When the idea of a free trade agreement (FTA) between the US and South Korea was first mooted early this year, assistant US trade representative Wendy Cutler said that, as it would be the US’s first FTA with a north Asian partner, it would “underscore America’s commitment to and engagement with” the region. Korea’s vice-minister of finance Chin Dong-soo said at an international forum in September that an FTA with the US would serve as a “catalyst” for Korea to grow into a hub in the north-east Asian region. But can the two countries negotiate their way through the thorny issues that are holding them back?

South Korea, the world’s 12th largest economy, is the US’s seventh largest trading partner; and the US is South Korea’s third largest trading partner, after China and Japan. Two-way trade totalled about $72bn last year, with South Korea enjoying a surplus of $16bn. US imports from Korea total $43.8bn while its exports to Korea are worth $27.7bn.

Challenging talks

FTA negotiations began in June, after which the two sides exchanged tariff offers in August. A third round of talks was held in Seattle in early September and a further round is planned for October in Jeju, South Korea. The talks in Seattle covered as many as 10,000 product lines in 19 categories and the negotiations, as Ms Cutler told the media after the talks, were “challenging”.

Soon after the conclusion of the talks in Seattle, Kim Jong-hoon, South Korea’s chief negotiator, acknowledged that the two sides had failed to make “practical progress” in certain “sensitive areas”, such as automobiles, agricultural products and pharmaceuticals. Korea sought to protect its sensitive agricultural sector by, for instance, excluding rice from the proposed agreement and the US tried to shield its textile sector.

The US presented revised tariff reductions for Korean textile imports but they still fell short of Seoul’s expectations. Yet the US stood firm on its demand that South Korea phase out its tariffs on agricultural goods and automobiles, and open financial and other service markets earlier than proposed by Seoul.

Another important barrier is Korea’s ban on the import of beef from the US, which was imposed in 2003 because of concerns about the cattle disease bovine spongiform encephalopathy. Korea has promised to lift the ban in October.

Another issue that hangs in the balance is South Korea’s demand that the proposed FTA cover goods made at an industrial complex in the North Korean border city of Kaesong. The US has rejected that demand, saying that a FTA should not apply to goods originating from “a third country”.

Pharmaceuticals is a sector for which the US would like an agreement, but no progress has been made so far. At the second round of talks in Seoul in July, the US boycotted a final day of talks to protest against a new South Korean medicine reimbursement policy, saying it would discriminate against US pharmaceutical companies.

Clock is ticking

Negotiators are racing against time because US president George W Bush’s ‘fast-track’ authority, which allows US officials to conclude free trade deals without congressional amendments, expires at the end of June 2007. Ms Cutler said that to meet the deadline her “marching orders” are to seek to conclude the FTA by the end of this year.

Given that the collapse of the negotiations at the multilateral trade talks in Doha earlier this year has set back that process for now, the US would like a bilateral agreement with a strong trading partner that will boost its trade and economy. Both countries have a strong incentive to sign on the dotted line as soon as possible.