The U.S.-Korea FTA: Its Geopolitical Implications and some Lessons for the Japan-Korea FTA

The U.S. and Korea dramatically concluded their free trade agreement (FTA) on April 2, 2007. Originally, the two nations had agreed to eight rounds of negotiation for the FTA to take place alternately in the U.S. and Korea, the first on June 5, 2006 and the last on March 8-12, 2007. Both delegations found that they were unable to move forward at the conclusion of the designated final round, so both nations agreed on one extra round of negotiation to begin on March 28, 2007 with a designated deadline of 7 a.m. on March 31, 2007. This date was three months before the expiration of the U.S. Trade Promotion Authority (TPA). Even after the extra negotiation certain "hot" issues could not be agreed upon, for example rice and beef market opening, trade remedy issues, and automotive taxes. Many in Korea felt that the trade negotiations had failed when, suddenly, the U.S. suggested a 48-hour extension to the negotiations. Just five hours before the deadline, the U.S. and Korea dramatically reached an agreement.

Why was this so dramatic? Last year I made a presentation in Washington, D.C. in which I cautiously suggested four possible scenarios for the development of the then-ongoing U.S.-Korea FTA (UKF) negotiations. The first scenario was technical failure because the designated deadline gave too short a time frame for such a complicated and controversial deal. The second scenario was unilateral withdrawal, just as the Korean government had done from the negotiations for a Japan-Korea FTA in 2004. The third scenario was political conspiracy, in which some in Korea would try to switch an anti-UKF movement into an anti-U.S. movement for some political purpose. Lastly, the fourth scenario was that there would be hard-positional, die-hard bargaining but the two governments would eventually reach an agreement. The point I was trying to make in my speech was that the outcome of the negotiations was very uncertain. Ultimately, though, the FTA was signed.

What did the U.S. and Korea actually agree to? Firstly, 94% of industrial and fishery products would be under an early elimination program, i.e. 100% of their tariffs would be eliminated either immediately or within three years. This means that Korean companies will be able to export automobiles, TVs, cameras, monitors, and so on to the U.S. without tariffs. Textiles and apparel - one of the hottest issues in the FTA - will have around 61% of tariffs eliminated immediately, with the rest eliminated within 5 or 10 years. One exception demanded by the Korean side, to which the U.S. finally conceded, was the "U.S. yarn-forward rule," which will allow Korea to import yarns and fabrics made in China and make them into 33 designated items to then be exported to the U.S.

In agriculture, the 40% tariff on U.S. beef exports to Korea will be eliminated within 15 years, with a 15-year safeguard period. For oranges, the current 50% tariffs remain on oranges imported from the U.S. during harvesting season, but will be eliminated within seven years from the current 30% level for the non-harvesting season.

For automotive tariffs - another hot issue - there are three kinds of elimination: immediate elimination (for passenger vehicles under 3,000cc and automotive parts and components); three-year elimination (for passenger vehicles over 3,000cc); and 10-year elimination (commercial vehicles, including trucks). Commercial vehicle tariffs are very politically sensitive items for the U.S., just as they are for Japan.

Korea demanded duty free status for products made in the Kaesong Industrial Complex, which is located on North Korean territory, resulting in the compromise U.S.-Korea "Committee on Outward Processing Zones on the Korean Peninsula." The Korean demand for compromise on trade remedy issues like anti-dumping and safeguarding resulted in the creation of the "U.S.-Korea Committee on Trade Remedies." Also, Korea agreed to an extension of the copyright protection period from 50 years to 70 years.

Korea agreed to transparency in the pricing of new drugs in response to the U.S. demand for minimum pricing, and agreed to open foreign legal consulting services within five years and to extend financial market opening. The health care and educational markets were not included in the negotiations from the start, however.

What was it that enabled the U.S. and Korea to reach an agreement? I think this was due to the fact that the way in which these negotiations were conducted was much different to our prior experiences in dealing with the Office of the United States Trade Representative (USTR). In 1997 for example, during the Korea-U.S. automotive trade dispute, Korea conducted defensive and "soft" trade negotiations with the U.S. This time, however, Korea was able to instead play a more mutual concession-making and hard-positional game. By this I mean that both sides began negotiations with very hard positions that did not change right up until the end of the negotiation process. For example, the U.S. wanted an open rice market and Korea insisted that it would never agree to that; Korea wanted immediate concession on passenger vehicles, but the U.S. wanted five years; Korea wanted concession on the yarn-forward rule and the U.S. wanted extension of the copyright protection period, but each side would not agree, and so on. In the end this allowed for package deals to be done and various mutual concessions, as I outlined before.

The Korean attitude was also different. Whereas in the past, the Korean government had been willing to accept whatever was demanded by the U.S. with its strong bargaining power, this time the Korean attitude was more nuanced. This is shown in a statement by President Roh Moo-hyun, who intimated that the deal could break down if it felt that the U.S. was being excessive in its demands.

The U.S., on the other hand, had its own double-edged motives in wanting to sign the FTA with Korea. On the economic front, the U.S. saw the UKF as the most commercially meaningful FTA since the North American Free Trade Agreement (NAFTA). Moreover, on the geopolitical front the UKF was regarded as being the "icebreaker" for President George W. Bush's Hanoi Vision on an Asia-Pacific Economic Cooperation (APEC)-wide FTA. In some sense, the geopolitical motives were more important than the economic motives. To get a better view of U.S. motives one must look at China.

When looking at Asia, China's FTA policy has been a south-looking one, with its intention being to conclude a FTA with the Association of South-East Asian Nations (ASEAN) by 2010 on the way to creating a "Greater Chinese Economic Zone." In this sense, Korea has something of a casting vote between this Chinese economic zone and the market-oriented U.S. and Japanese economies. To the U.S.'s disappointment it had seemed that Korea had been stepping under China's umbrella as, over the past three or four years, Korea's trade with China almost doubled as trade with the U.S. stabilized, meaning that China has overtaken the U.S. as Korea's major trading partner. Thus, a U.S. failure to conclude a FTA with Korea would encourage Korea to step under Beijing's umbrella and would therefore damage U.S. trade interests in East Asia.

Another factor that helped in the conclusion of the UKF was the fact that this time there was a different domestic political reaction than is usual in these kinds of cases. That is to say that, usually, those who lose out from FTAs are very vocal in their opposition while the winners are silent; as was the case with the Korea-Chile FTA. This time however, both the winners and the losers were vocal, with the anti-FTA demonstrations organized by non-governmental organizations (NGOs) being countered by pro-FTA demonstrations by various opinion leaders in Korea. This encouraged political leaders to exert leadership in the conclusion of the FTA.

Various changes in domestic attitude were evident toward the UKF as opposed to the Korea-Chile FTA, with public opinion being less sympathetic to the farmers' associations and other losers, courts ruling against anti-UKF NGOs for damage caused by demonstrations, and Hyundai automotive union members declining to join in anti-UKF strikes.

In my opinion, the most important factor in enabling the U.S. and Korea to reach agreement on the FTA was strong political leadership. President Roh and President Bush spoke several days before the conclusion of the FTA to reiterate their strong political willingness to reach an agreement. In addition to this, President Roh was willing to turn his back on his traditional political supporters, for example the ruling party leader and the former justice minister, both of whom were considered as his right-hand men. They both went on a hunger strike to oppose the UKF but this did not deter President Roh.

In relation to political leadership and the deadline game, we can see that because of the strong political will demonstrated by the two presidents, all the issues that had not been resolved over the previous eight rounds of negotiation - rice, oranges, automotive, pharmaceutical, textiles, beef, intellectual property rights (IPR), Kaesong - were resolved in the final 48 hours. Without political leadership, no FTA can be reached.

There may be some lessons to take away from this for any future Japan-Korea FTA, the negotiations for which stalled after the six negotiation rounds that ended in December 2004. In terms of competitive liberalization, I predict that Korea will have concluded a FTA with the European Union by the end of 2007, as well as with Canada, Mexico, and India. China is also sending strong signals to the Korean government that it is keen to open official dialogue on an FTA and ready to be generous in terms of negotiations. I therefore predict that a China-Korea FTA will be able to be concluded by the end of 2008.

I agree with the many people in Japan who have told me that they do not think the U.S.-Korea FTA will negatively impact Japanese trade with Korea or the U.S. What I do think will negatively impact Japan is a Korea-EU FTA. For example, Lexus will suffer from a trade-diversion effect in its competition with BMW. On top of this, the competitiveness of Japanese products, especially in Eastern European markets, will be threatened. Also, if Korea has an FTA with China without at the same time having one with Japan, the geopolitical effect is very great.

What I want to suggest is that Korea and Japan should reopen official dialogue on an FTA next year when Korea launches its negotiations with China. The rebuilding of mutual trust between Japan and Korea is very important. Japanese opinion leaders have told me that Korea unilaterally withdrew from the negotiation table, whereas the Korean government is telling the Korean public that Japan was unwilling to open the agricultural market, so they were unable to move forward. Some people have suggested that the breakdown in negotiations was due to a "not good interpersonal relationship" between President Roh and former Prime Minster Junichiro Koizumi. But, I do not agree with this as President Roh is not known to have a particularly good relationship with President Bush, but they made a U.S.-Korea deal.

In my opinion, if Japan and Korea were to conclude a FTA, Japan would be the overall winner in terms of manufacturing while Korea is looking to enjoy some benefit from the opening of Japan's agricultural sector. Unfortunately, the opening of the agricultural market is less a matter of bilateral negotiation and more a matter of the Japanese political leadership's relations with domestic farmers. I believe that as long as the Korean government is skeptical about the Japanese political leadership in opening its agricultural market, the Korean government will not come back to the negotiation table. Therefore, the Japan-Australia FTA will be a good test to see if the Japan side shows strong political leadership. If it does, then this may convince the Korean government to come back to the negotiation table. Japan also needs a symmetric reaction domestically to a FTA with Korea, much as Korea had to its FTA with the U.S.

Japan and Korea may, however, be able to conclude a mid-level FTA as a second best option. Both Korea and Japan have their own sensitive sectors: for Japan it is agriculture; for Korea it is the parts and components sector, whose employees number 1.1 million and account for 46% of all manufacturing employees and also include over 33,000 small and medium-sized firms (SMEs). Therefore, just as Japan would not have the political power and leadership to open its agriculture sector 100%, as would be required by a high-level FTA, Korea would be unable to do so with its parts and components industry 100%. At the same time, a 50% opening in a low-level FTA would not be acceptable to either side, so the final option may be a mid-level FTA with a 70%-80% opening.

Japanese farmers are worried about the increase of Korean agricultural product imports that would come with a Japan-Korea FTA, but I do not think that they should be worried as I believe that there would actually be intra-agricultural, two-way trade between Korea and Japan. High-quality Japanese fruit, beef, and rice would be consumed by rich people in Korea, and medium-quality Korean fruit and so on would be made available for the Japanese market. This is the win-win solution I envision.

Q: What do you think was President Roh Moo-hyun's main motivation in wanting to conclude the FTA with the U.S.?

A: To be honest with you, I do not know President Roh Moo-hyun's motive for wanting to sign the FTA with the U.S. Even though I was a member of the presidential committee on the UKF, last year I was unable to figure out his real intentions. I suppose that the president believes that the FTA is good for the economic welfare of Korea and Korea's international status on the way to becoming an economic hub in East Asia.

Q: What is the impact of a country's political system - presidential versus parliamentary - on its political leadership and its ability to conclude FTAs?

A: I am often told that Japan's parliamentary system is different from our presidential system in Korea. What I believe to be important, however, is for Japan to build some public consensus on the necessity of having a Korea-Japan FTA. I am told from Japanese opinion leaders that Japanese people are not that interested in having a Japan-Korea FTA. In this sense, the role of Japanese opinion leaders, like newspapers, TV, and government officials, is very important in building public consensus on the necessity of a Korea-Japan FTA.

Q: What is the definition of a mid-level FTA: is it the liberalization of 70%-80% of total trade or is it the liberalization of 70%-80% of Japanese agriculture and Korean parts and components, respectively?

A: I have found that every country - be it the U.S., Korea, or Japan - says that they pursue high-level FTAs. When we look at the results of the negotiations, however, most FTAs are in fact mid-level FTAs. Critically sensitive items are excluded, just as sugar cane, beef, and dairy products were excluded from the U.S.-Australia FTA; only 58% of agricultural products had their tariffs eliminated in the EU-Mexico and EU-Chile FTAs; and only 51% of bilateral trade was liberalized in the Singapore-India FTA. This is even the case in the China-ASEAN FTA, with China excluding many sensitive items.

What I would like to express, then, is that the definition of a mid-level FTA is not a question of how much bilateral trade steps into the FTA package, but rather relates to how many politically sensitive items are excluded.

Q: To what extent did the domestic political situation in the U.S. - specifically the transfer of control of Congress from the Republicans to the Democrats - have an effect on your negotiations for the U.S.-Korea FTA? To what extent did you feel the U.S.'s change in attitude toward North Korea throughout the negotiation period?

A: Last November the Democrats became the majority party in the House of Representatives and the Senate. Some in Korea were worried as they believed that Republicans are more free trade-oriented than the Democrats. There was no serious change in the U.S.'s attitude in negotiating with Korea, however.

As to the U.S.'s opinion and attitude in relation to the North Korean nuclear issue, they see it as a completely separate issue unrelated to the U.S.-Korea FTA. The North Korean nuclear issue did not and will not affect the U.S.-Korea deal.

Q: When will the U.S.-Korea FTA enter into force and how likely is it that the FTA will be blocked at the ratification stage?

A: I am optimistic that the FTA will be ratified. The U.S. Congress takes a very hard stance on environmental issues and labor issues, as was the case in the U.S. FTAs with Caribbean countries, etc., at which time Congress demanded that USTR renegotiate or revise some agreements. In the U.S.-Korea FTA on the other hand, there was no such politically sensitive environmental or labor-standards issue. That is why I am relatively optimistic of ratification.

In terms of ratification in Korea, again, I do not shy from optimism. As I mentioned, in the case of the Korea-Chile FTA, ordinary Koreans were very sympathetic toward the losers, i.e. the farmers' organizations. The Korean farmers' association made a critical mistake, however, at the time of the Korea-Chile FTA in that they over exaggerated the damage that would be caused by the FTA. They claimed that if the FTA were signed the whole of the Korean fruit industry would be destroyed. Many people believed that argument at the time. Three years have now passed since the Korea-Chile FTA but nothing has happened to the Korean fruit industry; on the contrary, Korean grape production has increased by 10%. This means that ordinary Koreans are learning very quickly, and hence most Koreans feel that the U.S.-Korea FTA should be ratified in Congress.

Q: Does the U.S.-Korea FTA include details on investment regime services, in particular "Mode 4" movement of natural persons? What is the percentage coverage of total trade?

A: These questions are a little detailed, so I will gladly show you some materials I have and answer them after the seminar.

Q: Could you give a prediction for the production value of the Kaesong Industrial Region 5 or 10 years from now? What is the likely impact of that income on North Korea?

A: President Roh strongly argued for the duty free status of the Kaesong Industrial Region. This was political motivated. In economic terms, there are only 16 Korean companies in the Kaesong Industrial Region and I am told that to do business there is extremely difficult and that companies are not able to make money due to the non-market economic system, hence I am skeptical about the future of the Kaesong Industrial Region. As I said, therefore, the issue of the Kaesong Industrial Region's duty free status is a political one, not an economic one.

There is a chance that if there is a peaceful resolution of the nuclear issue between the U.S. and North Korea, then perhaps the bilateral committee will designate the Kaesong Industrial Region as an outward processing zone. As it stands now, the Kaesong Industrial Region is a mostly symbolic creation of the bilateral committee.

Q: What would you say are the chances for a Japan-U.S. FTA, and how should Japan approach the negotiations?

A: I am not really in a position to comment on the possibility of a Japan-U.S. FTA. I think that next year we could see a Korea-China FTA and a Korea-Japan FTA, and the U.S. and Japan - being the number one and number two economies in the world - could look at an FTA, but given that this is a sensitive issue, I would rather not comment. This is not to say that Korea would not welcome such a deal.

Q: Do you not think that public opinion in Japan lacks the urgency found in Korea when it comes to looking to conclude FTAs with other countries?

A: I am strongly convinced that political leadership can change and manage public opinion. Public opinion does not change political leadership; therefore, political leadership is much more important than other factors.

Q: What is the reason that some sections of the Korea media are very interested in FTAs? In terms of electoral political issues, the Japanese public is more concerned with pensions than with FTAs and foreign relations: is this the case in Korea?

A: Both the Korean media and the Korean public were, and are, divided into two camps: those who support a U.S.-Korea FTA and those who are against it. Some major daily newspapers like the Chosun Daily and the Dong-a Daily were basically on the pro-UKF side, while on the other hand some minor newspapers and some TV broadcasts were on the anti-UKF side.

This coming December there will be a presidential election and the FTA issue is one of the hottest issues among presidential candidates. All three of the current candidates have, however, actually come out in support of ratification of the U.S.-Korea FTA. There may be other candidates who emerge with differing opinions, but that remains to be seen.

Q: What are the prospects for a Korea-ASEAN FTA? How many countries does Korea already have FTAs with? Is most of your trade now covered by FTAs?

A: Korea has already concluded or is in the final stages of ratification of an FTA with the members of ASEAN, excluding Thailand.

Korea also has FTAs with Chile, Singapore, and the European Free Trade Association (EFTA), and we are currently in negotiations with Canada, Mexico, India, and the EU, with the Japan negotiations at a stalemate, as you know.

Our largest trading partner is China, followed by the U.S., Japan, and then the EU, so our trade is not yet mostly covered but, all going well, by the end of next year it will be. There are some in Korea who are optimistic about our chances of becoming an FTA hub country in East Asia, but I am not sure whether that will be the case or not.

Q: How is the Ministry of Agriculture in Korea acting throughout these FTA negotiations?

A: Last year, the agriculture and fisheries ministers were saying to the president that there would be very serious damage caused to their respective sectors by a U.S.-Korea FTA. The fisheries minister repeated his argument again in the cabinet meeting this year. President Roh reacted and demanded detailed data (the number of fishing boats, etc.) from the fisheries minister for his claims. The fisheries minister could not do it. A few days later this minister was ousted.