by bilateral disputes over unrelated political and security issues, including differences over policy toward North Korea. To be successful, negotiations will require strong presidential commitment and intervention to overcome the inevitable deadlocks and attain legislative approval.
The United States and South Korea announced in February that formal FTA negotiations would commence on June 5 and be completed by spring 2007. The accelerated pace is necessary to obtain US congressional approval before the expiration of President George W Bush’s trade-promotion authority in June next year.
Although estimates vary greatly, the FTA is anticipated to provide significant economic advantages to both countries. To garner domestic support, Roh will also tout additional strategic benefits such as improving South Korean competitiveness by forcing additional economic reforms, increasing the potential for raising South Korea’s credit ratings, and providing a competitive advantage over regional rivals China and Japan. For the US, an FTA would strengthen bilateral ties by broadening the relationship beyond the military alliance; reverse South Korea’s growing trade ties with China; potentially regain the US position as Seoul’s pre-eminent trade partner; and counter perceptions of Beijing’s increasing influence over South Korea.
Although an FTA would provide overall economic benefits, the impact would differ by sector. South Korea’s automobile, textile and apparel, and electronic-appliance sectors would benefit while agricultural, petrochemical, telecommunications, financial, and pharmaceutical companies would face greater challenges. In both countries, those sectors that will fare poorly in a more competitive environment will lobby their governments for restrictions or exemptions as "sensitive industries". The South Korean agricultural and film industries will remain the most strongly opposed to the FTA. US automobile, film-industry and pharmaceutical firms will press Washington for greater access to South Korean markets, while US textile companies will request protection.
Long-standing trade disputes will hinder progress
Negotiations will be complicated by strongly divergent positions on several key sectors. As many as 17 working groups will be established to negotiate a range of issues, including several that previously prevented concluding a bilateral investment treaty. The talks will most likely reach an impasse, however, over those topics that both sides have identified as non-negotiable, such as rice, beef, automobiles, and goods produced in the Kaesong enterprise zone in North Korea.
– Agriculture: Seoul will insist that rice be excluded from the FTA, citing its importance to "the nation’s food security". South Korea will also point out that the US exempts some of its own industries in other FTAs. Furthermore, Seoul will claim that its 2005 World Trade Organization accord, which incrementally opened the country to foreign imports, supersedes the need for a separate bilateral agreement. However, the public has grown increasingly impatient with rural extremism and will likely support the FTA if it perceives that farmers have been adequately compensated by the government. US officials will insist that a comprehensive agreement must include all agricultural products. In particular, the US farming lobby and Congress will demand that the Bush administration obtain significant agricultural concessions. The head of the American Farm Bureau Federation stated on March 14 that the US market share of South Korea’s agricultural products market had plummeted from 45% in 1996 to 30% in 2004.
– Beef: South Korea agreed in January to resume imports of US beef products, reversing a two-year ban imposed after "mad cow disease" was discovered in US meat. Seoul agreed to import US beef from cows under 30 months old but excluded beef ribs, which had accounted for 60% of US beef imports (many Korean dishes use rib meat, which Koreans regard as superior). South Korean agricultural groups will protest Washington’s insistence on a resumption of imports of all beef products and a reduction in tariffs, arguing that domestic beef prices might drop by 40%. These groups will appeal to continuing domestic fears over the safety of imported meat. A December 2005 poll indicated that only 4% of Korean consumers believed US beef was safe to eat. For its part, the Roh administration will not be deterred by farmer protests, but it will press for more stringent inspections of US beef to allay safety concerns. National Assembly legislators may advocate a comprehensive aid package for domestic cattle producers to offset lost revenue and long-term reform measures to retain their competitiveness.
– Kaesong: A critical negotiating requirement for Seoul is US acquiescence to designating goods produced in the Kaesong (also transliterated Gaesong) inter-Korean industrial complex as "made in South Korea". The Kaesong project, located in North Korea, represents the flagship initiative of Seoul’s engagement policy toward Pyongyang. The local-content designation is critical to the economic viability of Kaesong exports and is intended to induce additional South Korean and foreign firms to join the venture. The issue is politically sensitive for the US, however, since it would dilute Bush administration efforts to pressure North Korea over its nuclear-weapons programs by restricting Pyongyang’s sources of foreign currency. Washington will not agree to South Korea’s demand. Moreover, US labor unions will declare that "slave labor" in Kaesong would provide South Korea an unfair competitive advantage. As a fallback position, Seoul might request that the US allow a percentage of Kaesong-produced components in a South Korean end-product. Seoul’s FTA with the European Free Trade Association provides duty-free status to Kaesong products if more than 60% of the contents are from South Korea.
– Automobiles: The US Congress has stipulated that gaining greater access to the South Korean auto market is a key requirement for approving an FTA. An enormous disparity continues to exist in the two countries’ auto trade: in 2005, South Korea sold 730,000 cars in the United States (a 4.3% market share) while the US reciprocally sold only 5,700 cars in South Korea (a 0.7% market share). Gaining market share in the South Korean auto sector is generally prevented by regulations, not traditional tariffs or quotas, and Seoul has inconsistently and retroactively applied such regulations. Washington will accordingly press Seoul to restructure discriminatory tax systems (at one time owners of foreign cars were singled out for tax audits), overcome domestic anti-import sentiment and reduce South Korea’s 8% auto tariff, which is three times the US rate. South Korea will dispute US assertions that the local market is closed to foreign sales. The National Tax Service commented in February that no penalties, official or otherwise, are imposed on Koreans who own or buy foreign cars. The Korea Automobile Importers and Distributors Association reported that March sales of foreign cars were up by 75% year-on-year.
– Pharmaceutical: The US will demand resolution to outstanding transparency, pricing and regulatory issues. The US Trade Representative has complained that Seoul is protective of South Korean pharmaceutical companies, which predominantly produce generic drugs. The US will press for more stringent intellectual-property-rights standards and more aggressive efforts by authorities to combat illegal copying of US drugs. It will also demand that South Korea rescind discriminatory requirements that foreign drugs must undergo redundant local testing prior to governmental approval. The president of the American Chamber of Commerce in Korea even characterized the pharmaceutical sector as one of the most corrupt in Korea.
– Government practices: Although Roh advocates breaking down trade barriers that hinder competition, foreign firms have complained that an entrenched bureaucracy uses vaguely written regulations and tax policies to engage in protectionist policies. Moreover, Seoul is seen as having encouraged the selection and periodically dictated the incorporation of Korean-standard technology to limit foreign access to the telecommunications sector. South Korean regulators have historically favored firms with large market share, which intrinsically provides an advantage to established domestic firms. Wendy Cutler, assistant US trade representative and chief negotiator for the FTA talks, said on April 20 that the FTA would require provisions beyond those in other FTAs to address South Korea’s unique trade barriers. For its part, Seoul will request changes to US trade remedy practices, including anti-dumping and anti-counterfeiting, that it deems discriminatory.
Political, economic differences reinforce opposition
Although polls indicate a majority of South Koreans favor an FTA, the populace remains apprehensive about opening the economy further to international competition.
Furor over foreign firms gaining large, tax-free profits, combined with a recent hostile takeover attempt of a local corporation by a foreign entity, has caused a domestic backlash against overseas firms. FTA opponents may also try to undermine the talks by warning that an agreement will leave South Korean firms vulnerable to takeover.
Difficult negotiations could increase anti-American sentiment, although this is unlikely to spark widespread anti-US demonstrations. FTA negotiations will be further complicated by growing strains in the bilateral relationship, brought on by widely divergent foreign policies, most notably over resolving the North Korean nuclear-weapons impasse. The level of bilateral political discord could influence the degree to which negotiators feel pressured to gain concessions as well as the level of public and legislative support for approval of the FTA.
Declining influence hinders Roh’s ability to deliver
To reduce growing domestic opposition, Seoul will seek to exclude sensitive sectors from FTA negotiations as well as promising additional governmental assistance programs to affected industries.
On March 28, 270 civic groups announced a coalition to oppose the FTA with the US. South Korean officials will continue to issue strong statements, partly to frame the upcoming negotiations, but also to counter perceptions that Seoul will make too many concessions during the negotiations. Roh has already been criticized for agreeing to the four US preconditions for initiation of trade talks without demanding reciprocal agreements. He has vowed to intercede to ensure the completion of FTA, but his declining political influence will limit his ability to gain approval even within his own political party.
Achieving an FTA within a year will be extremely difficult given the comprehensive agenda, the number of potentially deal-breaking disputes and historic difficulties in resolving previous trade disagreements. The initial negotiating rounds in June and July will provide a better indication of the two sides’ commitment to reaching an agreement. The degree to which negotiating differences are played out in the media will also signal the potential for success. Frequent negative public comments by either side will restrict negotiating flexibility and reduce the potential for legislative approval.
Despite these challenges, there are causes for optimism, most notably in that both presidents have so clearly committed themselves to its success. Roh has publicly declared that achieving an FTA is one of his two principal policy objectives for 2006, seeing it as a "legacy issue". As such, Seoul may have set the bar low for negotiating requirements, but there are certain matters that will be seen as non-negotiable. South Korean negotiators cannot appear to be too accommodating lest they cause a nationalist backlash among the populace and legislature.
Despite the South Korean propensity for violent street demonstrations, there is strong US and Korean business support for an FTA. Several polls have shown that 60-70% of South Korean businesses favor an FTA. A wide-ranging business group was launched in April to advocate on behalf of the FTA, including the Korea International Trade Association; the Korea Chamber of Commerce and Industry; the Federation of Korean Industries; and the Korea Federation of Small and Medium Businesses.
In the US, the US-Korea FTA Business Coalition, consisting of more than 100 leading US companies and trade associations, has declared strong support.
Although achieving an FTA would improve the state of the US-Korea alliance, it would not be a panacea for all the ills brought on by steadily diverging policies. A failure to attain an FTA, however, would have a significant and potentially devastating impact on both the relationship and Roh’s political standing. The conservative opposition would see the collapse of talks as vindication of its criticism of Roh and ramp up accusations that the president has severely damaged the bilateral relationship with Washington. As such, the stakes are much higher for Roh than for Bush.
Bruce Klingner is the Korea analyst for Eurasia Group, the world’s largest political risk consultancy. The views expressed herein are his own. His areas of expertise are national security, political, military and economic affairs in Korea, China and Japan. He can be reached at klingner@eurasiagroup.net.
