The KOR/US FTA : Its Implications and Challenges Ahead

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Jin Kyo Suh
Senior Research Fellow
Korea Institute for International Economic Policy

The Free Trade Agreement between the Republic of Korea and the United States of America, often abbreviated as the KORUS FTA, officially went into effect on March 15, 2012. This was a long four years and nine months after the conclusion of the 14-month FTA negotiations on April 2, 2007, which had commenced in June 2006 during the administration of former South Korean President Roh Moo-hyun.

In fact, the KORUS FTA as it is today is a result of former President Roh’s agonized and prudent decision-making. The South Korean economy is heavily dependent on trade, making free trade agreements essential to the country’s survival amid the endless competition in the global arena. For these reasons, he saw the positive side of a free trade agreement with the US and wanted to leverage it to create jobs and transform South Korea into a global trade powerhouse. It is for these reasons that his administration officials sat at the table with their US counterparts to hammer out an agreement on an FTA.
The situation has changed significantly since then. Some politicians, including even those who took up important positions in former President Roh’s administration and loudly pressed for the ratification of the FTA as soon as possible now assert that the KORUS FTA should be scrapped. No less lamentable is seeing them back-peddling as doing so appears to be a thinly veiled attempt to win more votes in the forthcoming general elections.

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Thanks to the effectuation of the KORUS FTA, South Korea now stands to compete on much better footing in the US, the largest single-country market. South Korea’s exports to the US of such products as automobiles and automobile parts, fabric, and electronic and electrical products, where the country has traditionally been a strong exporter, are expectedto increase sharply. Both big and small companies will benefit. The KORUS FTA will give more opportunities to many small and medium companies in South Korea, which have been struggling in the US market due to low name recognition and brand awareness despite their advanced technology and high quality. Two other significant benefits of the FTA are of course consumer welfare gains and job creation. Notably, the consumer prices of daily necessities will decline, enabling shoppers to buy more with less money. Some eleven government-run research institutes expect the KORUS FTA to push up the productivity of South Korean industry, leading to dramatic increases in production and exports. Specifically, consumer benefits will jump by about KRW 35 trillion and around 350,000 new jobs will be added in the long run. The FTA will eventually help the country more easily weather the global economic crisis, fuel economic growth by driving the country’s trade volume from one trillion dollars to two trillion dollars, and catapult it to powerhouse status in international trade. This is what the entry into force of the KORUS FTA means to the South Koreans.

To be sure, the FTA will not be uniformly beneficial. All such agreements necessarily entail challenges. There are concerns that the FTA will hit the agricultural and fisheries sectors and some manufacturing industries where South Korea is not particularly competitive, as a result of increases in imports from the US. To deal with these concerns, the South Korean government devised a direct payment scheme to compensate farmers and fishermen for the losses they suffer. It is linked to the average prices of domestically produced agricultural and fisheries products. If the average prices fall below 90 percent of the pre-FTA average due to increases in agricultural and fisheries imports, farmers and fishermen will receive compensation equivalent to 90 percent of the decline. The government has also established a number of support measures in order to make the agricultural and fisheriesindustries more competitive with a wider range of income sources. About KRW 24 trillion has been earmarked for these sectors until 2017. A similar program called the Trade Adjustment Assistant Program is in place for manufacturing. If a company’s sales for a six month period fall five percent or more year-on-year, it will become eligible for special loan and management consulting support. Moreover, those who lose jobs {due to the FTA} will be eligible for job-seeking benefits, vocational training, and job placement service.

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The effectuation of the KORUS FTA has expanded the realm of free competition for South Korea to 60 percent of the globe. Now is the time for the South Korean government, businesses, politicians, and the general public to combine their wisdom to maximize its benefits of the FTA while minimizing its negative impact. The expected benefits of the FTA will not be realized without any efforts. Businesses need to redouble their efforts in order to increase productivity through research and development and also through constructive competition so as to augment their share in the US market. Consumers should pursue more rational purchases. The government should improve institutions that hamper fair competition so that the benefits of the FTA will be more evenly shared by all Koreans. Politicians are no exception, especially as the South Korean public will not merely stand by and put up with the antics of their lawmakers any longer.

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