US-Korea Trade Deal Still Faces Hurdles

SEOUL, South Korea – The trade pact agreed to by U.S. and South Korean negotiators could generate $20 billion in trade in coming years and drive similar deals across Asia – if it can overcome major legislative opposition.

The U.S. Congress and Korean National Assembly are led by politicians who won office in part by campaigning against free trade. The deal as it stands could face strong opposition from U.S. farm-state lawmakers because of its beef restrictions and its failure to open any window for U.S. rice exports. U.S. negotiators have told the South Koreans that the deal won't pass Congress until they lift restrictions on beef imports first put in place during the 2003 scare over mad-cow disease.

If it clears legislative obstacles, the deal, reached yesterday afternoon minutes before a U.S. legal deadline, will especially benefit U.S. farmers and Korean manufacturers. By cutting tariffs, it will lower the prices U.S. consumers pay for Korean cars and electronics and provide new opportunities for U.S. investors and businesses in South Korea. And by cutting tariffs and taxes, it will sharply lower prices for U.S. cars and food in South Korea, which has some of the world's highest prices for both. However, the agreement doesn't include rice, which Korean negotiators insisted on leaving out.

South Korea also gets a head start in Asia on competition for American business. The trend could spread in the region as bilateral trade agreements grow in popularity after efforts to strike a global deal in the Doha Round under the World Trade Organization fell apart last July. Also Monday, Thailand's prime minister flew to Japan to sign a free-trade agreement with Japanese leaders. (Thai trade talks with the U.S. stalled last year when the former premier was deposed in a coup.) The U.S. and Malaysia announced they will meet later this month to restart free-trade talks that stalled a few weeks ago.

The U.S.-South Korea deal is the largest free-trade pact, as measured by the size of the economies involved, since Canada, Mexico and the U.S. completed the North American Free Trade Agreement, which took effect in 1994. Deputy U.S. Trade Representative Karan Bhatia, who led the U.S. delegation during the final talks in Seoul, said the U.S.-South Korea efforts show "that two countries with large, complex and dynamic economies and a tradition of robust public involvement can work through challenges and create a high-quality free-trade agreement."

Forecasts by private and South Korean government-funded institutes before the agreement showed the countries' two-way trade, which was $75 billion last year, could increase to between $90 billion and $100 billion within a few years. South Korea, which had a $14 billion trade surplus with the U.S. last year, would see its surplus continue, though its advantage would likely shrink as the overall pie grew.

The final pact lowers tariffs in many industrial segments and reduces investment protections in service industries. U.S. legal and accounting firms, for instance, will find it easier to set up their own offices in South Korea. Producers of U.S. television shows will be able to sell more of them to Korean broadcasters as quotas on domestic programs fall away.

With more competition, such service businesses could become more efficient and profitable, says Kim Jung Sik, an international-trade professor at Yonsei University in Seoul. "The agreement will strengthen the service industry just as the liberalization of the manufacturing industry in the 1980s led to an increase in exports," he says.

In one key part of the agreement, South Korea agreed immediately to drop tariffs and other restrictions on imported cars. Currently these consist of an 8% tariff, a tax on engine size and restrictions on parts, and have created one of the most lopsided car markets in the world: Just 3.5% of cars sold last year in South Korea were imported, compared with 37% in the U.S. The U.S. also will drop a much smaller tariff on Korean cars over three years and a larger one on pickup trucks over 10 years.

Still, the deal is narrower than the countries planned when they began formal talks. South Korea excluded large swaths of its agricultural production, led by rice, its biggest crop. That means Koreans likely will continue having to pay about four times as much for rice as Chinese pay. Other food quotas will be reduced slowly: South Korea's 40% tariff on beef will phase out over 15 years – though right now South Korea accepts no imports of U.S. beef after a case of mad-cow disease was found in the U.S. in late 2003.

U.S. Senate Finance Committee Chairman Max Baucus, a Montana Democrat, blasted the agreement over the beef issue, saying it was "an entirely unacceptable outcome." Sen. Baucus said he wouldn't allow the deal to move in the Senate "until Korea completely lifts its ban on U.S. beef," a message the administration already has conveyed to the South Koreans.

Sen. Charles Grassley, an Iowa Republican and the ranking member of the Senate Finance Committee, said he has "mixed feelings" about the deal, which would open markets for U.S. soybean and wheat farmers while doing little to reward ranchers or rice farmers.

The agreement is a boost to U.S. President George W. Bush and South Korean President Roh Moo Hyun, who are both in their final terms and suffering from low support ratings and slowing economies. For Mr. Bush, the deal proves that the U.S. can forge a major trade pact with another industrial power, not just the smaller economies it has so far reached deals with, such as Chile, Jordan and Australia.

For Mr. Roh, the deal is a victory for his campaign to shake off the vestiges of the country's protectionist past, when the country kept out imports and foreign companies to nurture domestically run industries. It sets the stage for South Korea to forge free-trade deals with Canada, Australia, the European Union and others, and may become the largest economic accomplishment of Mr. Roh's five-year presidency, which ends early next year.

On the final day of talks, both countries compromised on core areas. South Korea agreed to end its ban on U.S. beef if an expected safety reclassification of U.S. meat is made by a world health group next month. And the U.S. will consider adding to the pact items that are made by South Korean companies at an industrial park just across the border in North Korea. The U.S. has refused to engage in trade with North Korea for years and has expressed worries that the North's oppressive government benefits from the industrial park.

The two countries reached the deal just before midnight, Eastern Time in the U.S., in time to reach Congress ahead of a deadline tied to the expiration of Mr. Bush's trade-negotiating powers.

With fewer than 80 minutes remaining to the U.S. deadline, South Korea Trade Minister Kim Hyun Chong left the Grand Hyatt Hotel in Seoul, where the negotiations were taking place, to meet Mr. Roh and several other cabinet ministers to discuss final terms. He called Mr. Bhatia on his way back to the hotel – 22 minutes before the deadline – to say the countries had a deal.

A complete draft of the deal will take a week or two, after which Messrs. Bush and Roh will have to win approval for the deal from lawmakers.