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Trade: FTA talks to start

TMCnet, March 03, 2006

Trade: FTA talks to start

(Business Asia Via Thomson Dialog NewsEdge)

South Koreas efforts to secure free-trade agreements (FTAs) have received a boost with the announcement of the launch of talks with the US. But starting talks is one thing; successfully concluding a deal will prove challenging.

On February 2nd South Korea and the US officially announced the start of negotiations on a comprehensive bilateral FTA. Supporters of the deal claim it will be beneficial to both countries trade, but protectionist backlashes in South Korea and perhaps also, though to a much more limited extent, in the US may impede the progress of negotiations. The tight timetable in which to conclude and ratify an FTAbefore the US presidents authority to fast-track trade bills through Congress expires in mid-2007also poses a challenge.

A bilateral trade deal with South Korea, if completed, would mark the USs largest FTA since the 1994 North American Free-Trade Agreement (NAFTA), according to the US State Department. And for South Korea, of course, it would be a milestone in foreign trade relations: the US is its third-largest trade partner, after China and Japan, and its second-largest export market. According to South Korean customs data, two-way trade reached US$71.9bn in 2005, only slightly below the US$72.4bn in South Korean trade with Japan but well below the US$100.6bn in South Korean trade with China.

A buffer against the neighbours

An FTA with the US is attractive to Seoul not only because of the absolute size of the market it could open up to South Korean exporters. It is also likely to appeal as a partial solution to the growing sense of unease that South Koreas economy is being upstaged by, on the one hand, the Japanese recovery and, on the other, by the ever-growing economic muscle of China. Part of this anxiety is probably the natural result of South Koreas geographical location between two major Asian powers, as well as of its political and military tangles in the region in the last century. But in concrete terms South Korea also has grounds to fear that its manufacturers and exporters could lose competitiveness, sandwiched as some arguably are between high-end Japanese competitors and low-end Chinese ones. The prospect of sealing an FTA with the US thus promises to create a more robust buffer against these forces, opening up further an important trading channel and boosting export manufacturers sales.

How all this could translate into numerical changes to bilateral trade flows is hard to tell for now, especially since the details of specific tariff cuts and services-sector concessionsthe FTA looks set to cover both goods and servicesare what must be negotiated. But there is some feeling that, depending on its provisions, a deal would be likely to boost exports of South Korean manufactured goods, while offering improved access for US exports of farm goods, manufactured goods, and services in sectors like healthcare and education. One South Korean estimate suggests an FTA could create over 100,000 new jobs, mainly in manufacturing, but could hit farm production hard if it exposed the domestic market to a surge of US imports. South Korea is also hoping that the FTA will include a visa-waiver programme for travel to the US, a move that would facilitate trade and investment co-operation, among other things.

Recent trade data underscore the USs importance as a market for South Korean export mainstays like cars and electronics. According to customs data released by the Korea International Trade Association (KITA, a large non-profit trade-promotion body), South Koreas top four exports to the US last year were road vehicles (US$10.5bn), telecoms and sound-recording equipment (US$7bn), electrical equipment (US$4.5bn) and office machines (US$2.6bn). Meanwhile, South Koreas top import by far from the US was electrical equipment, at US$7bn. Other industrial, scientific and transport equipment were also significant imports, as were organic chemicals. According to the US State Department, the USs other major exports to South Korea include agricultural products, aircraft and organic chemicals.

KITAs data may also betray an additional motivation for South Korea rapidly to conclude a FTA with the US: namely, a desire to arrest a decline in its exports to the US. South Koreas total exports to the US were down 3.5% year on year, to US$41bn, in 2005. With the US economy set to slow further in 2006, South Korean manufacturers are likely to continue to feel pressure to expand the scope of their export markets, even though the FTA itself would not come into effect until 2008 at the earliest.

A bilateral trade pact would have the secondary benefit of giving South Korean exporters more to fall back on should currently buoyant export demand from China, on which the economy is now heavily reliant, subside. This is becoming a greater risk given the Economist Intelligence Units forecast for a substantial slowdown in Chinese GDP growth in 2006. Our forecast for a further appreciation of the won against the US dollar this year will also do little to improve the attractiveness of South Korean exports, either globally or in China where the renminbis room to appreciate against the US dollar is tightly controlled. South Korean exports to China surged 24% to around US$62bn last year, according to KITA.

Pitfalls and obstacles

However, South Koreas ambitions for an FTA with the US raise several concerns. The first is that the national prestige to be gained by securing such a deal ahead of rivals like Japan and China, combined with the pressure of a tight negotiating timeframe, could prevent the South Korean government from paying due attention to the FTAs broader strategic fit with its domestic economy, industrial priorities and competitive advantages. There is a risk, in other words, that the quality of decision-making could suffer, or that South Koreas bargaining position with the US could be weakened, in the rush to get the deal done. Pressure from slowing export growth could exacerbate this, as too could the inevitable barrage of protectionist vitriol South Korean officials will face domestically.

Even assuming the rationale for the FTA is perfectly thought out, of course, resistance in domestic markets is almost certain to be another obstacle to the successful or rapid completion of an agreement. Unsurprisingly, South Koreas small but notoriously militant farm lobby has already protested against the FTA, and some industrial and labour groups will doubtless follow suit. This could prove to be more than an irritation: protests by South Korean farmers resulted in an FTA with ChileSouth Koreas firstthat was completed in early 2003 taking a full year to obtain ratification in the national parliament. And a storm is already brewing in the film industry following the governments announcement on January 26th that it will halve a quota requiring cinemas to screen South Korean films for 146 days a year. Reduction in this quota was one of the key remaining US conditions for the start of FTA talks, along with the lifting of a two-year ban on imports of US beef that had been imposed over fears of mad-cow disease. The South Korean government will look to appease farmers with a substantial compensation package, but if their previous reactions to any hint of opening of the heavily protected domestic market is any indication, they are likely to put up a big fight.

Timing is another problem. US congressional procedure means that the talks themselves can only start three months after the February 2nd announcement officially confirming their launch, so in practical terms nothing will happen until May. But the negotiations then need to be wrapped up by the spring of 2007 if the US president, George W Bush, is to have time to get the FTA through Congress before his Trade Promotion Authoritywhich gives him the right to put trade bills to a simple yes/no vote in the US legislature, without modificationexpires. Thereafter, getting US congressional support for the FTA could be much more complicated and time-consuming.

Political clouds

The complexities of South Koreas important but often difficult political relationship with the US could also undermine trade negotiationsalthough the extent to which this may be a problem will depend on how much the build-up to elections in 2007 encourages South Korean politicians to make opportunistic efforts to stir up anti-American sentiment. As a rule, such sentiment is not nearly as strong or as widespread on a national scale as the high-profile coverage of occasional flare-ups suggests, but bilateral relations can nonetheless be volatile.

Other political issues could make the situation more difficult. For example, relations generally with the US are expected to worsen, partly owing to differences over how to handle North Korea. A more abrasive US ambassador, Alexander Vershbow, in Seoul is straining the US-South Korean alliance. And the promotion in January 2006 to the post of unification minister of Lee Jong-seok could also make relations difficult. South Korean forces in Iraq may be cut further. Ongoing relocation of US forces both in and from South Korea will be a further sore point.

 source: TMC