As the Obama Administration and U.S. businesses pursue efforts to double U.S. exports over the next five years as proposed by President Obama, finalizing the U.S.-Korea Free Trade Agreement (FTA) should be at the top of the list. The President hopes to have issues resolved before he visits South Korea in early November. The agreement would increase trade for the U.S., strengthen economic relations with a key Asian ally and show the rest of the world that the U.S. is serious about reengaging trade policy discussions after a three-year timeout.

The U.S. International Trade Commission (USITC) is required to analyze the impact of FTAs proposed by the President within 90 days of signing an agreement. U.S.-Korea Free Trade Agreement: Potential Economy-wide and Selected Sectoral Effects was released by the USITC in September 2007. According to the analysis, when the agreement is implemented, 82 percent of U.S. tariffs lines would be immediately tariff free and 80 percent of South Korea’s tariff lines will be tariff free, compared to 38 percent now for the U.S. and 13 percent for Korea. After ten years, 99 percent of the U.S. tariff lines and 98 percent of Korean tariff lines would be tariff free. When the agreement is fully implemented, the removal of tariffs and tariff rate quotas could increase U.S. exports by $9.7-10.9 billion per year and U.S. imports could be $6.4-6.9 billion higher. Exports of machinery, electronics, transportation equipment, chemicals, rubber and plastics are expected to gain under the agreement. No significant changes in total employment are expected in the U.S. because the Korean economy is less than 10 percent of the U.S. economy, but specific industries like beef should see gains.

U.S. agriculture would gain exports because Korean tariffs are high for many agricultural products. The impact would be greatest on meats, fruits and vegetables where tariffs of 30-50 percent are common. USITC economic model analysis showed increased trade of 53-87 percent for vegetables, fruit and nuts, 58-165 percent for beef and beef products, 62-130 percent for beverages and tobacco products and 249-478 percent for dairy products. Benefits for grains and oilseeds would be limited because tariffs are minimal now due to the need to import wheat and vegetable oil for human consumption and coarse grains, feed wheat and protein meals for livestock feed. Rice is not included in the FTA and trade expansion would remain based on WTO commitments. Rules on sanitary and phyto-sanitary (SPS) issues are critical to market access and a bilateral standing committee would be established to address relevant SPS issues.

A stumbling block for U.S. agriculture has been beef trade. While the computer simulations based on the lower tariffs look good for beef, SPS issues have remained a problem, specifically the Korean government’s response to BSE. A September 2006 agreement between the two governments never became commercially operational because it did not include bone-in products and lacked effective SPS procedures. An April 2008 protocol allows for trade in all beef from animals less than 30 months of age. Outstanding issues include beef from animals over the age of 30 months, equivalency of USDA inspection of processing plants and other SPS issues. According to the U.S. Agricultural Attaché in South Korea, in 2009 beef imports totaled 314,000 metric tons (MT), 58 percent of consumption, and imports from the U.S. were 83,000 MT, 26 percent of total imports. For a popular loin cut, domestic beef prices in 2009 were about 1.8 times the price of imports.

Working out issues for the U.S.-Korea FTA would show other countries that the U.S. is serious about moving ahead on agreements after three years of inaction, and would boost talks on the Trans-Pacific Partnership agreement being negotiated by the U.S., Australia, New Zealand, Peru, Chile, Singapore, Brunei and Vietnam. South Korea has expressed interest in joining the group if it expands to other countries. Some Asian countries want the U.S. to take a more active role in Asia after being preoccupied with the Middle East for the last decade. Asia will be the center of economic growth for the immediate future and other countries are working on agreements. South Korea recently completed an FTA with the EU and has had some negotiations with Mexico. It has had an agreement with Chile since 2004.

Another factor was recently added to the trade opportunities when the President of South Korea, Lee Myung-bak, raised the issue of a unification tax to prepare for the time when South Korea and North Korea would again become one country as happened with West and East Germany 20 years ago. While there are no prospects for unification anytime soon, it is an additional reason to reach an agreement. South Korea is a country of 48.5 million people with a GDP of $1.4 trillion in 2009 on a purchasing power parity basis (PPP), the world’s 13th largest, and a per capita GDP of $28,900, 49th largest. Its land area is a little larger than Indiana with 17 percent of it arable. North Korea has a population of 22.7 million and a GDP of $40 billion, the world’s 96th largest, with a per capita GDP of $1,900 in 2009, ranked 189th in the world. Its land area is 20 percent larger than South Korea with 22 percent of it arable.

South Korea is the world’s ninth largest exporter and the twelfth largest importer. U.S. agricultural exports to South Korea were $3.82 billion in fiscal year (FY) 2009 and are estimated at $5.0 billion in FY2010 and projected at $5.0 billion again in FY2011. Some trade analysts have called the U.S.-Korea FTA the biggest trade agreement ever for the U.S. That may be an over statement in an economic sense with the importance of Canada and Mexico within NAFTA. It is certainly the largest bilateral trade agreement for the U.S. outside NAFTA, with the potential to further connect the U.S. economy to Asia.

South Korea and the EU are expected to sign their FTA later this month. It will then need approvals by South Korea’s National Assembly and the leaders of the 27 countries in the EU, which are expected this fall. South Korea just finished negotiations with Peru on an FTA and talks with China will likely begin early next year. Moving forward with the U.S.-Korea FTA is long overdue. Both countries have too much to gain economically and politically from an agreement to let significant differences on some important issues result in failure.