Conditions ripe for Korea-US FTA
Korea Times
Conditions Ripe for Korea-US FTA
8 September 2005
By Jeong In-gyo
Professor, Department of Economics, In-ha University
Brisk discussions are underway regarding a Free Trade Agreement (FTA) between Korea and the United States in both official and non-official ways.
A high-ranking official in the United States Trade Representative officially expressed a positive viewpoint over the FTA with Korea, and political circles in the United States are calling for the government to have more diverse target countries for FTAs.
The Korean and American Private Enterprise Convention already set the FTA issue as one of the top agenda items, requesting that the two governments get moving on FTA negotiations. The Korean government has yet to affirm its official standpoint over an FTA with the United States but it seems that it is viewing it positively.
Starting with the FTA negotiations with Chile in 1998, South Korea began focusing on regionalism in earnest. Korea admits the need for an FTA with the United States, but this issue has been set aside and regarded as a mid to long-term task for many reasons _ the political/economic burden resulting from the opening of agriculture, the lack of FTA experience, and the lack of interest from the U.S. government in the FTA with Korea.
Setting up the mid to long-term FTA road map in September 2003, the Korean government maintained the same viewpoint over the FTA with the United States.
Moreover, amid the reality that the Business Investment Treaty between Korea and the U.S. has been dragging for years due to the matter of screen-quarter issues, the Korean government had difficulty in practically reviewing an FTA with the U.S. U.S. trade specialists forecast that the review of FTA between Korea and the United States would be difficult without the preconditions of BIT settlement and the opening of agriculture.
The matter of opening agriculture became still more complicated as the Korean government has stuck to its viewpoint to protect Korean agriculture and a Korean Non Government Organization (NGO) led an anti-globalization rally in Mexico last year during a meeting of World Trade Organization (WTO) officials in Cancun.
Favoring FTA With Korea
In the middle of 2004, the United States started showing interests in an FTA with Korea. The US changed its position for many complicated reasons. These reasons include the request of the U.S. political circle for the FTA focusing on economic profits, implementation of the FTA between Korea and Chile, Korea’s ongoing FTA negotiations with many countries, China emerging as a big power in East Asia, and the need to respond to growing regionalism in East Asia.
Among the reasons listed above, the two most significant reasons that changed the position of the United States are China emerging as a big power and the rapid growth of regionalism in East Asia.
In late 1980s when Premier Mahathir of Malaysia initiated the establishment of the East Asia Economic Group (EAEG), the United States put Japan in the forefront of leading public opinion opposed to the suggestion, and succeeded in blocking the initial moves of regionalism in East Asia by using APEC as an official economic cooperative body in the Asia Pacific region.
At that time, Malaysia’s suggestion was hard to accept because regionalism was not that active except in Europe. Other countries have not had many experiences with regionalism, and many East Asian countries were dependent on the U.S. market.
However, after the financial crisis of 1997/8, key countries in East Asia worked on FTAs. Korea and Japan, both of which have big economic volume in East Asia and share many similarities in terms of economic systems and industrial structures, have been working on an FTA, and China, emerging as a big political and economic big power in East Asia, is seeking an FTA with ASEAN, which will become a decisive variable in the future of regionalism in East Asia.
The rapid economic growth of China naturally led many East Asian countries adjacent to China, including Korea, to deepen economic relationships with China, and as a result, China became the top trade and investment partner of many East Asian countries, surpassing the United States. China was regarded as a country to be involved in an FTA due to its incomplete market economy system, but it is reviewing FTAs with Australia, India, Middle East countries and ASEAN.
The number of FTAs that East Asian countries are working on is slightly over 30. Once started, regionalism has a domino effect and expands its driving power, so regionalism in East Asia is expected to progress faster.
So far, the United States has exerted its considerable political and economic power in East Asia, but its political and diplomatic position is shaking for many reasons _ emerging China, activated regionalism, weakening APEC, and growing anti-American sentiment because of the anti-terrorism war.
Therefore, many voices in the United States are bringing up the need for measures to reinforce relationships with the East Asian region. Moreover, the United States itself concluded FTAs with many countries in the past a few years, including Australia, Morocco, Jordan, Chile and other countries in Central and South America,.
It also seeks for a Free Trade Agreement in America (FTAA), so the United States would not be in the position of putting pressure on the moves towards regionalism among East Asian countries.
Then, why did the United States select Korea for an FTA, not Japan or China? As Zoellick, the former USTR of the United States pointed out last September, Japan is not likely to change its closed commercial practices and open its agriculture industry even a FTA is agreed to, and China has not yet established a sufficient social/economic infrastructure for an FTA. China, the only country to stand against the United States in the future, is expected to have more economic power in 20 years, and therefore, the United States is reluctant to agree to an FTA with China.
Meanwhile, the United States might have reached the conclusion that Korea is the most appropriate country to maintain its interests in the formation of a regional grouping in East Asia, from a geopolitical point of view, since Korea is one of the three largest economies in East Asia, and has a supplementary system in terms of trade and industry.
In addition, they might have concluded that an FTA is the most efficient tool to reinforce an economic and non-economic relationship with Korea, a relationship which is weak compared to that of the past.
New Korea-U.S. Alliance
What will an FTA with the U.S. bring to Korea? Let’s take a look at the economic side. It might cause some pain in opening agriculture and services, but the entire national economy will greatly benefit.
Based on my research, an FTA between Korea and the U.S. will a bring 1 percent additional economic growth and an additional 10 billion dollars worth of export to the U.S.
Clearly, the opening of agriculture will be a pivotal point in concluding an FTA between the two countries. The United States might be seeking the FTA with Korea to advance into the Korean agriculture market to some extent, but if the United States puts more emphasis on strategic goals to defend its own interests in the process of an East Asian regional formation, the United States will be flexible on agriculture.
As shown with the FTA with Australia, raw sugar and sugar are the two most sensitive agricultural items of the United States, and we will be able to avoid the full opening of our agricultural market if we strategically utilize the former examples.
More desirably, the Korea-U.S. Business Investment Treaty, deadlocked for years, should be tackled through negotiation within the framework of FTA. People engaged in the movie industry still obstruct a settlement of BIT, but there is another reason why the Korean government is not more actively responding to the negotiation with the United States; Korea has not decisive concession from the United States in the BIT.
When BIT becomes one of the FTA agenda for negotiation, Korea will be able to obtain concession for either agriculture or screen quarter from the United States.
Additionally, the FTA with the United States will serve as a good chance to accelerate the advancement of industrial structure and improve trade and economic systems, and in the future, less friction over trade with the U.S.
It will also help Korea reduce its dependence on China, which is growing drastically these days. In addition, the FTA will reinforce the Korea-US alliance with deeper economic cooperation, and this will ultimately contribute to the stability of the Korean peninsula.
It is clear that we can expect a high level of economic benefits from an FTA with the United States, Korea’s biggest trading partner, and the country with the biggest domestic market in the world. Moreover, an FTA between the two allies has significant strategic aspects in politics and security.
Of course, it will have some troubles in dealing with sensitive issues such as agriculture and screen quarter system, but it is necessary to review it from the perspective of the advancement of the Korean economy and globalization.
FTA as a Short-term Project
There is no official discussion about an FTA between the two countries, but the Korean government will have to respond to the suggestion of an FTA initiated by the US government (although it is unofficial).
Kim, Hyeon-jong, the head of the Trade Negotiation Headquarters, participated as a presenter in the international seminar on the Korea-US FTA on Oct. 26 last year.
During his presentation, Kim emphasized the importance of an FTA between Korea and the United States and affirmed the desire to seek a settlement through mutual flexibility and Korea’s efforts to innovate its agricultural industry. But agricultural products, the most sensitive item and the biggest concern of the United States, can become an obstacle to an FTA between the two allies.
Moreover, he added that it is high time for academic circles and the industrial community to start discussing sensitive items and economic effects in each field, aimed at facilitating official negotiations between the two governments.
As timing is the most important factor in FTA negotiations, it would be better to start a domestic review process such as a meeting of economic ministers in the second half of 2004, and officially set up FTA negotiations through the Korea-U.S. summit talk or the trade minister talk.
Additionally, the government should start collecting public opinion in the early stage, and adjust the FTA with the United States as a short-term task in the FTA progress road map.
