[VIEWPOINT]Paving the road to free tradeKorea has so far signed free trade agreements (FTA) with Chile, Singapore and the European Free Trade Association (EFTA). However, Korea’s trade with these FTA partners makes up less than 3 percent of Korea’s total trade. Korea’s major trading partners are the United States, Japan and China, totaling almost half of Korea’s trade. Thus, it is important for Korea to pursue FTAs with these three major trading partners and thus secure access to its major export markets.
The Korea-Japan FTA negotiations have been deadlocked since the end of 2004 after six rounds of negotiations. Since Korea is expected to suffer in the short run from an FTA with Japan, due to the similarity of industrial structure between the two countries, it is expected to take some time to achieve a Korea-Japan FTA.
China is not yet up to making FTA arrangements with any industrialized country like Korea. It is more important for China to meet its WTO commitments. Thus, it would be more realistic for Korea to consider an FTA with China later. We should also realize that China, more than America, is putting pressure on Korea to open up its agricultural market in the Doha negotiations.
Thus, it makes more sense for Korea to open FTA talks with the United States in the near future. Korea should not waste its limited negotiating man-power on FTAs with small economies or with countries where there is little possibility of success. Instead, Korea should focus on the Korea-U.S. FTA, which may start right away and is expected to produce large benefits.
From a Korea-U.S. FTA, both countries can enjoy large economic gains because of their complementary industrial structures. According to my research paper, co-authored with Jeffrey Schott and published in 2001 by the Institute for International Economics (IIE) in Washington, an FTA is estimated to increase Korea’s exports to the U.S. by up to 30% and U.S. exports to Korea by up to 49% in the long-run. It is also estimated to raise income, reaching up to 2.41% of GDP for Korea and 0.13% of GDP for the U.S. If we add the impact of lowering non-tariff barriers in the services sector, its positive impact will be much greater. We can also expect more industrial alliance between the two countries, which would increase their competitiveness.
For Korea, the trade diversion effect of an FTA could reduce its trade surplus with the United States and also its chronic trade deficit with Japan. Korea could also resolve many ongoing trade disputes with the United States during the course of FTA negotiations. As a result, Korea will be better able to maintain its trade relations with the United States and to secure access to the largest market in the world.
Forming an FTA would also bring the two countries much closer in their political and security relationships. Indeed, political objectives have often driven American participation in FTA negotiations in the past. In the midst of recent uncertainties in the Korea-U.S. alliance, caused by differences over resolving the North Korean nuclear issue and changing the role of U.S. military forces in Korea, an FTA between the two countries would provide meaningful and helpful benefits and strengthen the alliance. Through an FTA, as more Americans, U.S. enterprises and capital enter Korea, the security of the Korean peninsula automatically becomes more important for the United States to protect its citizens, corporations and investments.
For the United States, many firms could benefit not only from an increase in farm products and service exports to Korea, but also from having strategic alliances with Korean firms, thereby using Korea as a base for further expansion of their activities in the Northeast Asia region. Furthermore, a Korea-U.S. FTA would show firm United States support for peace and prosperity in Korea, thereby strengthening the bilateral alliance and contributing to the peace and security of the Northeast region.
In spite of all these clear benefits of an FTA, the two countries have not yet launched negotiations because of concerns of facing domestic resistance from weak and sensitive sectors. Korea faces strong resistance from the agriculture and service sectors. The United States will also need to persuade its steel and textile industries. Also, the recent rise in nationalism and anti-American sentiment in Korea could act as a hindrance.
In order to pave the road to a Korea-U.S. FTA, the Korean public should have a better understanding of how important free trade policy, a market economy, globalization and exports to America are in contributing to the growth of the Korean economy. Since the Korean economy is very much linked to the world economy, Korea should try to maintain a globalization policy and guard against nationalism, for its own sake. At the same time, structural adjustment of industries that lack competitiveness should be accelerated, while the government should provide adjustment assistance programs along with an efficient use of safeguards and a social safety net.
* The writer is an adjunct professor at Sogang University.
by Choi In-bom