[Outlook]An FTA worth saving

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[Outlook]An FTA worth saving

Many are concerned that the likely election of Senator Barack Obama and increased Democratic majorities in both houses of Congress will lead to greater U.S. protectionism, complicating the Korea-U.S. trade relationship in 2009. Given Democrats’ ideological predisposition on trade, those concerns are justified. As Korea knows, Democrats generally are more receptive to the views of their core base - organized labor - and tend to be more protectionist than Republicans.

Regardless of the election outcome on Nov. 4, however, the overriding factor that will drive U.S. trade policy towards Korea in the coming years is the gravity of the economic issues facing the country, and it does not augur well for Korea. Recall that Ronald Reagan, a Republican, was one of the most protectionist of recent U.S. presidents. His administration erected trade restraints to protect U.S. industries such as motorcycles, autos, steel and machine tools. In contrast, some of the major tariff-reducing events of recent decades, including the World Trade Organization and the North American Free Trade Agreement, were completed by Democrats. These trade milestones reflected domestic consensus about the economic conditions of the day, rather than the ideological leaning of the party in power. The same holds true today. The current sharp economic downturn is likely to usher in more protectionist U.S. trade policies, regardless of who becomes the next U.S. president.

Further, with the expected increase in their majorities in Congress next year, Democrats will likely be more emboldened to pursue trade policies that seek to promote the interests of organized labor and to protect the jobs of U.S. workers. We have already witnessed those 45 some Democrats, who were elected in 2006 on platforms critical of globalization, opposing various trade initiatives that were perceived to work against labor interests. These developments have impeded congressional approval of FTAs, including the one with Korea.

At the industry level, tensions will also likely grow, as deteriorating economic conditions generally lead to greater efforts by U.S. industries to restrict imports, particularly through antidumping duty cases. During tough economic times, U.S. industries have a better chance of winning these cases because they can more readily demonstrate that they are being injured by imports - a legal requirement for the imposition of duties. Hence, more trade cases will likely be filed against U.S. trading partners. In short, no matter who wins the White House, 2009 will likely be a contentious year for U.S. trading partners, including Korea.

To make matters worse, an Obama administration would likely be more aggressive in its dealings with its trading partners. It would likely make good on campaign promises of tougher trade enforcement. It would also likely seek to renegotiate pending FTAs. Senator Obama believes that the Korea-U.S. FTA in its current form does not do enough to eliminate market barriers in Korea to U.S. autos, reflecting the concerns of the Democratic base - organized labor - over further plant closings and layoffs that many believe were exacerbated by trade agreements.

What should Korea do to prepare for next year? First, it should focus on the most pressing outstanding trade problems that it has with the U.S., such as Korean import tariffs on U.S.-made medical devices and aircraft parts, as well as persistent claims by U.S. companies that Korea should do more to open up to U.S.-based investment, particularly in the telecom sector. To the extent that it is possible, Korea should make efforts to address these issues at the technical level. In a hostile economic environment, the lower the negotiating level, the less politicized, and the better for Korea.

Second, Korea should encourage its companies to try to identify those exports to the U.S. most vulnerable to possible new antidumping duty cases, and have the companies monitor those exports and their prices in order to reduce the chances for U.S. companies to successfully allege unfair dumping.

On the FTA with the U.S., Korea is at a crossroads and faces grave choices. As mentioned, the U.S. will seek to reopen the auto provisions. Despite the U.S. auto industry’s seeming focus on Korea’s various non-tariff barriers, its top priority is to obtain longer phase-out periods for U.S. tariffs - specifically, the 2.5 percent tariff on autos and the 25 percent tariff on pickup trucks. Of course, Korea has every right to walk away. After all, this will be the second time the U.S. seeks renegotiation of the completed deal - the first time being on labor and environmental issues.

However, Korea should step back and take a longer-term, strategic view. For one, Korea should keep in mind that, under current U.S. auto tariffs, the Korean industry has competed quite successfully in the U.S. market for years. And the duty is only going to decrease as time passes. So, it is unlikely that Korean concessions on the length of the phase-out periods would have a major impact on the Korean auto industry’s competitiveness in the U.S.

More importantly, the FTA, once fully implemented, could increase bilateral trade flows by nearly $20 billion annually. Also, it is significant that America’s first free trade agreement in Northeast Asia will be with Korea rather than Japan or China. Indeed, it would do much to raise Korea’s standing in the world and the strength of its U.S. alliance.

To be sure, the idea of another renegotiation is dismaying. It is tempting for Korea to dig in its heels and to show that it will not cave under pressure. However, the FTA must not be perceived as a mere trade deal but as a political agreement that, pending approval, can at times shift depending on changing political environments. With the economic crisis, that political context has changed drastically since the two sides concluded the deal in 2007.

There is a time to stand on principle, and there is a time to be flexible for the sake of long-term benefits. Given the changed political context in the U.S. and given the substantial importance of the FTA to Korea economically and geopolitically, I believe Korea should be visionary and choose the latter course.

*The writer is a senior partner at the law firm of Akin Gump Strauss Hauer & Feld LLP in Washington, D.C.

by Sukhan Kim
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