Winners and losers in Korus deal

The implementation of the Korea-U.S. free trade agreement spells both good and bad news for local businesses. The passing of the bill at the National Assembly on Tuesday was welcomed with open arms by major export-oriented industries such as automobiles and textiles, while the food and agriculture industries expressed their dissatisfaction at the decision.

Major beneficiaries

Immediately after the news broke that the National Assembly had voted in favor of the deal despite a simmering conflict with liberal parties, local industries that have been waiting for over four years - the agreement was originally concluded in 2007 - responded with joy and relief.

“There are multiple favorable factors [for the local auto industry],” said Choi Moon-suk, an official at the Korea Automobile Manufacturers Association. “We will now become more competitive against Japanese and European auto parts manufacturers.”

Korea’s automotive sector is said to be one of the biggest beneficiaries of the FTA. Tariffs on auto components, which range from 2.5 percent to 10 percent, will be abolished immediately.

According to the Korea Trade-Investment Promotion Agency, General Motors, Ford and Chrysler said earlier they would increase their procurement of parts from Korean companies. General Motors, in particular, said it would raise its components purchases from the country from $700 million to $1 billion.

Parts exports account for 36 percent of all automotive exports to the U.S. and some 5,000 components makers are expected to benefit from the new FTA.

“Not only auto manufacturers, but also those in the components industry, including those that make molds, tires, glass and steel are going to benefit,” said Choi Mun-seok, a manager at the Korea Auto Industries Corp. Association.

“Korean automakers and auto parts makers will benefit most from the Korus FTA,” said Chae Hee-keun, an analyst at Hyundai Securities. “Their market shares will expand.” Based on the trade deal that was revised in December, the U.S. will eliminate its 2.5 percent tariff on automobiles in four years of the deal taking effect. And Korea will cut its 8 percent tariff on U.S. car imports to 4 percent immediately.

In addition, non-U.S. automakers such as Toyota, Honda and BMW, which all have manufacturing bases in the U.S., will be able to import vehicles from the country more cheaply. Toyota and Nissan have already begun doing this, and with the high yen making imports from Japan more expensive, the trend is likely to grow.

The textiles industry, long seen as a decaying sector, can also reap rewards from the trade pact. The 4.3 percent tariff on high-functional yarns such as polyester, nylon and spandex will be immediately eliminated once the deal goes into effect, which will give local yarn producers as well as sewing and paper firms a boost, according to an official from Hyosung, a mid-size textile maker.

“The FTA with the U.S. will help Korean businesses secure a firm footing in the world’s largest economy,” said Kim Do-hoon, an analyst at the state-run Korea Institute for Industrial Economics and Trade.

Some will suffer

Not all are happy about the ratification, however. Particularly, the pharmaceutical, food and agriculture industries expect to see imports and therefore competition surge once the deal takes effect in January.

“It’s awful news,” said Kim Young-kil, vice chairman of the Hanwoo Association. “We were negatively affected by foot-and-mouth disease [last winter], then the Korea-European Union FTA [which took effect in July], and now this.”

The livestock and agriculture industries have strongly opposed the deal as for the next 15 years the two sectors are expected to see production losses amount to 12 trillion won ($10.4 billion), or 844 billion won per year, according to a report from the Ministry of Food, Agriculture, Forestry and Fisheries.

The most severely affected will be the livestock industry, as its accumulated production is expected to decline by almost 7.3 trillion won in the first 15 years following the implementation of the FTA.

In response to their concerns, the government insisted it will protect the local agricultural industry by injecting 22 trillion won to support farmers and help make up part of their losses.

The pharmaceutical industry is also expected to suffer, due in part to a clause that allows American patent holders to delay Korean companies from manufacturing and distributing generic drugs in the U.S., and vice-versa.

As this strengthens patent rights for newly developed medicines, of which Korean companies have only developed 17, it is expected to aid U.S. firms significantly more.

And with intellectual property rights bolstered, it will become more difficult for local companies to produce generic or modified drugs.

According to the government, Korea’s production of generic drugs is expected to drop by 68.6 billion won to 119.7 billion won because of the FTA. Seoul has said it is working on a plan to try and delay the introduction of the clause for three years.

“The clause actually has the effect of lengthening the life of patents,” said Kim Jin-hyun, a professor at Seoul National University. “It is absolutely disadvantageous to local pharmaceutical companies.”

In addition, tariffs on health care goods will also be abolished. Korea’s import duty on 463 goods, or 76.8 percent of products, will be eliminated immediately. This will affect vaccines and syringes among other products. For 122 products, or 20.2 percent of health care goods, including aspirin, the duty will disappear in three years.

By Lee Eun-joo, Limb Jae-un [angie@joongang.co.kr]