US-KOREA TRADE ACCORD DRAWS FIRE AS IT MARKS SECOND ANNIVERSARY / THE FINANCIAL TIMES

March 16, 2014 12:12 pm

US-Korea trade accord draws fire as it marks second anniversary

By James Politi in Washington and Song Jung-a and Simon Mundy in Seoul

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US trade representative Michael Froman with President Barack Obama

A free-trade agreement between the US and South Korea, which is seen as a model for a much larger Pacific trade deal , remains divisive in both countries almost two years after entering force.

This weekend’s anniversary of the pact was touted by Michael Froman, US trade representative, as a huge upgrade in economic relations between the two allies that was already producing strong results.

“Millions are benefiting from the lower tariffs on US exports as well as the progress being made to tackle non-tariff barriers blocking US exports to Korea,” he said.

But critics of President Barack Obama’s trade agenda have pounced on a sharp increase in the US trade deficit in goods with South Korea – from $16.6bn in 2012 to $20.6bn in 2013, the highest ever recorded – as evidence that the deal is not living up to its goals for the US economy.

This has been compounded by mounting concerns across corporate America that South Korea is not implementing some of their FTA commitments as rapidly or effectively as some had hoped.

“Making promises about jobs and exports that we know will not pan out is not OK,” said Rosa DeLauro, a Democratic congresswoman from Connecticut who is a frequent thorn in the Obama administration’s side on trade, comparing the Korea deal to the contentious North American Free Trade Agreement and warning about the looming Trans-Pacific Partnership (TPP) deal.

“We are going down the same road,” Ms DeLauro bemoaned at a recent briefing on Capitol Hill.
Supporters of the deal in Washington are keenly aware that negative perceptions of the Korea accord could make it even harder for Mr Obama to gain congressional backing for a TPP agreement with various Pacific nations, including Japan – and are urging patience.

“The true test of the success of [the US-Korea FTA] will be evident over time, I’m optimistic on that front,” said a senior US official, adding: “It’s fair to say this is a gold standard agreement.”

US officials and other advocates of the deal argue that the small decline in US exports to South Korea that drove the wider trade deficit last year can be explained partly by a slump in the South Korean economy that depressed demand for American products. They also noted the contribution of other factors, such as the US drought, triggering a big drop in US corn exports.

Moreover, Korean customs service data have shown that US goods exports to the Asian nation rose for products that are covered by the deal, and only dropped for those that are not. With more tariff cuts set to phase in over the coming years, there is reason to expect better numbers ahead. Recent months have been encouraging, with goods exports increasing compared with a year earlier.

“It’s important to look at the full picture of the FTA. If you look only at a snapshot of the numbers, some things are positive; some things are not,” said James Fatheree, executive vice-president of the US-Korea Business Council, noting that just focusing on the trade deficit was “simplistic”.

The US-Korea FTA was launched and signed under George W Bush, but parts were renegotiated by Mr Obama, notably provisions related to the sensitive auto sector. Mr Obama even toured a General Motors plant in Detroit with Lee Myung-bak, then South Korean president, after the rejigged agreement.

Two years on, the US trade representative touted the fact that US car exports from the “Detroit Three” to Korea had grown by 40 per cent. But opponents were quick to fire back that this increase came from a tiny base, and were overwhelmed by a flood of Korean car imports to the US.

Mr Fatheree says the regulatory component of the agreement is also crucial.

“Before the FTA, Korea was a really hard place for foreign firms to do business. The FTA helps eliminate a lot of that; there are specific chapters regarding regulatory transparency in some key sectors,” he added.

Concerns remain on that front, too. One big one relates to investigations by customs authorities into the “country of origin” status of exports. The inquiries into companies – which, according to people close to the situation, include Ford, Toyota and McDonald’s, as well as exporters of orange juice, chemicals, and aerospace components – could result in the businesses having to repay millions of dollars in tariffs if the authorities conclude that their products do not contain sufficient US content.

Meanwhile, US financial institutions have complained that South Korea has been reticent to lift requirements that all data processing must be done onshore, rather than through their global networks.

In South Korea, too, the second anniversary of the agreement has reignited debate over its impact on the national economy. The growth in the country’s trade surplus with the US has mainly benefited car and electronics components, chemicals and petrochemical products, according to Myung Jin-ho, a researcher at the Korea International Trade Association.

“We think the FTA has been very successful,” said Yoo Ji-mi, director of international co-operation at the Federation of Korean Industries lobby group. “More companies are now using the agreement to increase exports to the US. So our member companies are mostly satisfied with its impact on their businesses.”
South Korea is considering joining the TPP after the deal is completed.

But the introduction of the FTA was a source of fierce controversy, and criticism from its opponents remains fierce.

“The agricultural industry has been demolished by the government’s indiscriminate push for FTAs”, said Kim Young-ho, head of the Korean Peasants League. Beef and fruit farmers had been particularly hard hit by competition from US imports.

Copyright The Financial Times Limited 2014.