The Peninsula

Third Anniversary of the KORUS FTA: What Does the KORUS FTA Mean for Services?

This is the second part in a three part series on the U.S.-Korea Free Trade Agreement. The first part can be found here and the third part here.

By Peter Allgeier

Free trade agreements such as the KORUS FTA certainly aim to expand bilateral trade flows, and that usually is where the public and politicians devote the most attention. But the greater contribution of such agreements is in improving the global competitiveness of each partner. That is especially true today, in the world of the Internet, global value chains, and the integration of services and manufacturing.

In this regard, the KORUS FTA is the world’s most modern free trade agreement. It was negotiated in the context of two revolutions: the Services Revolution and the Digital Revolution. These are two symbiotic revolutions, and the KORUS FTA is helping both the United States and the Republic of Korea to position themselves to take maximum advantage of those two revolutions for the prosperity of our citizens.

The Services Revolution is having as dramatic an effect on our work lives and daily lives as the Industrial Revolution of 100-150 years ago. Services account for the largest share of GDP (70 percent of world GDP), the world’s largest employer (3.2 billion jobs), and the source of most job growth.  The numbers are impressive, but the revolution is more than just numbers of workers or share of GDP. The most important thing to recognize is that all businesses—small and large—and all segments of the economy, including agriculture, manufacturing, and energy, depend on services to be successful.  Services are the enablers of all other economic activities.

The integration of services with manufacturing and agriculture is what produces global value chains, in which enterprises and countries specialize in tasks rather than goods. Manufacturing jobs depend on services.  For example, GE, Hyundai, Samsung, and Boeing depend on services workers in their own companies or from outside service suppliers—in accounting, finance, product design, distribution and logistics, advertising, computer-related services, telecommunications, and express delivery, just to name a few.

Recently the WTO and OECD, by looking more closely at the services value added in manufactured goods, determined that the share of services in international trade really is 45 percent, rather than 23 percent, as previously reported. Greater than either manufacturing or farming.

At the center of the services revolution is the Digital Revolution, of which the Internet is emblematic.  The Internet is the Great Silk Road of the 21^st century. Just as the Great Silk Road provided the transmission route for trade among Asia, Europe and North Africa during the 6^th thru 14^th centuries, the Internet today plays that role for the entire globe. In this digital age, companies in international markets constantly move data digitally across the globe for their own internal operations and in serving their customers. While this may be obvious in the case of insurance firms processing claims or accounting firms verifying and reviewing audits, it is actually essential for any international business. For example, think of express delivery companies tracking packages across the globe or an airline company remotely monitoring its engines’ efficiency while the planes are in flight. Retailers have to manage their worldwide procurement and inventory. Health professionals seek second opinions from specialists across the globe.

This has enabled services to be delivered digitally across borders to a degree that was unimaginable twenty years ago.  Keep in mind that Amazon.com was only founded in 1994, and Facebook was founded ten years later. None of this was contemplated twenty years ago in the GATS (General Agreement on Trade in Services). The international rules and provisions governing trade in services have not kept up with these developments.  They urgently needed to be updated. The world has changed radically in the intervening years as a result of technological advances, global data flows, innovative business practices, and the widespread use of the Internet by everyone.

The KORUS FTA has taken a big step in that direction. Under the KORUS FTA barriers in services trade and foreign investment are being reduced or completely eliminated, especially in financial services, telecommunications, and professional services.As a result of these changes, U.S. services exports to Korea in 2014 exceeded $20 billion, an increase of nearly 25 percent since 2011.In addition, the KORUS FTA requires both parties to:

• Provide national treatment and most favored nation (MFN) treatment to services imports from one another;
• Promote transparency in the development and implementation of regulations in services;
• Prohibit limits on market access, such as limits on the number of service providers in a given line of business or on the total value of services provided; and
• Prohibit restrictions on the type of business entity through which a foreign service firm provides its services (e.g., subsidiary, branch, or joint venture).

In addition to the advances in the KORUS FTA, Korea and the United States now are leading the way in the ongoing negotiations of the Trade in Services Agreement (TiSA) in Geneva in developing the rules for trade in services for the next decades.

Along with their commitments on market access for services in the KORUS FTA, they are setting the stage for their global competitiveness in the coming years. This is at least as important a benefit from the KORUS FTA as the changes in bilateral trade volumes.

Peter Allgeier is the President of the Coalition for Services Industries. The views expressed here are the author’s alone.

Photo from CLUC’s photostream on flickr Creative Commons.