The Peninsula

Three Years of the Implementation of the KORUS FTA: A Korean View

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

By Taeho Bark

The United States (U.S.) used to be always the largest export market for the Korean products during 1970s and 1980s. The proportion of Korea’s exports to the U.S. once reached almost 50%. However, since the mid-1990s, it has continuously declined and recently went down to the 10% level. On the other hand, Korea’s exports to China have rapidly increased and China has become Korea’s number one trading partner since 2005. Moreover, the market share of the Korean products in the U.S. has decreased. This reflects that Korean products are losing their competitiveness against products from Japan, China, South East Asian countries and so on in the U.S. market, the most advanced and largest in the world. Some trade experts in Korea worry that losing competitiveness in the U.S. market could become a fundamental obstacle to Korea’s future economic growth. The Korean government probably had thought that it would be important to reverse the deceasing trend of Korea’s export to the U.S. market. This seems to be one of the main motivations for the Korean government to decide to pursue the KORUS FTA ten years ago.

March 15^th marks the third anniversary of the implementation of the KORUS FTA. The bilateral trade between Korea and the U.S. has increased by 1.1% in 2012, 1.7% in 2013, and 11.6% in 2014. The numbers do not seem to represent a large leap, but considering the recent world economic recession, it is worth mentioning that the KORUS FTA has been positively impacting Korea-U.S. trade relations. Korea’s exports to the U.S. have been constantly increasing; especially in 2014, when they increased by 13.3%. Exports from the U.S., however, decreased both in 2012 and 2013 but increased by 9.1% in 2014. The positive trade performance of Korea seems to have created some concerns in the U.S. that the KORUS FTA is working only in favor of Korea.

However, if we take a closer look, any of these concerns can be dispelled. From the Korean side, exports of those products that have been benefited from tariff cuts or eliminations through the KORUS FTA have increased without exception. However, exports of products such as telephones for wireless networks and semiconductors, which were originally subjected to zero tariffs in the U.S., have not expanded much. In the case of the U.S., exports of agricultural and pharmaceutical products to Korea have increased by benefitting from the KORUS FTA. At the same time, the U.S. exports of products that were already subjected to zero tariffs in Korea, such as semiconductors, aircrafts and parts thereof, have actually declined. And so, it is those products that have been profited from the KORUS FTA that have shown better trade performances. This is convincing evidence that the KORUS FTA has been working properly for both countries.

Furthermore, trade between Korea and the U.S. is influenced by many other factors as well. Especially, the macroeconomic situation significantly influences each country’s trade performance. The U.S. is concerned about its increasing trade deficit against Korea; but this can be a representation of strong recovery of the U.S. economy. On the other hand, a little expansion of Korea’s imports from the U.S. may reflect the mere fact that the Korean economy is recovering slowly. Meanwhile, in services trade, the U.S. is achieving large trade surpluses against Korea. If trade in goods and services is combined, the trade imbalance between the two countries is not serious at all.

There have been several issues raised in the process of implementing the KORUS FTA. The U.S. pointed out the Korean customs authorities are excessively strict, regarding their proof of origin system as applied to American automobiles and some processed foods like orange juice. Washington further complained that the Korean government’s policy on gas emissions for the purpose of environmental protection is too burdensome. Korea, for its part, drew the United States’ attention to its insufficient progress on the issues of outward processing zones including the Kaesong Industrial Complex as well as the mutual recognition of professional services providers. Fortunately, such issues as mentioned above are being effectively discussed in the appropriate committees and working groups which were established when the two governments started the implementation of the KORUS FTA.

Lastly, but not least, both Seoul and Washington should pay attention to the Korea-China FTA which is nearing official conclusion. If Korea adds China to its FTA network, Korea will become one of the few countries which have FTAs simultaneously with the U.S., the European Union and China. If American firms set up manufacturing facilities or R&D centers in Korea, they can export their products to the mainland China using the Korea-China FTA. By doing so, they can substantially reduce transportation costs and customs duties. Now is the time for Korean and American entrepreneurs to work together to penetrate into the rapidly growing China market.

It is too early to make a comprehensive assessment of the performance of the KORUS FTA after only three years. Nevertheless, the trade relations between the two parties for last three years remain solid and are expected to expand in the future. We must understand that the overall performance of an FTA is critically dependent on how firms utilize the opportunities provided by the FTA. In this context, we would like to see more firms from both Korea and the U.S., particularly small and medium-sized enterprises, utilizing the KORUS FTA. We would also like to see closer collaborations among the business communities of the two countries.

Taeho Bark is a Professor in the Graduate School of International Studies at Seoul National University. He previously served as the Minister for Trade for the Republic of Korea from 2011-2013. The views expressed here are the authors alone.

Photo from Chris Humphrey’s photostream on flickr Creative Commons.