Korea-U.S. FTA report cardIt was two and a half years ago that a free trade agreement (FTA) between South Korea and the United States went into effect after a long and arduous process of negotiations. I will not soon forget heated moments I witnessed as a member of the National Assembly FTA Forum between 2004 and 2008 and as a member of a joint council with the U.S. Congressional Caucus on Korea. In 2007, we accompanied American congressmen on their first journey to Mt. Kumgang in North Korea.
An FTA with the world’s largest economy was an inevitable choice for South Korea. Despite our rank as the world’s eighth largest trading nation, our domestic market accounted for only 0.7 percent of the world’s population. In terms of land mass, South Korea comes in 109th. The United States was the world’s largest market, accounting for 22.5 percent of global gross domestic product. Our exports to the U.S. market were decreasing at the time. We had to extend our economic frontiers. If globalization was unavoidable, it was better to make the first move before we were forced to open up in some less controllable way.
It may be a bit early, but it is useful to examine the FTA’s progress so far: how it has changed bilateral trade and what problems have arisen.
Exports to the United States have reached $62.3 billion and imports $41.7 billion in the second year of the FTA. In services, the United States runs a $10 billion surplus with Korea. The biggest concern during negotiations was a flood of cheaper American agricultural produces. In 2013, agricultural and fisheries exports to the United States totaled $630 million while imports were $6 billion. Wine imports have jumped 8.4 times and cherries 4.6 times compared to before the FTA. But overall, Korea exported more and imported less in the agricultural category since the FTA.
While application of the bilateral free trade package reached 76 percent of categories overall, it was held at 51 percent for agriculture and fisheries products. The main reason are strict guidelines on origin labeling and other food-related regulations from U.S. Food and Drug Administration. Regulations against imports toughened after the enactment of the Food Safety Modernization Act in 2012. To export farm produce, Korean companies must go through layers of federal regulations such as the Hazard Analysis Critical Control Point and separate rules for individual states. This is no easy process for small Korean companies. Shipment that failed customs clearance increased to 450 in 2012 from 403 in 2011 and 196 in 2010.
Let’s take anchovies as an example. Under the Hazard Analysis and Critical Control Point system, anchovies must be hygienically processed without heads and guts. Before 2011, the rule applied to fish species bigger than five inches. When it expanded to smaller category, some Korean exporters were indicted for counterfeiting anchovy brands. Six containers of yellow corvina were held at a port for a half a year and had to be disposed of in the end. Under the U.S. regulations, they had to be immediately frozen, but they happen to have been salted before being frozen. Ice cream was also blocked because under the rule it had to be made out of milk from Korea or the United States, but was instead made from Australian milk. An orange juice brand from the United States faced customs fines because the producer didn’t present documentation on the origin of the oranges. This issue was even discussed at a South Korea-U.S. summit meeting.
The business paradigm of the 21st century hinges on global value chain, or worldwide networks of production, supply and consumption. Under the Airbus consortium led by France, Germany and Britain, over 1,500 companies from 27 countries are involved in the manufacturing of aircraft. To make one Barbie doll, six countries contribute: the design is American, synthetic materials come from Taiwan, hair from Japan, clothes from China and assembling by Indonesia and Malaysia. It’s hard to pin down the country of origin of an industrial product these days. The World Trade Organization even came up with the phrase “Made in the World.” Despite dissolving trade frontiers, various and contradictory regulations and guidelines are in force, causing friction here and there.
The Korea-U.S. FTA has widened business opportunities and helped trade. Still, there are unresolved issues such as the official origin of products manufactured at the South Korea-North Korea joint venture in Kaesong. Stronger scrutiny and FDA regulations also pose challenges. Once the Foreign Supplier Verification Program is underway, Korean food suppliers will have an even tougher time selling their produce in the U.S. market. Both governments must try to iron out differences to find a way to promote trade without undermining safety regulations. The bilateral trade agreement will likely be a genuine win-win once the two countries come up with a common certification mechanism through a memorandum of understanding to establish non-tariff environment in both markets.
JoongAng Ilbo, Sept. 20, Page 31
*The author is former environment minister and a visiting professor at KAIST Science and Technology Policy Graduate School.
by Kim Myung-ja