[Overseas view]FTA: Caught in a maelstrom

The election of Senator Barack Obama as the 44th president of the United States and the significant gains made by Congressional Democrats has uncertain but potentially serious implications for the U.S.?South Korea Free Trade Agreement.

The Democrats’ electoral triumph comes against a backdrop of growing skepticism about free trade in Congress and among voters, many of whom incorrectly blame trade for manufacturing layoffs and the offshoring of American jobs.

The U.S. financial crisis and its impact on the broader U.S. economy has ushered in a completely new economic paradigm. As a result, progress toward further trade liberalization has become both considerably more challenging and secondary to addressing the immediate fiscal and economic crisis. This is particularly so with respect to the Korea?U.S. FTA, whose prospects for Congressional passage in the near term have become even more difficult.

To understand why, it is crucial to review the unprecedented downturn in the U.S. economy, beginning with financial services and housing sectors.

Wall Street is experiencing its heaviest losses in decades, with the Dow Jones Industrial Average, the S&P 500 and the Nasdaq losing more than 40 percent of their value. Housing prices have declined over 15 percent from last year, with no bottom in sight. The investment banking industry, which dates to the 1840s and survived the American Civil War and Great Depression, has disappeared in the space of a few months. There has been a dramatic consolidation in the financial services sector, with the federal bailouts of AIG and Bear Stearns, federal conservatorship of Fannie Mae and Freddie Mac, and the $750 billion bailout/rescue package, now being used to unfreeze capital markets. The adverse effects of the financial crisis on the real economy is likely to be severe in the fourth quarter, and is expected to last well into 2009.

The carnage on Wall Street has already spread to “Main Street,” with nine straight months of job losses totaling more than 760,000, rising unemployment that may reach over 8 percent in 2009, tens of thousands of home foreclosures and consumer spending chilled by the strong expectation of a deep and protracted recession.

Consumer confidence is at its lowest level in 40 years, and consumer spending, which accounts for over 70 percent of U.S. gross domestic product, is at its lowest level in 28 years.

The crisis in the U.S. auto industry further complicates the prospects for passing the FTA with Korea.

The statistics are sobering. General Motors, which in 2000 had a market capitalization of $56 billion, is today worth a mere $3.3 billion, while Ford which in 2000 was worth $32 billion, is today worth only $4.95 billion. Over the past year, GM and Ford stock prices have fallen 80 percent and 75 percent respectively; GM is depleting its cash reserves by $1 billion per month, and lost $18.8 billion in the first half of 2008. Sales figures for the Big Three are at all-time lows, down an average of 20 percent this year. In the past two years, the Big Three have shed 135,000 workers. The crisis is so severe that GM and Chrysler have been thrust into merger talks, and the two companies have asked the federal government for $10 billion to support their merger.

The incoming Democratic-controlled government will be reluctant to take any action seen as threatening the U.S. industrial base in general, and, in particular the Big Three, which may soon be the Big Two.

Fairly or unfairly, the Korea?U.S. FTA is seen as endangering the auto industry by exposing the U.S. auto sector to greater competition from Korean imports without providing reciprocal access for U.S. autos in Korea or eliminating Korea’s non-tariff barriers. This factor alone makes it unlikely that Congress will approve the deal unless and until the U.S. auto industry is comfortable that it will offer fuller market access.

All of this means that no trade issue is likely to be even near the front of the queue early in the U.S. government’s next cycle. Instead, the Obama administration and Congress are likely to focus on the immediate economic, financial, credit, and housing crises. At least initially, they will likely not have the time, energy or desire to expend significant effort or political capital to push for passage of the Korea?U.S. FTA.

Passage of the agreement depends on signs that the U.S. auto industry is on the path to recovery, addressing Congress’ concerns regarding the agreement, Obama’s willingness to use his influence to secure passage of the FTA and advocacy by the U.S. business community.

First, the U.S. auto industry must be put on the path to economic recovery and viability.

Second, the newly emboldened Democratic-controlled Congress is unlikely to bring the FTA to a vote unless three key demands are satisfied: (1) ensuring that U.S. beef exports to Korea remain uninhibited, (2) incorporating additional auto market access commitments designed to open Korea’s automobile market, and (3) adding further measures to eliminate current and future non-tariff barriers.

The United States and Korea appear to have resolved the beef dispute. But any backsliding on the beef accord would further complicate passage of the Korea-U.S. FTA because beef market access has been a key issue for Senator Max Baucus, the powerful chairman of the Senate Finance Committee, which has jurisdiction over trade in the Senate.

On auto market access, Korea made meaningful commitments designed to enable U.S. automobiles to compete in Korea. But given dramatic changes to the U.S. economic landscape, and in particular to the U.S. auto industry, more will need to be done on auto market access, non-tariff barriers and standards, and dispute settlement.

Once the U.S. and Korea resolve these remaining differences, Obama, his trade representative and other key economic advisers must work hard to secure Congress’ approval.

The U.S. business community must mobilize support and advocacy for the agreement. Already, the U.S. Chamber of Commerce, the National Association of Manufacturers, and the U.S.?Korea FTA Business Coalition have actively lobbied Congress in support of the FTA. These efforts should continue and intensify as congressional consideration of the agreement becomes more imminent.

Regrettably, the Korea?U.S. FTA has become snared in the U.S. (and now global) economic crisis, severe disruption in the U.S. auto sector, presidential election politics and the growing anti-trade, protectionist mood in Congress and among voters.

Although the agreement faces considerable near-term obstacles, these can be overcome. As overall economic conditions improve and key congressional conditions are met, prospects for passage of the agreement will improve.

I am optimistic that Congress will pass the Korea?U.S. FTA and that both countries will reap the economic rewards for decades to come.

*The writer is an international trade lawyer at Miller & Chevalier in Washington, D.C. He served as a negotiator for the United States Trade Representative, including the Korea?U.S. FTA.

by Jay L. Eizenstat