Korea, US FTA no longer an option
Korea Herald | 15 May 2006
Korea, U.S. FTA no longer an option
By Lee Hee-beom
Lee Hee-beom is the chairman of the Korea International Trade Association. - Ed.
A free trade agreement with the United States has sparked a heated debate in Korea. The two major labor unions and the nation’s largest environmental group have jointly launched a nationwide campaign against a Korea-U.S. FTA or KORUS FTA. There are also plenty of pro-FTA supporters who show solidarity for the FTA. On an encouraging note, a lively debate on whatever issue could promote people’s participation in politics and democracy.
Opponents of KORUS FTA are concerned about a massive inflow of products from the United States, especially agricultural products, which may reduce Korea to an economic colony of the United States. Proponents claim that free trade will spur competition, and it will in turn enhance national competitiveness, ultimately contributing to enhancing trade and income.
Though it is almost impossible to predict the impact of KORUS FTA in 10 or 50 years, past experience for Korea and other countries can give hints. We faced a similar controversy over the free trade agreement with Chile two years ago, but it turned out to be beneficial to both exports and imports.
Two years after the FTA took effect, Korea’s exports to Chile increased 2.3 times to $1.2 billion compared to the year before the trade agreement. In particular, auto exports have increased by 2.3 times, wireless communications equipments by 3.5 times, and TV sets by 2.4 times, on all of which tariffs have been eliminated.
In the meantime, annual imports from Chile have increased 85 percent to $2.45 billion. A closer look will reveal that 85 percent of imports from Chile are minerals including copper, and the global natural resource price rises have caused the increase in the imports. Tariffs on agricultural products will be reduced steadily over a 10-year period, and such products have contributed only 8 percent to the increase for the past two years.
Imports of Chilean wine have increased 2.8 times, surpassing $10 million last year from $3.77 million before the FTA. Chilean wine imports have grown significantly compared to its pre-tariff reduction level. Tariffs on Chilean wine have been reduced by 2.5 percent annually from 15 percent, reaching 7.5 percent this April. Meanwhile, French wine has decreased from $24 million to $19 million, indicating that the FTA has a trade diversion effect.
After World War II, the Bretton Woods Agreement established the World Bank, the International Monetary Fund and the General Agreement on Tariffs and Trade to maintain the order of the market economy. The GATT has greatly contributed to trade liberalization through eight rounds of multilateral talks including the Uruguay Round, and Korea has developed into the world’s 12th largest trading country thanks to this liberalization.
However, the GATT has an inherent flaw. In Article 1, the GATT obligates nondiscriminatory, most favored nation treatment to all nations, but it permits the formation of customs unions and free trade areas in Article 24. A customs union eliminates all tariff and nontariff barriers among participating countries, but maintains trade barriers with countries outside the union, thus violating the principle of nondiscrimination stipulated in Article 1.
There are 330 regional agreements reported to the World Trade Organization. Among the agreements, two thirds were signed after the WTO, and the European Union and the United States have led this trend. Fifty-two percent of global trade is currently tariff-free under free trade agreements or other forms of regional agreements. In particular, Mexico and Chile put 96 percent and 62 percent of their trade, respectively, under free trade agreements, and 25 percent of neighboring China’s trade is also done with its FTA partners. In Korea, however, the percentage is only 3.4.
Europe now has made a single market with 450 million consumers in 25 countries across the west and east of the continent. The United States signed the North America Free Trade Agreement with Canada and Mexico, and then the Dominican Republic-Central America Free Trade Agreement. In Asia, the Andean Free Trade Agreement was made by 10 Asian countries including Singapore and Malaysia.
In early 2004, Mexico applied zero-tariff on tires on its FTA partner Japan, but increased tariffs by 50 percent on Korean tires, resulting in temporary export suspension. If a country does not participate in regionalism, it should either move its manufacturing facilities to a country that has an FTA or stop exporting goods. Regionalism and FTAs are no longer an option - they are a matter of survival.
A free trade agreement with the United States cannot be an exception to this trend. Admittedly, this agreement will bring losses as well as gains. We must keep in mind, however, that no nation has ever prospered by isolating itself from the global economy. Trying to deny room for negotiations even before government officials sit at the negotiating table will not help. We need to give our trade negotiators the support and wisdom to pursue the national interest at the talks.
