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June 15, 2009

KORUS FTA Strengthens the U.S. Economy and Alliance with Korea

By and

During their June 16 summit, Presidents Barack Obama and Lee Myung-bak will discuss a daunting agenda filled with challenges. Though overshadowed by North Korean provocations, a critically important issue for both countries is reviving the Korea-U.S. free trade agreement (KORUS FTA).

Although signed in June 2007, the agreement has yet to be ratified--shunned by the Obama Administration, the Democratic leadership in Congress, and the usual purveyors of protectionism. This important agreement, which would help bolster America's economic and strategic relationship with a critical ally, is gathering dust, shelved indefinitely.

A Costly Mistake

Continuing to ignore the KORUS FTA would be a costly mistake. The FTA would add an estimated $10 billion to $12 billion to U.S. GDP annually, promote job growth, and expand market access for American businesses by eliminating 95 percent of bilateral tariffs. The FTA would also usher in a new era for U.S. economic engagement with East Asia and expanded opportunities for the American economy.

The agreement resolves many of the problems currently thwarting the full economic potential of U.S.-South Korea bilateral trade by:

  • Giving U.S. businesses an important bridgehead into the Asian market;
  • Counterbalancing South Korea's growing trade ties with China;
  • Potentially allowing the U.S. to regain its position as Seoul's preeminent trade partner;
  • Serving as a powerful statement of Washington's commitment to Asia and broaden the U.S.-South Korea relationship beyond the military alliance; and
  • Establishing formal channels through which ongoing trade concerns can be addressed.

The Next Logical Step

Given the significant levels of trade and foreign investment already occurring between the U.S. and South Korea, a bilateral trade agreement has long been a natural and logical step to further strengthen economic and political relations between the two countries.

The U.S. International Trade Commission has estimated that the impact of the trade agreement would increase U.S. GDP by $10-11.9 billion and result in a significant expansion of two-way manufacturing, agriculture, and services trade.[1] Ultimately, a trade pact with Korea would generate significant economic gains and would be the second largest free trade area for the United States, in terms of dollar value, after NAFTA.

In general, U.S. exports to Korea face higher tariffs and tariff rate quotas than do Korean exports to the U.S. The agreement would eliminate all industrial tariffs in the United States and Korea within 15 years of implementation, with most tariffs phased out within 10 years. More than 80 percent of U.S. industrial exports by value to Korea will receive duty-free treatment immediately upon implementation of the agreement.[2] U.S. agriculture exports would also benefit: Almost two-thirds of Korean imports of U.S. farm products will become duty free immediately upon entry into force of the agreement.[3]

Protectionism's New Guise

Unfortunately, the pervasive sentiment within the Obama Administration and the U.S. Congress is that of trade protectionism, though this attitude hides behind the more benign moniker of "fair trade." In the current political mood, congressional trade decisions will be based more on emotion and perceptions than logic and facts.

The Obama Administration has signaled that it is willing to walk away from trade agreements that would help U.S. economic recovery. U.S. Trade Representative Ron Kirk asserted during his confirmation hearings that the KORUS FTA was "not fair [and] simply isn't acceptable." He also signaled a desire to use free trade agreements to accomplish societal re-engineering or "social accountability" by saddling them with efforts to "address international environmental challenges."

Auto Industry Resistance to Fair Competition

Yet for all the benefits attached to the agreement, it is being held hostage to the interests of the U.S. auto industry and its advocates in Congress who seek to return to the negotiating table in the search of a "fairer" agreement. However, there is nothing unfair about KORUS.

As yet more evidence of the kind of wrong thinking that has driven America's car makers to the economic brink, Detroit is fighting to defeat a bill that redresses the very trade barriers it has complained about for years. Rather than cater to the protectionist demands of a few, the Administration should commit to supporting and introducing the agreement for congressional approval this year.

Importantly, KORUS addresses the most pressing concerns of the auto sector. The FTA would eliminate the tariff on U.S. imported cars and remove a tax system based on engine size, which was seen as discriminatory against U.S. cars. The agreement even comes with an unprecedented satisfaction-guaranteed "snapback" clause on automobiles, which would allow Washington to re-impose all pre-existing tariffs if South Korea were to engage in unfair trading practices.

Opponents of the KORUS FTA claim they simply want a level playing field, but the reality is that they want a guaranteed victory. The auto unions refuse to compete unless they are guaranteed to get more points on the board despite doing nothing to improve their game. That is not fair trade; that is managed trade. And the American consumer and taxpayer will suffer for their shortsighted demands.

Counterbalances and Costs

By formalizing bilateral economic ties with South Korea through an FTA, America also solidifies its ties to northeast Asia through international trade, providing a counterbalance to China's economic influence in the region.

There are also very real costs in not approving the KORUS FTA. Rejecting the agreement would result in discriminatory tariffs and non-tariff barriers that work against U.S. companies staying on the books. American businesses would be at a disadvantage, losing further market share as other countries sign FTAs with South Korea.

Opportunity and Prosperity

Without the lower barriers to trade that U.S. trade agreements and the more than six decades of multilateral trade liberalization has brought to bear on the world's markets, America's ability to weather the current economic storm would be much less. FTAs open markets, protect investors, and increase economic opportunity and prosperity. In short, free trade agreements serve to promote U.S. interests, not to weaken them or to place an unfair burden on American workers and consumers.

A new Administration keen on promoting America's economic well-being should turn away from trade policies that protect the few who fear competition at the expense of the consumers and businesses working hard to not only survive today's market downturn but to prosper in the future. Therefore, the Administration and Congress must not allow the KORUS FTA--a free-trade agreement that would strongly benefit America--to linger any longer in protectionist purgatory.

Bruce Klingner is Senior Research Fellow for Northeast Asia in the Asian Studies Center, and Daniella Markheim is Jay Van Andel Senior Trade Policy Analyst in the Center for International Trade and Economics, at The Heritage Foundation.

Show references in this report

[1]U.S. International Trade Commission, "U.S.-Korea Free Trade Agreement: Potential Economy-Wide and Selected Sectoral Effects," Investigation No. TA-2104-24, USITC Publication 3949, September 2007.

[2]International Trade Administration, "U.S.-Korea Free Trade Agreement Market Access Results: Industrial Goods Summary Report," at http://www.ita.doc.gov/td/tradepolicy/sectorreports_korea.html (June 12, 2009).

[3]U.S. Department of Agriculture, Foreign Agricultural Service, "U.S.-Korea Free Trade Agreement: Benefits for Agriculture," July 2007, at http://www.fas.usda.gov/info/factsheets/korea.asp (June 12, 2009).

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