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May-Jun 2007 > Economy > Cover Story

They did it. After 10 months of arduous negotiations, Korea and the United States confounded the skeptics and, with literally minutes left for what was already a much extended deadline, concluded a comprehensive free trade agreement at 1 a.m. April 2nd that both sides could present to their legislatures for ratification. A strong element of drama was injected into the negotiations on account of the strictly limited Trade Promotion Authority (TPA) allotted by the U.S. Congress to President George W. Bush. Congress mustbe given 90 days to review the agreement as required by law, and any final document must be ratified by the American legislative body before the president's "fast-track" authority to negotiate trade agreements expires at the end of June. The largest and most complex trade deal negotiated since the North American Free Trade Agreement (NAFTA) came into effect in January 1994, the Korea/United States (KORUS) FTA will bring about sweeping changes in the nature of commerce between the two partners. Effectively it will mean the end of tariffs on 95 percent of all goods represented in bilateral trade between the two countries within three years, leading eventually to the elimination of 99 percent of the tariffs on Korean goods bound for the U.S., and a 100percent elimination of tariffs on American products headed for Korea. At the same time, the deal excluded two contentious issues. They are: the Korean rice market, specifically, the American demand that it be opened to U.S. domestic growers; and the Gaeseong Industrial Complex, an enclave of South Korea firms manufacturing in North Korea, that, contrary to American wishes, the Korean side pressed to be included in any FTA. In the event, neither topic was made mention of in the final document. CHANGES IN LEGAL INFRASTRUCTURE Here's an overview of the major points that the negotiators agreed upon.

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Major breakthroughs were achieved in autos, beef, oranges and textiles. The U.S. agreed to abolish immediately its 2.5-percent tariff on cars with an engine capacity below 3,000 cubic centimeters, and remove all tariffs on automobiles above this size over three years. Meanwhile the punitive 25-percent tariff levied on Korean pickup trucks will be phased out over 10 years. In return, the Korean side will drop the 8-percent tax on U.S. passenger cars and adopt a new means of levying taxation upon them because Americans had complained that taxing them according to engine size -- U.S. car engines typically have larger capacities -- was tantamount to a "non-tariff barrier." U.S. beef, banned from Korea because of fears of Bovine Spongiform Encephalopathy (BSE), better known as mad cow disease, will be allowed into the country without restriction if the World Organization for Animal Health (OIE) announces this month, as expected, that BSE is a "controlled risk" in the United States. Should this be the case, the 40-percent tariff on beef will be reduced over 15 years. Also within agriculture, the U.S. has agreed to let Korea place a 50-percent tariff on American oranges at the time the Korean variety is being harvested and shipped to market. Textiles were a big winner on the Korean side with the U.S. immediately slashing its 61percent tariff on imports and agreeing to allow such imports from Korea to be made of cheaper Chinese yarn. In terms of changes to Korea's legal infrastructure under the agreement, four points are worth noting. First, under the Investment Settlement Dispute Mechanism (ISDM) investors will be allowed to sue the Korean government in the case where they have suffered loss through governmental action, such as, for example, expropriation or a voided sale. Second, foreign capital will be allowed to invest in the cable TV industry on a phased basis lasting three years. Third, Korea will be allowed to restrict movements of capital out of the country in bid to forestall another financial crisis; and fourth, intellectual property rights will be extended from 50 years to 70 years.

KICK-START THE ECONOMY Although unmentioned in text of the agreement, discussion of Gaeseong was effectively delayed and removed from the orbit of trade negotiations to be placed in the hands of a to-

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be-struck "Committee on Outward Processing Zones on the Korean Peninsula." Scheduled to meet one year following the ratification of the FTA, the committee will discuss the designation of Gaeseong as an "extra-territorial zone" of South Korea. Trade between the two trans-Pacific partners is already gargantuan in scale, amounting to some US$72 billion in 2006; the tariff reductions are gauged to boost this total by an additional US$20 billion annually according to some estimates and by US$27 billion according to others. Moreover, the new-found access of Korean industries to the American market is likely to kick-start the economy, boost the attraction of Korea as an investment destination, and encourage further liberalization. Moreover, the sudden turnaround in the course of the negotiations and the last-minute agreement on autos and the Korean rice market -- not to mention the likely impact of the FTA on Korea -- has stunned the country's neighbors and left them looking for similar favorable trading circumstances with the world's largest economy. The reaction from business and government representatives -- both Korean and American - has been overwhelmingly positive. Commented Tami Overby, president of the American Chamber of Commerce in Korea (Amcham): "Most American companies see the FTA as a great step for the bilateral trade relationship as it's going to give both countries preferential access to one another's markets." She said that as an observer of all the businessess involved, she was convinced that all parties would benefit. "The U.S. pursues high-quality agreements, and I believe this is the best deal I have ever witnessed," said the Amcham president. "We've taken our standard [for FTAs] and made it better. We could only have done that because the Koreans had the same goal, and both sides wanted a strong deal since we are both aware that the World Trade Organization (WTO) is faltering." Referring to the coup that the KORUS FTA represents, Ms. Overby said: "I think many countries were stunned because they really didn't believe Korea and the U.S. were serious. Everyone knew time was short and that the U.S. was operating on a very tight TPA deadline. Most people just didn't think it was going to happen and many in the U.S. did not think it would happen either." SHARED UNDERSTANDING "It's a great agreement," observed Drew Quinn, counselor for economic affairs at the U.S. embassy in Seoul and who played a pivotal role in the negotiations. "When we set out to achieve an FTA, there were many who doubted that we could reach a comprehensive agreement, if we could get the parties go to zero tariffs for all the items involved, or if we could reach understanding on the provisions regarding NTBs." He said it had proved difficult to negotiate an agreement between such two large sophisticated economies as those of Korea and the United States, each with their highly developed regulatory systems. "That was a challenge but we were able to meet it," he continued. "Anyone who reads this agreement will be surprised at how sweeping it is, and that is a measure of just how much shared understanding our goals were based upon." With a focus on policy issues and their implementation, Mr. Quinn was involved in the FTA negotiations on a few fronts: through interaction with members of the Korean negotiating team from various ministries including the Ministry of Foreign Affairs Trade (MOFAT), the Ministry of Commerce, Industry and Energy (MOCIE), and the Ministry of Agriculture and Forestry (MAF); and as a go-between for negotiators in Washington and those in Korea. Mr. Quinn believes that the FTA will benefit numerous stakeholders. "If you look at where the greatest trade effect is, it's in manufactured goods, while if you look at where highest tariffs will be reduced, it's in agricultural products," he explained. "If you look at where the most non-tariff barriers will be addressed, it's in the auto sector, and if you look at where

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the most regulatory issues will be addressed, it's in intellectual property." He expressed the view that though the impact of the agreement can be assessed from a number of angles, in the final analysis, the KORUS FTA will produce many beneficiaries. Remarking that the American administration is "tremendously pleased" with the agreement he went on to describe the importance of the FTA for Washington. "It's important in part because it's a hugely significant, commercial deal," he explained. "It's the largest U.S. FTA since NAFTA 10 years ago and it has been negotiated with one of our closest partners in East Asia. So obviously, you would want it to be successful in reinforcing the relationship."

ENGAGED IN ASIA Mr. Quinn said the KORUS FTA was the last that the U.S. had under the TPA and it had demonstrated the effectiveness of the model, i.e., a comprehensive high-standard agreement. As to what the KORUS FTA signals to the rest of Asia, he said: "It sends the message that there remains an interest in trade liberalization and that the U.S. is engaged in Asia, that the U.S./Korea relationship is a vital one, and that there will be benefits for those countries that take forward-looking steps toward reform." Hyun, Oh-Seok, president of the Trade Research Institute (TRI) of the Korea International Trade Association (KITA), opined that the FTA provided an avenue for the Korean economy to improve its competitive edge through Korean firms going head-to-head with their American and off-shore rivals in the wide-open U.S. market. "[Korean firms] will face very tough competition. That's why we pursue the FTAs," said Mr. Hyun. "In the U.S., for example, Hyundai competes with Toyota, Mazda and Honda. So to win and secure market share in the United States, the first condition is that Korea firms achieve better competitiveness." While tariff reductions will be of assistance to Korean companies in this regard, winning more U.S. consumers over to Hyundai cars, for example, will depend upon improvements in product quality of which design is an essential component. "FTA can only guarantee market access, not market share," said Mr. Hyun. KITA took a leading role in the KORUS FTA Business Alliance, a group of private sector organizations that includes the Korean Chamber of Commerce and Industry, the Small and Medium Business Administration of Korea (SMBAK), Korean Federation of Agriculture and the Korean Federation of Banks, who represent the service sector in general. The TRI made

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a critical contribution to the FTA negotiations, advising both the Korean government negotiating team and the KORUS FTA Business Alliance, and serving on a special committee to keep the National Assembly abreast of the negotiations surrounding the agreement. Cautioned Mr. Hyun: "The FTA is a just a necessary condition for increasing the efficiency of the Korean economy, not a sufficient condition. To use a baseball metaphor that means that we have joined the major leagues, but our performance hereafter depends solely on us." While it was impossible to say the FTA would automatically guarantee an increase in national competitiveness, it presented a clear opportunity to do so, said the president of the Trade Research Institute. SEEKING ADVANCED COUNTRY STATUS Dr. Lee Jun-Kyu of the Ministry of Finance and Economy serves the deputy prime minister (who is also the finance minister) as an advisor on international economics. He is also the director of the Americas Team within the Korea Institute of International Economic Policy, a widely respected think tank. In the course of the FTA negotiations he provided academic "backup" to the government and its high-ranking officials, held seminars to explain the benefits of free trade with the Americans, and devised negotiating strategies -- both internal to the government and external -- to the deputy prime minister. Dr. Lee envisages the FTA being a win/win proposition for both Korea and the United States. However, he believes that Korea has far more to gain from the agreement than its partner. "The U.S. is already an advanced country but Korea seeks to join the ranks of the advanced countries," he said. "By adopting the standards demanded of the FTA, integrating more globalized systems and building a better investment mechanism, Korea hopes to attain advanced country status." On broaching the topic of investment, Dr. Lee highlighted one of the KORUS FTA's less obvious but nonetheless crucial elements. The agreement, he said, would serve to boost foreign direct investment (FDI) into Korea, on the one hand, by boosting its protection -through structures such as the Investment Status Dispute Mechanism (ISDM) -- and on the other, through those initiatives that would upgrade the investment environment. "The investment chapter in the FTA gives assurances to foreign investors about their rights and the overall commitment to transparency," he said "Let's remember that in addition to the ISDM, the FTA grants Most Favored Nation (MFN) status upon Korea and accords foreign companies `national treatment,'" Dr. Lee pointed out that a 2003 report by the OECD stated that if Korea concluded an FTA with the United States that included an investment chapter, then FDI would increase "significantly."

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SEAL OF APPROVAL Ms. Overby stated that should the FTA be ratified by both countries, then FDI flows into Korea would grow. "Every FTA that the U.S. has ever concluded has always been followed by a dramatic increase in FDI," she said. "It gives a certain confidence level to investors and it's a signal to markets that it's the U.S. government's seal of approval that the country in question is an open market." While every country in the world wanted an FTA with America, were such a thing possible or not, their industries would nonetheless want to benefit as much as possible by locating the manufacture of certain products Korea. "They would be the more high-end, technologically advanced products," said Ms. Overby. "It would become a question of `Make it in Korea to be able to export to America at a lower tariff.'" She commented that with the expiry of the TPA at the end of June, not only would Korea be unique in being the only Asian country with an FTA with the United States, it would likely be the only country in the world to conclude such a deal for sometime, since the last time the White House lost the TPA it was not regained for eight years. Drew Quinn said that encouraging greater capital flows into Korea is an "explicit goal" of the agreement. "It's called an FTA and what it's designed to do is expand trade and investment between our two countries," he said, referring to the investment chapter in the FTA that is intended for companies wanting to invest in Korea or the U.S. "Our hope and expectation is that some of the major think tanks will encourage this investment and I believe what motivated Korea to seek free trade with the U.S. was the desire to become a stable, welcoming home for foreign investment because the FTA gives you a competitive edge in the region," Mr. Quinn said. The changes wrought by the KORUS FTA on Korean industry, business and society are likely to be extensive and generational in nature. The country has embarked upon a new path of development, one that holds the promise of greater efficiency, prosperity, and ever-stronger linkages to the advanced economies of the world. Given the new equation in the Asia/Pacific dynamic represented by the KORUS FTA, the investment appeal of Korea looks to likely to be burnished anew.