July 11, 2006

July 11, 2006 | Commentary on Asia

Moving forward with FTA

The prospect of a free trade agreement between South Korea and the United States is ruffling some feathers. For example, the actors and actresses in the film industry aren`t pleased. "To the U.S. demand, the Roh government has kneeled down," they wrote in a joint statement earlier this year. With an appeal to nationalistic sentiment, a former agriculture minister went even further by saying that the agreement would turn South Korea into the "51st U.S. state." In addition, the Korean Confederation of Trade Unions has been organizing a general strike to coincide with the second round of negotiations this week.

Welcome to what could well become a noisy, controversial, but ultimately, healthy conversation. The free trade agreement with the U.S. offers a unique opportunity for South Koreans to decide which direction they want their economy to move.

As competitive and dynamic economic partners, the two countries will pursue an FTA that would ensure fair and transparent dealings on both sides. Once approved, the agreement would scrap tariffs on about 90 percent of the goods that change hands between the two countries.

Through pursuing an FTA with the U.S., more importantly, South Korea could have a chance to "upgrade its economic system" by enhancing its economic freedom. Solidifying the free market system would create more opportunities for local entrepreneurs and amplify the creativity and dynamism of South Koreans that now sustain South Korea`s formidable economy.

As proven in past decades, South Korea`s experience with free trade has been exceptionally good. Today, as Asia`s third-largest economy, South Korea is the world`s 12th-largest exporter, producing nearly 3 percent of world goods exports. South Korea`s pursuit of liberal trade policies resulted in growth in real GDP per capita from $550 to around $15,000 in three decades.

Yet, with so many of the fundamentals for success in place - large supplies of capital, a highly educated labor force, modern infrastructure and a stable legal system - it`s fair to say South Korea could do far better. The problem is that South Korea can`t let go of its protectionist past.

According to the index of Economic Freedom by the Heritage Foundation and the Wall Street Journal, "free" economies earn twice what those in the "mostly free" earn. According the index, South Korea is slipping. It remains in the "mostly free" category. But its score has either gotten worse or remained the same in six of the last seven years.

Layers of regulations and lingering government intervention still keep South Korea from being economically "free." Frustration builds among people, in particular among young people whose unemployment rate stands at almost 8 percent. Anti-business sentiment and populist attacks on the free market system become more frequent. These developments, in turn, make it even harder to achieve the necessary reforms.

Neither South Korea nor any other country can turn back the clock. Globalization is a fact of life - both economically and socially. It requires that challenges be thought of in different ways, that some old ways of thinking be discarded.

It won`t be easy, of course. The silent majority who would benefit from free trade is too large, diverse and committed to other interests to deliver a clear and consistent message. Relatively small, organized, militant unions with a common concern of protecting profits and jobs in a particular industry are well positioned and strongly motivated to work through the political process to thwart progress.

These special interests have controlled South Korea`s legislative process for too long. They protect the past, but they thwart the future.

While ruffling some feathers, the FTA with the U.S. will create opportunities for South Korea`s young eagles to fly. It`s time for a frank and mature national discussion on how to continue and enhance South Korea`s prosperity. Is South Korea ready to join the great economies of the world or does it still need to be protected? If this FTA forces the country to deal with these questions, it will be worth it for that reason alone.

Anthony B. Kim is a research associate of the Center for International Trade and Economics, the Heritage Foundation.

About the Author

Anthony B. Kim Research Manager, Index of Economic Freedom, and Senior Policy Analyst
Center for Trade and Economics (CTE)

First Appeared in The Korea Herald