1. Negotiations
2. US-Korea

Time to put a US-South Korea free trade agreement on the fast-track agenda

Heritage Foundation, Washington DC

Time to Put a U.S.-South Korea Free Trade Agreement on the Fast-Track Agenda

by Anthony B. Kim and Daniella Markheim

WebMemo #964

January 23, 2006

After months of effort, South Korea has reportedly advanced to the last stages of discussions on beginning formal negotiations with the United States to strike a free trade agreement (FTA). An FTA with South Korea would advance the interests of U.S. businesses and consumers, expand trade and investment opportunities with a close ally, and reaffirm America’s leadership on trade. In response to Seoul’s recent positive steps towards reducing trade barriers against America’s goods, Washington should add U.S.-South Korea FTA negotiations to the fast-track agenda.

An Economic and Strategic Relationship

The economic relationship between the U.S. and South Korea is strong and dynamic. In 2004, South Korea was America’s seventh largest trading partner. In the same year, the U.S. was South Korea’s second most important trade partner, surpassed only by China. [1]

The U.S. is the leader in foreign direct investment (FDI) in South Korea. Over the past decade, American investments in South Korea have totaled nearly $30 billion, and American FDI there reached a record $4.7 billion in 2004-a 280 percent increase over 2003. [2] Today, more than 3,000 U.S. companies operate in South Korea. And as evidenced by Hyundai Motor’s new automobile factory in Alabama, South Korea has also been making major investments and creating jobs in the U.S.

Given the significant levels of trade and foreign investment between the U.S. and South Korea, a bilateral trade agreement is a natural and logical step to further strengthen economic relations between the two countries. Even without the benefits of an FTA, bilateral trade in such goods as electronics, machinery, chemicals, transportation equipment, and agricultural products already exceeds $70 billion. According to a study by the U.S. International Trade Commission, an FTA could increase U.S. shipments to South Korea by $20 billion. [3] A trade pact would generate significant economic gains and would be the second largest free trade area for the United States, in terms of dollar value, after NAFTA.

In addition to expanding trade, an FTA with South Korea would demonstrate that the U.S. has not abandoned its strong commitment to freeing trade. Trade negotiations between America and South Korea could spur the stalled World Trade Organization process by developing solutions to various trade barriers that could then be applied on a worldwide scale.

By formalizing bilateral economic ties through an FTA, the Administration can also achieve the strategic aims of solidifying its ties to Northeast Asia through international trade and providing a counterbalance to China’s growing economic influence in the region. For South Korea, steadily growing economic ties have become one of the most important pillars supporting its dynamic and comprehensive alliance with the U.S.

Formal Negotiations

Despite the merits of pursuing an FTA, bilateral trade issues such as Korean quotas that limit the screening of foreign films and a ban on U.S. beef have blocked approval of fast-track negotiations.

However, these barriers are shrinking. South Korea, the third largest market for U.S. beef before the ban, recently agreed to “an initial import protocol, an important step in reopening Korea’s market to US beef.” Seoul will soon import boneless U.S. beef from cattle less than 30 months old. Although he made it clear that “more needs to be done,” Senator Sam Brownback (R-KA) applauded South Korea’s beef decision, saying that “their decision to allow imports from cattle under 30 months of age is especially appreciated, given that neighboring Japan has ignored science and set its limit at 20 months.” [4]

Seoul also announced that it will soon reduce the screen quota that obliges Korean cinemas to show domestic movies for a minimum amount of time, expanding market access for U.S. film exporters.

This progress in reducing barriers to U.S. exports demonstrates South Korea’s willingness to open trade with the U.S. and removes several major hurdles to launching formal FTA negotiations.

The Fast Track

Washington should urge Seoul to accelerate its efforts on these bilateral trade issues in order to kick-start formal negotiations. Official trade negotiations can then address other tariff and non-tariff barriers that challenge U.S. and South Korea trade. Now that South Korea has shown good faith in pursuing freer relations with the U.S., the Bush Administration should respond by approving formal FTA negotiations and thereby promoting a stronger economy at home and stronger ties abroad.

Now is the time for action. Business communities in both the U.S. and South Korea are campaigning for a bilateral trade pact. Although official Washington support for an FTA with South Korea has been cautious at best, Congress, along with growing numbers of officials from the business community, has begun to recognize the merits of a pact. For example, the National Association of Manufactures has named South Korea as one of the "top five candidate countries" for a future trade agreement. [5]

Congressional support for an FTA has also emerged. In a letter circulated to his colleagues on Capitol Hill, Rep. Dan Burton (R-IN), vice-chairman of the Subcommittee on Asia and the Pacific of the House International Relations Committee, emphasized that South Korea would make “an excellent candidate for consideration” for FTA negotiations. [6]

Launching an FTA with South Korea will reinforce the strong and mutually beneficial economic and strategic relationship that exists between the U.S. and South Korea and ultimately serve both countries’ national interests. Now is the time to put a U.S.-South Korea FTA on the fast track to promote prosperity and growth in both countries.

Anthony B. Kim is Research Associate, and Daniella Markheim is Jay Van Andel Senior Analyst in Trade Policy, in the Center for International Trade and Economics at The Heritage Foundation.