The proposed South Korea-U.S. free trade agreement (KORUS FTA).(CRS Report for Congress)

Summary

Close to midnight on April 1, 2007, President Bush sent a message to the leaders of the House and Senate, notifying them of his intent to enter into a free trade agreement (FTA) with South Korea. The President's notification to Congress signified the completion of the negotiations on the U.S.-South Korea FTA (KORUS FTA) that the two countries launched on February 2, 2006, at South Korea's request. The negotiations covered a wide range of subjects, including a number of sensitive issues--autos, agriculture, trade remedies, among others--that have plagued the U.S.-South Korean trading relationship for decades. As a result, the FTA negotiations were at times contentious and their successful completion in doubt.

Congress will have to approve implementation legislation for the KORUS FTA before it can enter into force. The negotiations were conducted under the trade promotion authority (TPA), also called fast-track trade authority, that the Congress granted the President under the Bipartisan Trade Promotion Act of 2002 (the Act) (P.L. 107-210). The authority allows the President to enter into trade agreements that receive expedited congressional consideration (no amendments and limited debate).

The United States and South Korea conducted the FTA negotiations with a high degree of political risk for both countries, and that risk will likely carry over as their respective legislatures debate the merits of the FTA.

Judging from information released to date, the results of the FTA negotiations were the product of much compromise. As negotiators from both countries stated, the two sides were able to accomplish some of their objectives, but neither side got everything it wanted A detailed and accurate analysis of the agreement must await the public release of the complete text, which is anticipated in May. In the meantime, some highlights of the results of the negotiations can be provided based on official U.S. and South Korean summaries and comments as well as comments from informed private sector representatives.

Preliminary reactions from the U.S. business community have varied and in a number of cases have been cautious because the final text of the FTA has yet to be released. These reactions largely reflect perceptions of to what degree the objectives of various groups were realized in the final agreement. Preliminary reactions in South Korea were similarly varied.

This report is designed to assist Members of the 110th Congress as they consider the merits of the KORUS FTA. It examines the results of the FTA negotiations in the context of the overall U.S.-South Korean economic relationship, U.S. objectives, and South Korean objectives. The report will be updated as events warrant.

 
Contents 
 
The Results of the Negotiations 
    Agriculture 
    Automobiles 
    Other Provisions 
    Preliminary Reactions to the Negotiations 
 
An Overview of the U.S.-South Korean Economic Relationship 
 
U.S. Interests and FTA Negotiating Objectives 
     Why an FTA? 
     U.S. Issues and Negotiating Objectives 
          Agriculture 
          Autos and Autoparts 
          Other Manufactured Goods 
          Intellectual Property Rights (IPR) Protection 
          Services 
          Foreign Investment 
          Competition Policy 
          Other U.S. Objectives 
 
South Korean Interests in an FTA with the United States 
    Why an FTA? 
    Criticism of the FTA within South Korea 
    South Korean Issues and Negotiating Objectives 
         Agriculture 
         The Kaesong Industrial Complex 
         U.S. Antidumping Practices 
         Visa Issues 
 
The Potential Economic Effects of a U.S.-South Korean FTA 
         Trade Creation vs. Trade Diversion 
         Estimates of the Economic Effects of a KORUS FTA 
 
Next Steps 
 
Other Relevant CRS Products 
 
Appendix A. Timeline for Negotiation, Congressional Consultation, and 
    Legislative Implementation of Trade Agreements Under TPA 
 
Appendix B. A Short Guide to the Expedited Legislative Procedures for 
    Passage of Trade Implementing Bills Under TPA 
 
Appendix C. Top 10 U.S. Exports to and Imports from South Korea, 2006 
 
List of Tables 
 
Table 1. Annual U.S.-South Korea Merchandise Trade, Selected Years 
Table 2. Asymmetrical Economic Interdependence (2006) 
Table 3. Snapshot of the Kaesong Industrial Complex 

The Proposed South Korea-U.S. Free Trade Agreement (KORUS FTA)

Close to midnight on April 1, 2007, President Bush sent a message to the leaders of the House and Senate, notifying them of his intent to enter into a free trade agreement (FTA) with South Korea. The President's notification to Congress signified the completion of the negotiations on the U.S.-South Korea FTA (KORUS FTA) that the two countries launched on February 2, 2006, at South Korea's request. The negotiations covered a wide range of subjects, including a number of sensitive issues--autos, agriculture, trade remedies, among others--that have plagued the U.S.-South Korean trading relationship for decades. As a result, the FTA negotiations were at times contentious and their successful completion in doubt.

Congress will have to approve implementation legislation for the KORUS FTA before it can enter into force. The negotiations were conducted under the trade promotion authority (TPA), also called fast-track trade authority, that the Congress granted the President under the Bipartisan Trade Promotion Act of 2002 (the Act) (P.L. 107-210). The authority allows the President to enter into trade agreements that receive expedited congressional consideration (no amendments and limited debate).

The United States and South Korea conducted the FTA negotiations with a high degree of political risk for both countries, and that risk will likely carry over as their respective legislatures debate the merits of the FTA.

The U.S.-South Korean alliance remains very strong. The United States and South Korea have been allies since the United States intervened on the Korean Peninsula in 1950 and fought to repel a North Korean takeover of South Korea. Over 33,000 U.S. troops were killed and over 100,000 were wounded during the three-year conflict. (1) However, the alliance also has shown signs of fraying. Some observers argue that the FTA would help to strengthen the alliance.

U.S.-South Korean trade frictions have diminished over the last decade and a half as political leaders have been forced to give higher priority to foreign policy and national security concerns, and the United States and South Korea have increasingly used the multilateral dispute settlement mechanism of the World Trade Organization (WTO) and other fora to address bilateral trade problems. In addition, South Korea has introduced a number of reforms to open its economy to foreign competition and investment that have addressed some of the U.S. complaints. Yet, even though tensions have diminished, a number of long-standing, deep-seated differences in trade and investment relations have remained below the surface.

This report is designed to assist Members of the 110th Congress as they consider the merits of the KORUS FTA. It examines the results of the FTA negotiations in the context of the overall U.S.-South Korean economic relationship, U.S. objectives, and South Korean objectives. The report will be updated as events warrant.

The Results of the Negotiations

Judging from information released to date, the results of the FTA negotiations were the product of much compromise. As negotiators from both countries stated, both sides were able to accomplish some of their objectives, but neither side got everything it wanted. A more detailed and more accurate analysis of the agreement must await the public release of the complete text. In the meantime, some highlights of the results of the negotiations can be provided based on official U.S. and South Korean summaries and comments as well as comments from informed private sector representatives.

Agriculture

As expected, agriculture proved to be one of the most sensitive issues, pitting the more efficient U.S. producers against the highly protectionist South Korean agriculture sector. In general, the United States had pressed for complete trade liberalization in agriculture while South Korea wanted a number of products to be excluded from trade liberalization.

Rice was the most sensitive area for South Korea, and it was an issue that negotiators did not resolve until the end of the negotiations. The United States agreed to let South Korea exclude rice from FTA coverage; thus, South Korea would be able to maintain its quota on rice imports. U.S. negotiators came to the conclusion that their South Korean counterparts could not relent on rice because of domestic political pressures and that continuing to press the issue could jeopardize the entire negotiations. Deputy United States Trade Representative (USTR) Karan Bhatia stated that, "Ultimately, the question that confronted us was whether to accept a very, very good albeit less perfect agreement or to lose the entire agreement because Korea refused to move on rice." (2)

South Korean restrictions on imports of U.S. beef was and continues to be a critical issue that could impede congressional consideration of implementing legislation for the KORUS FTA. At the conclusion of the FTA negotiations, South Korean officials did not provide a date by which their government would allow shipments of U.S. beef to enter. (On April 23, 2007, South Korea's Yonap news service that U.S. beef will be allowed to enter South Korea sometime the week of April 30.) (3) In December 2006, South Korean meat inspectors prohibited the entry of the first three shipments of U.S. beef after they found bone fragments. South Korea claimed that the shipments violated a September 2006 agreement to lift a ban that was imposed in December 2003 after a case of mad-cow disease was discovered in a cow in Washington State. Some Members of Congress, including Senate Finance Committee Chairman Max Baucus and Committee Ranking Member Charles Grassley, indicated that implementing legislation for the KORUS FTA would not pass Congress without a resumption of imports of U.S. beef into South Korea. (4) Before the ban was imposed, South Korea was the third-largest foreign buyer of U.S. beef.

South Korean officials said that they would resume the imports if the World Organization for Animal Health (OIE) determines that the United States is a "controlled risk" country, a decision that is supposed be made by May 20, 2007. (5) In an address to the nation, South Korean President Roh Moo-hyun noted that he personally had promised President Bush that Seoul would "uphold the recommendations" of the OIE and "open the Korean [beef] market at a reasonable level." (6) This beef issue was not actually part of the formal FTA negotiations but was discussed in parallel with the talks.

However, other market access issues in trade in beef and other meats were a direct part of the negotiations and the results include: a phaseout of South Korean tariffs on beef over a 15-year period; a 10-year phaseout of tariffs on fresh and chilled pork products; a 12-year phase out of tariffs on frozen chicken breasts and wings; and a phaseout to be completed in 2014 of tariffs on frozen and processed pork products. (7)

In addition to rice and beef, trade in citrus products was also sensitive and was not resolved until the final days of the negotiations The United States wanted complete elimination of tariffs on citrus, while South Korea wanted quotas and tariffs to remain, primarily because of their importance to the economy of Jeju Island. In a compromise, the negotiators agreed to a two-part solution: First, the 50% South Korean tariff will be maintained on imports of U.S. navel oranges in excess of 2,500 metric tons for shipments during South Korea's September 1-February 28 growing season, and the quota will be increased 3% per year. Second, the tariff on out-ofseason shipments will be reduced immediately from 50% to 30% and phased out over seven years. In addition, the South Korean tariff of 30% on grapefruit will be phased out over five years, and a 144% tariff on mandarin oranges will be phased out over 15 years. (8)

Also regarding agriculture, the negotiations resulted in:

* a phase-out of over twenty years of South Korean tariffs on apples and pears;

* immediate duty-free treatment for wheat, feed corn, soybeans for crushing, hides and skins, and cotton;

* immediate duty-free treatment for almonds, pistachios, bourbon whiskey, wine, raisins, grape juice, orange juice, fresh cherries, frozen french fries, frozen orange juice concentrate, and pet food;

* phase-out of tariffs over two years on avocados, lemons, dried prunes, and sunflower seeds;

* phase-out over five years of tariffs on food preparations, chocolate and chocolate confectionary, sweet corn, sauces and preparations, alfalfa, breads and pastry, and dried mushrooms; and

* increased quotas with zero in-quota tariffs (that is, tariffs that are applied to imports that enter within the quota) on skim and whole milk powder, whey, cheese, dextrins and modified starches, barley, popcorn, and feed-grade soybeans. (9)

Automobiles

The United States had wanted South Korea to revise, if not eliminate, various tax regimes that the U.S. auto industry has cited as barriers to foreign competition in the South Korean market. Trade in autos proved to be another highly contentious issue that was not resolved until the final hours of the negotiations. As a result of the negotiations, the United States agreed to eliminate its 2.5% tariff on imports of Korean cars with engines up to 3,000 ccs, and to phase out the tariff on larger South Korean vehicles over three years. The United States also would phase out its 25% tariff on imports of South Korean light trucks over 10 years.

South Korea agreed to eliminate its 8% tariff on auto imports. In addition, South Korea agreed to revise its engine displacement tax regime so that there would be fewer tax categories and that the tax would be applied to most cars that are made in the United States in the same manner as it is applied South Korean-made cars. South Korea would also reduce over three years the excise tax on cars from 10% to 5% and reduce the number cars that would be subject to the tax. (10)

South Korea and the United States agreed to create a special dispute settlement mechanism for the commitments in the FTA pertaining to passenger cars. Specifically, the United States could bring a complaint to a special dispute panel if it believes that South Korea has violated a KORUS FTA commitment on autos or otherwise nullified or impaired expected benefits under that commitment. If the panel finds that (1) the relevant FTA provision has been violated or the benefits of the United States have been nullified or impaired and (2) the infringement has caused material injury to the U.S. industry, the panel can permit the United States to return or "snap-back" the auto tariff from zero to the MFN tariff, which is 2.5% in the case of the United States. (11) South Korea also agreed to loosen emission standards for certain categories of imported cars, to a grace period until December 31, 2008, for the application of an onboard diagnostics system for manufacturers that sell 10,000 or fewer cars in Korea, and to a two-year grace-period for the application of new South Korean safety standards. (12) The two sides would also create an Autos Working Group as a forum to address potential auto issues.

Other Provisions …