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A Free Trade Agreement with South Korea Would Promote Both Prosperity and Security, Cato Trade Briefing Paper No. 31

A Free Trade Agreement with South Korea Would Promote Both Prosperity and Security, Cato Trade Briefing Paper No. 31

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Published by Cato Institute
President Barack Obama took office with a record of skepticism toward free trade, including several free trade agreements negotiated by the Bush administration. The Democratic Congress was even more hostile to liberalizing international commerce.

Now the president has made trade promotion an administration priority. One of the surest strategies to grow the economy and increase higher-paying employment is to expand trade. Thus he has endorsed the free trade agreement with South Korea — with as yet undefined changes. He hopes to have an amended version ready at the next G-20 Summit, scheduled for Seoul in November.

Although the accord is not perfect, it would substantially increase access to the South Korean market. Both the Republic of Korea and the United States would benefit from increased exports, economic growth, and job creation. The long-term potential is even greater: as South Koreans grow wealthier, they are likely to increase their foreign purchases, and eventual Korean reunification would greatly expand the Korean marketplace for American exporters. The free trade agreement also offers important geopolitical benefits. China's rapid economic growth has helped expand Beijing's influence throughout East Asia. Indeed, there is now more trade between South Korea and China than between the South and the United States. As American military dominance fades, the large and productive U.S. economy offers an important alternative form of regional engagement. Washington should seek to expand trade throughout the Asia-Pacific. Reducing trade barriers with South Korea is an important first step.

The United States should move ahead even if Seoul resists formal renegotiation of the trade pact. Washington can and should push for further liberalization, but such efforts will be stillborn if the free trade agreement is not soon ratified. This is no time to allow the perfect to become the enemy of the good.
President Barack Obama took office with a record of skepticism toward free trade, including several free trade agreements negotiated by the Bush administration. The Democratic Congress was even more hostile to liberalizing international commerce.

Now the president has made trade promotion an administration priority. One of the surest strategies to grow the economy and increase higher-paying employment is to expand trade. Thus he has endorsed the free trade agreement with South Korea — with as yet undefined changes. He hopes to have an amended version ready at the next G-20 Summit, scheduled for Seoul in November.

Although the accord is not perfect, it would substantially increase access to the South Korean market. Both the Republic of Korea and the United States would benefit from increased exports, economic growth, and job creation. The long-term potential is even greater: as South Koreans grow wealthier, they are likely to increase their foreign purchases, and eventual Korean reunification would greatly expand the Korean marketplace for American exporters. The free trade agreement also offers important geopolitical benefits. China's rapid economic growth has helped expand Beijing's influence throughout East Asia. Indeed, there is now more trade between South Korea and China than between the South and the United States. As American military dominance fades, the large and productive U.S. economy offers an important alternative form of regional engagement. Washington should seek to expand trade throughout the Asia-Pacific. Reducing trade barriers with South Korea is an important first step.

The United States should move ahead even if Seoul resists formal renegotiation of the trade pact. Washington can and should push for further liberalization, but such efforts will be stillborn if the free trade agreement is not soon ratified. This is no time to allow the perfect to become the enemy of the good.

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Published by: Cato Institute on Oct 20, 2010
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   F   I   N   G    P   A   P   E   R  •   T   R   A   D   E   B   R   I   E   F   I   N   G    P   A   P   E   R  •   T   R   A   D   E   B   R   I   E   F   I   N   G    P   A   P   E   R  •   T   R   A   D   E   B
October 20, 2010No. 31
President Barack Obama took office with a record of skepticism toward freetrade, including several free trade agree-ments negotiated by the Bush adminis-tration. The Democratic Congress waseven more hostile to liberalizing interna-tional commerce.Now the president has made tradepromotion an administration priority.One of the surest strategies to grow theeconomy and increase higher-payingemployment is to expand trade. Thus hehas endorsed the free trade agreement with South Korea—with as yet undefinedchanges. He hopes to have an amended version ready at the next G-20 Summit,scheduled for Seoul in November.Although the accord is not perfect, it would substantially increase access to theSouth Korean market. Both the Republicof Korea and the United States would ben-efit from increased exports, economicgrowth, and job creation. The long-termpotential is even greater: as South Koreansgrow wealthier, they are likely to increasetheir foreign purchases, and eventualKorean reunification would greatly expandthe Korean marketplace for American ex-porters. The free trade agreement also offersimportant geopolitical benefits. China’srapid economic growth has helpedexpand Beijing’s influence throughoutEast Asia. Indeed, there is now moretrade between South Korea and Chinathan between the South and the UnitedStates. As American military dominancefades, the large and productive U.S. econ-omy offers an important alternative formof regional engagement. Washingtonshould seek to expand trade throughoutthe Asia-Pacific. Reducing trade barriers with South Korea is an important firststep. The United States should moveahead even if Seoul resists formal rene-gotiation of the trade pact. Washingtoncan and should push for further liberal-ization, but such efforts will be stillbornif the free trade agreement is not soonratified. This is no time to allow the per-fect to become the enemy of the good.
 A Free Trade Agreement withSouth Korea Would Promote Both Prosperity and Security
 by Doug Bandow 
Doug Bandow is a senior fellow at the Cato Institute. A former special assistant toPresident Ronald Reagan, he is the author of  
 Tripwire: Korea and U.S. ForeignPolicy in a Changed World
(Cato Institute).
Executive Summary 
 
Introduction
Unemployment remains high, with Wash-ington politicians promising to create more jobs.China is ever more confident, challenging theUnited States both economically and politically. The People’s Republic of China (PRC) has dis-placed America as the number one trading part-ner with leading East Asian states, such as SouthKorea.How have the Obama administration andDemocratic Congress responded to these chal-lenges? By retreating economically from theregion. As a candidate for president, then-senator Obama termed the U.S.–South Koreafree trade agreement (KORUS FTA) “badly flawed” and urged the Bush administration notto submit it for ratification.
1
At his confirmationhearing in March 2009, President Obama’s U.S. Trade Representative Ron Kirk called the agree-ment “unacceptable” and “just not fair.” Al-though increased trade with the Republic of Korea (ROK) is “one of the biggest opportunities we have,” he affirmed that the administration“will step away from that if we don’t get it right.”
2
 That approach was remarkable for both itseconomic and geostrategic folly, but to theircredit, President Obama and his administrationhave wisely toned down their earlier objectionsto the agreement.
3
In fact, administration tradepolicy now may be undergoing a reset of sorts. The president used his last State of the Unionspeech to set the objective of doubling exportsover the next five years and pushing forward onpending FTAs with Colombia, Panama, andSouth Korea.Moreover, he met South Korean presidentLee Myung-bak at the June 2010 G20 Summitin Toronto and expressed his desire to revive theKorean agreement. President Obama said, “It isthe right thing to do for our country, it is theright thing to do for Korea.”
4
He added that theUnited States intended to work in a “methodicalfashion” to meet congressional objections.
5
Ad-ministration officials say that primarily meansimproving the access of autos and beef in theKorean market. “Overall, I think it’s a potentialgood deal for U.S. exporters, but there’s certainsectors of the economy that aren’t dealt with aseffectively, and that’s something I’m going to betalking to President Lee about,” said PresidentObama last fall.
6
 The administration hopes to wrap up out-standing issues by the next G20 meeting set forNovember 11–12 in Seoul, South Korea. As theG20 meeting in Toronto was drawing to a close,the president added, “I want to make sure thateverything is lined up properly by the time I visitKorea in November, and in the few months thatfollow that, I intend to present it to Congress.”
7
Still, the path to ratification is not clear.President Obama spoke of “adjustments” ratherthan “renegotiation” of the FTA.
8
 Yet leadingcongressional Democrats remain opposed, indi-cating that the changes would have to be “sig-nificant” to win their support.Moreover, while negotiators for both nations will be meeting for talks, Seoul has little incen-tive to make concessions to the Obama adminis-tration. Trade liberalization remains controversialin the ROK. Two years ago President Lee cameunder sharp attack for easing restrictions onAmerican beef imports.
9
In July Trade MinisterKim Jong-hoon said: “Taking just one period—one comma—out of the agreement will mean acomplete revision. This will not happen.”
10
Hespecifically rejected changing the ROK’s policy on beef and auto imports, two key Obamaadministration demands. (Interestingly, in 2008the Bush administration refused to revisitKORUS FTA despite South Korean concernsover U.S. beef exports.
11
) The president must focus less on the desires of Democratic interest groups and more on the inter-ests of Americans generally. Washington shouldset as a major objective expanding Americaninvestment and trade opportunities in East Asia. The starting point should be to ratify the pendingtrade agreement with the Republic of Korea.
12
Expanding Export Opportunities in a Major Market 
South Korea possesses one of the world’s
2
 Washingtonshould set as a major objectiveexpanding Americaninvestment and tradeopportunities inEast Asia.
 
3
largest economies—its GDP ranked number13 in the world at last count—and is amongthe world’s top dozen trading nations. Totalbilateral trade in goods between the UnitedStates and Korea reached $83 billion in 2008(before falling to about $70 billion last year),making it America’s seventh largest tradingpartner. Koreans are among the world’s topcustomers for U.S.-exported civil aircraft, semi-conductors, industrial machinery, chemicals,plastics, and cereals.
13
In 2008 South Koreansalso purchased $14 billion worth of U.S. serviceexports, making it our 10th largest market.
14
Unfortunately, despite its stunning tradingsuccess, the South has not completely opened itsarms to foreign products. Korean business pro-fessor Moon Hwy-chang admitted that “Koreahas not been a very open economy.”
15
Similarly,the Washington-based Korea Economic Insti-tute observed: “Korea remains a very difficultplace in which to do business.”
16
 Thus, opening up the Korean market offersAmericans significant economic benefits. Jeffrey Schott of the Peterson Institute for InternationalEconomics reported: “The U.S.-Korea pact cov-ers more trade than any other U.S. trade agree-ment except the North American Free TradeAgreement” and “opens up substantial new opportunities for bilateral trade and investmentin goods and services.”
17
Roughly 95 percent of commerce would become duty free within three years and most of the other tariffs would be lift-ed within a decade. The accord would provideparticular benefits for U.S. agriculture, financialservices, and American firms seeking access toROK government procurement.
18
 Trade ana-lysts cite significant progress in a number of eco-nomic areas.
19
 The Office of the U.S. Trade Representativeoffered a more detailed analysis: “In addition toeliminating South Korea’s 7 percent average tar-iff on industrial goods, the KORUS FTA effec-tively addresses a wide range of discriminatory non-tariff barriers to U.S. goods and services.It will improve regulatory procedures and dueprocess in South Korea through the mostadvanced transparency obligations in any U.S.FTA to date. In addition, the Agreement con-tains an unprecedented package of automotiverelated provisions, including a unique disputesettlement mechanism that will level the playingfield for U.S. automakers in this important mar-ket.”
20
Obviously, the FTA does not eliminate alleconomic barriers in the ROK—just as it doesnot eliminate all import restrictions by the U.S.government. For example, Senator Obamapointed to continuing limits on the sale of U.S.autos and agricultural products. But the FTAmakes progress, eliminating ROK taxes onlarge U.S. autos and reducing the tariff on beef.Schott contends that the accord benefits bothsides on autos and disproportionately benefitsAmericans on agriculture.”
21
For this reasonSouth Korean farmers stridently opposed theaccord.Liberalizing access by agreement is particu-larly important since U.S. producers have beenlagging in the fast-growing Korean market.During the final KORUS FTA negotiations in2007, Dr. Cheong Inkyo of Inha University inInchon, South Korea, observed: Trade relations between the UnitedStates and Korea have been getting weaker over time. The proportion of exports to the United States out of Korea’s total exports peaked at 39.98percent in 1986 and declined to 14.54percent in 2005. Korea’s share of totalimports entering the United Statesdeclined from 3.31 percent in 2000 to2.60 percent in 2005, and Korea’s shareof U.S. exports declined from 3.58 per-cent to 3.05 percent during the period.
22
Both countries would benefit economically from the FTA. The pact could increase SouthKorea’s GDP by up to 2 percent, according tothe Korea Institute for International EconomicPolicy.
23
 The U.S. economy is much larger sothe relative boost would be smaller, but theincrease in exports would be particularly help-ful as America recovers only uncertainly fromthe recession.According to the U.S. International TradeCommission, the elimination of South Koreantariffs alone should add $10 billion to $12 billion
Roughly 95 percentof commerce wouldbecome duty free within three yearsand most of theother tariffs wouldbe lifted within a decade.

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