Korea-US FTA Still Not There Yet

♠ Posted by Emmanuel in ,, at 11/15/2010 12:25:00 AM
[NOTE: This should be the last South Korea post for a while after--count 'em--three consecutive ones.] It has been a very hectic week in the Asia-Pacific region with any number of things going on: US President Obama visiting our large neighbours India and Indonesia; the not-so-consensual G-20 in Seoul; and the annual Asia-Pacific Economic Cooperation shindig, this year in the Japanese industrial town of Yokohama (more on that in the post above). Something that bears mention, however, is the continuing Obama administration futility in concluding any sort of trade agreement. From the Bush administration, Obama inherited pending deals with Colombia and Panama in the Americas as well as with South Korea in the Asia-Pacific. Speaking of which, legislative approval in both countries does not yet appear to be on the horizon.

Let us begin with the Korea side. In early January 2009, Korean legislators from the opposition were literally smashing up parliament over plans to put the Korea-US Free Trade Agreement (the rather unwieldy KORUSFTA). Korean lawmakers apparently enjoy a vigorous democracy for they were beating each other up again by mid-2009 over another issue. Like Japan, South Korea has some of the most protected agricultural producers in the region, and the continuing fear is that KORUSFTA would unleash a flood of American imports. There is also the related and quite frankly nonsensical Korean retention of age limits on US beef imports to consider as a barrier. Previously in place for the mad cow scare that has long since died down Stateside, many Koreans--especially their lawmakers--retain a quite frankly unreasonable fear of US beef contamination. So serious is this mass delusion that Korea's government was nearly toppled over it. Again, if such Korean hysteria were true, there would be thousands of Americans keeling over, but there is absolutely no sign of that happening.

On the US side, there is an equal delusion that American automakers hold of opening the Korean automotive market to their wares. In the mid-1990s, these same US car manufacturers were keen on exploiting the also secluded Japanese auto market. Simply put, it won't happen as there is little demand for American gas guzzlers in these Asian markets. Market liberalization, while categorically desirable, is a ploy that certainly didn't work for the likes of GM, Ford, and Chrysler in Japan as they still have minuscule market shares there. I have little reason to believe that opening up the Korean market will do them any better.

At any rate, that's my reading of events. The Wall Street Journal summarizes what happened in South Korea that resulted in...a continuing legislative stalemate for both the Americans and the Koreans:
The presidents of the U.S. and South Korea were unable to overcome disputes over cars, cattle and domestic politics, potentially killing the biggest bilateral trade deal the U.S. has taken up in more than a decade. The failure to resolve issues by Barack Obama's self-imposed deadline was a blow to the president, who has put export growth at the center of his jobs agenda and had invested political capital in getting a deal by the Group of 20 summit in Seoul.

A U.S. trade official said working-level staff from both sides will meet Friday. But chances for a deal look dim given opposition Mr. Obama faces from Ford Motor Co., labor unions and Democratic lawmakers. Labor leaders and some powerful politicians from both parties praised Mr. Obama for not going ahead with a deal they characterized as bad for U.S. workers. "President Obama is exactly right in holding out for a deal that puts working people's interests first," said Richard Trumka, president of the AFL-CIO.

Polls suggest U.S. political support for trade-opening deals is weakening amid high unemployment. While Republican congressional leaders have suggested they would support moving forward on such deals, some newly elected GOP lawmakers have expressed doubts. Without presidential pressure, trade experts say the South Korea agreement, which has languished in Congress since 2007, could return to limbo along with pending trade agreements with Colombia and Panama and the dormant Doha round of global trade talks. In addition, Mr. Obama hasn't moved to resolve a festering trade dispute with Mexico because of pressure from Democratic lawmakers and unions...

One stumbling block was Korea's refusal to change a provision in the 2007 pact that provided an immediate end to a 2.5% tariff the U.S. levies on imports of Korean cars, said House Ways and Means Committee Chairman Sander Levin (D., Mich.). The U.S. wanted the tariff reduced gradually, while Korea eliminates safety and environmental rules that U.S. auto makers, led by Ford, said help keep Korea the world's most closed car market. The effect of reducing the U.S. tariff more slowly likely wouldn't be large because South Korea's Hyundai Motor Co. already gets around it on more than half of the cars it sells in the U.S., by making them in Alabama and Georgia...

The U.S. also wants Korea gradually to drop its ban on imports of U.S. beef from older cattle, which began after the U.S. had a case of mad-cow disease seven years ago. Previously thought the easier of the two issues, it is a hot button politically for Korea and prompted a walkout by Korean negotiators.

In the end, the parties ran out of time. U.S. Trade Representative Ron Kirk said, "We won't be driven by artificial deadlines," though it was Mr. Obama who set the G-20 deadline. The president alluded to the political pressures. "If we rush something that then can't garner popular support, that's going to be a problem," said Mr. Obama, who had criticized the moribund 2007 Korea pact when he was a candidate. "We think we can make the case, but we want to make sure that that case is airtight."

His plan to revive the Korea trade deal originated in the spring, with a conversation with then-Chief of Staff Rahm Emanuel about broadening the national-security relationship with South Korea. The idea was that reviving the pact could broaden that relationship; help meet Mr. Obama's goal of doubling U.S. exports by 2015; and further U.S. economic interests in Asia as a counterweight to China.

Limiting new trade talks to cars and beef allowed the White House to convince Korea, which had paid a heavy political price for the 2007 agreement, that the pact wouldn't be "renegotiated" but "supplemented" by two side agreements. The narrow reopening also made success more likely, and Mr. Obama in June set the deadline to coincide with the G-20 summit, in part to pressure negotiators to get the job done. The bruising election season chilled the climate for new trade action, as Democrats trumpeted opposition to the Korea deal and some populist Republicans expressed skepticism of free-trade deals...

The Korean auto rules the U.S. wants changed are a blend of American and European emissions and other standards, which force foreign producers to make slight modifications to enter the Korean market. Doing so is expensive, and when unit shipments are low it can force car makers to raise prices. "Free-trade agreements should be about free trade, and we greatly appreciate President Obama's and Ambassador Kirk's commitment to that fundamental principle," said Ford Chief Executive Alan Mulally.

Detroit auto makers and the United Auto Workers got fresh backing Thursday from two prominent Michigan lawmakers who will likely be gatekeepers for any trade pact, should one be reached. House Ways and Means Chairman Mr. Levin and the panel's senior minority member, Michigan Republican Rep. Dave Camp—who are likely to switch positions in the next Congress—jointly said that the effort to salvage a U.S.-Korea trade deal will succeed only if it addresses "the dangerously lopsided trade in automotive vehicles."

South Korean President Lee Myung-bak also faces a political dynamic, including pressure not to change an agreement that was portrayed as a victory over U.S. negotiators when it was first struck in 2007.
I see limited scope for KORUSFTA going forward soon given that it is such a political hot potato in both countries. Sitting on the desk since 2007 and not being put to a vote in either country is a surefire sign that things are amiss. Legislative attention is concentrated in other places in the US, while Korean anxiety over mad cow borders on the irrational. With the Obama administration being unable (or unwilling) to move KORUSFTA forward, there's also a question of whether resistance is specific to Korea or generalized aversion to trade, period.