US-South Korean Free-Trade Agreement: The Cost of Failure

Trade has not been a priority for the Bush administration, and negotiations have stalled over a free-trade agreement between the US and South Korea. Meanwhile, South Korea has lots of leverage and plenty of alternative markets, including China. The inability of the US to reach such a major trade agreement signals that Europe could set standards in global trade. For example, trade agreements that the European Union have been negotiating include anti-trust provisions and protections on certain agricultural products, both of which add on challenges for US exporters competing in those markets. US automakers are a major political obstacle for any trade agreement: They sold less than 4000 cars in South Korea during 2005, while South Korean vehicles have gained growing market share in the US. Columnist Bruce Stokes warns that the US ignores free-trade agreements at its own economic peril – as nations in Europe and Asia continue to develop competitive products, pursue agreements and set standards, all the while giving short shrift to US interests. – YaleGlobal

US-South Korean Free-Trade Agreement: The Cost of Failure

US influence over major emerging markets has diminished
Bruce Stokes
Tuesday, January 9, 2007
Sovereign concerns: South Korean farmers' demand for protection, rejected by the US, gets sympathetic hearing in Europe

WASHINGTON: Efforts to create a US-South Korea free-trade area, commercially the most significant such American initiative since the formation of the North American Free Trade Agreement a decade and a half ago, are now deadlocked. Negotiations in early December broke up without resolving major differences over beef, the pricing of pharmaceuticals and anti-dumping rules. With the US facing a March 2007 deadline imposed by the impending expiration of presidential trade negotiating authority, prospects for success look grim.

But the potential loss of foregone economic benefits is the least of Washington’s worries. Failure would demonstrate the inability of the US to conclude bilateral free-trade agreements with major emerging-market economies such as South Korea. Throwing in the towel would also cede to the Europeans global leadership in setting standards for future deals. And it would signal to the South Koreans, who already harbor deep anti-Americanism and disagree with Washington about how to deal with North Korea, that they have little choice but to drift further into China’s economic and diplomatic orbit.

Rarely have such weighty strategic and economic interests rested on the outcome of a single bilateral-trade negotiation. With so much at stake and so many obstacles, the White House has to make free trade a priority.

The US has recently concluded numerous bilateral commercial agreements with Central American and Middle Eastern nations. But most of these deals have been with small or relatively weak economies such as Morocco or Honduras. Washington could dictate the terms of those arrangements and foreign governments had little choice but to sign. This leverage enabled American trade negotiators to obtain from their free-trade partners far more trade liberalization than had been achieved through multilateral trade negotiations through the World Trade Organization. And it also enabled Americans to impose on other countries US standards for everything from food safety to trade rules.

The negotiations with South Korea have exposed the limitations of that American free-trade template. South Korea is the 14th largest economy in the world, larger than Mexico and twice as large as Australia, another recent US free-trade partner. The US trails both China and the EU as a market for Korean exporters. And, as a matter of pride, an increasingly self-confident Seoul, having rebounded sharply from the 1997 Asian financial crisis, will not be dictated to about the terms of a trade agreement. For the first time, Washington finds itself in the position of having to accommodate the demands of others if it wants to conclude a deal.

South Korean negotiating leverage comes, in part, from the fact that it has alternative prospects. In the next few months the EU will begin negotiations with South Korea, part of a broader EU strategy to consummate free-trade deals with major emerging economies such as Korea, India and members of the Association of South East Asian Nations.

The bilateral trade game, once the preserve of the US, is clearly changing. And if Washington is not careful, Brussels will set the rules.

Past EU bilateral deals covered 90 percent of all trade. In reality that has meant elimination of all tariffs on goods, but no more than two-thirds of tariff lines in agriculture, allowing farmers to protect “sensitive” products from foreign competition. If such exemptions become the norm for free-trade agreements, they will set a low ceiling on how much US grain or meat Seoul, Delhi and others will be willing to buy, because no foreign government is likely to give American farmers greater concessions than it has given the Europeans.

Similarly, American beef exporters already have trouble meeting Korean health standards. If, as Brussels intends, the EU “precautionary principle” approach to regulating the health and safety of foods, drugs and chemicals is established through its bilaterals as the new regulatory standard, rather than the American “sound science” principle, then access to the Korean and other markets will be all the more difficult for US exporters.

And European notions about anti-trust policy – which have already tripped US business giants such as Microsoft – are likely to be imbedded in future EU bilateral agreements, shaping the emerging economies’ competitive environment for American companies in South Korea and elsewhere.

Finally, failure to finalize the US-South Korean free-trade agreement will only accelerate Seoul’s economic relationship with Beijing, further diminishing American influence in northeast Asia. China is South Korea’s number one trading partner, exceeding both Japan and the US. A quarter of Korean overseas direct investment went to China in 2005, more than went to the US. And Beijing presses Seoul to negotiate their own bilateral free-trade agreement. Given South Korea’s proximity to the Chinese market, such economic integration is inevitable. But the US has the ability to influence the pace of that trend, if it can break the deadlock in the current US-South Korea negotiations.

The largest such roadblock involves automobiles. Korean automakers sold nearly 800,000 cars and light trucks in the US market in 2005, while the American Big Three sold less than 4,000 in the Korean market. Chrysler, Ford and General Motors claim their lack of success is due to Korean taxes on engine size, constantly changing Korean regulations and the lingering effect of past government efforts to dissuade consumers from buying imported cars.

Seoul is willing to cut the taxes and change the regulations. But the Big Three are unlikely to be satisfied because their opposition is grounded in fears of further Korean inroads into the US market once the free-trade agreement does away with American car and truck tariffs.

Detroit has the political leverage on Capitol Hill to block Congressional approval of the free-trade agreement. And it will, without White House intervention.

President Bush needs to pick up the phone and bluntly tell the Big Three that he cannot help protect their market from more efficient Korean producers. But then he needs to offer to make Detroit whole in other ways by helping it lower its health care and pension costs in return for them dropping opposition to the South Korean deal. Unfortunately, there is no evidence that President Bush is inclined toward such political horse trading.

Therein lies the problem. The South Korea negotiations have reached the point where tough political decisions must be made by the White House.

But North Korea, not trade, dominated President Bush’s recent discussions with South Korea’s President Roh in November in Hanoi at the APEC Summit. There was no public attempt to link broader security concerns with deeper American-Korean economic integration.

With his public favorability rating in the low 30 percent range among American voters, President Bush has little political capital to expend on closing this deal. So, faced with this dilemma, the Bush administration will be tempted to let the negotiations slide, deceiving itself that its successor can pick up the talks at America’s convenience. But Seoul’s impending deliberations with Brussels, and eventually with Beijing, should put Washington on notice that the free-trade train is leaving the station, with or without the US.

America may have to learn the hard way that the cost of failure in the South Korean free-trade negotiations is greater than anyone ever anticipated when the talks were first launched. Such initiatives should never be started unless the political will exists to complete them. And the US will rue the day it let these talks fail.

Bruce Stokes is international economics columnist for the “National Journal.”

© 2007 Yale Center for the Study of Globalization