GMF - The German Marshall Fund of the United States - Strengthening Transatlantic Cooperation

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The United States and South Korea finalized renegotiation of the U.S.-Korea Free Trade Agreement on Friday, an accord first struck in 2007 but never ratified by either government, ending a state of limbo in American-Korean commercial relations that had become a divisive political issue in both countries. The breakthrough may open the door for Congressional consideration of other pending trade deals with Colombia and Panama that have been long stalled on Capitol Hill. And could accelerate U.S. trade talks with nations in the southern Pacific and may even encourage Japan to seek similar trade liberalization with the United States.

Any Korea Free Trade Agreement that gains the backing of both Ford Motor Co. and Rep. Sander Levin, D-Mich., the outgoing chair of the House Ways and Means Committee, both stout opponents of the initial trade promoting deal struck in the 2007 by the Bush administration, stands a good chance of now passing the Congress early next year.

“Ford Motor Company applauds the outlines of the revised U.S.-Korea Free Trade Agreement that were announced today,” said Alan Mulally, Ford’s CEO. “These new provisions provide Ford greater confidence that we will be able to better serve our Korean customers.”

Levin echoed Ford’s comments: “I support today’s agreement.”

Not surprisingly, similar sentiments were expressed by incoming Ways and Means chair Dave Camp, R-Mich., who despite his free trade credentials had criticized the 2007 accord in defense of his auto-state constituents, and likely Ways and Means trade subcommittee chair Rep. Kevin Brady, R-Tex.

The only truly discordant note from a major official was sounded by Sen. Max Baucus, D-Mont. He said: “I am deeply disappointed that today's deal fails to address Korea's significant barriers to American beef exports...I am deeply committed to righting this wrong and… I will reserve judgment on the free trade agreement until then.” Baucus went on to pointedly note that the Senate Finance Committee, which he chairs, “has exclusive jurisdiction over international trade.”

The loudest non-governmental criticism came from Lori Wallach, the director of Public Citizen's Global Trade Watch, a vocal opponent of all recent trade agreements, who claimed that “merely tweaking the ‘cars and cows’ market access provisions of Bush's NAFTA-style Korea trade pact but leaving in place the offshoring-promoting foreign investor protections is a slap in the face to the majority of Americans who, according to repeated polls, oppose the same old trade policy that has cost millions of American jobs.”

To Wallach’s dismay, Ford’s satisfaction and Baucus’ ultimate frustration, negotiations over the last few days on the 2010 Korea free trade supplemental agreement largely focused on automotive issues.

Ford, the principal corporate opponent of the 2007 agreement, has long demanded greater access to the Korean market and downplayed any concerns that the deal might threaten Ford in the U.S. market. This assertion of its offensive interests in removing Korea’s non-tariff trade barriers, such as environmental and safety standards that Ford claimed discriminated against American cars, and Ford’s denial of its defensive stake, especially the potential challenge posed by Korean competition in the protected and highly profitable American truck market, has been widely disbelieved in the Washington trade policy community.

Whatever Ford’s true motivation, the 2010 supplemental accord seems to deliver on both of the corporation’s explicit offensive and implicit defensive objectives.

Standards can be as effective as tariffs in keeping products out of a market. Japan, Korea and others have long had domestic regulations that suspiciously differ from world rules and effectively freeze foreign producers out of their markets because adjusting emissions or strengthening bumpers to sell just a few thousand vehicles has proven too expensive for American automakers.

Under the new agreement Ford, GM and Chrysler will each be able to sell 25,000 cars in the Korean market—four times the cap in the Bush administration deal—that need only satisfy U.S. highway safety standards before having to meet more costly Korean safety standards.

Through September of this year, U.S. automakers had exported 10,434 passenger vehicles and light trucks to the Korea market, more sales than in any such period in history. And now Ford, GM and Chrysler will have the headroom to more than quadruple their share of the Korean market. Detroit may be happy to live within this niche in the Korean market, selling profitable, expensive, high-end U.S.-made vehicles for which the demand may not exceed 25,000 per automaker for the foreseeable future.

In another difference, the 2007 agreement immediately eliminated U.S. tariffs on almost all imported Korean cars, with remaining tariffs phased out by the third year of implementation of the accord. The 2010 supplemental agreement keeps the current 2.5 percent U.S. auto tariff in place until 2016 or 2017 at the earliest. At the same time, Korea will immediately cut its tariff on U.S. auto imports in half (from 8 percent to 4 percent), and fully eliminate that tariff five years after implementation begins.

Ford had reportedly argued that early loss of the 2.5 percent tariff would force it to lower its prices by that amount, especially on their smaller, less-expensive vehicles, to compete with suddenly cheaper imported Korean Hyundais and Kias. Ford asserted that such a move would wipe out its profits on such vehicles.
Skeptics have dismissed such claims, arguing that in the highly competitive low-end of the U.S. market, Hyundai and Kia were already eating the tariff, taking it out of their profits. If that is so, Ford would not need to cut prices in the wake of a Korean trade deal.

Ford’s concerns clearly prevailed. Whether it needed to be worried is a matter of conjecture. Korea shipped 336,000 vehicles to the U.S. market in first nine months of 2010, less than half the 731,000 they shipped to the US market in 2005. Moreover, Hyundai claims that 80 per cent of the vehicles it sells in the United States will be built in America next year, including its three top-selling models. So extending the tariff may do little to boost Ford’s profits, at least in the short run.

President Obama’s push to make U.S. automakers players in the hybrid and electric car markets of the future got a boost in the renegotiated deal. In the original 2007 agreement, the United States and Korea would have eliminated tariffs on electric cars and plug-in hybrids by the tenth year of implementation. Under the new accord, Seoul will immediately reduce its electric car tariffs from 8 percent to 4 percent, and both countries will then phase out their tariffs by the fifth year. This corrects a major perceived default of the early pact, which Ford had vehemently criticized.

The U.S. truck tariff, which because of a quirk in U.S. trade law also applies to SUVs, is 25 percent, the relic of a 1960s’ trade war with the Europeans over chickens, that still applies even though international competition in the truck market now comes from Asia not Europe.

Trucks and SUVs are extremely profitable, so they are a jealously-guarded sinecure for Detroit. Trade experts have long suspected, despite Ford’s denials, that the company’s real opposition to free trade with Korea was its fear that Hyundai would flood the U.S. market with trucks.

Hyundai initially denied such intentions, disingenuously claiming that its trucks had their cab over the engine and American consumers preferred truck cab’s behind the engine, as if Hyundai could not make American-style trucks for a market the size and profitability of the U.S. one. Once the Bush administration initialed the trade pact in 2007, however, Hyundai officials said they might consider shipping trucks to the U.S. And the company now builds its Santa Fe SUV in the United States.

Nevertheless, Ford’s concerns, if they had any, may now be less pressing. The 2007 agreement would have required the United States to start reducing the 25 percent duties on Korean-built trucks right away and to phase them out by the agreement’s tenth year. The 2010 supplemental agreement allows Washington to maintain the truck tariff until the eighth year after the deal begins to be implemented and then to rapidly phase it out by the tenth year. This back-loading of the tariff reduction will avoid any quick erosion of Detroit’s profitability, while encouraging Hyundai to build more trucks for the U.S. market in America, creating jobs in the United States. Meanwhile, as per its original commitment, Seoul will immediately eliminate its 10 percent tariff on U.S. trucks.

One concern of the U.S. auto industry was that freer trade with Korea would open the flood gates for a surge of Korean auto shipments to the United States, despite Hyundai’s avowed intentions to service the U.S. market from production in the United States or their claimed disinterest in building trucks for the American market.

Trade agreements sometimes have surge protectors built in to them to guard against such sudden changes in imports, to give the domestic industry time to adjust. The American agreement that allowed China into the World Trade Organization had such protections, as did the phase out of the Multi-Fiber Arrangement that once shielded the U.S. textile and apparel market.

The Bush administration deal with Seoul contained no safeguard specific to the U.S. auto industry. Under the 2010 supplemental agreement, Korea has committed to add a special safeguard for motor vehicles to ensure that the American auto industry does not suffer from any harmful surges in Korean auto imports due to the trade agreement.

The auto safeguard will be in force for 10 years beyond the full elimination of auto and truck tariffs, which means at least until 2031 in the case of trucks. And any higher tariff that might be imposed to slow imports can apply for four years. Moreover, in order not to dissuade future U.S. administrations from imposing the safeguard, the U.S. government will not be required to offer Korea tariff reductions or other compensation, which are often done in many trade agreements when a safeguard is available, for up to two years after the safeguard is applied.

Finally, it would appear that U.S. negotiators lost at least one automotive-related fight in the negotiation. The 2007 accord included an innovative and unprecedented “snap-back” provision, that re-imposed U.S. tariffs on imported Korean cars if U.S. automakers claimed Seoul was not keeping its side of the bargain and was either not dismantling non-tariff barriers or erecting new ones. These re-imposed duties would remain while the complaints were investigated and the dispute adjudicated. Normally, until one partner to a trade agreement is found guilty, the other partner can not impose sanctions. The “snap-back” provision was intended to keep Seoul from dragging its feet in any dispute settlement.

But this “snap-back” innovation was harshly criticized by American auto experts for applying only to the auto tariff and not the much higher American truck tariff, the re-imposition of which would be far more onerous and give the U.S. government far more leverage in any dispute with the Koreans.

The White House claims the new 2010 agreement substantially increases Korea’s obligations in a number of areas subject to this enforcement mechanism. But the failure to mention inclusion of the truck tariff as one of those obligations suggests the Koreans would not budge on this issue.

Despite Baucus’ concerns about greater access to the Korean beef market, little progress seems to have been made on that contentious issue.

The Korean market for beef is potentially quite lucrative. In 2009, U.S. cattlemen sold Korea $215 million worth of beef, making Korea the fourth largest market for U.S. meat. But in 2002 they sold $754 million there. U.S. sales in the Korean market dwindled to almost nothing from 2004 to 2006, Seoul banned imports of U.S. beef out of fear of mad cow disease. The market reopened only after an industry-to-industry agreement in which U.S. cattlemen agreed to ship no meat to Korea from cows older than 30 months.

But the effective closure of the Korean market to American producers for three years allowed Australian cattlemen to step in and increase their market share. And a new Korean-Australian free trade agreement promises to give Australian beef a price advantage in the Korean market. So, while American cattlemen would prefer to have the 30 month cap eliminated, and argue strenuously that there is no scientific basis for such a limitation, they are willing to live with to make sure the Australians do not get more entrenched in the Korean market.

Nevertheless, the 2007 accord promised to eliminate Korean beef tariffs, but did nothing to lift the 30 month ban. And the supplemental agreement leaves that restraint in place, sparking Baucus’ complaint.
But the senator’s anger may have more to do with Montana politics than it does with the broader interests of American beef producers.

“We are ok with the deal we have,” said one lobbyist for the cattlemen. “We do not have full access but that caused riots in streets in Seoul [Korean protests scuttled an earlier effort to lift the 30 month ban] and didn’t sell a lot of beef. There is domestic risk for the Koreans. We understand that and we are not pushing them. Baucus is.”

Notwithstanding Baucus’ concerns, the support from Ford Motor Co., Sander Levin and the GOP trade leadership in the House, along with a reiteration of the business community’s support for the deal dramatically enhance prospects for Congressional passage early next year.

It has long been conventional wisdom in the trade community that if and when a Korea deal is brought to a vote, it will pass.

Moreover, in the wake of recent confrontations with North Korea, U.S. geopolitical interests in Northeast Asia are now, if anything, even more obvious. “It is hard to say we are going to stand by our good friends the South Koreans,” said Jeffrey Schott, a senior fellow at the Peterson Institute for International Economics in Washington, “and then nickel-and-dime them on the free trade agreement.”

The recent EU free trade agreement with Korea and Seoul’s pending Australian trade deal now offer tangible evidence of likely market share losses for American companies if Washington fails to act to give U.S. businesses a level playing field in Korea.

And expected opposition to a Korea deal by liberals and organized labor may not be as fulsome as once expected. With its numbers in Congress reduced by the outcome of the November Congressional election, the left may have to pick its fights in the new Congress. Forced to expend political capital defending budget priorities and the administration’s health care reforms, its opposition to a Korea deal may prove to be more symbolic than substantive.

Nevertheless, the results of the November election raise enough doubts about voters’ sentiments toward trade that Congressional passage of a Korea deal is far from a slam dunk. It is now clear that the American people and presumably some of the newly elected members of Congress remain to be convinced of the efficacy of freer trade with Korea.

In a post-election survey, Pew found that only 45 percent of the American public thinks increasing trade with Korea would be a good idea. Women, Blacks and the poor in particular lacked enthusiasm.
These results confirmed earlier findings in a Chicago Council on Global Affairs survey done in June that found that only a minority of Americans, 44 percent, favored a free trade agreement with Kora, and that 47 percent actually opposed it.

And, despite his free trade credentials, Camp, representing his auto-making Michigan constituents, has repeatedly pressed the Obama administration to extract greater concessions from the Koreans.

The legislative strategy for Congressional consideration of a Korean agreement is not yet settled. Korea is not the only trade deal awaiting Capitol Hill approval. Congress has also failed to act on Bush administration agreements with Colombia and Panama.

Business lobbyists know that members of Congress are loath to take multiple tough votes on the same issue, so they have floated the idea of bundling the three agreements into a single vote, which, by broadening the stakes, might also boost K Street efforts for passage on Capitol Hill. But in 2008 the Democratically-controlled Congress rescinded expedited voting for the Colombia agreement. So bundling might prove difficult.

Moreover, to avoid formally reopening the 2007 agreement, which the Koreans have resisted for their own domestic political reasons, U.S. trade officials have floated the idea of adding any changes as amendments to the agreement’s implementing legislation, the text that Congress actually votes upon, rather than the accord itself, saving face for the Koreans. Such amendments would lack fast track protection, but GOP control in the House could ward off opponents’ efforts to change them. The strategy could prove dicey in the Senate, however.

Whatever the legislative strategy, time is short. Fights over the budget and the deficit will eat up much of the Congressional calendar in early 2011. And, by mid-year, the presidential campaign will be gearing up, further impeding willingness for compromise.

Moreover, the Koreans also face a tight, politically-driven calendar for ratification. Their national assembly must also approve the accord. And there is likely to be some criticism of Korean negotiators for “renegotiating” the 2007 deal, giving the Americans new concessions without gaining additional market access to the U.S. market for Korean exporters.

Moreover, Korea has parliamentary elections in April, 2012 and a presidential election in December, 2012. “If we do not approve the deal in the first half of 2011,” said a Korean official involved in the talks, “we will lose our political window.”

Congressional failure to act early next year would likely ensure there is no movement until 2013. At that time, global economic developments could mean the Korea free trade agreement might face yet another major renegotiation that will make this past week’s talks look like child’s play.

But assuming Congress does pass the Korea deal early next year, a major roadblock impeding U.S. trade liberalization efforts will have been removed. The Colombia and Panama deals may face an easier path to passage. And there will be new impetus for the Trans-Pacific Partnership the administration is now negotiating with Australia, Brunei Darussalam, Chile, Malaysia, New Zealand, Peru, Singapore and Vietnam.

Moreover, Japanese officials have long told their American counterparts that if they ever finalize a deal with the Koreans, Tokyo will come calling, unwilling for Ford to have greater access to the Korean market than that now enjoyed by Toyota. A U.S.-Japan free trade agreement would face almost insurmountable obstacles given the frustratingly contentious U.S. experience in trying to gain market access to Japan in the 1980s. But, Tokyo would now be the demandeur, giving Washington new leverage in any such talks.
So finalization of the Korea free trade agreement is major success for the Obama administration and, by breaking a logjam, possibly a game changer for U.S. trade policy. However, the American people have yet to be convinced.