Washington’s tactical shift on global trade
Stratfor
Washington’s Tactical Shift on Global Trade
5 June 2006
Summary
Seoul and Washington have just launched free trade talks. The negotiations will be complex, acerbic and angry — and will finally bury the Doha Round of World Trade Organization talks.
Analysis
South Korea and the United States launched free trade negotiations in Washington on June 5. The process undoubtedly will be long, complex and, to put it mildly, grueling.
The Koreans’ willingness to enter into negotiations does not mean they embrace free trade. While they are nothing if not inventive and determined, they are fiercely nationalistic and protective of their markets. The United States, for its part, intends to slice through a labyrinth of regulations, restrictions, tariffs and customs that are explicitly designed to limit market access.
The most sensitive product, as in most Asian states, is rice. Although foreigners are supposedly guaranteed 8 percent of the Korean market, a healthy and realistic fear of consumer backlashes leads retailers to simply avoid carrying foreign brands. And the Koreans certainly do not want subsidized U.S. rice flooding their markets without consumer choice. After all, the Koreans are quite happy behind their own walls of heavy subsidization and massive import tariffs, which ensure that Korean consumers pay five times the average global price for their rice.
Another sticking point involves South Korea’s efforts to prepare for unification with North Korea by setting up industrial zones north of the border. Seoul wants items from those zones — some of which already are operational — to be covered in any free trade agreement (FTA). On that point the response from the United States, which has maintained 37,000 troops in the demilitarized zone for most of the past half century, has been less than enthusiastic.
However, the room for progress in the bilateral trading relationship is huge. In 2005 the United States shipped $27.7 billion in goods to South Korea, and imported items worth $43.8 billion. The Commerce Department expects that a successful accord would increase both figures to about $50 billion, which would easily make the deal the single largest for the United States since the North American Free Trade Agreement took effect in 1994. South Korea has come a long way since the post-Korean War era, when it was among the world’s poorest states; it now is the world’s tenth-largest economy and among its largest trading powers.
But the going will be rough indeed. Koreans are notorious for their antipathy to free trade accords, protests against them going so far as to feature self-immolations and self-eviscerations. During the negotiation of the Uruguay Round of the World Trade Organization accords — which bore the name simply because of the location at which the discussions were launched — Koreans regularly attacked the Uruguayan Embassy.
The point being that the unlucky U.S. Trade Representative (USTR), who has primary responsibility for hammering out the deal, has just been handed a hugely frustrating and complex task that will absorb all of his time.
The USTR position has been a bit of a hot potato of late. Robert Zoellick held the job until recently, and, although he had plenty of political connections, he had very little to show for his term when he was dragged to the upper ranks of the State Department on Condoleezza Rice’s coattails in February 2005. The nameplate barely had time to dry on the door of his successor, Rob Portman, before he was nominated in April to run the Office of Management and Budget. His No. 2 at the office, Susan Schwab, is now in the proverbial firing line.
It is a tough job, and one that a replacement of a replacement is going to have a hard time carrying out. Luckily, the simple fact that the Korea FTA has been put on her plate allows Schwab to do some badly needed prioritizing. The only other major task on the USTR’s to-negotiate list is the Doha Round of the WTO accords, a task that is every bit as nasty and controversial and painful as a Korean FTA will be.
But there’s one major difference between the two negotiation tasks. The Korea FTA, while difficult, only has one other player in the room. The Doha Round has some 200, and has not gone anywhere in three years because of the European Union’s refusal to meaningfully reform its agricultural subsidies. Although the WTO as it currently exists has a great deal of staying power, the Doha talks on how to make it something more are sunk.
For Schwab this is heaven-sent, as she can shelve serious work on the Doha Round and focus on a single task: the Koreans. It is a good thing, too. Even a highly experienced, well-connected USTR would find it impossible to do both.
For the United States, focusing on the FTA with Korea has a broader implication. U.S. abandonment of the WTO talks — in all but the formal sense — demonstrates a firm shift away from plodding multilateral trade liberalization efforts and toward the expansion of ad hoc trading groups formed by a series of interlocking bilateral treaties. Unlike in multilateral forums where several players routinely stack up to block American initiatives, in bilateral forums the United States can apply military and political pressure on a case-by-case basis to further its economic goals.
Korea appears poised to be the test case — and if past Korean performance is any guide, the United States will need all the pressure it can muster to get this deal through.
