Obama Sours on U.S.-Korea Free-Trade Deal

Among several controversial free-trade agreements left over from the Bush Administration for Ron Kirk, President Obama's choice to be the new U.S. Trade Representative, is a deal the U.S. negotiated with South Korea almost two years ago. When Washington and Seoul signed the U.S.-Korea Free Trade Agreement in 2007, officials from both governments trumpeted the pact as a breakthrough that would lead to an economic bonanza. But the free-trade deal, which requires ratification by lawmakers in both countries to come into force, didn't win congressional approval before President Bush left office.

Explaining Obama's trade policy at his Senate confirmation hearing on Mar. 9, Kirk, the former mayor of Dallas, made clear the new Administration isn't keen on lending the agreement much support. The deal, Kirk told senators, "just simply isn't fair." Kirk said Washington was "prepared to step away" from the U.S.-Korea trade deal—the biggest for the U.S. since NAFTA, the North American Free Trade Agreement, during the Clinton Administration—unless the Koreans agree to make changes.

Korean officials immediately expressed opposition to renegotiating the agreement, which Obama supporters have criticized for failing to address an imbalance between Korean automakers and the U.S. auto industry. The Koreans have managed to do well in the U.S. market despite the global recession; last year Korean automakers including Hyundai and Kia sold 700,000 cars in the U.S. General Motor's (GM) Korea subsidiary, GM Daewoo Auto & Technology, ships well over 100,000 Korea-built cars to the U.S. annually. Meanwhile GM, Ford (F), and Chrysler combined managed to sell only about 7,000 vehicles in Korea, according to the Korea Automotive Importers & Distributors Assn. Democrats in Congress have said they felt the Bush Administration didn't fight as hard for concessions for cars as it did for beef and agricultural products.

Open Market Fails to Benefit U.S. Automakers

Yet economists and industry officials in Seoul point out there's no way any free-trade agreement could rectify the gap in the foreseeable future. "The only measure I can think of to stop the imbalance is imposing quotas, which are not allowed in a free-trade agreement," says Lee Hang Koo, an auto specialist at the Korea Institute for Industrial Economics & Trade, a government-funded think tank in Seoul. "The Americans simply don't offer attractive products."

Indeed, the opening this decade of Korea's car market largely benefited European and Japanese makers. While the share of imported cars rose to more than 6% of some 960,000 sedans sold in Korea last year, up from 0.7% in 2001, European and Japanese brands account for nearly 90% of the imports. Although Korea has emerged as one of the world's top five markets for BMW's flagship 7 Series, General Motors sold only 577 Cadillac sedans to Korean drivers last year.

Under the terms of the free-trade deal forged by the Bush team, South Korea would remove its 8% tariff on all U.S. vehicles and parts immediately after legislators of the two countries approved the accord. To help address U.S. concerns about nontariff barriers, Seoul also agreed to change its auto tax structure, which calls for higher rates for vehicles with larger engines. In return, the U.S. agreed to remove its 2.5% import tax for Korean cars with 3-liter or smaller engines, as well as for car parts. The tariff for cars with bigger engines would be removed over three years, while a 25% U.S. tariff for pickup trucks would be gradually phased out over 10 years.

Pressure from a Potential EU Deal

During her visit to Korea last month, part of an Asian tour that was her first overseas trip as Secretary of State, Hillary Clinton also expressed the need for Korea to renegotiate provisions of the pact covering trade in autos and other manufactured goods. Clinton argued that ratification of the agreement in its present form would mean Washington would lose its remaining leverage to "counteract" Korea's nontariff barriers. She added that the Obama Administration will work with the Koreans if they would be willing to renegotiate the provisions.

The American deal isn't the only game in town, though. The American Chamber of Commerce in Korea has supported the free-trade agreement and AmCham Korea President Tami Overby said last month a separate free-trade accord being negotiated between Korea and Europe may provide an impetus for the U.S.-Korean trade deal. "Should the EU-Korea FTA get ratified first, that is wonderful pressure for us to use for our members of Congress to do their job to ensure our companies are not left behind," said Overby.

Still, many Korean economists aren't as optimistic. They expect any ratification of the U.S.-Korean deal will have to wait until after a U.S. economic recovery. That's because duty-free access isn't likely to boost trade much unless consumers and companies start spending again. Says Han Sangwan, senior economist at Hyundai Research Institute, a private think tank: "With Detroit in serious trouble and Obama giving a high priority to keeping U.S. jobs, it won't be politically [palatable] for the Democrats to approve a free-trade deal."

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