Monday, April 02, 2007

U.S. and South Korea Reach Landmark Trade Deal

April 2, 2007

The United States and South Korea today struck a landmark bilateral free trade agreement, the United States’ biggest since the North American Free Trade Agreement in 1994 with Canada and Mexico, and its first with a major Asian economy.

Studies have estimated that the free trade pact could add $20 billion to bilateral trade between the two countries, estimated last year at $78 billion.

The deal “will generate export opportunities for U.S. farmers, ranchers, manufacturers, and service suppliers, promote economic growth and the creation of better paying jobs in the United States,” President George W. Bush said in a letter notifying Congress of his intention to enter into the deal. If ratified, the agreement will immediately remove tariffs on more than 90 percent of all goods bilaterally traded, officials said.

Potential gains to the United States economy range from $17 billion to $43 billion, according to Usha Haley, director of the Global Business Center at the University of New Haven. South Korea’s exports to the United States are expected to rise in the first year by 12 percent, or by $5.4 billion.

The agreement “highlights the United States’ strong commitment to active engagement and partnership throughout Asia,” said Deputy U.S. Trade Representative Karan Bhatia.

The deal gives the United States badly needed support for its trade policy and South Korea a chance to boost its export-driven economy in return for opening up its market. It has long restricted access to such iconic American products as cars and beef.

The last-minute agreement marks a significant victory for the Bush administration, which sought a high-profile deal to add to a list of bilateral trade pacts with Panama, Peru and Colombia that it is struggling to sell to a Democrat-controlled Congress.

The increased relations between the United States and South Korean economies — the world’s biggest and eleventh-largest, respectively — provide the United States economy with an important stronghold in Asia to check the growing influence of China.

It could fuel a global race to forge bilateral trade pacts as an alternative to stalled multilateral talks under the World Trade Organization, economists said.

With pressure mounting from Congress, and Seoul’s streets reverberating with farmers’ protests in the early hours of Monday, negotiators haggled right up to the deadline set for resolution of the talks.

Students marched on the presidential palace in Seoul, chanting “No to FTA!” or “Feed mad cow beef to Bush!”

Once hailed for seeking a greater distance from Washington, President Roh Moo Hyun has now stood accused of turning his country into a “51st state of the United States of America.”

Breakthroughs came when negotiators exchanged compromises in politically sensitive issues. South Korea agreed to phase out its 40 percent tariffs on beef over 15 years.

It also indicated today that it would resume American beef imports, which have been banned for three years over mad cow disease, if the World Organization on Animal Health, or OIE, declares United States meat safe in a ruling expected in May.

Seoul will also remove an 8 percent duty on cars and revise its taxation system that American officials said discriminates against American cars with bigger engines and makes South Korea one of the world’s most protected auto markets.

In return, Washington agreed to South Korea’s wish to keep its heavily subsidized rice market out of any free trade deal, even though South Koreans were buying rice for four times the global price.

Washington will also remove 2.5 percent tariffs on cars with engine sizes of 3,000 cc or less — a key South Korean export item — and phase out 25 percent duty on trucks, as well as slashing tariffs on textiles.

Mr. Bush said the trade pact would strengthen ties between the United States and South Korean — an assessment shared by analysts who had repeatedly warned that the alliance, forged during the Korean War, was fraying during the terms of Mr. Bush and Mr. Roh in disputes over Communist North Korea.

“President Roh believes the free trade agreement with the United States will serve as a spring board for South Korea to become an advanced economy,” said Roh’s spokesman, Yoon Seung Yong.

Consumers of both countries are the biggest winners from the deal. Hyundai cars and Samsung flat-panel TV sets, as well as Korean-made hats and clothes, will become cheaper in the United States. American beef and oranges, as well as Ford cars and Toyota vehicles built in the United States, will be more affordable in South Korea.

TV networks can air more American movies and TV series, such as “CSI,” “Prison Break” or “Grey’s Anatomy,” which already command large followings here.

But the deal will cost South Korean farmers tens of thousands of jobs and up to 2 trillion won, or $2.1 billion, in lost revenue, as cheap American corn, soybeans and processed foods flood in, according to studies by South Korean economists.

Meanwhile, there is doubt American carmakers will win quick gains in South Korea, even after the deal is implemented. Many South Koreans still equate buying domestic vehicles to patriotism. High-end consumers prefer European models like Mercedes or BMWs to American cars.

The ambitious talks began in June last year. In their final round, the negotiators held eight days of marathon talks in Seoul, lasting through the night because Mr. Bush must notify Congress of his plan to sign a trade agreement 90 days before his special Trade Promotion Authority expires July 1.

Congress must ratify or reject a trade deal submitted under the special authority, but cannot amend it.

Originally, American officials said a deal had to be agreed by March 31, but later said the deadline was April 1. Shortly after midnight today, the White House released Mr. Bush’s letter to congressional leaders, dated April 1.

Washington seeks bilateral pacts in Asia to counter China’s move to expand its influence in the region through its own free trade agreements. Washington’s talks with Malaysia are stalling, while deals are unlikely with Japan, with its powerful farmers, or with China, with its huge state-owned industries.

The new deal will help narrow Washington’s large trade imbalance with South Korea, experts on both sides said. Only 5,000 American cars were sold here last year while South Korean carmakers sold 800,000 vehicles in the United States. The gap accounted for 80 percent of the estimated $13 billion United States trade deficit with South Korea last year.
United States officials hope that today’s deal will placate American cattle raisers, who were struggling to recapture their global beef market following an outbreak of mad cow disease in late 2003.

Before its import ban, South Korea used to be the world’s third-largest consumer of American beef, importing $800 million a year.

“A free trade agreement with the United States carries a huge potential for the South Korean economy,” said Huh Chan Guk, director of research at the private Korea Economic Research Institute in Seoul.

“Besides winning more access to the U.S. market, it will help upgrade the economy by exposing its inefficient sectors, like the service industry, to competition.”