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 that the president has made trade promotion an administration priority—one of the surest strategies to grow the economy and increase higher-paying employment—he has endorsed the free trade agreement with South Korea. The deal, which has support from many Republicans as well as some Democrats, will soon be submitted for a vote.

A Good First Regional Step

Although the accord is not perfect, it would substantially increase access to the South Korean market. Both the Republic of Korea (ROK) 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 an 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 South Korea 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.

Expanding Export Opportunities

South Korea possesses one of the world’s largest economies. Its Gross Domestic Product (GDP) ranked 13th in the world at last count and the country is among the world’s top dozen trading nations.

Total bilateral trade in goods between the United States and Korea reached $83 billion in 2008—before falling to about $70 billion in 2009—making it America’s seventh largest trading partner. Koreans are among the world’s top customers for U.S.-exported civil aircraft, semiconductors, industrial machinery, chemicals, plastics, and cereals.

In 2008, South Korea also purchased $14 billion worth of U.S. service exports, making that country our 10th largest market. Unfortunately, despite its stunning trading success, South Korea has not completely opened its arms to foreign products. Korean business professor Moon Hwy-chang admitted that “Korea has not been a very open economy.” Similarly, the Washington-based Korea Economic Institute observed, “Korea remains a very difficult place in which to do business.”

Opening up the Korean market offers Americans significant economic benefits. Jeffrey Schott of the Peterson Institute for International Economics reported, “The U.S.-Korea pact covers more trade than any other U.S. trade agreement except the North American Free Trade Agreement” and “opens up substantial new opportunities for bilateral trade and investment in goods and services.”

Roughly 95 percent of commerce would become duty free within three years and most of the other tariffs would be lifted within a decade. The accord would provide particular benefits for U.S. agriculture, financial services, and American firms seeking access to ROK government procurement.

The Office of the U.S. Trade Representative offered a more detailed analysis, “In addition to eliminating South Korea’s 7 percent average tariff on industrial goods, the KORUS FTA effectively addresses a wide range of discriminatory non-tariff barriers to U.S. goods and services. It will improve regulatory procedures and due process in South Korea through the most advanced transparency obligations in any U.S. FTA to date. In addition, the Agreement contains an unprecedented package of automotive related provisions, including a unique dispute settlement mechanism that will level the playing field for U.S. automakers in this important market.”

“Obviously, the FTA does not eliminate all economic barriers in the ROK—just as it does not eliminate all import restrictions by the U.S. government. For example, former Senator Obama pointed to continuing limits on the sale of U.S. autos and agricultural products. But the FTA makes progress, eliminating ROK taxes on large U.S. autos and reducing the tariff on beef. Schott contends that the accord benefits both sides on autos and disproportionately benefits Americans on agriculture.” For this reason South Korean farmers stridently opposed the accord.

Strengthening Trade and Relations

Liberalizing access is particularly important since U.S. producers have been lagging in the fast-growing Korean market. During the final KORUS FTA negotiations in 2007, Dr. Cheong Inkyo of Inha University in Inchon, South Korea, observed, “Trade relations between the United States and Korea have been getting weaker over time. The proportion of exports to the United States out of Korea’s total exports peaked at 39.98 percent in 1986 and declined to 14.54 percent in 2005. Korea’s share of total imports entering the United States declined from 3.31 percent in 2000 to 2.60 percent in 2005, and Korea’s share of U.S. exports declined from 3.58 percent to 3.05 percent during the period.”

Both countries would benefit economically from the FTA. The pact could increase South Korea’s GDP by up to 2 percent, according to the Korea Institute for International Economic Policy. The U.S. economy is much larger so the relative boost would be smaller. Nevertheless, the increase in exports would be particularly helpful as America recovers from recession.

According to the U.S. International Trade Commission, the elimination of South Korean tariffs alone should add $10 billion to $12 billion to America’s GDP. Overall, the ITC figures that American exports to South Korea would go up nearly twice as much in volume as imports from the ROK. Estimates of increased exports start at about $10 billion.

In November 2009, the U.S.-Korea Business Council (which is related to the U.S. Chamber of Commerce) predicted the FTA would add $35 billion worth of exports, $40 billion to the national GDP, and 345,000 jobs.

Sector analyses also suggest substantial benefits. For instance, the ROK has 10 times as many telecommunications exports as imports with the United States. The Telecommunications Industry Association estimates the FTA would improve American access. As noted earlier, American farmers likely would see a marked increase in their exports. Demand for audiovisual and financial services also would likely increase substantially.

Long Term Benefits Are Substantial

The long-term benefits could be even greater than the short term gains. First, South Koreans remain less affluent than suggested by their national GDP: the ROK’s per capita GDP is about $17,000, between 27th and 37th in the world depending on the estimate. Continued strong growth— especially if spurred by further economic reform in the face of increased U.S. economic competition—would enhance individual buying power, leading to increased purchases of American goods and services. Second, reunification with the North is likely some day. A unified Korea would be an even more important economic market for U.S. producers and consumers.

This article appeared in Impact Analysis, January-February 2011.
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Doug Bandow
About The Author Doug Bandow [Full Bio]
Doug Bandow is a senior fellow at the Cato Institute, a former special assistant to President Ronald Reagan, and author of “Tripwire: Korea and U.S. Foreign Policy in a Changed World.”




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