A global procurement company, Chicago-based DirectAlly, sources a lot of high-quality components for its clients from South Korea. “We import everything from fasteners, screws, bolts and animal cages to plastics,” says CEO Steve Kim. Rubber and high-quality steel are also top procurement items. It is little wonder then that Mr Kim is rooting for a successful completion of the ongoing US-Korean free trade talks.
Tariffs are only part of the landed cost of an import – that is, the final cost of an imported product after everything from transportation to taxes has been factored in – he says. “But it can be a significant part and when these rise too high, it can quickly price us out of a market.” That has not happened yet for Mr Kim in Korea. A US-Korean free trade agreement (FTA) would mean it never would.
Unfortunately for Mr Kim, the chances are that his hopes are not going to be realised. With an impending deadline of March 31 – the date by which negotiations must be concluded to get a US Congressional endorsement while the necessary trade promotion authority is still in effect – those that have been watching the year-long deliberations believe that the odds are slim that the agreement will be successfully negotiated.
“For several reasons, a positive outcome is not looking likely,” says Elliot J Feldman, a partner at law firm Baker Hostetler’s Washington, DC, office who represented the provincial government of Quebec in the North American Free Trade Agreement (Nafta) agreement among the US, Canada and Mexico.
Forward-looking US firms, not to mention European companies that are hoping the EU will swoop in after the US is forced to bow out, are starting to plan for the next phase of Korea’s global trade outreach programme, which is probably going to have a stronger regional focus and greater ties with Europe.
“Between the combination of free trade agreements and their embrace of international intellectual property laws, it is clear they are putting a lot of emphasis on forming new ties in the international markets,” says John Rabena, a partner at Sughrue Mion who focuses on international IP issues. He has recently been to Korea, China, Japan and Brussels to discuss various IP issues, and how international laws and regulations could affect business and trade in these regions. “The Koreans are well on their way to becoming a huge force internationally,” he says.
Agreement in doubt
It is the countries’ global gravitas that has caused the negotiations between the Koreans and Americans to all but stall. “This has been a very interesting negotiation because it is arguably the first time that the US has been in an FTA negotiation – apart from its FTA with Canada – with a developed country that has a lot at stake in the outcome,” says Mr Feldman.
Other negotiations have been with developing countries and have been largely done for political reasons by the country that wishes to be perceived as having a special relationship with the US, he says. The agreement with Australia was also driven by politics, he adds. “Neither side gave up much or got that much in exchange.”
Korea, though, has been willing to make real demands on the US and has indicated it is willing to walk away from the talks if it does not get what it wants, says Mr Feldman. Some of the demands Korea has made would require a change in the US trade law, which is highly unlikely to occur, especially now that the Democrats control Congress.
One proposal, in particular, has resulted in a stalemate: Korea has asked to be exempted from the ‘cumulate’ procedure initiated by the International Trade Commission when it is determined that a US industry has been hurt by dumping or illegal subsidies. A basic description of this complex process is a grouping of the offending imports from a region, and the penalising of those countries. Korea’s rationale for the requested exemption is that it does not want to be cumulated with China to determine injury.
To make this exemption the US would have to change its trade law. “The US position to Korea has been ‘we are happy to talk with you but we cannot get the law changed’,” says Mr Feldman.
It is possible that Korea might concede on this point.
Another issue, which is not technically part of the FTA under negotiation but is nonetheless threatening to scuttle the talks, is Korea’s ban on US beef imports. The ban has been in place since 2003, in response to reports of BSE in US cattle. Korea relented last year to allow imports of boneless meat but it was discovered that bone fragments were in those shipments and the ban was reinstated. This has been a sore point of negotiation for the US.
The stalemate is unfortunate because Korea has increased its trade flows significantly with all of the countries with which it has signed FTAs, says Sunhee Lee, also a partner at Sughrue Mion. “Korea has successfully negotiated FTAs with six countries, starting with Chile in April 2004,” she says.
She cites figures provided by the Korea customs service that depict a steady uptick in trade: between April 2004 and March 2005, Korean exports to Chile grew by 58.2% and its imports grew by 44.9%. Between April 2005 and March 2006, those figures were 52.6% and 26.6%, respectively.
With this history, Korea is sure to look elsewhere to form trade and investment relationships if the talks with the US fail, Mr Feldman predicts. “Others will rush in. The EU, for instance, is likely to offer to make a deal with them. Their pattern is to wait and see what the US doesn’t get and then step in behind them.”
Mr Feldman adds that Korea will also begin to look more systematically at other Asian nations in its own sphere of interest, such as China. “The Koreans are saying: ‘If you don’t do this we can and will form regional agreements’.”
Most members of the US trade community would like to see an agreement reached with Korea. Robert Peek, director of communications at the Jacksonville (Florida) Port Authority (Jaxport), says that the port is making concrete moves to establish new trade lanes with Asia in general, including Korea. “Jaxport has historically been active in the Americas. Last year, we signed an agreement with Japan’s Mitsui OSK Lines to build a 158-acre terminal here.” It will expand the port’s container handling capacity by up to 800,000 TEUs/year. The port hopes to leverage this facility for additional trade business in the region.
Jaxport will continue its Asia initiative with or without a US-Korean FTA. Most US companies that trade with Korea are unlikely to reconfigure operations if the FTA does not happen. Some firms that assemble products in the region for re-exportation to nearby markets or back to the US may even avail themselves of the free trade zones in the country, such as the multi-billion dollar facility in development at Incheon.
Spanning more than 50,000 acres and ultimately expected to accommodate 500,000 people, Incheon Free Economic Zone (IFEZ) was set up in 2003 as part of the national government’s Act on Designation and Management of Free Economic Zones. It will be developed through to 2020, with phase one due for completion in 2008. As of November 2006, IFEZ had received 42 investor agreements worth $28.2bn.
Still, Mr Feldman cannot help but observe: “In the abstract, an FTA makes the whole country a free trade zone.”
Mr Kim says: “It would be a huge benefit for our business. I could procure steel at a cheaper cost, and that would be a huge plus for our company.”