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Korea-US Free Trade Agreement—Will the Korean President’s Visit to the White House Close the Deal?

After years of political maneuvering and renegotiation, the long-awaited Korea-United States Free Trade Agreement (KORUS) could finally be moving towards ratification – providing ample new opportunities in Georgia for expanded trade between the two nations.

Lee Myung-bak, the president of South Korea, will make a state visit October 13 to Washington and meet with U.S. President Barack Obama. The White House is only saying the two leaders will “review progress” towards legislative approval of KORUS. However, the meeting is sparking speculation that approval by the U.S. Senate and the General Assembly of South Korea could be at hand after six years of delays.

Under KORUS, each country would drop 95% of their tariffs within five years, and most tariffs would be gone in 10 years. Dropping the tariffs are expected to add up to $12 billion to the U.S. gross domestic product; spark $10 billion in annual exports to Korea; and create thousands of jobs. The agreement would particularly benefit the agricultural, automotive and manufacturing industries. It is also expected to enhance the export of services from the U.S. to South Korea and bring more direct investments between the two nations.

The treaty was initially negotiated in 2006 and 2007 during the George W. Bush administration. Although the leaders of both countries signed KORUS FTA June 30 2007, it will not take effect until approved by legislators in either country. During the Bush administration, Democrats who controlled the U.S. Congress blocked the agreement over the potential impact on the automotive and beef industries. After Obama took office in 2009, a new KORUS FTA was negotiated that addresses labor concerns in the automotive sector. (The beef issues were tabled.) U.S. and Korean leaders signed the revised treaty in December 2010. While there are still some Democrats with concerns about labor issues, Republicans generally support free trade agreements, and the enabling legislation has already begun working its way through Congress. Once the U.S. approves the bill, Korea’s General Assembly will then take up the measure. While there is some opposition from Korean legislators, the treaty is expected to gain approval in that body as well.

For the United States, KORUS would be the largest trade agreement since 1993’s North American Free Trade Agreement. The confrontational U.S. legislative climate in recent years has stalled all trade treaties for several years. Leaders hope approval of KORUS would help move pending agreements with Panama and Colombia forward as well.

For South Korea, KORUS would be the country’s second largest FTA, trailing only a recent trade agreement with the European Union. Trade Minister Kim John-hoon has already said South Korea’s next FTA target is China (already Korea’s top trading partner with an 18% market share). The U.S. State Department ranks Korea as the world’s 15th largest economy and the United States’ seventh largest trading partner. Keeping trade ties strong with the almost $1 trillion Korea economy – and keeping other countries from infringing on that relationship – is a top priority for U.S. trade officials. The U.S. was once South Korea’s top trading partner, but now trails China, Japan and the European Union. The U.S. share of the Korean import market fell from 21% to 9% from 2003 to 2010.

Korea is a particularly important market for Georgia, where exports to South Korea directly support 1,849 jobs, according to the Business Roundtable. The American Farm Bureau estimates that direct agricultural exports from Georgia to Korea would increase by almost $39 million annually under KORUS. More than $6 million would come from the poultry industry alone, which has been hammered by protectionism in some of its major Asian markets. Exports of fruits, vegetables, nuts and processed food products would also increase under the proposed free trade agreements, the Farm Bureau stated. The Office of the U.S. Trade Representative  (USTR) stated KORUS would immediately eliminate or phase out tariffs and tariff-rate quotas on a broad range of products, with almost two-thirds (by value) of Korea’s agricultural imports from the United States becoming duty free” when the agreement takes effect.

In addition to agriculture, KORUS would provide Georgia and the rest of the United States ample opportunities to expand trade with Korea, which is already the seventh largest trading partner for the U.S. Other areas impacted by the proposed agreement include:

- Services exports. The Brookings Institute stated that services represent “one area where the U.S. should reap significant economic benefits from KORUS.” The group expects “increased exports of services such as finance, legal, accounting, telecommunications, health care and education, and areas of specialization and knowledge intensity that the U.S. excels in.” USTR valued the Korean services market at $560 billion. The office pointed specifically to foreign legal consulting, financial services companies and international delivery services (such as Georgia-based UPS, which backs KORUS) as significant beneficiaries.

- Manufacturing. KORUS eliminates duties charged when U.S. exports come into Korea, as well as addressing non-tariff barriers, the USTR stated.

- Government procurement. The treaty will also expand U.S. firms’ access to the $100 billion Korean government procurement market, USTR noted.

- Direct investment. USTR Brookings suggested the “bilateral investment relationship between the U.S. and Korea is arguably underdeveloped,” pointing to 2007 investment of $38 billion versus $81 billion in trade that year.

- Automotive. The agreement creates more job-creating export opportunities in Korea by several areas of contention, including safety and environmental standards. It also phases out tariffs on cars, trucks and electric vehicles in coming years.

Concluding KORUS could also be a first step towards more free trade agreements throughout Asia, opening up more opportunities for Georgia and U.S. businesses in the region. “As the first U.S. FTA with a North Asian partner,” the USTO stated, “the KORUS FTA could be a model for trade agreements for the rest of the region, and underscore the U.S. commitment to, and engagement in, the Asia Pacific Region.”

Questions or comments? Please email Michael Fenton at mfenton@atlantapacificgroup.com