The Odd Bargains Behind Trade Deals

The odd bargains behind the pacts with Korea, Colombia, and Panama

When Congress voted this month to approve long-lingering free-trade agreements with South Korea, Colombia, and Panama, perhaps no one in Washington was more relieved than Jay L. Eizenstat. As customs affairs director for the Office of the U.S. Trade Representative through 2008, Eizenstat spent years negotiating the thorny $10.9 billion Korea deal—by far the largest of the three—which had stalled again and again over a thousand picky details. How much of the sugar in a packet of Hershey’s instant hot cocoa must be from American growers to qualify as a U.S.-made product? What percentage of the fake leather on a New Balance sneaker has to be manufactured in the U.S. for the whole shoe to be considered American-made? What would it take for Caterpillar earth mover engines to meet noise restrictions in Seoul? “You just sort of get used to it,” says Eizenstat, now a lawyer with Miller & Chevalier in Washington, of the endless bickering and arcane jargon of trade negotiations. “It’s a discipline that not a lot of people know about.”

The three pacts were largely wrapped up in 2007 before languishing in Congress as health-care reform, the debt ceiling debacle, and other political skirmishes took priority in Washington. The expectation is that they will open new markets to American businesses. The Korea deal will make it simpler for American insurers and banks to set up shop in Seoul. It will open Korean grocery stores to American beef exports that were shunned after a 2003 mad cow scare and remove tariffs on U.S.-made cars that were as high as 8 percent. The biggest winners in the Colombia and Panama Free Trade Agreements are American manufacturers of farm and construction equipment, which get immediate duty-free access to both markets, and exporters of beef, corn, and soy products.

Together, the deals are expected to bring in $13 billion in annual export revenues on top of last year’s $56.9 billion, a relatively modest amount as trade agreements go; Washington says the North American Free Trade Agreement resulted in $412 billion in export revenue for U.S. companies in 2010. Yet that didn’t make the pacts easier to negotiate. Eizenstat and his fellow negotiators faced a barrage of lobbying from U.S. companies and trade groups that wanted specific language written into the agreements to protect their products or give them an edge over their rivals.

The smallest tweak to the wording in some buried passage can mean the difference between tens of millions of dollars in sales or being shut out of a foreign market altogether. In the hyper-legalistic locution of such negotiations, some of the stickiest discussions revolved around “rules of origin.” The job of a trade negotiator is to get American-made goods onto the store shelves of a foreign trading partner at a competitive price, usually by eliminating high tariffs on U.S. goods. But in an era of global markets, it isn’t always easy to determine what qualifies as American-made.

Take the humble candy bar. Sugar growers lobbied trade officials for a rule that would stop U.S. candy makers from getting around U.S. import quotas and using too much imported sugar in their products. Eizenstat says that was a deal breaker for big chocolatiers such as Hershey’s and Mars, which buy ingredients, including cheaper sugar, from all over the world. In the end, the negotiators devised a compromise: At least 65 percent of the sugar in products containing cocoa powder must be from U.S. growers to be considered American-made. Otherwise tariffs will apply, which could make the product prohibitively expensive. But no such restrictions apply on sugar that’s used to make candy bars. In other words, a packet of instant hot chocolate that contains 64 percent U.S.-grown sugar is not considered American under the deal. But a chocolate bar made with 100 percent foreign sugar is.

The trade agreements are full of compromises like this that don’t make much sense when viewed outside the curious internal logic of the negotiations, which isn’t about making sense but doing what it takes to find an outcome everyone can live with. Some of the most difficult bargaining had to do with opening the notoriously closed Korean market to U.S. automobiles.

For decades, Korea went out of its way to make it a hassle for its citizens to buy foreign-made vehicles. The government taxed them heavily and audited Koreans who bought them. It restricted the square footage of dealerships, enforced fuel efficiency standards that American manufacturers could not meet, and even tried to change the size of Korean license plates to make them too big to fit on American bumpers. “It was always one thing or another,” says Representative Sandy Levin (D-Mich.), the ranking member on the House Ways and Means Committee. The more serious barrier to trade, says Levin, was South Korea’s constantly shifting regulations: Government officials would make sudden changes to the nation’s safety and fuel economy standards, requiring U.S. manufacturers to adapt on the fly with costly engineering changes to make their cars fit for sale in Korea. “From one year to the next, you find out the rules have changed,” says Stephen Biegun, vice-president for international governmental affairs at Ford Motor.

The tactics were effective. In 2009, the Congressional Research Service says, automobiles accounted for nearly three quarters of that year’s $10.6 billion U.S. trade deficit with South Korea. In 2010, U.S. automakers exported fewer than 14,000 cars to South Korea, while South Korea exported 515,000 cars to the U.S.

Ultimately, the two sides worked out a head-scratcher of a compromise. The U.S. agreed to something the Koreans wanted—a removal of the 2.5 percent tariff on Korean auto imports. Korea will withdraw its tariffs on U.S. cars. What American car companies really wanted, though, was an end to Korea’s practice of unexpectedly changing auto standards. The Korean negotiators wouldn’t agree to that. Instead, they will allow each foreign automaker to sell 25,000 cars per year in Korea that don’t have to meet the country’s safety regulations.

Now that it is done and both sides can claim to have gotten their way, one big question remains: Will Fords and Chevys sell in Seoul the way popular Hyundais and Kias roll off the lots in Seattle? Biegun concedes no one knows the answer. But at least, he says, the trade deal “gave us an end to this game.”

    BOTTOM LINE -

    The bottom line: The U.S. exported fewer than 14,000 cars to South Korea in 2010. Under the new trade deal, that number could quintuple next year.

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