Thursday, December 16, 2010

US-Korea Trade Agreement Moves Forward, Could Signal More Trade Liberalization

By Edward Steiner

(Sandler, Travis & Rosenberg, P.A.)

The following article is excerpted from North American Free Trade & Investment Report (NAFTIR), also published by Thomson Reuters. Since 1992, key players in law, business, and government have relied on NAFTIR to stay on top of the legal and regulatory developments that critically impact companies involved in cross-border trade and investment in Mexico, the U.S. and Canada. For more information or to request a sample issue, go to:

Also of interest is Mexico, Tax, Law & Business Briefing

Even before the effects of the November midterm elections are being felt and the new slate of largely Republican members has been ushered in, the Obama administration is already reprioritizing its agenda and focusing on compromise. Trade policy, relegated to back burner status for much of the past two years, is re-emerging as an area in which the two parties can find a semblance of common ground.

Politics aside, trade is an important part of the American economy. In 2008, exports alone sustained over 10 million domestic jobs – jobs that often earn 13% to 18% more than the national average. The administration has launched a National Export Initiative (NEI) to double exports and add two million jobs within the next five years, and trade agreements are necessarily part of that initiative.

The recently agreed U.S.-South Korea free trade agreement (KORUS) could be the jewel in the NEI crown and a win, to some extent, for both sides of the aisle. The FTA with South Korea, America’s seventh-largest trading partner, would be the largest such agreement since NAFTA in 1994 and would eliminate tariffs on a majority (over 95%) of consumer and industrial goods within a five-year period. Now comes the hard part – the agreement has to move through the legislatures in both countries. Though there is optimism regarding passage of the agreement, there is also a not insignificant amount of opposition among lawmakers in both the U.S. and Korea, and finally implementing the long-stalled pact is far from a pro forma exercise.

U.S.-Korea Trade in Focus

The South Korean economy is the fourth-largest in Asia and the twelfth-largest in the world. It is home to multinational companies such as Samsung Electronics Co. and Hyundai Motor Co., which undoubtedly boost Korean export numbers. South Korean exports account for about half of the country’s gross domestic product. The primary products Korea ships abroad are semiconductors, automobiles and parts, computers, telecom equipment, petrochemicals and textiles. Many of these products arrive on the shores of the U.S., Korea’s second-largest export market.

Largely as a result of these high-value, high-tech products, the size and health of South Korea’s exports continue to grow, with November shipments to the U.S. alone increasing by 25.2% compared to 2009. November was the 13th month in a row Korea’s export sales increased, earning the country a $39.11 billion trade surplus since January. Exports are also benefitting from a weaker won, making South Korean goods cheaper on the international market.

U.S. exports to South Korea have been unable to maintain volume parity with U.S. imports from that country. While the U.S. enjoyed a $7.1 billion service trade surplus with Korea in 2008, in bilateral goods trade the U.S. ran an $11 billion deficit in 2009 and a $6.6 billion shortfall in the first nine months of 2010. The primary products the United States currently exports to South Korea are corn, petrochemicals, organic chemicals, industrial machines, semiconductors, and civilian aircraft and related parts. The National Association of Manufacturers (NAM) notes that manufactured goods account for over 80% of total U.S. goods exported to Korea and that these shipments sustained 230,000 U.S. jobs in 2008.

A study by the United States International Trade Commission (USITC) claims that gross U.S. goods exports to South Korea will increase by about $11 billion as a result of tariff cuts under the pending FTA alone. Imports, on the other hand, are expected to rise only by about $6.7 billion, helping to improve the U.S. trade deficit with Korea. Ironically, government analysis also predicts that an overall increase in trade as a result of KORUS may in fact cause the U.S. trade deficit with the rest of the world to rise.

Cars and Beef

The United States and South Korea concluded FTA negotiations in 2007, but concerns among U.S. lawmakers about access to the Korean market for automobiles and beef have stalled efforts to implement the agreement. Of the big three U.S. automakers, Ford was the most vehement in opposing the agreement, running advertisements noting that for every 52 Korean cars sold in the U.S. only one U.S. car is sold in Korea. Chrysler expressed similar concerns while General Motors, owner of South Korea-based Daewoo, did not comment. A study conducted by the United Auto Workers echoed Fords’ concerns. The UAW claimed that 70% of the 2009 U.S. trade deficit with South Korea - $8.9 billion – was due to the deficit in automobile sales.

An agreement reached in early December 2010, however, has some of these earlier critics rethinking their stances. Ford now supports the Korea FTA and, breaking with labor unions’ traditional opposition, so does the UAW, which claims the agreement will increase U.S. auto exports.

The December agreement includes some significant changes related to automobiles. The United States can keep its 2.5% auto tariff for five years, while Korea must immediately cut its auto tariff from 8% to 4%. U.S. 25% truck tariffs can be maintained until the eighth year after implementation of the FTA and must be phased out by year ten, while South Korea will cut its 10% U.S. truck tariff immediately. Finally, Korea must also immediately cut its tariff on electric cars from 8% to 4%, with both countries required to phase out such tariffs by year five. The new agreement also allows U.S. carmakers to sell in the Korean market up to 25,000 cars that fail to meet strict Korean safety standards as long as the autos meet U.S. standards. The obligation of U.S. car companies to abide by Korean fuel economy and greenhouse gas emission targets will also be eased, allowing U.S. autos that fall within 19% of the standard. Finally, the U.S. can levy a safeguard against any surges of autos from South Korea for up to ten years after all tariffs on a given product have been phased out.

The progress made on autos was not mirrored in the negotiations on U.S. beef products. Specifically, South Korea will maintain its import ban on U.S. beef sourced from cattle over 30 months old, which was first imposed because of a 2003 case of mad cow disease in Washington state. U.S. beef industry groups have indicated that this situation is not overly worrisome, as a 2008 U.S.-Korea protocol is already bolstering beef exports to Korea, which are expected to rise even further with the phase-out of the 40% Korean tariff under the FTA. However, Sen. Max Baucus (D-Mont.) said he is “deeply disappointed” with the lack of progress on the current ban, and he and other legislators from heavily agricultural states have indicated that they may not support the FTA until their concerns are addressed.

Outside of automobiles and beef, the KORUS agreement includes substantial long-term benefits for many other sectors of the U.S. economy. Perhaps most valuably, U.S. service companies will enjoy increased access to the $560 billion Korean services market, an industry in which the U.S. already enjoys a trade surplus with Korea. This includes accounting, health care, education, legal, finance and telecommunications services, areas in which the U.S. excels. In agriculture, U.S. food processors, ranchers and farmers will enjoy increased access to the Korean market, as high Korean tariffs will be eliminated along with other non-tariff barriers. With respect to manufactured goods, the National Association of Manufacturers expects the already large volume of U.S. manufactured goods exported to South Korea to increase by over one-third. Other notable provisions of KORUS include increased access to the Korean government procurement market, improved enforcement of intellectual property rights in Korea, and a requirement that Korea uphold and respect fundamental labor laws in such a way that ensures a level playing field for U.S. workers.

Edward Steiner is Director of Trade and Legislative Affairs for Sandler, Travis & Rosenberg, P.A., resident in the Washington, D.C., office. Mr. Steiner consults for a diverse client base of private industry, trade associations and foreign governments on a wide range of trade compliance issues including: consumer product safety, food safety, environmental protection and labor standards.

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