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.
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