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SPEAKER REPORTS

The Korea-U.S. Free Trade Agreement: Economic Implication and Security Imperative

by Dongman Han, Minister-Counselor for Economic Affairs, Embassy of the Republic of Korea, Washington, D.C.

Mr. Han gave the following presentation at ACWA's February 27, 2009, Trade Program.

It is my great honor and pleasure to be with you today. I am very grateful for the Akron Council on World Affairs to organize this meaningful event.

I would like to take this opportunity to commend the Council on World Affairs for the valuable role it has played to advance the bilateral relations between Korea and the United States under the outstanding leadership of Jane Walker Snider, Executive Director of the Council.

Today, I am very happy to share my thoughts with you on the Korea-US Free Trade Agreement and await your intellectual contribution to our discussion.

My presentation is composed of three parts. The first part concerns the U.S.-Korea Economic relations, including Ohio-Korea economic relations. The second part concerns the major benefits of the Korea-U.S. Free Trade Agreement (KORUS FTA); and the final part relates the economic implications and security imperative of this FTA.

First, let me start with some basic facts about Korea.

In area, South Korea is about as big as Virginia, with population of 49 million. But with the about 1 trillion dollars’ economy, Korea ranks as 13th largest economy in terms of its GDP size in the world, ahead of Mexico.

Korean peninsula, located in the center of Northeast Asia has been divided by two Koreas since 1950 after the Korean War. It still remains as legacy of the Cold War. Since Korean War, Korea has maintained strong alliance relations with the United States.

Before 1962, Korea was one of the world’s poorest agricultural countries with a per capita income of less than $100. At that time, a African country Ghana’s GDP per capita was higher than that of Korea. Since then, Korean has worked hard and achieved remarkable economic progress.

Korea became an outstanding emerging economy with a per capita GDP about $20,000 and is now an OECD member country. Korea has transformed itself from a receiving country to a giving country. Korea is firmly committed to making contributions and playing international roles befitting its strength in the community of nations.

Korea ranks as the 12th largest in exports, and 13th in imports in the world. More than 70 percent of Korea’s GDP depends on the trade..

And much more than that, in some areas Korea became most ahead in the world. For example, Korea is the number one ship builder in the world and also the number one DRAM(Dynamic Random Access Memory) and LCD maker. Samsung Electronics and other South Korean companies topped the global display market in 2008 for the fifth consecutive year. Hynix Semiconductor, a Korean company has developed the world’s first 1-gigabit DRAM chip using 44-nanometer technology in early February this year.

Samsung and LG company are the second and third mobile phone maker respectively. Samsung mobile phone places number one in the market share of the United States and Canada. Korea is the 5th steel producer and the 6th largest automobile maker after U.S., Japan, Germany, China and France.

In addition, Korea is proud of its cutting edge IT industry. Korea was the first in the world in terms of high-speed internet penetration for 4 years from 2002 to 2005, 3rd in the world in number of internet users, also 3rd IT competitive country.

U.S.-Korea Economic Relations

Now, let me touch upon the bilateral economic relations between Korea and the United States. Korea is the United States’ 7th largest trading partner, placing it ahead of France, Brazil and India. Two-way trade volume reached over 83 billion dollars last year.

U.S. is Korea’s 3rd largest trading partner after China and the European Union. Korea exports mobile phone, micro chip and automobile etc while imports aircraft, computer chip, machinery and agricultural products from the U.S.

Two-way direct investment is fast increasing. Korean investment in the United States has totaled $31 billion since 1968.

Hyundai automobile plant is a $1.4 billion investment and has created more than 3,500 new jobs. The computer chip plant in Austin, Texas by Samsung Electronic company is a $2.4 billion dollars investment and has created about 2,000 jobs. The Kia automobile plant in Georgia, expected to be in operation this year is a $1.2 billion investment that will generate around 2,500 new jobs.

The U.S. is the largest investor in Korea with total amount of $40 billion.

Ohio-Korea Economic Relations

Korea is currently Ohio’s 12th largest export market, with exports totaling almost 600 million dollars. Exports to Korea are spread across a wide range of manufactured goods such as machinery equipment, chemicals and transportation equipment.

Korea accounted for nearly $1.5 billion in two-way trade through the port of Cleveland (in 2006). Korea is already a growing market for Ohio’s manufactured goods. Ohio’s exports to Korea increased by more than 39% between 2003 and 2006.

Korean companies have invested nearly $21 million in Ohio. The companies are Hankook Tire American Corporation in Uniontown, Kumho America Technical Center here in Akron, Hyundai America Shipping Agency in Westlake and Hanjin Shipping Company in Cincinnati Westlake.

In Ohio state, there are about 13,000 Korean-American residents and the number of Korean students in Ohio state is 1,700 which is the 3rd largest foreign student population.

Major benefits of the KORUS FTA

The Korea-US Free Trade Agreement, signed on 30th June 2007 is the most commercially significant FTA for the United States in more than a decade.

While the U.S. business community and agricultural groups support this FTA, some democratic members of Congress and labor unions have expressed their concerns about the automobile provisions in the FTA. Now, I would like to touch upon the major benefits of the KORUS FTA in some important, starting with the agricultural sector.

Agriculture

Agriculture is the most beneficial area of opportunity for the United States as U.S. farm exports to Korea have averaged $3 billion on an annual basis. Korea is the 6th largest market for US agricultural goods.  

The average tariff applied by Korea on agricultural imports is 52%-- nearly four times that of the United States.

The tariff eliminations or reductions will help the United States compete against China and Australia, which have increased their presence in Korea’s $12 billion agricultural market.

Almost two-thirds of U.S. farm products worth over $1.9 billion will become duty free immediately under the KORUS FTA.  These includes corn, hides and skins, wheat, soybeans for crushing, cotton, bourbon whisky, wine etc.

Ohio farmers and ranchers, who are leading exporters of agricultural products, stand to be among the biggest winners of the KORUS FTA. When the FTA is implemented, the tariff on Ohio’s main agricultural products such as soybean and corn will be eliminated completely.

Also, Korea will be eliminating tariffs completely over time on key products such as beef (15 years), pork (7 to 10 years), and poultry (10 to 12 years).

The US International Trade Commission expects the U.S meat sector to experience the largest increase in exports to Korea, and the U.S. beef export to increase by $600 million to $1.8 billion, while exports of pork and poultry, could increase by $456 million to $763 million.

The meat sector is expected to see an increase in employment by 2%.

Even though U.S. beef exports are expected to increase by up to $1.8 billion under the KORUS FTA, beef remains one of the major obstacles to the passage of the KORUS FTA in the U.S. congress.

As a matter of fact, the U.S. beef quarantine issue is not a part of the Agreement. Nevertheless, the two governments have been working expeditiously to resolve the U.S. beef import issue in a mutually acceptable manner and now U.S. beef is flowing in the Korean marketplace, accounting for number one market share among the imported beef market.

1. According to the U.S. Meat Export Federation, South Korea ranked as the world’s fourth largest market for American beef exporters in 2008 trailing Mexico, Canada and Japan which paint a rosier picture for future sales to Korean consumers.
2. Korea resumed its U.S. beef imports in the second half of 2008 after months of violent street protests by civic activists wary of an outlook of mad cow disease.
3. The 2008 beef import figure marked a surge of 128% from 2007, when Seoul temporarily lifted a ban on American beef.

Non-Agricultural Goods

With respect to non-agricultural goods, this FTA will pave the way for expanded trade and investment.

The FTA will eliminate 100% of all tariffs on industrial, forestry and maritime products. And nearly 94% of these goods will become duty-free within 3 years, including Ohio’s leading exports to Korea of computers and electronics, machinery, chemicals and transportation equipment.

Automobile

Let me move on to a very important issue: the automotive trade. Despite the fact that the U.S. automobile sector stands to gain immensely from this FTA, the opposition is stiff among Democrat leaders, Ford and labor union who argue that the auto chapter fails to open Korea’s market.

However, the debate surrounding the auto deal is fraught with misunderstandings and misinformation. Let me give you a clear picture of the auto deal. 

First, the terms of tariff elimination is more favorable to the United States than to Korea. Korea will eliminate its 8 percent automotive tariff immediately.  However, the United States will eliminate its 2.5% tariff.  

Second, Korea will grant U.S. automakers a two-year grace period to apply new safety standards and Korea has agreed to revamp its engine displacement taxation system so that larger vehicles will not be liable to pay higher taxes. In addition, the special consumption tax on autos will be streamlined to a single rate of 5% on vehicles over 2,000cc.

Last but not least, an expedited dispute settlement mechanism will be introduced, along with an unprecedented snap-back mechanism. If Korea is found to violate the auto agreement, the United States will be able to reinstate the tariff on Korean cars. 

Taking these facts into consideration, the U.S. International Trade Commission concluded in its independent study that the removal of the 8% tariff on the U.S. passenger cars in Korean market would likely have a positive effect on U.S. exports. However, the impact on U.S. employment would likely be negligible. 

Korean manufacturers are opening state-of-the-art automobile manufacturing plants in Alabama and Georgia by investing more than 2.5 billion dollars and creating total more than 6,000 jobs.

Service sector

Korea is the 2nd largest export destination for U.S. services in Asia. In the area of services, Korea will further expand meaningful market access opportunities across virtually all major service sectors, including legal, broadcasting, telecommunications and financial services.  

For the first time, Korea is going to open its legal services market through the KORUS FTA. Upon the entry into force of the Agreement, the US law firms and lawyers will be able to provide foreign legal consulting services in Korea. They will be able to establish a representative office and provide legal advisory services in Korea.

Ohio-based financial institutions will have the rights to full ownership of financial institutions in Korea, including the establishment of branches for banks, insurance companies and asset management.

Implications of the KORUS FTA

Korea

Let me now comment on the potential implications of this Agreement.

First, the KORUS FTA will accelerate new momentum for Korean economic growth by securing access to the world’s largest market.

When the Agreement is implemented, Korea expects to gain a solid market share in the U.S. and FDI into Korea is also expected to increase.

Korea will benefit from enhanced growth and employment driven by stimulated economy and service market opening.

Consumers also stand to benefit from this free trade agreement, in the form of lower prices of imported goods and services as a result of intensified competition. For example, under the KORUS FTA, Samsung or LG color television sets will be 5 percent cheaper than before the FTA due to tariff elimination.

This Agreement also gives Korea an opportunity to find new growth engines by pursuing legal and institutional advancement.

The KORUS FTA will facilitate cross-border exchange of production elements such as capital and human resources. Without doubt, this FTA will contribute to improving corporate management environment with the introduction of advanced international standards.

This will also increase the chance of Korea's national sovereign ratings being upgraded.

We also believe that the KORUS FTA will be a stepping stone for Korea in pursuing FTAs with the European Union and China.

We have already launched negotiations with the EU in May 2007 and expect to wrap up in March of this year.

With China as well, we have held many meetings for a joint feasibility study on Korea-China FTA, with the participation of industries, governments, and academia.

It is our hope that the FTA with the US will act as a catalyst in our endeavors to become an FTA hub of the East Asia, connecting the US, East Asia, and the EU.

Among non-economic effects of this Agreement, we expect U.S.-Korea alliance to be further strengthened, reducing security risks and enhancing stability and prosperity of Northeast Asia.

The KORUS FTA will bring a positive change to the U.S.-Korea alliance by expanding its focus beyond security as a dynamic economic partnership.

U.S.

Now, let me turn to the implications of the KORUS FTA from the U.S. perspective.

Historically, the United States has always ranked as Korea’s number one trading partner.  However, this trend reversed a few years ago and now China and the EU export more goods to Korea. 

The KORUS FTA will provide market access, incentives and mechanisms necessary for U.S. products to reclaim lost market share in the Korean economy.

Beyond Korea, this FTA will also provide U.S. businesses with a strategic springboard to strengthen their position among the other dynamic economies of Northeast Asia. 

The KORUS FTA has a profound strategic and geopolitical implication for both of Korea and the United States. It will bring a positive change to the U.S.-Korea alliance as a dynamic economic partnership by expanding its focus beyond security.

By way of illustration of these strategic gains of the KORUS FTA, the U.S. Federation of Korean War Veterans Organization adopted a resolution in September 2007, urging the U.S. Congress to approve the KORUS FTA as early as possible.

In November 2007, ten Democratic members of the House of Representatives sent a letter to their leadership, stressing the geopolitical importance and economic benefits of the KORUS FTA. 

The KORUS FTA will be the first FTA that the United States concludes in Northeast Asia. Given the economic as well as geo-political and strategic interests at stake, the importance of strengthening the U.S. presence in this region cannot be overemphasized, because this FTA could curb the rising tide of China’s economic and political influence in East Asia.

The US ITC report concluded that the KORUS FTA is expected to result in a greater increase in U.S. exports to Korea than in U.S. imports from Korea. This FTA provides state-of-the art protection of intellectual property rights(IPR), making it a model for future FTAs.

It also provides a comprehensive set of strengthened protection measures for trademarks, copyrights and patents.

Cost of Inaction

The US-Korea Business Council summarized well the cost of inaction in its booklet, issued on September 2007 as, I quote:

“If the United States misses the current opportunity to complete the US-Korea FTA, there will be considerable setbacks to American economic competitiveness and strategic goals;

And, it would undermine US leadership and credibility in promoting open markets and fair competition not only in Korea but globally, set back vital US geo-strategic goals, and undercut US global economic competitiveness.”

Conclusion

In conclusion, the KORUS FTA is a rare opportunity and a win-win situation for both our countries.  It will not only provide a boon to our economic relationship, but also reinforce our traditional security-based alliance. 

We have made tremendous progress thus far – but the difficult process of congressional approval from both countries lies ahead.

In Korea, the KORUS FTA bill was submitted to the National Assembly and it is expected to be ratified in the next several weeks.

However, the situation in the United States remains more complicated, as we face an uphill battle for approval by Congress with high priority on recovering from the current economic turmoil and anti-trade sentiments among democratic leadership.

The United States and Korea share the view that the KORUS FTA will strengthen ties overall and the two countries agreed to work together to move forward on the FTA during the visit of Secretary Clinton to Korea on February 20th.

Therefore, at this important juncture, I ask all of you to work together to achieve timely consent of ratification for this historic trade deal so that businesses and consumers can reap the benefits as soon as possibleI thank you very much for your time and for your interest in the Korea-US partnership.