The proposed U.S.-South Korea Free Trade Agreement (KORUS FTA): provisions and implications.

January 22, 2008

Summary

On June 30, 2007, United States Trade Representative Susan Schwab and South Korean Foreign Trade Minister Kim Hyung-chong signed the proposed U.S.-South Korean Free Trade Agreement (KORUS FTA) for their respective countries. If approved, the KORUS FTA would be the largest FTA that South Korea has signed to date and would be the second largest (next to North American Free Trade Agreement NAFTA) in which the United States participates. South Korea is the seventh-largest trading partner of the United States and the United States is South Korea's third largest trading partner. Various studies conclude that the agreement would increase bilateral trade and investment flows.

The final text of the proposed KORUS FTA covers a wide range of trade and investment issues and, therefore, could have wide economic implications for both the United States and South Korea. The KORUS FTA includes issues on which the two countries achieved early agreement, such as the elimination on tariffs on trade in most manufactured goods and the partial liberalization in services trade. The agreement also includes provisions on a number of very sensitive issues, such as autos, agriculture, and trade remedies, on which agreement was reached only during the final hours of negotiations.

If the agreement is to enter into force, Congress will have to approve implementation legislation. 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 (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 White House has not indicated when it will send the draft implementing legislation to Congress. (The TPA sets no deadline for the President to do this.)

While a broad swath of the U.S. business community supports the agreement, the KORUS FTA faces opposition from some groups, including some auto and steel manufacturers and labor unions. In addition, the agricultural community and some Members of Congress have withheld support for the agreement until South Korea lifts its restrictions on imports of U.S. beef. Some U.S. supporters view passage of the KORUS FTA as important to secure new opportunities in the South Korea market. Opponents claim that the KORUS FTA does not go far enough in opening up the South Korean market and is a lost opportunity to resolve long running concerns about South Korean barriers. Other observers have suggested the outcome of the KORUS FTA could have implications for the U.S.-South Korean alliance as a whole.

Differences between the White House and the Democratic leadership in the Congress over the implications of the KORUS FTA have made the timing and even the likelihood of the President's submission and the Congress's subsequent consideration of implementing legislation uncertain. This report will be updated as events warrant.

 
Contents 
 
The KORUS FTA in a Nutshell                                           2 
  Agriculture                                                         3 
  Automobiles                                                         3 
Other Key Provisions                                                  4 
Estimates of the Overall Economic Effects of a KORUS FTA              5 
An Overview of the U.S.-South Korean Economic Relationship            6 
U.S. and South Korean Objectives in An FTA                            8 
Sector-Specific Issues and the KORUS FTA                             10 
  Agriculture and Sanitary and Phytosanitary Issues                  10 
  Autos                                                              15 
  Textiles and Apparel                                               22 
  Other Manufactured Goods                                           24 
  Pharmaceuticals and Medical Devices                                27 
  Financial and Other Services                                       29 
                                                                     32 
General Provisions                                                   32 
  Trade Remedies                                                     36 
  Kaesong Industrial Complex                                         37 
  Foreign Investment                                                 39 
  Intellectual Property Rights                                       40 
  Labor Rights and Conditions                                        42 
  Government Procurement                                             42 
  Environment Protection                                             42 
  Transparency                                                       43 
  Institutional Provisions and Dispute Settlement                    43 
  Other Technical Provisions                                         43 
Next Steps, Implications, and the Emerging Debate                    44 
Appendix A: South Korea's restrictions on Imports of U.S. Beef       48 
Appendix B: South Korean Motor Vehicle Manufacturing                 50 
Appendix C: South Korea's Entry into the Visa Waiver Program         52 
 
List of Tables 
 
Table 1. Annual U.S.-South Korea Merchandise Trade, Selected Years    7 
Table 2. Asymmetrical Economic Interdependence (2006)                 7 

On June 30, 2007, United States Trade Representative Susan Schwab and South Korean Foreign Trade Minister Kim Hyung-chong signed the proposed U.S.-South Korean Free Trade Agreement (KORUS FTA) for their respective countries. (1) If approved, the KORUS FTA would be the largest FTA South Korea has signed to date and would be the second largest (next to the North American Free Trade Agreement) in which the United States currently participates. South Korea is the United States's seventh-largest trading partner and the KORUS FTA, if enacted, is expected to expand bilateral trade and investment flows according to some studies.

The final text of the proposed free trade agreement (FTA) covers a wide range of trade and investment issues and, therefore, could have wide economic implications for both the United States and South Korea. The subjects include ones on which the two countries achieved early agreement, such as the elimination on tariffs on trade in most manufactured goods and the liberalization in services trade. But the text also includes a number of very sensitive issues on which agreement was reached only during the final hours of negotiations--autos, agriculture, and trade remedies, among others.

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 White House has not indicated when it will send the draft implementing legislation to Congress. (The TPA sets no deadline for the President to do this.) In December 2007, South Korea's sitting president and president-elect said they hope to have the South Korean National Assembly consider, and pass, the agreement in February 2008.

The United States and South Korea entered into the KORUS FTA as a means to further solidify an already strong economic relationship by reducing barriers to trade and investment between them and to resolve long festering economic issues.

The United States specifically has sought increased access to South Korean markets for agricultural products, services, and foreign investment. Of importance to South Korea was change in U.S. trade remedy procedures which it considers to be discriminatory and U.S. recognition of products made in an industrial park in North Korea as eligible for preferential treatment under the KORUS FTA.

Supporters of the FTA argue that failure to approve the KORUS FTA would allow those opportunities to slip away. Some opponents of the KORUS FTA have argued that the agreement failed to go far enough in addressing South Korean trade barriers and would be a lost opportunity if approved in its current form. A congressionally mandated study by the United States International Trade Commission (USITC) concluded that investment and trade between the United States and South Korea would increase modestly as a result of the KORUS FTA. (2) This result is in line with other similar studies.

Many observers have argued that in addition to economic implications, the KORUS FTA would have diplomatic and security implications. For example, they have suggested that it would help to deepen the U.S.-South Korean alliance. 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. (3) South Korea subsequently has assisted U.S. deployments in other conflicts, most recently by deploying over 3,000 troops to play a non-combat role in Iraq. Some have also suggested that a KORUS FTA would help to solidify the U.S. presence in East Asia to counterbalance the increasing influence of China while failure to pass it could harm the alliance.

This report is designed to assist Members of the 110th Congress as they consider the costs and benefits of the KORUS FTA. It examines the provisions KORUS FTA 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 KORUS FTA in a Nutshell

The KORUS FTA was the product of much compromise. As negotiators from both countries stated, each country was able to accomplish some of its objectives, but neither side got everything it wanted. For example, South Korea made concessions in agriculture and services while the United States made concessions on rice and textiles. Yet, U.S. car manufacturers felt that South Korea did not go far enough in addressing barriers to auto imports and South Korea would have liked to have more U.S. concessions on trade remedies.

Some highlights of the results of the agreement are provided below. Background information on a more detailed examination of the agreement's provisions is provided in the main sections of this report.

Agriculture

Under the KORUS FTA's agricultural provisions, South Korea immediately would grant duty-free status to almost two-thirds of current U.S. agricultural exports. Tariffs and import quotas on most other agricultural goods would be phased out within 10 years, with the remaining commodities and products subject to provisions that phase out such protection by year 23. Seven U.S. products (skim and whole milk powders, evaporated milk, in-season oranges, potatoes for table use, honey, and identity-preserved soybeans for food use) would be subject to import quotas that slowly expand in perpetuity.

Much effort went into negotiating provisions covering three agricultural commodities of export interest to the United States. Under the KORUS FTA, South Korea agreed to eliminate its 40% tariff on beef muscle meats imported from the United States over a 15 year period. Also, South Korea would have the right to impose safeguard tariffs on a temporary basis in response to any potential surge in imports of U.S. beef meats above specified levels. However, negotiators did not reach a breakthrough on the separate but parallel issue of resolving differences on the terms of access for U.S. beef that would address Korea's human health concerns arising from the 2003 discovery of mad cow disease in the U.S. cattle herd. Though South Korea's President Roh promised President Bush that his country would open up its market at a reasonable level once an international animal health body presented its findings on the risk status of mad cow in the U.S. cattle herd, retail sales of U.S. boneless beef now permitted to enter are on hold. This status could change once South Korea finalizes its risk assessment and both countries revise an earlier agreement laying out the rules applicable to U.S. beef imports.

The KORUS FTA does not give U.S. rice and rice products any preferential access to South Korea's market. The agreement only requires South Korea to continue to abide by its multilateral trade commitments to increase rice imports. Access for U.S. citrus products was not settled until just before the talks concluded. With South Korea protecting its orange sector by a 50% tariff, negotiators compromised on a multi-part solution. A small duty free quota was created for "in season" U.S. navel oranges that would grow slowly in perpetuity. Sales during this September to February period in excess of this quota would face the high 50% tariff. For "out-of-season" oranges that pose less competition to South Korea's orange producing sector, the tariff would be phased out by year 7.

Automobiles

Trade in autos and autoparts proved to be among the most difficult issues tackled by U.S. and South Korean negotiators, pitting an increasingly competitive South Korean industry seeking to increase its market share in the United States and a U.S. industry that wants South Korea to eliminate policies and practices that seemingly discriminate against U.S. auto imports. The KORUS FTA would:

* eliminate most South Korean tariffs on U.S.-made motor vehicles. South Korea would immediately eliminate its 8% tariff on U.S.-built passenger cars and its 10% tariff on pickup trucks.

* reduce discriminatory effects of engine displacement taxes. South Korea would simplify its three-tier "Special Consumption Tax" and would also simplify its five-tier "Annual Vehicle Tax" both of which are based on engine displacement by making it a three-tier system.

* harmonize standards and create an"Automotive Working Group." The agreement provides for self-certification on safety and emissions standards for a limited number of U.S.-exported vehicles, and a commitment that South Korea will evaluate emissions using the methodology applied by the State of California. South Korea also agreed "not to adopt technical regulations that create unnecessary barriers to trade and to cooperate to harmonize standards."

* eliminate of U.S. tariffs and provide for "snapback" clause. The United States would immediately eliminate its 2.5% duty on gasoline-fueled passenger vehicles with engine displacement up to 3000 cc, would phase out over three years the 2.5% duty on South Korean imports with larger engine capacity or that are diesel-powered and would phase out over ten years the 25% duty on South Korean pickup trucks.

Other Key Provisions

The KORUS FTA would cover a broad range of other areas. According to the Office of the United States Trade Representative (USTR), most U.S.-South Korean trade in consumer and industrial products would become duty-free within three years after the agreement enters into …