The FTA and ‘Fortress Korea’

It can be disturbing to find so  much to agree with in the writings of someone who doesn’t share your  outlook on  the bigger picture.  I generally favor the lowering of trade barriers and oppose the protection of domestic industries  from the competition of  a fair and open market.  Note the key caveat in that last sentence, for defining “fair and open” is where the devil is.  I suspect Alan Tomlinson defines it more narrowly than I do, and that he doesn’t share my broader outlook.  Yet  in his piece  at American Economic Alert.org, he demonstrates that he  also knows the subject matter far better, which may be why I found his arguments about the FTA so persuasive.  Also, this passage may have colored my thinking favorably early on:

Korea’s unions are independent and effective.   But their U.S. counterparts (along with many American national security stalwarts and others) have legitimate labor rights concerns over Korea’s ardent desire to bring under the FTA’s purview the new southern-financed Kaesong industrial complex located in dictatorial and belligerent North Korea.

Indeed, Kaesong was politically poisonous to the  FTA because it cut through opaque arguments about countervailing duties and arbitration with  three things  that most people can easily understand and not like:  WMD proliferation, slave labor, and hypocrisy.  For those of us who frankly don’t understand the economic substance that well, I haven’t seen anyone explain it  as well as Tomlinson.  Tomlinson obviously followed the progress of the negotiations well enough to know that a wide impasse separated the parties  at the eleventh hour.  I didn’t think we could bridge it,  but I underestimated how much we were willing  to  concede to ram the deal through.  Not surprisingly, that left may important technical matters unresolved.

[T]he Korea FTA has “Rush Job” written all over it.   A final agreement needed to be signed by March 30, or else it couldn’t be fast-tracked by Congress until trade promotion authority was renewed.   Clearly, both Seoul and Washington were anxious to avoid lengthy debate in and extensive amendments by Congress.   

Yet with Korea’s market obviously much more closed than America’s, and the Bush administration plainly in the role of demandeur, there’s every reason to believe that, on numerous specifics, the United States settled for a bad deal rather than no deal at all.   In fact, as revealed by comments written from the U.S. government’s official Industry Trade Advisory Committees, dozens of critical details still need to be clarified or actually agreed on.   More bizarrely, U.S. and Korean negotiators are still frantically working to produce a second “final” text before a second fast track-related deadline expires this Saturday night.   

Conceding every point to the Koreans didn’t end the impasse, of course; it just brought Congress into the negotiations.  Here’s a long, must-read graf that fits with everything I’ve seen about  how Korea’s xenophobia extends to  its trade policy:

The biggest problem with the Korea FTA […]  concerns the Bush administration’s reluctance to acknowledge the real nature of the Korean economy.   It’s best seen not as a system shielded by hundreds or thousands of discrete tariff and even non-tariff barriers that, however vexing, can be meaningfully opened by canny American diplomats.   Instead, the Korean system is best seen as one gigantic, all-embracing trade barrier whose fundamental purpose is to disadvantage foreign competitors, and whose specific forms at any given time are limited only by the human imagination

After all, Korea is a country that, like most developing countries, needed to rely heavily on export-led growth to promote industrialization, and that is fully aware that its domestic market is way too small to support its ambitious ““ and hugely successful ““ technology development plans. This orientation has meant not only promoting exports, but nurturing national champions in heavily traded industries like steel, shipbuilding, autos, and electronics by (a) curbing imports and (b) providing extensive subsidies.   

According to the Office of the U.S. Trade Representative, Korea is a country whose government openly mounted anti-import public relations campaigns until the very recent past, and retains numerous more subtle means of stigmatizing foreign products.   It’s a country whose government agencies require prior approval to import an unusually wide range of products.   It’s a country with a state-owned Development Bank charged with providing favored sectors with low-cost loans and loan guarantees.   It’s a country that also provides major industries with special tax breaks and government-supervised sales of debt obligations.   It’s a country that keeps most of its regulations, rules, and policies secret, and gives unaccountable bureaucrats wide-latitude in applying them.   It’s a country whose drug approval process requires foreign pharmaceutical companies to submit proprietary data to the government, which then often shares it with Korean competitors.   It’s a country that currently imposes five types of engine taxes plus a Special Consumption Tax to discriminate against foreign auto sales.   And it’s a country that has kept out foreign motorcycles by banning the heavy models made competitively by Harley-Davidson and other non-Korean producers from being driven on expressways and certain bridges ““ exactly where they would perform best.

The effectiveness of Korea’s manifold trade barriers shows up in the country’s trade with the United States.   It’s bad enough that from 1997 to 2006, the U.S. trade balance with Korea shifted from a $1.35 billion surplus to a $13.92 billion deficit.   And that the manufacturing trade deficit during this period rose more than ten-fold, to $16.48 billion.   

Tomlinson then cites statistics to prove a very revealing fact:  Korea’s imports from the United States are composed almost exclusively of  products Korea can’t make for itself. 

Even more revealing, Korea’s imports from the United States are highly concentrated in a handful of industrial sectors.   Certain products like aircraft and, more recently, semiconductors, tend to dominate U.S. global trade flows.   But the Korean pattern is glaringly distinctive.   America’s top five goods exports to the world in 1997, for example, represented 19.19 percent of total U.S. goods exports. (In order, they were aircraft, semiconductors, a catch-all category known as special classification goods, autos and light trucks, and basic inorganic chemicals.)    By 2006, this total had dipped to 18.53 percent    (with the top five exports being identical).   

The top five U.S. goods exports to South Korea in 1997, however, represented a much higher 27.71 percent of total U.S. goods exports that year.   The list’s makeup was distinctive, too ““ in order, the Korea top five were semiconductors, aircraft, non-poultry meat products, semiconductor production equipment, and computer parts.   In 2006, this degree of concentration increased to more than 36 percent (with the list changing to semiconductors, aircraft, semiconductor production equipment, basic inorganic chemicals, and aircraft parts).

In fact, the only major U.S. trade partner with a profile like Korea’s is China, where the top five’s share of total U.S. goods exports rose from 33.19 percent in 1997 all the way to 39.67 percent in 2006.   The implications are pretty clear: to a great extent, Korea (along with China) buys from the United States products it doesn’t yet make at all itself, or in which it remains hopelessly uncompetitive.

The obvious answer to this argument  is that the FTA was designed to address this very problem by opening Korea’s markets.  But Tomlinson doubts Korea’s sincerity in promising to do this, and also doubts the FTA’s provisions for enforcing that promise:

Even the Bush administration has conceded that Korea is a special trade policy case.   Thus it has trumpeted  how systematically it has won Korean promises to eliminate or greatly reduce various non-tariff barriers, and how many Korean commitments it has won to improve regulatory transparency.   Mindful of Seoul’s failure to carry out previous pledges to open the auto market, the White House has also boasted of crafting “an innovative process for settling disputes” in this sector “within six months” that will “serve as a powerful deterrent against violations of FTA commitments.    The secret weapon?   The right to restore pre-FTA auto duties whenever a bilateral dispute resolution panel finds a violation ““ a practice known as “snapping back” tariffs. 

Tomlinson then explains why the snap-back is no deterrent because it  wouldn’t so much as scratch the competitiveness of Korean cars.   There’s much more, so read the whole thing.  You’ll be glad you did.