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Dealing with domestic conflicts in FTA negotiations: Lessons from the Korea-Chile FTA and NAFTA

Pacific Economic Cooperation Council

Dealing with Domestic Conflicts in FTA Negotiations: Lessons from the Korea-Chile FTA and NAFTA

Se Young Ahn

Paper presented at the Korean PECC Committee conference on 21 September 2006 to discuss Korean Perspectives on "Broadening the Horizon for Pacific Cooperation."

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Executive Summary

Even though the US, Japan, Korea, and China were latecomers to the global
proliferation of FTAs, they are currently aggressively pursuing FTAs. There are,
however, many obstacles and barriers to economic integration in the Asia-Pacific
region, including huge gaps in economic development and economic scale,
differences in domestic political systems and industrial structure, cultural disparities,
etc. As is evident from the fierce political opposition to and reactions against the
US-Korea FTA negotiations, the real obstacles to FTAs in the Asia-Pacific region
are not geopolitical, cultural, economic or historical, but rather domestic, namely,
domestic conflicts stemming from the fierce political reaction of “the losers.”

Therefore, this paper analyzes the domestic conflicts that arise in FTA
negotiations in the Asia-Pacific region. The paper introduces Putnam’s “two-level
game model” as a theoretic framework for domestic conflict in FTA negotiations
and presents two case studies: the Korea-Chile FTA and NAFTA. It then draws
lessons from the Korean and US experiences. The results of the Korea-Chile FTA
case study indicate that Putnam’s four determinants run counter to the smooth
creation of an FTA, making a level II game extremely difficult. These determinants
are: the heterogeneous nature of the FTA negotiation context (creation of winners
and losers in a national economy); asymmetric political reactions (free-riding
winners and fiercely opposing losers); excessively sensitive political FTA issues; and
weak political leadership. The lessons from NAFTA highlight the particular
importance of political leadership in concluding FTAs. As President Clinton’s
leadership in the NAFTA ratification process shows, effective political leadership
can overcome political resistance and lead to a national consensus on an FTA that
allows its successful conclusion.

This paper suggests four policies for the three major Northeast Asian
countries and the US that effectively address domestic conflicts arising from FTAs:
strong political leadership, international leadership of the big three (the US, Japan,
and China) that are engaged in a hegemony game, pursuit of mid-level FTAs, and
sustainable and comprehensive domestic foundations addressing the concerns of the
losers. The most important policy recommendation, however, is to pursue mid-level
FTAs as the second-best option among the US, Japan, China, and Korea--where
strong domestic opposition to market opening is expected. Finally this study
suggests that successful conclusion of the 2006-2007 US-Korea FTA negotiations in
the form of a mid-level FTA would encourage competitive liberalization in the
region that could facilitate the Japan-Korea FTA and the China-Korea FTA as well
as the US-Japan FTA. This proliferation of FTAs among the four major countries
would act as an icebreaker for the effective economic integration in the Asia-Pacific
region, eventually moving towards a APEC-wide Free Trade Area proposed by US
President Bush at the 2006 APEC Summit Meeting.

 source: PECC