IHS Global Insight Perspective | |
Significance | On Friday last week, the United States and South Korea finally reached agreement on a long-stalled free trade deal after the latter made concessions on the divisive issue of auto-tariffs. |
Implications | The pact will see tariffs abolished on 95% of goods over five years, making it the largest trade pact since the 1994 North American Free Trade Agreement with Canada and Mexico. |
Outlook | The FTA will significantly boost bilateral trade, resulting in a marginal reduction of the U.S. trade deficit with South Korea, while further strengthening the U.S.-South Korea alliance. |
A Far-Reaching Deal
A Closer Look at the Auto Provisions |
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The United States and South Korea achieved a breakthrough on 3 December that promises to unblock a free trade agreement (FTA) which had languished for three years. Progress came after four days of talks in the United States when the South Korean negotiating team agreed to open up their auto market to U.S. producers. Under the revised agreement, the United States will now be permitted to retain its 2.5% tariff on South Korean cars for five years, while South Korea will immediately decrease its current 8% tariff to 4%. The Seoul administration will also relax safety and environmental standards in order to permit each U.S. auto-manufacturer to export 25,000 cars per year under U.S. safety standards. Overall, the pact will abolish tariffs on 95% of goods between the two countries over five years. It also paves the way for greater trade in the services industry, opening up South Korea's banking sector.
Ruling Party Defends Trade Pact
The proposed FTA has been controversial in both countries, but especially so in South Korea. Following the announcement, the South Korean opposition party declared it a "humiliation" and an "economic attack". Opposition Democratic Party leader Park Jie-won launched a barrage of invective against the ruling Grand National Party (GNP) over the weekend, saying "we have been hit by the North with cannons and now we're being hit by the United States with the economy". Park has now pledged to organise a national campaign to whip up opposition, while promising to block the bill in the National Assembly.
President Lee Myung-bak has fought back, praising the agreement for bringing "huge benefit" to the country. The GNP, which controls 171 of the 299 parliamentary seats, said that they would push for ratification of the agreement as soon as possible. Speaking at a nationally televised news conference which lasted over an hour, Trade Minister Kim Jong-hoon, issued a strong rebuttal against criticism that the government had caved in to U.S. pressure. He strongly denied that the Seoul government had pushed for the agreement to be signed too quickly after the North Korean attack on Yeonpyeong Island on 23 November. However, he did admit that the auto tariffs concession had been necessary in order to improve the agreement's prospects in the U.S. Senate.
Obama Welcomes Job and Export Boost
Many in President Barack Obama's Democratic Party are ambivalent about the merits of free-trade deals, but he has repeatedly committed himself to sealing the deal with South Korea. Indeed, his failure to clinch it while he attended the recent G20 Summit in Seoul was cited as a major diplomatic failure. Obama said on 3 December that his team had worked to attain the "best possible deal for American workers and corporations", adding it would create roughly 70,000 jobs. There was some disappointment, however, over access for U.S. beef to the South Korean market after the Seoul administration refused to make concessions on the age of U.S. beef imports. South Korea managed to retain restrictions on imports of U.S. beef, limiting it to cuts from cattle younger than 30 months. Younger cattle are alleged to be less at risk of contracting so-called "mad-cow" disease. The South Korean government also managed to secure a two-year delay, pushing the deadline back to 2016, on abolishing tariffs on certain U.S. pork products.
All international treaties need to be ratified by a two-thirds majority in the U.S. Senate, a high hurdle when the Democrats will only be able to count on 54 votes from January. This legislation stands a better chance than most of making it through, however, as there are many Republicans sympathetic to it; indeed, the original negotiations were conducted while George W. Bush was president. It has instead been the Democrats who have tended to resist free-trade agreements most vociferously. Republicans will be reluctant to hand Obama a legislative victory of sorts in the highly charged partisan environment, but it seems ratification will proceed. The South Korean concessions will also play well among wavering Democrats.
Outlook and Implications
The pact is the most significant U.S. trade agreement since the North American Free Trade Agreement with Canada and Mexico in 1994. South Korea is already the United States' eighth largest trading partner, and the FTA is expected to increase bilateral trade—which stands at some US$69 billion per year—by a further US$10 billion. It is also likely to result in a marginal reduction of the U.S. trade deficit with South Korea. More broadly, it will serve to strengthen the U.S.-South Korea alliance—already in the best shape it has been in years after the Obama administration has stood shoulder-to-shoulder with its traditional ally amid a series of provocative acts from North Korea this year, including the torpedoing of a South Korean warship, the Cheonan, in March, as well as its artillery bombardment of Yeonpyeong Island last month. For President Lee, the deal is part of a long-term strategy to boost the South Korean economy, pushing it out of the shadows of giants China and Japan. Here it is important to note that the Seoul government already has trade deals in place with India, the European Union, and the Association of Southeast Asian Nations (ASEAN). However, there will remain some uncertainty regarding the passage of the bill through South Korea's National Assembly owing to intense opposition from the Democratic Party. Previous attempts to push through the FTA have triggered violent brawls in the legislature. For Obama, the agreement also marks a victory, boosting his objective of doubling U.S. exports. Senate ratification does not appear to be a major hurdle given relative enthusiasm among Republican ranks for the FTA.
U.S. automotive manufacturers greeted news of the deal warmly. Ford, which lobbied hard for modifications to the FTA that would make it more favourable to exporting vehicles from the United States, released a statement by chief executive officer Alan Mulally expressing his satisfaction that the new agreement would "open the Korean auto market". The latest agreement does indeed seem to be far more favourable towards U.S. auto businesses than the original deal reached in 2007. Previously, exporting vehicles from the United States to South Korea simply did not make much sense as the two markets were extremely different in terms of what consumers drive and buy. However, a downsizing of the U.S. market following the fuel price spikes, economic collapse, massive bankruptcies, and emissions-regulation reforms over the past three years since the original agreement was reached has resulted in a completely different approach by U.S. automakers in their home market. No longer are U.S. automakers relying solely on big trucks and large cars to generate profits; they are now focusing on much more balanced portfolios that include top-notch small cars, super-high fuel-efficient engines, and global designs that have been created by facilities around the world (including South Korea) and which are sold as common vehicles in multiple markets. Combine this new approach with a U.S. dollar that has been falling steadily versus other global currencies, and suddenly U.S. exports are starting to look a lot more attractive again. In just three years, the idea of exporting vehicles from the United States to South Korea in volume has gone from being just plain ridiculous to highly possible.