The accord between the U.S. and South Korean governments on a Free Trade Agreement (FTA) shows again that FTAs are partly driven by political calculations and wider policy concerns. The economic benefits of FTAs are undeniable, but finding the right policy/political mix remains the key to moving FTAs forward.

 

The final negotiations dealt with two key economic issues – two-way auto trade and beef sales from the U.S. to South Korea. Senators and Representatives in both major political parties from Michigan and other auto manufacturing states continued to oppose the original June 2007 agreement. Under the new agreement, the U.S. would be allowed to phase out its 2.5 percent auto tariff over five years instead of immediate elimination. South Korea would eliminate its 10 percent tariff on American-made trucks immediately and phase out over three years a tariff on larger vehicles. Seoul would also immediately cut its tariff on auto imports from 8 percent to 4 percent. A U.S. 25 percent tariff on South Korean truck imports would remain for eight years. Each U.S. car maker could export 25,000 cars per year to South Korea based on U.S. safety standards, nor South Korean standards.

U.S. negotiators agreed to not demand an expansion of access for beef from animals over 30 months of age because of South Korean consumers’ concerns about BSE. The Korean government has agreed to produce a memorandum of understanding on beef trade after the South Korean National Assembly has approved the agreement and before the U.S. House and Senate vote. High level Korean officials had asked that changes in beef trade not be part of the FTA.

These changes, along with a few others, moved the agreement forward that is estimated by the U.S. International Trade Commission to expand U.S. merchandise exports by $11 billion per year when implemented. These provisions could not have been included in June of 2007 when neither side felt a strong need to change policy positions or in mid-November before the G-20 summit in Seoul.

Two conditions changed in recent weeks. The more obvious one was the North Korean shelling of a South Korean island. Both countries recognized the need for further economic cooperation to match their military and diplomatic cooperation. Strengthening national security has been a part of trade openings dating back to 1947 when the General Agreement on Tariffs and Trade was created.

The second factor was that both countries needed to make a clear statement in support of the global trading system. President Obama has talked in recent months about the importance of expanding trade and proposed in his State of the Union speech in January to double U.S. exports over five year. This agreement should confirm the President’s commitment to trade expansion. The South Korean government has been negotiating FTAs with other major partners, including one with the EU that will come into force next July 1. Talks with Australia, New Zealand and Canada are ongoing. The South Korean economy is trade dependent and an agreement with the U.S. will make clear the importance of trade policy. South Korea is the seventh largest trading partner with the U.S.

While U.S. agriculture will clearly gain from the agreement, the biggest beneficiaries will be South Korean consumers who face some of the highest food prices in the world. South Korea has a population of 49 million people and land area about the size of Indiana, with only 19 percent as crop land. Agricultural imports are forecast at $24.0 billion in 2010 with over 25 percent from the U.S. Their standard of living will increase as U.S. products gain greater market access.

Dropping the demand to allow access to beef over 30 months of age is not expected to have a major impact on demand for U.S. beef. Consumers want beef from animals under 30 months of age and most animals that meet their quality requirements are under 30 months. This was more of a struggle over the fact that all U.S. beef should be allowed to be imported because the International Animal Health Organization, the standards setting group for meat, has determined that U.S. beef is at minimal risk for BSE. The U.S. has been right in wanting complete access, but has made little progress in South Korea and other countries.

The U.S. also agreed to delay the effective date for a zero tariff on most pork products from January 1, 2014 to January 1, 2016. The 2014 date for zero tariff access was the same as Chile’s pork under an agreement implemented in 2004. U.S. pork will enter tariff free six months before EU pork enters tariff free.

As with most FTAs, the U.S.-Korea FTA allows for gradual phase-in of more open trade for politically sensitive items like pork, with 22.5-25 percent tariffs, and beef, with a 40 percent tariff to be phase out over 15 years. The tariff for out of season oranges would be immediately reduced from 50 percent to 30 percent and eliminated over six years. An in-season duty-free quota would be set at 2,500 tons per year with a 3 percent yearly increase and an over quota tariff of 50 percent. Commodities like corn and distiller dried grains will receive immediate duty free access. For products with phase-in time periods, three years of increased access have been lost with the stalled agreement.

Senate Finance Committee Chairman Max Baucus (MT-D), who has raised concerns about the beef provisions, and in-coming House Ways and Means Committee Chairman David Camp (MI-R) will handle legislative efforts to write implementation language and move the agreement through the Senate and House. The legislation will be an up or down vote with no amendments.

The agreement between the U.S. and South Korea was concluded because both governments had reasons beyond just trade economics to overcome differences. Arguments can be made that FTAs should stand or fall on sound trade economics, but FTAs are political documents with multiple objectives. Supporters of FTAs should push ahead with negotiations with all willing countries and recognize FTAs will move forward at different speeds depending on policy and political issues.