May 18, 2005
By Balbina Y. Hwang, Ph.D. and Anthony B. Kim
anxiety about the future of the U.S.-Republic of Korea alliance has
raised concerns in both Washington and Seoul. Yet the two
allies have more in common today than ever before in a relationship
that has endured for more than 50 years. This includes shared
values of open markets, free trade, respect for the rule of law,
and democratic principles. With South Korea's development into
one of East Asia's most vibrant market-oriented democracies, its
economic relationship with the United States has steadily grown
stronger, becoming one of the most important pillars
supporting the alliance.
One of today's most
prominent issues is the possibility of reaching a free trade
agreement (FTA). Although the ongoing FTA review process will not
automatically result in FTA negotiations, it will provide
insights into the obstacles to bilateral trade and lay the
foundation for a future trade agreement.
Washington and Seoul
should seize this opportunity to examine thoroughly the range
of trade issues that exist between the two countries and to develop
solutions. Regardless of whether or not an FTA is determined to be
feasible at this time, mutual acceptance and resolution of
challenges in the trading relationship will lead to a more
positive and productive future for the United States and
Republic of Korea (ROK); therefore, the possibility of
launching formal FTA negotiations should be vigorously
The Current Status of
U.S.-ROK Economic Relations
Since the inception of
a mutual security treaty in 1953, the United States and South Korea
have enjoyed a strong alliance that is considered one of the
pillars of stability and security in Northeast Asia. While the
alliance has provided the basis of a broad and mutually beneficial
economic partnership for the past half-century, many Americans
might be surprised to learn that Korea actually entered into the
Treaty of Peace, Amity, Commerce and Navigation with the United
States in 1882. This was Korea's first treaty with a Western power,
and during this long and sometimes rocky relationship, the two
allies have come together in cooperation when strategic
interests have converged.
The United States has
played a critical role in the South Korean economy since the Korean
War, but the bilateral economic relationship has steadily equalized
in recent years, with bilateral trade expanding dramatically in the
past 20 years. In 2004, total trade between the two countries
exceeded $70 billion, a 120 percent increase from 1990.
South Korea has the
world's 11th largest economy, and the United States is its
second largest export market, accounting for nearly 20 percent of
its total exports in 2004 (more than 6 percent of South Korea's
GDP). Major exports to the United States include
electrical and general machinery, cellular phones, textiles,
and steel. In turn, South Korea is America's seventh largest export
market, importing such goods as semiconductors, machinery,
aircraft, agricultural products, and beef. In 2003, South Korea was
the United States' fifth largest market for agricultural
products and third largest beef market.
Bilateral trade in
services has grown robustly as well. The United States is a major
supplier of private services to the South Korean economy and
ran a $4 billion surplus in 2003. American companies have
established a substantial presence in South Korea, with marked
increases in foreign direct investment (FDI) in recent years. Over
the past decade, American investments totaled nearly $30 billion,
with FDI from the U.S. reaching a new record of $4.7 billion in
2004 alone-an astounding 280 percent increase from 2003.
Today, more than 3,000 U.S. companies operate in South
Why an FTA with the
Enthusiasm for a
U.S.-ROK FTA has grown steadily in recent years, particularly in
South Korea, while American interest has been more cautious.
In principle, the Bush Administration has been a strong proponent
of bilateral trade agreements because they are an integral
part of U.S. trade strategy to promote competitive
liberalization, both at home and abroad.
agreements benefit both partners by injecting new competition into
their domestic economies, lowering consumer prices, and shifting
factors of production to more efficient uses, leveling the playing
field for exporters. While free trade is certainly best pursued
globally to minimize barriers and distortions in trade, the slow
pace of negotiations in the World Trade Organization (WTO) has
led many nations to pursue free trade through bilateral and
regional agreements, allowing countries to customize agreements
that meet the needs and concerns of individual
For the United States,
an FTA with South Korea makes immense sense considering the
existing areas of economic convergence and complementarities
and the potential for even greater future gains. As one of
America's top trading partners, with bilateral trade exceeding
$70 billion in 2004, South Korea currently enjoys relatively free
access to the U.S. market while American exporters still face
hurdles in South Korea.
One of the greatest
benefits of an FTA for the United States would be increased
opportunity to export to South Korea. A 2001 U.S. International
Trade Commission (ITC) report predicted that a U.S.-ROK FTA would
increase annual American exports to South Korea by nearly $20
billon, while South Korean exports to the United States would rise
by $10 billion.The ITC study concluded that the largest
gains in American exports would be in agricultural products such as
dairy and meat products. South Korea, which imports over $2
billion in U.S. farm products annually, is America's fifth
largest export market for agricultural goods. An FTA would
provide greater access to agricultural goods by eliminating many of
the strict non-tariff barriers.
Official and private
studies on the likely economic impact of an FTA conclude that it
would benefit producers and consumers in both countries. For
South Korea, increasing participation in trade agreements is not
just beneficial, but may be necessary in order to achieve its
stated goal of raising annual per capita income to $20,000 by 2010.
Partially due to its scarcity of natural resources and the
economy's heavy reliance on external trade, which accounts for
nearly 70 percent of GDP, South Korea will not realize this goal
unless exports grow by 12 percent annually.
benefits of a U.S.-ROK FTA would go beyond promoting free trade,
increasing economic benefits, and bolstering the broader bilateral
relationship. Agreement and cooperation on economic issues provide
a strong basis from which to reinforce collaboration in the
political and security arenas. An FTA would undoubtedly
reinvigorate and strengthen the dynamic and comprehensive
U.S.-ROK alliance, which has been the cornerstone of peace and
stability in Northeast Asia for more than 50 years.
In addition, a
U.S.-ROK agreement would provide the United States with a
strong economic presence in Northeast Asia and allow South
Korea to reduce its economic dependence on China. U.S. Ambassador
to the ROK Christopher Hill alluded to this strengthening of
America's strategic presence in Northeast Asia when he stated that
"South Korea can solidify a role as America's economic bridge in
the Northeast Asian region" through an FTA.
Challenges and Future
Although a broad
consensus on the benefits of a U.S.-ROK FTA has existed since the
idea was first floated in the mid-1980s, daunting obstacles have
impeded implementation. While some of these challenges are
structural, lack of political will and lack of support on both
sides of the Pacific have hampered any real progress toward
initiating serious negotiations.
The American and South
Korean business communities are enthusiastic about an FTA, but
official support in Washington has been muted, due not only to
specific markets such as agriculture, which is likely to be a
highly contentious issue, but also to the view that South Korea
needs to do more with existing agreements and regulations. Seoul's
difficulty in passing the ROK-Chile FTA, which took almost a
year to ratify, does not bode well for future South Korean trade
In particular, growing
popular nationalism in response to the opening of South Korean
markets has caused concern in Washington. While nationalism
itself is not necessarily a negative trend, in South Korea the tone
is worrisomely tied to anti-foreign sentiment, including a popular
backlash against foreign investments. One trade area in which
popular nationalism has overtaken the debate is the South Korean
movie industry, which maintains a screen quota limiting the
screening of foreign movies on the basis that South Korean culture
must be protected in order to thrive. Tensions over this quota
remain a primary stumbling block for the conclusion of the
bilateral investment treaty.
While the Bush
Administration is skeptical about the near-term possibility of an
FTA, support is stronger in the U.S. Congress. In May 2001,
Senator Max Baucus (D-MT) introduced a bill (S. 944)
authorizing FTA negotiations with the ROK, marking the second
time that he sponsored such legislation. Regrettably, because of
the lack of broader support in Congress and in the Administration,
it did not lead to the launching of formal negotiations.
United States should consider negotiating a free trade agreement
with South Korea in the near future, although several areas of
concern must be addressed before formal negotiations can
begin. As the 2001 ITC report identified, the South Korean
regulatory regime is still a significant barrier to U.S.
exports, along with other non-tariff measures such as product and
safety standards and pharmaceutical testing requirements.
Seoul needs to address such issues before any future agreement is
To create and build
positive momentum for an FTA with South Korea, the United States
Given the challenges
posed by several contentious trade issues, a U.S.-ROK FTA in
the near future may be an overly ambitious goal. Nevertheless,
it is undoubtedly in the interests of both countries to work
toward a trade agreement. The American National Association of
Manufacturers has identified South Korea as a one of the "top five
candidate countries" for a future trade agreement. If
an agreement is to be reached, however, this positive assessment
must be accompanied by concerted efforts in Washington and
Both the United States
and South Korea have much to gain from reinvigorating their
economic relations. Seeking an FTA will reinforce the alliance
by establishing a positive venue for dialogue and ultimately serve
the national interests of both countries.
Hwang is Policy Analyst for Northeast Asia in the
Asian Studies Center, and Anthony B. Kim is a Research Associate in
the Center for International Trade and Economics, at The Heritage
The review process
consists of a series of working-level meetings to evaluate the
feasibility of a bilateral FTA. The review process is
scheduled to conclude in June.
During the Korean War,
the United States suffered nearly 40,000 casualties defending South
Korea. During the Vietnam War, South Korea sent more than 100,000
personnel to support the American effort. Today, South Korea
maintains nearly 3,600 personnel in Iraq to assist coalition
U.S. Department of
Commerce, International Trade Administration, National Trade Data,
in "TradeStats Express," at
(May 16, 2005).
Republic of Korea,
Ministry of Commerce, Industry, and Energy, "Exports by Commodity,"
default/statistics_view.asp?num=0407&page=1 (May 16,
U.S. Department of
Agriculture, Economic Research Service, "South Korea: Trade,"
updated September 23, 2004, at
www.ers.usda.gov/Briefing/SouthKorea/trade.htm (May 16,
U.S. Department of
Commerce, Bureau of Economic Analysis, "U.S. International
Services: Cross-Border Trade 1986-2003, and Sales Through
Affiliates, 1986-2002," updated October 29, 2004, at
www.bea.gov/bea/di/1001serv/intlserv.htm (May 16,
The United States has
FTAs with Australia, Canada, Chile, Israel, Mexico, Morocco,
Jordan, and Singapore.
Trade Commission, U.S.-Korea FTA: The Economic Impact of
Establishing a Free Trade Agreement (FTA) Between the United States
and the Republic of Korea, Investigation No.
332-425, September 2001.
Figures stated by Korea
Institute for International Economic Policy (LIEP) and Korea
Institute for Industrial Economics and Trade, "Korea Needs FTAs,
Experts Say," Chosun Ilbo, August 1, 2003.
R. Hill, remarks at American Chamber of Commerce General Membership
Meeting, October 5, 2004, at
usembassy.state.gov/seoul/wwwh0133.html (May 16,
A bilateral investment
treaty (BIT) aims at protecting investment interests and promoting
more market-oriented policies. A U.S.-ROK BIT was proposed in 1998,
but South Korea's screen quota is a major impediment to concluding
the treaty. Many would expect rapid conclusion of the BIT to pave
the way for an FTA between the U.S. and South Korea.
The 106th Congress took
no legislative action on his first attempt (S. 1869).
The screen quota, which
limits the screening of foreign films, has been increasingly viewed
as outdated in light of South Korea's vibrant film industry. Many
South Koreans question the value of the screen quota, given that it
is hindering progress toward an FTA between the two
Although this is an
improvement of seven spots over the past two years, South Korea has
fluctuated within only the "mostly free" category of economic
freedom during the 11 years measured by the Index. See Marc
A. Miles, Edwin J. Feulner, and Mary Anastasia O'Grady, 2005
Index of Economic Freedom (Washington, D.C.: The Heritage
Foundation and Dow Jones & Company, Inc., 2005), at
www.heritage.org/index (May 16, 2005).
National Association of
Manufacturers, "NAM's Recommended Candidates for Additional Free
Trade Agreement Negotiations, 2005," at
(May 16, 2005).
Although, given the challenges posed by several contentious tradeissues, a U.S.-South Korea free trade agreement in the near futuremay be an overly ambitious goal, it is undoubtedly in the interestsof both countries. If an agreement is to be reached, however, thispositive assessment must be accompanied by concerted efforts inWashington and Seoul.
Balbina Y. Hwang, Ph.D.
Senior Policy Analyst
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Anthony B. Kim
Senior Policy Analyst, Economic Freedom
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