Issues in Brief

A Look at KORUS FTA One Year In—Auto Trade Continues to be a Focal Point for Proponents and Critics

Vice President, General Counsel and Secretary
May 7, 2013

Introduction
March 15, 2013 was the first anniversary of the entry into force of the United States–Korea Free Trade Agreement (KORUS FTA), and the debate as to its potential impact that raged during its protracted negotiation, renegotiation, and ratification process endures. The U.S. and South Korean governments and free trade proponents say that the agreement, at this early date, is living up to its promise, with greater benefits likely upon further implementation. Critics continue their mantra that free trade agreements expand the U.S. trade deficit and thus cost the country jobs. Admittedly, the facts to date are mixed and need to be viewed in context.

Background
Negotiations for the KORUS FTA were announced in February 2006 and concluded in March 2007. It was first signed in June 2007, with a renegotiated version signed in December 2010. The agreement passed both houses of the U.S. Congress—with broad bipartisan support—in October 2011. It was ratified by the National Assembly of South Korea the following month. As noted, the agreement entered into effect on March 15, 2012.

Of particular importance to MAPI’s membership, the KORUS FTA’s provisions eliminate tariffs on some 95 percent of each nation’s trade in goods with one another within five years. The agreement represents the United States’ first trade pact with a major Asian economy and its largest such deal since the North American Free Trade Agreement in 1991. For Korea, it was the second-largest agreement it had entered into, behind the pact it signed with the European Union that entered into force in July 2011.

One of the main areas of contention that led to renegotiation of the agreement concerned the automotive trade provisions. The 2007 agreement would have immediately eliminated U.S. tariffs on an estimated 90 percent of imports of South Korean autos, with the remaining tariffs phased out by the third year of implementation. The 2011 agreement maintains the 2.5 percent U.S. tariff until the fifth year of the agreement. South Korea immediately cut its tariff on U.S. auto imports in half (from 8 percent to 4 percent) and agreed to fully eliminate it in the fifth year.

The 2007 agreement would have required the United States to start reducing its 25 percent tariff on imports of South Korean light trucks immediately and phase it out by the agreement’s 10th year. The 2011 agreement allows the United States to maintain that tariff until the 8th year and then phase it out by the 10th year. The 2011 agreement holds the Koreans to their originally negotiated commitment to eliminate their 10 percent tariff on U.S. trucks immediately.

Lastly concerning auto tariffs, under the 2007 agreement, both countries would have eliminated tariffs on imports of electric cars and plug-in hybrids by the 10th year of implementation. Under the 2011 agreement, South Korea will immediately reduce its tariff on those vehicles from 8 percent to 4 percent, and both countries will phase out these tariffs by the fifth year.

The Koreans made some concessions on issues that were seen as non-tariff barriers to auto trade involving safety and environmental (i.e., fuel economy and emissions) standards. The renegotiations also resulted in specific safeguard measures to protect against “surges” of Korean vehicles that harm the U.S. domestic auto industry after tariff reductions begin. Such a safeguard action before the U.S. International Trade Commission (USITC) can be initiated by the United Auto Workers union, the domestic auto industry, or the U.S. government. The remedy for a finding of injury is a “snapback” to the original tariff levels in place prior to implementation of the FTA. This remedy can be used more than once and is available for a period of up to 10 years after the concerned tariffs are eliminated.

Where the Parties Stand Now
Given the contentious focus on auto trade in the KORUS FTA renegotiations, it is not surprising that both proponents and critics of the agreement continue to examine this issue. The U.S. government touts the fact that exports of U.S. autos to South Korea have risen in the agreement’s first year. While U.S. manufacturing exports to Korea grew from $34.3 billion in 2011 to $34.8 billion in 2012, exports of transportation equipment enjoyed a significant rise of nearly $1 billion. That latter increase is a 24 percent boost to $5.0 billion. Sales of “Detroit 3” cars within Korea grew 18 percent, and overall U.S. passenger vehicle exports rose 48 percent in terms of quantity. Also experiencing significant increases were U.S. exports to Korea of chemicals and aircraft and parts.

Critics scoff at these results. On March 14, 2013, Leo W. Gerard, international president of the United Steelworkers, released a statement selectively dissecting the increase in U.S. auto exports to Korea. He said that according to Korean statistics, the registration of Ford vehicles in Korea grew 23 percent from 2011 to 2012—a difference of 942 vehicles—from 4,184 to 5,126. During the same period, he said South Korean companies sold more than 1.26 million cars in the United States. Imports of Korean passenger vehicles into the United States totaled $10.9 billion in 2012, up from $9 billion in 2011.

More generally, critics of the KORUS FTA point out that U.S. goods exports to Korea have dropped 9 percent (a $3.2 billion decrease) since the agreement took effect, when compared with the same months of the year prior to implementation. U.S. imports from Korea rose 2 percent (an $800 million increase). The U.S. trade deficit with Korea has grown by $4 billion since the FTA went into effect. January data from the USITC show that this trade deficit was up significantly in January 2013 over the preceding month—the January number represented the largest recorded monthly U.S. trade deficit with Korea. While U.S. goods exports from all countries grew by 3 percent in January, the nation’s imports from Korea were up 18 percent.

The Office of the United States Trade Representative has requested that the USITC prepare a detailed report on the impact of the KORUS FTA on U.S. industry by May 1, 2013. That report will study ways to maximize the benefits of that agreement in the United States.

Concluding Observations
Clearly, it is too soon to make any conclusive observations about the benefits that will inure to the parties to the KORUS FTA. A one-year or one-month snapshot of the agreement can be particularly misleading, especially since tariffs are still being phased out. It takes time for firms to beef up their sales infrastructure in the country, and large capital goods flows have a long lead time. U.S. manufacturers are selling big-ticket items to Korea that will not ship—and thus factor into the trade balance equation—for 18 months or longer.

As all of the provisions of the trade agreement come into effect, there is likely to be a significant benefit to U.S. exporters. The USITC estimates that when the agreement is fully implemented, Korean tariff cuts alone should boost U.S. exports to the country by $10 billion above what they would have been without the agreement. It should be remembered that in the years just prior to the KORUS FTA, U.S. trade in goods with Korea was in a deficit position; when factoring in trade in services, however, the picture becomes more balanced.

Moreover, when judging the benefits of the agreement, it is important to not ignore that imports from Korea are a critical means of controlling the cost of products for American consumers and improving the quality of their choices through increased competition. The high-quality inputs imported by U.S. manufacturers help them become or remain highly competitive in both domestic and foreign markets, thereby creating and protecting U.S. jobs.

This year also marks the 60th anniversary of the U.S.–Republic of Korea security alliance, and the KORUS FTA goes a long way toward cementing that important relationship. As such, this trade agreement is critical for long-term national security and foreign policy reasons as well.

As mentioned earlier, this pact is the first U.S. FTA with a North Asian partner. While every free trade area negotiation has its own dynamic and presents unique issues relevant to the participants, the KORUS FTA can serve as a useful model for trade agreements for the rest of the region. It underscores the United States’ commitment to, and engagement in, the Asia-Pacific region. In that sense, the KORUS FTA sends a positive signal to the countries involved with the United States in the Trans-Pacific Partnership (TPP) negotiations.

While not currently involved in the TPP negotiations, the Korean government has said that it is carefully monitoring those developments. Through the KORUS FTA and its agreement with the EU, Korea has established itself as a key player in the trade liberalization process in the Asia-Pacific region. Looking forward, it is involved in trilateral FTA negotiations with China and Japan. Another endeavor is the ambitious so-called ASEAN Regional Comprehensive Economic Partnership talks involving the 10 ASEAN members and Australia, China, India, Japan, New Zealand, and South Korea. As such, Korea can play a key role in terms of helping to ensure appropriate interoperability between overlapping free trade agreements. While each agreement will have its unique, differing market access rules and commercial rules and disciplines, Korea is in a position to see that mechanisms are in place in the various regimes to coordinate border procedures such as customs and transportation and communications services near ports to ensure efficient supply chain operations throughout the region. In these circumstances, Korea’s experience in the KORUS FTA may well be an important step in the consolidation and deepening of economic relations throughout the Asia-Pacific region.


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