Jul 17, 2013

KORUS FTA: Impacts on Trade & Investment for Korea and the States (Guest Post by NerdWallet Journalist)

Guest Post by Maxime Rieman of NerdWallet

In March 2012, the U.S.-South Korea Free Trade Agreement (KORUS FTA) went into effect after years of bilateral negotiation and months of contentious debates in both nations.

After the North American Free Trade Agreement (NAFTA), this is the largest free trade agreement to which the United States has pledged itself. KORUS FTA covers a wide range of investment and trade matters and reduces each nation’s tariffs on the other’s goods by 95% over half a decade. Given the close economic ties between the U.S. and South Korea—the U.S. is South Korea’s third-largest trading partner and South Korea is the seventh-largest trading partner of the United States—, this massive agreement is bound to have a wide gamut of both positive and negative consequences for each nation.

FTA Impact on the United States
• Reduced costs for American consumers
Supporters of KORUS FTA have pointed to the dramatic lowering of prices for many American consumers. In manufacturing, electronics and textiles, in particular, cheaper South Korean prices will benefit American consumers looking to save in tough economic times. • Increased foreign interest in US goods According to the government and political watchdogs, the FTA may generate as much as $15 billion in sales of US products to foreign buyers. In particular, American agriculture is posed to benefit greatly from having a much larger market in which to send its surplus cache of goods; this surplus is actually quite large. US exporters, on the whole, hope to see their share of the South Korean market go from 11% (in 2012) to as high as 25%.

• American job losses 
Warnings of massive job losses as a result of KORUS FTA have been a mainstay. In 2010, the Economic Policy Institute reported widespread predictions that lowered tariffs would cost over 150,000 American jobs through increased imports and reduced American competitiveness. Opponents fear workers in vulnerable sectors like manufacturing and textiles will suffer while only corporate heads profit.

 • Increased American trade deficit
Since NAFTA contributed to raising the American trade deficit 40 times over in 10 years, economists have been hesitant about the ramifications of KORUS FTA. South Korean manufacturers in textiles and automobiles sell their products for 20 percent less than their American counterparts, which may contribute to an increased trade deficit; moreover, many key American tariffs will be reduced or eliminated years before their South Korean counterpart tariffs. Impact on South Korea.
 
FTA Impact on South Korea
• Increased exports to the United States
 South Korean business analysts and leaders have indicated that their nation will benefit greatly from the much larger consumer market in the United States; statistics indicate that Americans buy more than ten times as many goods as do Koreans. The New York Times reports the findings of the Korea Institute for International Economic Policy: Korean exports to the United States will rise by 12% each year (worth $5.4 billion) and grow by 15% overall within a few decades.

• Privatization opportunities for Korean public companies 
Korean corporations have taken account of the increased privatization opportunities afforded by KORUS FTA. The public companies in South Korea have been in decline for decades, but with the free trade agreement in place, these may be able to privatize and bring public ownership below 50%.

• Declining South Korean Agriculture 
While the South Korean manufacturing and textile industries stand to benefit from free competition with American counterparts, the opposite is true in agriculture, despite the tariff on rice which Seoul insisted upon keeping. According to the Korea Rural Economic Institute, US agricultural exports to the nation will more than double from the FTA; more than 100,000 South Korean agricultural jobs may be lost and the industry crippled by the more powerful American competition.

• Lack of transparency, standards 
With a tortuous history of foreign invasion and domestic despotism, South Korea has only had a liberal democracy in place for two decades. At the apex of FTA negotiations, polls indicated that more than 80% of Koreans opposed at least some of the measures of the trade agreement.

Korean critics of the accord have pointed to the lack of transparency from the government in Seoul, and from the total lack of democracy in its negotiation of the FTA with the United States.

Conclusion 
What will become of the South Korean-United States Free Trade Agreement, a momentous arrangement that was years in the coming? Nearly twenty years later, the full legacy of NAFTA is far from clear and highly contentious.

Given the comparable significance and scope of KORUS FTA, there can be little doubt that the true nature, negatives and positives alike, will be inchoate for some time, and if recent history is any indication, the wise prophets of today will not be proven wrong or right for decades to come.

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Guest Post by Maxime Rieman.  Maxine is a writer for NerdWallet, a financial literacy that helps consumers find the information they need to make better choices about their personal finances, car insurance companies, mortgage rates, investments and health.