Obama Administration, South Korea Clinch Long-Awaited FTA

9 December 2010

The US and South Korea last week managed to resolve differences on auto and beef trade that had been bedevilling a long-awaited free trade agreement (FTA) for years, paving the way for a deal that would, if ratified, represent the Obama administration's first such accord.

Negotiators from the two countries hammered out the compromises last Friday in Columbia, Maryland, at the end of three days of discussions.

Technically speaking, the agreements reached last week will be an add-on to an FTA first negotiated and signed by the George W. Bush administration in 2007.  The Democratic Party, which has since then controlled either Congress or the White House (or both), has been seeking to modify the deal, believing that it does too much to open the US market to Korean cars and too little to open Korea's market to US beef and automobiles. As recently as mid-November, the two sides had failed to reach an agreement in high-profile talks on the sidelines of the Group of 20's summit in Seoul, calling into question the Obama administration's ability to thread a trade policy line among trading partners' needs, its Democratic base, and Congressional Republicans (see Bridges Weekly, 17 November 2010).

Ultimately, Washington secured greater protection for its own auto sector, while giving up its attempts to secure unrestricted access for all US beef to the Korean market. The Washington Post reported this week that the bulk of the compromise took shape when US President Barack Obama met one-on-one with his Korean counterpart, Lee Myung-bak, in Seoul.

According to a White House fact sheet, the US will be able to retain its 2.5 percent on South Korean cars for five years after the agreement is implemented, instead of phasing it out earlier. Its 25 percent tariff on trucks and sports-utility vehicles will now stay in place for seven years, and be eliminated after nine (Korea will still eliminate its 10 percent truck tariff immediately).

In terms of providing the expanded access Washington was seeking, Seoul agreed to soften its safety and environmental standards for automobiles, which US officials believe to unfairly restrict US exports. South Korea will set up an annual quota of 25,000 cars per US auto maker that will be eligible for import under the FTA if they meet US, rather than Korean, standards (the accord as concluded in 2007 included a similar quota, albeit one quarter the size). US autos will be deemed to meet low-emissions standards if their emissions per kilometre are up to19 percent higher than the level for other cars.

As for import restricting measures, Korea will retain its current import ban on US beef from cattle younger than 30 months old, a contested remnant of an import ban introduced several years ago following a mad cow disease scare in the US. It will immediately halve its 8 percent tariff on US cars, with the remainder to be eliminated after five years instead of immediately. Korean pork farmers will also benefit from tariff protection by two additional years.

The supplemental accord concluded last week includes a special safeguard measure for surges in auto trade. The initial agreement had no industry-specific safeguards, but the measure was necessary to assuage the concerns of US automakers. According to the White House, increased duties through the "special auto safeguard" will be available for a decade following the US's elimination of tariffs on Korean auto products, in the event that a jump in Korean imports causes "serious damage to US production" of a given product. The new mechanism requires is easier to invoke than the general safeguard in the original agreement, and no longer requires the US to compensate Korea for using it.

Other provisions will see Korean generic drugs on sale in the US shielded from patent challenges for a three-year period instead of 18 months. Tariff removal on electric cars was also sped up to five years, instead of ten.

In the US, the changes to the FTA won plaudits from leading lawmakers from both parties and a wide spectrum of industry groups, and even won support from former opponents of the accord, such as the United Autoworkers union and auto manufacturers GM and Ford. The US Chamber of Commerce, Intel, JPMorgan Chase, and the National Foreign Trade Council were among those expressing support for the deal.

While there are some questions surrounding whether the supplemental accords will be eligible for a straight up-or-down vote like the 2007 agreement, which was concluded under the Bush administration's ‘trade promotion authority', there are promising signs for the accord's prospects for Congressional ratification. Michigan Republican Representative Dave Camp, the presumptive chair of the powerful Ways and Means Committee in the Republican-controlled House that will take over in January, called the deal "a big win for American employers and workers." Representative Sander Levin, the outgoing chair of the trade subcommittee and a Michigan Democrat who had been critical of the US-Korea deal called the modifications "a dramatic step toward changing from a one-way street to a two-way street for trade between the US and South Korea."

On the other hand, Senate Finance Committee Chair Max Baucus (Democrat-Montana) was "deeply disappointed" that the deal failed to address Korea's "significant barriers to American beef exports." He said he would "reserve judgment" on the FTA based on whether he succeeds at improving its terms.

Nevertheless, Kevin Brady, the Texas Republican who is set to become the head of the House trade subcommittee, said this week that he hoped to pass the long-delayed FTAs with South Korea, Colombia and Panama in the first six months of 2011, according to Reuters.

US Trade Representative Ron Kirk called the agreements with Korea an example of "trade policy that works for America's families and workers as well as it does for its manufacturers." In an interview with Bloomberg, he expressed hope that the accord would combat "the growing...cynicism among the American public that our trade policy can work for us."

The Obama administration's press releases hailing the agreement focused exclusively on its potential to increase US exports to Korea, along with the opening of Korea's markets for investment, services, and public procurement.

On the other side of the Pacific, the optics surrounding the deal are very different. Opposition parties have accused the government of making "humiliating" concessions in the wake of the tensions resulting from North Korea's 23 November artillery attack on the South's Yeonpyeong island. Chosun Ilbo reports that the chair of the leading opposition Democratic Party has called for rejecting the FTA. The Korea JoongAng Daily editorialised in favour of ratification, arguing that that even though the deal "can hardly be called satisfactory," with Korea making considerable concessions in return for relatively small ones, the FTA with the US "has a meaning beyond trade," promising closer security links as well. It also noted that Korea could become one of few countries with unrestricted access to the US and the EU markets, which would provide valuable leverage vis-à-vis China.

ICTSD reporting; "Ratify the Korea-U.S. FTA," KOREA JOONGANG DAILY, 6 December 2010; "A ‘win-win' compromise breaks FTA deadlock," KOREA JOONGANG DAILY, 6 December 2010; "Parties Lose No Time to Clash Over FTA Deal with U.S.," CHOSUN ILBO, 6 December 2010; "US lawmaker sees House approving free-trade pacts," REUTERES, 7 December 2010; "Obama, Lee outlined U.S.-Korea trade deal in Seoul, official says," WASHINGTON POST (Political Economy Blog), 6 December 2010.

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