S. Korea / U.S. trade agreement signed -- But will it stick?

July 11, 2007

South Korea signed a new Free Trade Agreement (FTA) with the U.S. on June 30, 2007. Although this agreement was negotiated in April, the U.S. Congress insisted that stronger labor and environmental amendments be put in place.

The agreement will eliminate 94% of tariffs between the two countries, especially benefiting the auto, textile and service industries. It will immediately eliminate tariffs on $1 billion worth of agriculture exports to South Korea.

This is the largest agreement since NAFTA. Trade with South Korea in 2006 was $75 billion, and could increase to $100 billion within a few years.

What the South Korean FTA means:

The agreement may not obtain Congressional approval. It is getting caught up in Presidential election politics, as candidates say that the elimination of tariffs on autos will help the Korean auto industry more than the American. Last year, Korea exported 700,000 cars into the U.S., while only importing 5,000 U.S. cars. The beef industry is opposing the agreement unless South Korea accepts all beef imports, including those from cows older than 30 months and including bones. Korea imposed those restrictions after mad cow disease was found in U.S. beef in 2003.

This is last FTA to be signed under the President’s Fast-Track Trade Promotion Authority, which is not going to be renewed by the Democratic Congress. The protectionism in Congress is causing the U.S. to fall behind other countries’ in signing bilateral trade agreements. With the failure of the Doha round of the WTO, the days of multi-lateral trade agreements are over. With it goes U.S. and European dominance in that organization. Now the U.S. must negotiate agreements country-by-country. Unlike China and other non-democratic countries, U.S. law requires that each agreement obtain Congressional approval. This will slow down and perhaps even block agreements, since many Congressmen come from states with large exporters who want protection from free trade.

The U.S. also concluded free trade deals with Colombia, Panama and Peru before expiration of the Fast-Track authority.

Background on South Korea (2006)

Democratic government successfullly manages a solid economy based on consumer electronics, automotive and agriculture.

• 48 billion people, (smaller than Italy but larger than Spain)
• GDP - $1.18 trillion, larger than Canada
• GDP growth rate - 4.8%
• GDP per capita - $24,200 (better than Greece)
• Unemployment rate - 3.3%
• Inflation - 2.2%

Source: CIA Factbook; The Office of the U.S. Trade Representative; Business Week, “U.S. urges S. Korea to accept FTA revisions,” 6/22/07; The China Post, “U,S., S. Korea FTA faces tough fight", July 7, 2007; “U.S., S. Korea Sign FTA,” July 1, 2007; BBC News,"U.S.- S. Korea Trade Pact Signed,” July 1, 2007.

Action steps:

Check with your financial planner to make sure your emerging markets fund includes South Korean companies.

Related Articles:

FTA boosts Soth Korean economy, 4/4/07
ASEAN economic summit, 6/16/07
Inflation targeting,5/23/07

Profit from increased U.S. trade with Malaysia, 3/11/07

Thai coup ousts Thaksin,9/20/06

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