Free trade agreement (FTA) negotiations between the US and Korea were called off ahead of schedule on 14 July, the day after US officials boycotted sessions on trade remedies and services in response to disagreements on several issues, particularly pharmaceuticals.

Korea's planned reform of a government programme for pharmaceutical reimbursements has emerged as one of the principal sticking points in the talks. The regulations for the scheme, which were drafted in May, set up a 'positive list' of prescription drugs for which the government will reimburse people.

US pharmaceutical manufacturers are concerned that many of their own drugs may not be on the list eligible for reimbursement. Deputy US Trade Representative Wendy Cutler, Washington's chief negotiator in the talks, said that Seoul's decision to proceed with the reform plan was "inconsistent with… the market-opening spirit of the FTA" and "precluded meaningful negotiations." She argued that it was necessary to suspend work on services as well as trade remedies such as anti-dumping duties and countervailing measures "in order to ensure continued balance in the overall negotiations."

Nevertheless, both Cutler and Korean lead negotiator Kim Jong-hoon maintained that the differences were not insurmountable, and that they remained committed to finding common ground.

Rice -- specifically access to Korea's highly protected market -- remains another contentious issue. Korean press reports quote Kim as insisting that rice tariffs and import volumes were not up for negotiation, even though Cutler said that it was "no secret" that the US would seek increased market access for rice.

The US is also seeking more open access for its automotive exports and insurance companies.

Korea's famously militant farmers' groups are strongly opposed to the talks, and organised several protests during the recent negotiations.

Civil society groups have expressed concern about how Washington's demands might affect drug prices.

The next round of negotiations is scheduled to take place in September. The US and Korea are hoping to conclude the talks in time for the mid-2007 expiry of the Bush administration's fast-track authority to negotiate trade agreements.

ICTSD reporting; "US boycotts discussions on medicines in FTA talks with S. Korea," HANKYOREH, 13 July 2006, "Korea-US FTA Talks Bog Down," KOREA TIMES, 14 July 2006; "S. Korea, US Reach Impasse on Drugs, Rice in $29 Bln Talks," BLOOMBERG, 13 July 2006; "Korea, US fail to complete second FTA talks," KOREA HERALD, 14 July 2006.

FOCUS ON BUILDING LDCs' CAPACITY TO PRODUCE GOODS AND SERVICES: UNCTAD

Least-developed countries (LDCs) must build and enhance their ability to produce goods and services in order to achieve substantial and sustained poverty reduction, according to a new report by the UN Conference on Trade and Development (UNCTAD).

The 2006 Least Developed Countries Report, released on 20 July, focuses on developing 'productive capacities,' which it defines as "the productive resources, entrepreneurial capabilities and production linkages which together determine the capacity of a country to produce goods and services and enable it to grow and develop."

According to the study, the development of productive capacities in LDCs faces three basic limitations: poor physical infrastructure, weak domestic private sectors and financial and knowledge systems; and insufficient demand. Policies need to mobilise currently underutilised resources and abilities. Developing productive capacities will help LDCs compete in international goods and services markets in ways that go beyond preference-dependent exports of primary commodities.

LDCs need to increasingly rely on domestic resource mobilisation for the funding of economic growth, reduce aid dependency and attract private investment to support development, the report added.

UNCTAD says that the interrelated processes of capital accumulation, technological progress and structural change are very weak in most LDCs, producing low labour productivity and widespread underemployment, and hence persistent mass poverty. It suggests that national and international policies should seek to start and sustain a cycle of investment and building capacity both in dynamic sectors and those where the majority of labour is employed. Expanding opportunities for productive employment and wealth creation would help reduce poverty.

The report suggests that a simply trade-centric policy orientation will be insufficient for sustained and inclusive growth. Instead, a development-driven approach to trade would be necessary. The need for assistance for building infrastructure and improving the business climate in developing countries has been a central part of WTO discussions on aid for trade.

The report is available online at http://www.unctad.org/Templates/WebFlyer.asp?intItemID=3881&lang=1.

ICTSD reporting.