U.S.-South Korea free-trade pact stalls over politics

The U.S. could use a boost in exports, some analysts say, but a deal with South Korea isn't likely any time soon.
By Don Lee

November 28, 2009

Reporting from Washington

At a time when the United States desperately needs to boost exports and create jobs, America's free-trade pact with South Korea offers the promise of doing both, say many analysts and businesses especially on the West Coast.

But the long-stalled agreement isn't likely to get ratified any time soon -- despite renewed hopes from President Obama's trip to Asia this month and the threat that South Korea's pending trade deal with the European Union could soon put U.S. exporters at a competitive disadvantage.

In Seoul, Obama pledged to move the U.S.-South Korea agreement forward, but he offered no timetable for when that might happen. And although South Korean President Lee Myung-bak expressed a willingness to reopen talks on granting the U.S. wider access to his country's auto market, a crucial sticking point, Korean officials have since backed away. "We are not going to offer anything to the U.S. side," said a South Korean Embassy official in Washington.

Strong opposition to the accord in the U.S. has come from organized labor. AFL-CIO policy director Thea Lee contends that the deal will end up costing American jobs and that there aren't enough protections for South Korean workers' rights. Ford Motor Co. has been a vocal critic as well. But what's really holding up the agreement is politics.

In Michigan, Ohio and other big industrial states, politicians face a strong backlash against trade accords that are seen as symbols of the problems afflicting the U.S. manufacturing sector. For Obama, it's all the more difficult to push harder on the South Korea agreement given his tough talk on trade during the campaign trail -- he promised to reopen the North American Free Trade Agreement -- and the risks of alienating labor unions and Democratic lawmakers while he has unfinished business trying to overhaul healthcare.

Obama has come under fire from abroad and at home for protectionist moves such as slapping heavy tariffs on cheap Chinese tires, even though trade has not been a major part of his agenda in his first year as president. Besides the South Korea trade accord, which was signed in June 2007, similar pacts with Panama and Colombia have languished as well.

At the same time, Obama administration officials have repeatedly stated that the president wants to build a more export-oriented economy in the wake of the financial crisis, and a senior aide said Obama's trip to Asia was aimed in good part at doing just that.

But Obama faces an uphill challenge within his own party.

"I don't know why the president would want to continue [George W.] Bush's trade policy," said Sen. Sherrod Brown (D-Ohio), calling for a fresh start on South Korea-U.S. trade talks.

"Look at what's happened with the numbers," he said, referring to America's persistently large trade deficit, which was running at $360 billion through September of this year. "Our trade policy hasn't worked, and we ought to try something else."

South Korea is the United States' seventh-largest trading partner, with Americans importing $48.1 billion and exporting $34.7 billion to South Korea last year. That amounted to a $13.4-billion shortfall.

The agreement would probably boost U.S. exports to South Korea by $10 billion to $11 billion, particularly of farm goods, machinery and electronics; Korean shipments of textiles, shoes and possibly cars, among other products, would increase by $6 billion to $7 billion, according to projections by the U.S. International Trade Commission.

U.S. Trade Representative Ron Kirk calls the ITC analysis "the gold standard for weighing the economic benefits and costs of an agreement." Yet Kirk also told the U.S.-Korea Business Council this month that the administration was undertaking a fresh review of the pact and gathering public comments, even though the nearly 400-page ITC report contained views from dozens of parties in varying industries.

The report foresees small job gains in the meat industry and some other sectors, while losses are expected to be negligible, in part because South Korea's import growth would probably displace shipments from other foreign suppliers.

On cars, Kirk said: "Our market is open to Korean autos. All we are asking for is for our own auto companies to be able to compete on a level playing field in the Korean market."

General Motors Co., Ford and Chrysler shipped about 7,000 vehicles to South Korea last year, a little more than 1% of the number of cars that Hyundai Motor Co. and Kia Motors Corp. sent to the U.S. That difference accounts for most of the U.S. trade gap with South Korea.

South Korea's car market has a legacy of being closed, but the agreement would require Seoul to drop its 8% auto tariff immediately. Meanwhile, the 2.5% duty on small-engine Korean cars to the U.S. would disappear right away, and the 25% levy on pickup trucks would phase out over 10 years.

Critics said the accord didn't adequately address South Korea's nontariff barriers. But many doubt that American automakers could make big gains anyway. U.S. car brands don't rate highly among Korean consumers. Under similar market conditions, Japanese cars outsell American models in South Korea by 3 to 1, and German automakers have a nearly 4-to-1 edge over U.S. rivals.

"It's a bit exaggerated to say the U.S. could export a lot of cars even if the market was completely open and you had no restriction," said Jeffrey Schott, a trade policy expert at the Peterson Institute for International Economics in Washington.

Similarly, he doesn't see the elimination of the 2.5% tariff in the U.S. as making a whole lot of difference for Korean automakers. Hyundai and Kia have a combined market share in the U.S. of about 7% through October of this year.

"Overall, the U.S. economy is a big winner from the U.S.-Korea trade agreement," Schott said, although he warned that time was running out. He expects the South Korea-EU pact to take effect next year, and "there would be trade diversion."

Joseph Rollo, head of the international department at the Wine Institute in San Francisco, remembers how California's share of South Korea's wine market slipped after Seoul struck a free-trade deal with Chile a few years ago. It's almost certain to fall further once the 15% tariff on foreign wines is lifted for Europe, he said.

"We would like to see it get through," Rollo said of the South Korea-U.S. agreement. But after more than two years in limbo, he said, he isn't holding his breath.

don.lee@latimes.com

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