September 8, 2007

September 8, 2007 | Commentary on Asia

Do not let Detroit derail this fair trade agreement

America and South Korean trade negotiators overcame seemingly insurmountable obstacles to sign the landmark Korea-US free trade agreement on June 30. The trade pact would provide new opportunities for US businesses and workers by increasing US-South Korean trade, liberalising South Korea's economy to expand market access and making 94 per cent of bilateral trade duty-free within three years.

The FTA would also strengthen bilateral ties by broadening the US-South Korean relationship beyond the military alliance, help retain US influence in the region and counter Seoul's econ-omic shift towards China.

But protectionist demands for managed trade by the US automotive sector and the Democratic congressional leadership threaten to derail the agreement. Detroit is fighting to defeat a trade bill that redresses the very problems it has complained about for years. It is as if a patient preferred to continue bemoaning his maladies, rather than take the medicine that will cure them. In fact, the FTA chapter on automobiles is one of the agreement's strongest selling points.

The FTA would eliminate the 8 per cent tariff South Korea slaps on passenger cars imported from the US. It also revises the domestic tax system based on engine size, which has been seen as discriminatory against US cars. The agreement even comes with an unprecedented satisfaction-guaranteed "snapback" clause on automobiles, so that Washington could reimpose all pre-existing tariffs if South Korea engaged in unfair trading practices.

Detroit, however, wants more. It has called for guaranteed market share and tying an incremental reduction in US tariffs to the number of cars sold in South Korea. Previous South Korean trade practices were not fair, but sticking one's head in the sand while complaining about the past does not make globalisation go away, nor does it provide the basis for a good trade policy. Congress should remember that the US national symbol is the eagle, not the ostrich.

No FTA can guarantee higher sales. It can merely provide balanced economic rules of engagement. This FTA would enable companies from both countries to engage in the intense competition of free and fair trade on a more level playing field. In a telling reflection of the benefits of the agreement, South Korean auto workers are protesting against it for fear of losing market share to the US.

The real downside to this agreement is a matter of principle that has nothing to do with cars. Contrary to US assurances to Seoul that completing negotiations by March 31 would limit congressional action to a yes/no vote under President George W. Bush's fast-track trade promotion authority, the Democratic leadership imposed additional labour and environmental standards on negotiators.

Although accept-able to South Korea, because its labour and environmental standards are already so high, the vaguely worded requirements are an onerous precedent that could prove troublesome for the trade agenda in future.

To be sure, not all industries would benefit equally from the FTA. There are costs involved. But put aside the ramifications of the labour and environmental standards and focus on the real trade-related substance of the agreement, and you will find tremendous benefits across sectors. It would be a shame for these benefits to be obscured owing to a myopic focus on the complaints of just one industry.

One thing is certain: not redressing existing barriers to free trade will only strengthen protectionists on both sides of the Pacific. Locking in the status quo will disadvantage US business as it loses additional market share to countries more willing to implement free trade agreements with South Korea. It will also undermine US strategic objectives in Asia by reinforcing perceptions of a degraded bilateral relationship with Seoul.

Companies and trade sectors that would benefit from the FTA should educate the public about the benefits of the agreement.

They should let congressional members know that a focus on just one narrowly defined industry interest will hurt their constituents.

If Congress is to have any prospect of a well-informed, considered debate on the merits of the FTA, it is critical that others in the business community wrest the megaphone from the auto-motive sector.

Bruce Klingner is senior research fellow for Northeast Asia in the Asian Studies Center at The Heritage Foundation.

About the Author

Bruce Klingner Senior Research Fellow, Northeast Asia
Asian Studies Center

First appeared in the Financial Times