FTA boosts South Korean economy - Will you benefit?

April 4, 2007

South Korea’s economy will receive a boost from the free trade agreement (FTA) signed with the U.S. on April 1. 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. (See details of the agreement “U.S. and Korea Conclude Historic Trade Agreement”; Summary of Korea-US free trade agreement.)

This is the largest agreement since NAFTA. Must now be ratified by both countries’ legislatures. Trade with South Korea in 2006 was $75 billion, and could increase to $100 billion within a few years.

What this boost to South Korea’s economy means:

Expect to see lower prices on textiles, small Korean cars, and consumer electronics imported into the U.S. It will also create jobs for exporters to Korea, including auto and agri-businesss. It could be blocked from ratification in Congress, which wants South Korea to immediately lift the restriction on beef imports. South Korea wants to lift the restriction slowly over 15 years, since it is still concerned about the case of mad cow disease discovered in U.S. herds in 2003. Congress is also opposed because the agreement doesn’t remove subsidies to Korean rice farmers.

This agreement could lead to more bilateral free trade agreements throughout Asia. U.S. and Malaysia are next. (See “Profit from increased U.S. trade with Malaysia”). In fact, Japan signed an FTA with Thailand the next day, and is discussing FTA's with both the U.S and South Korea. The U.S. agreement with Thailand, on the other hand, fell apart after last year’s military coup. (See "Thai coup ousts Thaksin" )

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%

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

Source: CIA Factbook; The Office of the U.S. Trade Representative; International Herald Tribune, “U.S. and South Korea reach free trade agreement”, April 2, 2007.