Ensuring the success of Korus

With the Korea-U.S. FTA (Korus) nearing the first anniversary of its entry into effect, now is an opportune time for Korea to ask if its implementation is going well. There is no question that the bilateral relationship, already sound before Korus, has been strengthened by the increased trade and investment flows triggered by the deal. But to unlock its full potential and ensure its continuing success, Korea must look beyond current trade and investment statistics at several looming challenges and opportunities.

Korea and the U.S. have ample cause to label Korus - the most commercially significant FTA for the U.S. since the Nafta - a success. During the period from March 15, 2012, when the deal took effect, through the end of 2012, Korean exports to the U.S. of all goods subject to Korus tariff reductions increased by more than eight percent. During the same period, U.S. exports to Korea of all goods receiving Korus preferences also increased, by about two percent. Both countries’ exports of services to each other also increased, by roughly ten percent each. Moreover, Korus has boosted investor confidence and activity. During the first three quarters of 2012, Korean investment in the U.S. totaled $4.8 billion, while Korea-bound U.S. investment reached $1.9 billion. These statistics point to significant and balanced overall gains for both countries’ exporters and investors during the first year of Korus.

The enhanced economic relationship under Korus has not, however, been free of trouble, and new controversies are brewing. Critics in the U.S. have lost no time in also marshaling statistics to try to show that Korus is a failure. For example, they correctly point out that, when all U.S. goods exports to Korea are considered, the value of this trade has dropped by 10 percent, or roughly $3 billion, from 2011 to 2012. The critics also complain of substantial sector-specific declines for U.S. exporters of beef, pork and chicken. More broadly, critics of all three newly implemented U.S. FTAs - with Korea, Colombia and Panama - argue that the trade data bear out their longstanding fears of worsening U.S. trade deficits with these countries. They also maintain that Korus does nothing to stop Korea from manipulating the value of the won in order to generate an unfair advantage for its exporters.

The U.S. auto industry, a reluctant supporter of Korus, also has grievances about the deal. While it is enjoying a modest comparative gain in its exports in Korea, from just over $400 million in 2011 to roughly $600 million in 2012, the Korean industry increased its shipments to the U.S. to a much greater extent during the same period, from $8.6 to $10.6 billion. The U.S. auto and auto parts industries also view with deep concern a number of recently proposed Korean regulatory measures that, in their view, could undermine the increased market access promised by Korus. This issue could have grown into the first real crisis under Korus but the two governments worked together creatively to defuse it.

The current implementation phase of Korus is delicate because public views about the success of the deal will soon solidify. Nafta offers an important lesson in this regard. Following its implementation in 1994, Nafta’s supporters rested on their initial success. The deal’s critics, however, coalesced around their cause, focusing on negative developments such as the mounting U.S. trade deficit with Mexico in the years following implementation and a Mexican currency collapse in the mid-1990s that sharply reduced demand for U.S. goods. Lingering perceptions of Nafta’s failure continue to place pro-trade presidential candidates on the defensive to this day, even though total two-way trade flows under the deal have increased markedly over the long term.

Korea must take a number of steps to ensure that Korus does not experience the same crisis of negative perception as did Nafta. Korus supporters must not forget that the work is not done to make this free trade agreement a success.

First, although the Korus FTA opens opportunities for tremendous economic growth, it is just a framework. Now, it is up to both American and Korean businesses to take full advantage of this framework, but many may be ill-equipped. Where large corporations have the international experience and expertise to leverage an FTA, small and medium-sized business (SMEs) may be less so. Both countries should consider public-private partnerships and assistance to ensure SMEs can also join in this opportunity.

Second, Korus supporters should be vigilant to publicize the economic success stories facilitated by Korus, as well as to blunt unjustified criticism. As we learned from Nafta, the public relations war continues in both countries even after the ratification of the free trade agreement. If supporters do not continue to shape public perception about the agreement, the critics will. As we saw in the 2008 U.S. presidential elections, we even saw calls by then-candidate Barack Obama to renegotiate Nafta.

Finally, critical to this public relation effort is how SMEs in both countries are benefiting, as SMEs play an outsized role in driving politicians’ and the general public’s understanding of any trade deal’s real economic value.

Also, while outside of Korus, Korea can help buttress Korus by promoting greater cross-border movement of highly skilled Korean workers, such as engineers and computer programmers. The U.S. currently places a stringent cap on the number of highly skilled foreign nationals who may work in the country, causing the full demand for such workers to go unfulfilled. Korea should press the Obama administration to open the door further for highly skilled Korean workers, for the benefit of both countries and Korus.

Korea overcame many obstacles to make Korus a reality. One year later, a continuing effort is required to ensure that it will be seen as an enduring success.

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

by Sukhan Kim