From May 1st, a quota system, which were agreed during the KOR-US FTA renegotiation, will be enforced to limit exports of Korean steel, focusing the attention of society on the KOR-US FTA renegotiation which took place from March 15th to 16th. Since the outcome of renegotiation will have a direct impact on Korean citizens’ daily lives, interest and concern are growing as to what effect this renegotiation will have later. Though the Korean government viewed the result of this renegotiation positively, there are various arguments as to whether it will help the nation to remain economically competitive on a global scale. The Sungkyun Times (SKT), therefore, analyzes the FTA between Korea and the United States (US), the contents and the limitations of this FTA negotiation, and finally the future people can expect through it.
About the KOR-US FTA
What is an FTA?
FTA stands for Free Trade Agreement. It aims to lower the rate of tariffs between two nations gradually during the negotiated period; eventually removing tariffs completely. FTAs target products and services which will be traded between two nations. Among numerous FTAs in the world, the FTA between Korea and the US received attention because of their large market size and the issues with North Korea. Through the KOR-US FTA, South Korea and the US expect to expand the trade market and build stronger economic relations.
The Early KOR-US FTA
In 1989, a report by the United States International Trade Commission (USITC) examining the Asian-Pacific FTA firstly mentioned that Korea would be a suitable partner for the FTA. Discussions about entry into the FTA started in 2003, and official discussions between the two governments began in 2006. Since then, there have been a total of eight official discussions and further consultations for the FTA, as well as three renegotiations. From agricultural and dairy products, financial services, and even to the law, the KOR-US FTA includes lots of targets across various fields. In the case of products, it sets a “duration of tariff removal” to each product because the properties of products vary. In the case of services, it aims at opening the market between two nations not removing tariffs. For instance, a person will be allowed to obtain qualifications and any license gained in the other country will be valid without any limitations, and money transactions can be made without any issue. To be specific, most of the services should follow the four obligations below.
It was feared that the US may include favorable conditions to them in the deal, such as the removal of tariffs from crops and the “Investor State Dispute Settlement”, which have been a limiting factor for the Korean government’s public policy implementation. The two nations, however, concluded the deal with satisfaction via several agreements. In the case of rice products, which Koreans were most concerned about, tariffs were maintained given that rice is a staple food in Korea. Through the renegotiation, Korea is expected to improve its conditions for entering the US market and increase the number of foreign investments, which might result in its economic growth.
Background of the Renegotiation
The KOR-US FTA was first enforced on March 15th, 2012. According to the Ministry of Trade, Industry and Energy (MTIE), the transaction rate with the US increased 8.8% in 2017 compared to the previous year, showing an increasing tendency. The 2016 KOR-US FTA Implementation Assessment Report by the government also showed that the number of exports from Korea to the US increased from $45.88 billion in 2007 to $66.75 billion in 2016, showing an increase of 1.45 times. The number of imports increased as well. From this data, it is proved that the trade relations between Korea and the US have been strengthening. The Trump administration, however, addressed on March 29th that the KOR-US FTA should be reconsidered and revised, considering that the US has been suffering from trade deficits in the car, steel, and Information and Communication Technology (ICT) industries. Trump, being a protectionist, required a revision of the FTA especially in regard to the steel industry, stating that section 232 of the Trade Expansion Act, which enables the president to impose tariffs on imported products, can be a security threat. The Korean government refuted Trump’s statement clarifying that the deficits in the US were not due to the KOR-US FTA, and demanded further research and analysis. Even mentioning the possibility of canceling the KOR-US FTA, however, the US complained about the claims of Korea and strongly demanded the renegotiation.
Contents and Limitations of the “KOR-US FTA Renegotiation”
The Third Renegotiation of the KOR-US FTA
1. Limitation on the Steel and Car Industry
In the steel industry, 25% of the original tariff was removed when Korea exported to the US. Through the renegotiation, though, Korea is now limited to export only up to 70% of the previously exported amounts, 3.83 million tons, which is the average amount of exported steel from 2015 to 2017. In the car industry, the maximum quantity of imported cars from the US to Korea was originally 20,000 cars, but the number has extended to 50,000. Also, the deadline for tariff removal on Korean pick-up trucks is postponed from 10 years to 20 years after the FTA coming into effect; that is, the tariffs can be removed in 2041, 30 years after the start of FTA.
|Evaluation of KOR-US FTA in Korean Congress/ yonhapnews.co.kr|
2. Improvement of the “Investor State Dispute Settlement”
Being seen in other countries’ FTAs as well, the “Investor State Dispute Settlement” (ISDS) is a system that allows companies investing in foreign companies to resolve potential disputes through arbitration by international organizations, protecting local policies or property damage caused by ISDS law effectively. There was a concern that the US could abuse this article if added to the KOR-US FTA. Since Korea’s export rate is dependent on the US, if corporations of the US suffer financially due to the Korean government’s policy, this article operated as a disadvantage. Through this renegotiation, however, US investors in Korea will not be able to exploit this article because the capable number of suits is limited. Also, the Korean government insisted that its legitimate policy and authority of sovereignty should not be violated.
3. Supplementation of the “Pharmaceutical Reimbursements”
The Korean government met the “Pharmaceutical Reimbursements” demand of the US, in order to set the price of new medicine better than before. “Pharmaceutical Reimbursements” is a system where new drugs can be priced highly if they contribute greatly to the improvement of health care in Korea, for instance, by conducting clinical tests in Korea or hiring people in the fields. When a medicine meets the aforementioned criteria, its price could increase by up to 10% according to renegotiation.
4. No Change in Additional Opening of Agricultural and Dairy Market
The Korean government considered this agenda carefully because the price of the US agricultural and dairy products are highly competitive. Through the FTA renegotiation, it was confirmed that there will be no additional opening between the two nation’s markets. That is, US products like dairy products will not be additionally entered in the Korean market anymore, which means there will be no change in this field.
Limitations of the Renegotiation
1. Disadvantage of Korea in the Steel Industry
The maximum quantity of steel pipe exports, which is the main export product of Korea, will be limited. The number of exportations will decrease to more than 50% than before. To obtain an opportunity to export more, it is expected that competition between several businesses will be fierce. Also, the renegotiation did not specify the duration for the limitation on the amount of exported products. Furthermore, it is hard to predict the fluctuation of steel trading, so it is common not to limit export figures based on the International Trade Law when it comes to steel industry. The renegotiation received negative views that two nations made a poor decision by accepting the conception of limiting the amount of exports, which does not accord to the current international trade law. Criticism was raised at a policy conference held at Congress on March 30th to evaluate the results of the KOR-US FTA and the steel tariff negotiations. Jeong In-gyo, the former president of the Korea Association of Trade and Industry Studies (KATIS), argued that the FTA reached a poor compromise by accepting the import quota system, which is prohibited by the World Trade Organization (WTO). The Gyeonggi Research Institute (GRI), where researchers investigate policy for Gyeonggi Province, showed that export losses of Korea to the US are estimated to exceed more than $9 billion over the next five years in its report, “The Effects of the Korea-US FTA Negotiations and Direction of Trade Policy”. In the report, export losses in the steel industry showed the largest drop of $6.6 billion. As the tariff on Korean pick-up trucks is extended and the regulations applied to the import of American automobiles have also been eased, damage on the automobile industry is expected as well.
2. Concerns About “Pharmaceutical Reimbursements” in Korea
The US argued that this article is discriminative because the Korean government does not allow foreign companies to sell their medicines when they are not developed in Korea. Pharmaceutical Research and Manufacturers of America (PhRMA) is pushing the United States Trade Representative (USTR) to impose the highest level of trade sanctions on Korea. Currently, it is difficult for the US or multinational pharmaceutical companies to release new medicines in Korea, but if future agreements compensate for the US, domestic pharmaceutical companies will be in fierce competition with other companies.
3. Violation of Korea’s Red Line
During the renegotiation, Korea tried to defend its “red line”, which is the maximum extent that the government is not willing to yield, since there would be possibilities that the US requires further opening of agricultural products. On March 29th, Trump suddenly stated that he can delay the FTA until the North Korean nuclear negotiations end. USTR stated that the US is requesting market access for apples and pears, which are currently blocked, and will continue to press for it. The Korean government reported that it defended the request of the US regarding agricultural and fishery products and noted that the FTA has successfully reached an agreement, but it is possible that there may be a renegotiation again.
Required Measures and Future After Renegotiation
The Korean government plans to complete detailed research in each field as soon as possible, and then proceed with requesting the ratification of the National Assembly. However, the US is currently enforcing steel tariffs on trade negotiations with other countries. Jean-Claude Juncker, the president of the European Commission, mentioned that the European Union (EU) will retaliate against tariffs on the US products. However, Korea is taking a cautious attitude because it is hard for them to mention the retaliatory tariff due to its relationship with North Korea. Moreover, the US is using the steel tariff exemption as a leverage for the KOR-US FTA revision proposal and the defense spending for protection against North Korea.
Lee Sang-hun, a senior fellow at the GRI, stated that it is necessary to prepare measures based on the fact that trade protections of the US can recur at any time. In addition, the export and import management system should be monitored at all times to solve trade problems with the US. This system can check the damage of the Korean steel and car industries, and help create other strategies in order to minimize the damage. He also mentioned that the government should utilize international norms based on the WTO, and that the “Regional FTA Utilization Support Center” should prepare measures for the danger of opening import markets.
The MTIE, accordingly, has planned to establish the so-called “New Trade and Order Strategy Office”, by the Office of Trade Negotiations to be readied for the protectionism of the US. This plan was approved in the Cabinet Meeting on March 26th. The “Trade Legal Planning Department” will be established under this organization to oversee the KOR-US FTA and respond to any movement to regulate imports in Korea. Baek Un-gyu, the president of MTIE, suggested that the government will strengthen its ability to respond to pending trade issues, such as import regulations. Also he expected that the Korean government will establish an organization to represent the interests of the nation in the newly required international trade order.
Although the KOR-US FTA renegotiation currently seems to have several problems, there are still ways to overcome them. Just like establishing relationships with people, negotiating with other nations requires an in-depth analysis and a continued focus. In doing so, the SKT hopes that the Korean government will not only maintain good relations with other countries, but also show economic growth through a strong and balanced FTA.
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