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The Peninsula

Expectations Run High for the KORUS FTA

Published March 14, 2012
Category: South Korea

By Troy Stangarone

After more than six years of negotiations, debate, and delay, the U.S.-Korea Free Trade Agreement (KORUS FTA) will come into effect tomorrow. Expectations for the agreement run high, especially in Korea where there has been significant public debate over the KORUS FTA. Starting tomorrow we will begin to see if the agreement is an important economic shot in the arm for Korea and the United States during an uncertain economic time globally or if it will lead to the unexpected consequences that opponents argue lie ahead. With that in mind, here are five issues to consider as the KORUS FTA comes into effect:

1.      What Will Be the Economic Impact of the KORUS FTA?

Expectations will be high, but the agreement needs to be judged on its long-term benefits not short-term results. The EU agreement, which is very similar to the KORUS FTA, has presented a mixed picture so far. In the first four months the EU agreement has been in effect, Korea’s overall exports to the EU have fallen as a result of a drop in orders for ships stemming back to the 2008 financial crisis and the slowdown in overall growth in Europe over the last year. At the same time, Korean exports for goods that either fully or partially saw their tariffs removed are up 14.8 percent according to an analysis by the Korea International Trade Association.

The immediate benefits of the FTA will likely be seen by consumers, who are already seeing the cost savings as supermarkets in Korea have recently announced cuts in U.S. food and beverage products. However, Korean exporters should benefit as well. Major U.S. firms such as Wal-Mart, Caterpillar, and GE Aviation have all indicated the FTA will factor into how they source their products.

Overall, though, the expectations are well known. The U.S. International Trade Commission (USITC) estimates that once fully implemented the KORUS FTA will increase U.S. exports to Korea by $10-11 billion, while raising U.S. GDP by $10-12 billion. The same report estimates that Korea’s exports to the United States will grow by $6.5-6.9 billion dollars, while the Korea Institute for International Economic Policy estimates that the FTA will increase Korea’s GDP growth by 5.7 percent over the next decade.

2.      Can the U.S. Auto Industry Succeed in Korea?

This is another area where Korean consumers will benefit from the agreement. Korea’s tariff on autos will be cut from 8 to 4 percent immediately, and U.S. producers are expected to make a strong push into the Korean market. GM has announced price cuts in advance of the agreement, Ford plans on increasing its presence in the Korean market, and Chrysler plans on introducing more models in its showrooms. Additionally, Toyota has made plans to take advantage of the FTA by exporting cars to Korea from the United States. According to the Korea Herald, the FTA could see exports from the United State rise from under 10,000 vehicles a year to 75,000.

3.      What Will the Impact Be on Korean Agriculture

As with any trade agreement, agriculture was a sensitive issue with Korea. However, concerns about the KORUS FTA’s negative impact on Korean agriculture may be overstated. Korea is highly dependent upon imports of food, only growing a little more than 50 percent of its food. Among some of the agricultural products that gain attention, U.S. beef largely competes with Australian beef rather than Korean beef, while rice was excluded from the agreement and oranges only see tariff reductions when they are out of season in Korea. One other factor to consider is the Chile FTA. When it came into effect in 2003 there were widespread concerns that it would have a detrimental impact on Korean agriculture and those fears have not come to pass.

4.      Can Korea Become an FTA Hub?

The KORUS FTA is not only the template for the EU-Korea FTA, but also the potentially much larger Trans-Pacific Partnership. As Korea prepares to start negotiations with China later this year, it could find itself in the advantageous position of being the only country that could connect the world’s great developed and emerging markets together. The challenge for Korea will be to make itself a hub for all of the agreements taking place around it.

5.      Will Korea Seek to Renegotiate the FTA?

With elections approaching for the National Assembly and presidency in Korea, the opposition has called for the renegotiation of the KORUS FTA and suggested that they might consider withdrawing from the agreement should their demands not be met. Recent polling in Korea suggests that support for the Democratic United Party (DUP) is slipping in Korea, but they are still expected to gain seats in the National Assembly and come close to a majority in the National Assembly. Public opinion in Korea is divided on DUP’s position on the FTA, leading the DUP to back off of its talk of withdrawing from the agreement. Until we see how the National Assembly and presidential elections play out in Korea, it will be difficult to know if this represents a significant change in Korea’s trade policy or merely electoral politics.

However, their stand on renegotiation could make it difficult for the United States to resolve longstanding concerns on restrictions on U.S. beef in the Korean market. Having promised Senator Max Baucus that the United States would request consultations under the current beef protocol to allow in all cuts and ages of U.S. beef, the Obama administration may have to delay this to avoid Korean requests for changes in other areas.

Troy Stangarone is the Senior Director for Congressional Affairs and Trade for the Korea Economic Institute. The views represented here are his own.

Photo from Kevin Collins photo stream on flickr Creative Commons.

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