Global Business 4th Edition by Mike Peng

Exercise 6

The Korea-US Free Trade Agreement (KORUS ) 1
Charles M. Byles (Virginia Commonwealth University)
What does the Korea-US Free Trade Agreement cover Will it deliver its promise
"American manufacturers o f cars and trucks will gain more access to the Korean market and a level playing field to take advantage of that access. We are strengthening our ability to create and defend manufacturing jobs in the United States; increasing exports of agricultural products for American farmers and ranchers; and opening Korea's services market to American companies. High standards for the protection o f workers' rights and the environment make this a model for future trade agreements, which must be both free and fair."
Statement by President Barack Obama announcing
KORUS on December 3, 2010.
The Korea-US Free Trade Agreement (KORUS) had its origins on June 5, 2006, when the United States and the Republic of Korea (South Korea- hereafter, "Korea") began negotiations. Although the agreement was signed by both countries on June 30, 2007, it was stalled for a few years because of the expiration o f President George W. Bush's fast-track trade authority and disagreements about trade in automobiles and beef. Almost three years later on June 26, 2010, President Barack Obama and President Lee Myung-bak expressed commitment to move ahead with the agreement and address the outstanding disagreements.
The United States Congress and the Korean National Assembly approved the agreement on October 12 and November 22, 2011, respectively. The agreement was finally implemented on March 15, 2012.
Importance to the United States of KORUS According to the Office of the United States Trade Representative (USTR), KORUS is the most commercially significant free trade agreement in almost two decades. Estimates from the US International Trade Commission show an addition of $10 billion to $12 billion to the US annual gross domestic product as a result of Korean tariff reductions on merchandise. In addition, merchandise exports to Korea will increase by $10 billion. The tar iff rates prior to the agreement were 12.1% on average for exports to Korea and 3.5% for Korean exports to the United States Almost 80% of US exports to Korea o f consumer and industrial products became duty free on March 15, 2012, and nearly 95% of trade between the two countries will become duty free on March 15, 2017. W ith in 10 years o f the implementation of the agreement, most remaining tariffs will be removed.
The International Trade Commission also estimates the creation of 70,000 jobs as a result o f increased merchandise exports. In addition, o f particular importance for American companies given their competitive advantage in services is access to Korea's $580 billion services market. There is the potential for additional jo b creation in a variety o f services industries such as telecommunications, education, and health care. In addition, there are opportunities for increases in direct investment in Korea. KORUS will provide an institutional framework to remove previous barriers to investment in Korea and the institutions to make investment easier and more predictable such as dispute settlement mechanisms and intellectual property protections. Despite the general support in the United States from the government and business community, there have been predictions that KORUS will produce economic losses for the United States. For example, an Economic Policy Institute working paper by Robert E. Scott published in 2010 warned that KORUS could displace up to 159,000 jobs between 2008 and 2015. In addition, the article argues that a major risk o f KORUS is surging truck imports from Korea. Scott also notes that one study o f the benefits o f the agreement ignores currency manipulation by Korea in order to ensure a continued trade surplus.
Bilateral Trade Agreements in the Context of M ultilateral Trade
A n article in the Economist, published in 2009 noted that legional and bilateral trade deals were increasing rapidly from 49 in 2001 to 167 in 2009. This increase was a reaction to the failure of the Doha Round o f the World Trade Organization (WTO) negotiations. The article, however, gave a number o f criticisms o f regional and bilateral trade deals. First, these deals impose much bureaucracy and paperwork on trade and as a result, many companies do not take advantage o f their provisions. Second, the deals favor less efficient companies that gain advantages primarily through lower tariffs. Finally, regional and bilateral deals do not serve as a stepping stone to broader multilateral trade deals but are instead a distraction for governments. Rather than devoting time working on the multilateral process (which could take much time and energy and is less visible to the public), countries instead work on regional and bilateral trade deals such as KORUS and the Colombia and Panama FTAs, which can take less time and are more visible to the public. W ill these criticisms apply to KORUS Can it provide some trade advantages especially to President Obama 's National Export Initia tive to double exports between 2009 and 2014
The Essence of KORUS
The KORUS agreement consists of 24 chapters and several annexes, appendices, and confirmation letters. What follows is not a detailed discussion of each chapter, annex, appendix, or confirmation letter, but rather an exposition of the key provisions in order to show the role o f institutions (i.e., KORUS) not only on primarily trade (both merchandise and services), but also foreign direct investment (FDI). In addition, the case will show the link between a bilateral trade agreement and the protocols o f the W T O agreement o f which the United States and Korea are part.
Trade in Goods
KORUS reduces tariff barriers (e.g., customs duties) for goods exported to Korea and imported into the United States. Neither country can increase tariffs on a given item (some exceptions exist such as a safeguard action or as authorized by the W T O 's Dispute Settlement Body) and both countries should work to gradually eliminate existing tariffs.
KORUS also addresses nontariff barriers by eliminating existing ones or preventing future ones to be enacted. Examples o f prohibited nontariff barriers are export or import price requirements, import licensing conditioned on the fulfillment of a performance requirement, and voluntary export constraints. Administrative fees (charges other than duties applied to imports) must be kept to the approximate cost o f the service and cannot be used as a means of protection of domestic industries. Each country must make available to the other a list of all fees and charges in connection with imports or exports.
The agreement also addresses the so-called "distinctive products" as follows. Korea must recognize Bourbon Whiskey and Tennessee Whiskey as products only of Tennessee. The United States must recognize Andong Soju and Gyeongiu Beopju as distinctive products of Korea.
The agreement on trade in goods also has certain institutional provisions. A Committee o n Trade in Goods with members from each country will be established for the purposes o f ensuring that both parties adhere to the agreement and to handle any disagreements between the parties. This committee may meet at the request o f either country or the Jo in t Committee (described later) to address matters relating to trade in goods, rules o f origin (Chapter 6 o f the agreement), and customs administration and trade facilitation (Chapter 7 o f the agreement). The committee will also resolve any differences between the countries related to the classification of goods under the H a rm o nized System (a common or "harmonized" method of describing and coding products).
Automobiles
The Korean automobile market presents a major opportunity for US automobile manufacturers. KORUS addresses an important no ntariff barrier- Korea's automotive safety standards that have been a major barrier to US automobiles. KORUS also addresses the Korean environmental standards that have in the past been another n o nta r iff barrier. The agreement attempts to articulate standards that address important safety and environmental standards while at the same time minimizes their role as barriers to trade. Some specific aspects o f the agreement on automobiles are the following: KORUS reduced the tariff on US automobiles from 8% to 4% with a complete elimination in 2016. The US tar iff on Korean imports will be 2.5% u n t i l 2016, when the tariffs will be eliminated entirely. W ith in the agreement, a dispute settlement panel will hear complaints from either country. I f the panel rules in favor o f the complaining country, that country may suspend its tar iff reductions and assess duties at the previous W T O rate (called a "snapback" as the duties go back to their previous rate).
The agreement also requires amendment to Korea's engine displacement taxes to reduce those taxes over time as these taxes have an adverse effect on US automobile prices. Korea has also agreed to give the United States up to one year to comply with any new automob. le regulations. Additionally, as mentioned earlier, Korea will work at harmonization o f automobile safety an environmental standards. For example, KORUS allows some US vehicles that comply with US safety standards to be considered in compliance with Korean standards. The agreement also allows some leniency on meeting Korean environmental standards. Specifically some US manufacturers (classified according to the' number o f cars sold) will be considered meeting the standards even i f they are below it within certain limits Finally, the agreement allows a safeguard measure w ich allows the United States to impose a duty i f there is a surge m Korean imports that cause damage to the US automobile industry.
Agricultural Products
The United States is Korea's m a in supplier o f agricultural products. The agreement requires each party to abide by the Tariff R ate Quotas in the agreement Tariff Rate Quotas lay out the quantity o f agricultural products listed by product type that can enter each country duty free. Typically, the quotas show the quantity in metric tons o f a product allowed in duty free for agreement' At some later year (typically 10,12, or 15), the duty free amount becomes unlimited. The agreement also contains an annex o f Agricultural Safeguard Measures for Korea. This section includes a schedule by product that gives the year (1, 2, 3, 4), the amount o f the import in metric tons that will trigger the safeguard duty, and then the actual duty A safeguard duty allows the impo rt ing country to impose a duty if imports reach a level that would impose damage on a particular sector. For example, if pork imports reach 8,250 metric tons (the trigger level) in year 1, Korea may impose a safeguard duty o f 22.5%.
There are certain agricultural items that merit special attention. The first is beef, which in the recent past has been restricted in Korea. In 2003, Korea was the third-largest market for US beef exports (US market share m that year was 76%). A subsequent ban in US beef imports as a result o f m a d cow disease led some members of the US Congress to condition support of KORUS on a full opening of Korea's market for US beef. Under the KORUS agreement, Korea would eliminate its 40% tariff on US beef imports over a 15-year period. A safeguard system applies to beef as for other agricultural products where Korea can impose safeguard tan offs (temporarily) in response to a-surge in imports The trigger for this tariff was 270,000 metric tons in 2012, and the trigger amount will increase 2% annually u nt il year 16 (2027) when safeguard mechanism will e removed. Since the opening o f the Korean market exporters have gained market share (38% in 2013 compared to 1% i n 2005).
The second agricultural product worth mentioning nee. Under KORUS, US rice receives no preferential treatment. Korea simply has to abide by its W T O com Hutment with respect to rice where the United States would receive equal treatment under the W T O 's non discrimination rule. In the negotiations, Korea would no t change its position on rice as a result o f the coun trys desire to maintain self-sufficiency, the cultural identity provided by rice, and the political influence o f rice farmers. The United States was faced with the choice o f accepting Korea's stand or having no agreement at all. 5
Geographic Indications for Dairy Products During the course o f negotiations o f KORUS, the US airy sector was concerned that geographic indications (a sort o f trademark that restricts the use of certain names such as Champagne or Vidalia onions to products only from that region) negotiated in theEU-Korea A might place US dairy products at a disadvantage m the Korean market. For example, i f cheese names such as feta, muenster, and parmesan are restricted in the Korean market, US exporters will be at a significant disadvantage. To address these concerns, Korea agreed that use o f names such as camembert, mozzare lla em m e n ta l , parmesan, and others as applied to US cheeses exported to Korea would be allowed. Other cheeses, however, such as asiago, feta, and gorgonzola can only be sold m Korea by EU exporters.
Textiles and Apparel
Textile and apparel imports into the United States from d" reaSin g over the last few years. In Ports came from Korea compared to 9% in 1990. Simi.arly, garment imports from Korea in 2013 were less than 1% o f all garment imports compared to 10% in 1990. This decrease is partly a lesult o f increases in imports o f textiles and apparel z m th m exports *° Korea are quite smaI1-In 2013, the US exported *285 millio n in textiles and *100 million in garments to Korea. Limmediately eliminated tariffs on 52% (of value) o f US imports oftexti.es and apparel from Korea. Tariffs o n an additional 19% will be eliminated by 2016 and tanffs o n the remaining 29% will be eliminated a t the end o f 2021. For US textile and apparel exports to Korea, tariffs were eliminated on 77% (in value) in 2012. Tariffs will be eliminated on an additional 13% in 2015, and the remaining 10 % by 2016.
KORUS allows certain "Bilateral Emergency Actions" in response to a surge in imports. Such actions may be in the form o f suspension o f further tariff reductions or an increase in the tar iff rate. The importing country may only take such an action following an investigation. Written notice must be given to the exporting country and the country taking the emergency action must provide concession in the form of tariff reductions on other textile and apparel products or any other products provided both countries agree. Certain Rules o f Origin as laid out in the agreement (Chapter 6 of KORUS) apply to textiles and apparel. In addition, a Committee on Textile and Apparel Trade Matters has been established and will meet at the request o f either country to consider any issues relating to trade in textiles and apparel.
Rules o f Origin and Origin Procedures KORUS lays out complex rules o f origin and origin procedures that must be met in order for a good to be considered "originating" in either partner country and thus qualifying for a preferential tariff. These rules are stated in Chapters 4 (Textiles and Apparel) and 6 (Rules o f O r ig in and O r ig in Procedures). The customs office in either country is responsible for applying those procedures to determine whether the relevant country meets the criteria and hence qualifies for the preferential tariff. Thei'e has been concern among some US exporters that the Korean Customs Service has undermined the spirit o f the FTA by requiring excessive documentation. The United States has questioned a number of decisions issued by the Korean Customs Service on the qualification of certain products for preferential treatment.
Technical Barriers to Trade
KORUS contains a chapter on the rules governing technical barriers to trade. The goal is to allow reasonable technical standards needed for safety and other goals that conform to accepted international standards but that are not barriers to trade. The agreement specifically seeks to have the parties.. seek to identify, develop, and promote trade facilitating initiatives regarding standards, technical regulations, and conformity assessment procedures that are appropriate for particular issues or sectors." In addition, the agreement suggests that "These initiatives may include cooperation on regulatory issues, such as transparency, the promotion of good regulatory practices, alignment with international standards, and the use o f accreditation to qualify assessment bodies." The transparency aspect o f the agreement requires that each country participate in the development o f the standards, technical regulations, and conformity assessment procedures. With respect to automotive standards and technical regulations, the agreement stipulates that technical regulations do not create unnecessary regulations that are impediments to trade. To achieve this goal, KORUS requires that these regulations only be used to achieve legitimate objectives such as national security requirements, the prevention o f deceptive practices, the protection of h um a n health or safety, animal or plant life or health, or the environment. The agreement establishes a Committee on Technical Barriers to Trade with the functions o f addressing a number of issues relating to problems and questions relating to the implementation o f the Chapter on Technical Barriers to Trade.
Trade Remedies
The primary trade remedy in KORUS is the safeguard measure. By definition, a safeguard measure is an allowance to either party to impose a temporary tariff in response to a surge in imports that has the potential to cause damage (loss in sales and /o r employment) to a particular industry. The agreement allows either country to respond in one o f two ways. First, it may suspend the further reduction of a customs duty in accordance with the agreement. In such a case, the increase in the duty should not exceed the W T O agreed upon Most-Favored-Nation (MFN) duty at about the time the safeguard action is taken. Second, either country may increase the customs duty on the product in question not to exceed the lesser of the MFN duty at the time the action is taken or the MFN duty in effect on the day immediately following the signing o f the KORUS agreement.
Foreign Direct Investment
Both countries agree that each country will offer treatment no less favorable than it accords investments in its own country by its own investors. Specifically, the no less favorable rule applies to the establishment, acquisition, expansion, management, conduct, operation, and sale or disposition of investments in either country. In addition, the agreement stipulates that each country provide fair and equitable treatment and full protection and security as customary under international law. Fair and equitable treatment includes agreement not to deny justice in criminal or civil proceedings and adhere to the principles o f due process. Full protection and security means that each country should provide police protection as required under international law. KORUS prohibits expropriation o f investment property except under certain circumstances (e.g., for a public purpose). Where such expropriation occurs, compensation must be promptly paid. KORUS requires each country to facilitate transfers relating to investment property (e.g., profits, dividends, and capital gains). The agreement also p io h ib its the application o f performance requirements to any investment (e.g., having a requirement to export at a given level or have a certain level o f domestic content). W ith respect to staffing the investment, the agreement requires that neither country stipulate the nationality o f the top management team and board o f directors. Finally, KORUS has a dispute settlement process whereby the countries first try to resolve the issue through negotiation before go ing to arbitration. Services A number o f chapters in KORUS address services: Chapter 12 (Cross-Border Services), Chapter 13 (Financial Services), and Chapter 15 (Telecommunications). This section deals primarily with Chapter 12, although KORUS broadly seeks to reduce barriers across all service categories. The commitments outlined here generally apply to financial services and telecommunications. As with investments, the agreement requires that each country provide treatment no less favorable than provided to local service suppliers. The agreement requires that neither country impose limitations on the number o f service suppliers, quotas on the value o f service transactions, the total number o f service operations, or the total number o f persons that maybe employed in a service sector or in a particular firm providing those services. In addition, no country can restrict or require a particular legal entity through which the service is supplied no r require either country to establish a local office as a condition for trading in services. As with investments, KORUS requires that transfers (e.g., profits and dividends) be freely permitted without delay. Each country is also required to make available to the other any rules and regulations relating to services. 292 Institutional Provisions and Dispute Settlement KORUS establishes a Joint Committee to be co-chaired by the United States Trade Representative and the Korean Minister o f Trade. The committee's purpose is to oversee implementation of the agreement, supervise the work of all other committees (which may address specific products such as automobiles), find ways to enhance trade between the countries, and establish panels to resolve disputes.
An important responsibility o f the Jo in t Committee is dispute settlement. KORUS requires that where a dispute arises, the countries first attempt to resolve the dispute through negotiation. The dispute settlement process only applies to issues relating to violations of the agreement as outlined in each chapter, for example where a country foils to execute its obligations as outlined in the agreement. I f negotiation fails to resolve the dispute, the Jo in t Committee will establish a panel o f three members to hear the case. The panel will then review the case and present a report within 180 days. The country losing the dispute may make the required changes. I f it does not, then the w in nin g country may suspend certain benefits in accordance with recommendations o f the panel.
KORUS at its Two Year Anniversary
After two years in force, has KORUS expanded trade a nd investment between the United States and Korea Generally, the evidence is in favor o f a "yes" answer. According to the Office o f the USTR, at the second anniversary o f KORUS by March 2014, there have been several benefits. Overall, trade between the two countries has increased to the poin t that Korea is now the sixth-largest trading partner o f the United States. Exports o f manufactured goods, services, and agricultural products have increased. US exports o f automobiles increased 80% compared to 2011, and service exports to Korea increased 18.5% from 2011 to 2013 According to the USTR, three rounds o f tariff cuts or eliminations have taken place since the agreement came into force on March 15, 2012. By January 1, 2016 Korean tariffs on over 95% of US merchandise exports will be eliminated.
For Korea, there have also been gains. Korean investment in the United States has grown considerably and in 2013 exceeded US investment in Korea. Exports o f goods to the United States grew by 7% while Korean sales o f passenger vehicles grew by 79.5 % and packaged medicines by 98.7% from 2011 to 2013.
1) c Charles M. Byles. Reprinted with permission.
Sources: Based on (1) Korea-US Trade Partnership, 2014, The facts about the Korea-US Free Trade Agreement, Embassy of the Republic of Korea, retrieved December 22, 2014, from http://www.uskoreaconnect.org/files/publications/facts-about-the-korea-us-fta.pdf; (2) Economist, 2009, Trade agreements: Doing Doha down, September 3, retrieved December 22, 2014 from http://www.economist.com/node/14363297/print; (3) Korea Southeast US Chamber of Commerce, 2014, Happy anniversary KORUS FTA, retrieved January 4, 2015, from http://www.koreaseuschamber.org/kseuscc-news/happy-anniversary-korus-fta; (4) J. Meltzer, 2010, A closer look at the Korea-US Free Trade Agreement, Brookings Institution, December 8, 2010, retrieved December 22, 2014 from http://www.brookings.edu/research/opmions/2010/12/08-us-korea-trade-meltzer; (5) Office of the United States Trade Representative, 2014, US-Korea Free Trade Agreement shows strong results on second anniversary, retrieved December 22,2014, from http://www.ustr.gov/trade-agreements/free-trade-agreements/korus-fta and http:// www.ustr.gov/about-us/press-office/press-releases/2014/March/US-Korea-Free-Trade-Agreement-Shows-Strong-Results-on-Second-Anniversary; (6) R. E. Scott, 2010, Trade policy and job loss: US trade deals w ith Colombia and South Korea will be costly, EPI Working Paper, February 25, retrieved December 22, 2014, from http://epi.3cdn.net/87da5b7ec4f5677422 _o9m6bh6nv.pdf; (7) US Korea Connect, A history of the US-Korea Free Trade Agreement, retrieved December 22, 2014, from http://www.uskoreaconnect.org/about/history.html; (8) US Korea Connect, KORUS FTA trade figures, retrieved December 22, 2014, from http://www.uskoreaconnect.org/facts-figures/issues-answers/korus-trade-figures.html; (9) White House Office of the Press Secretary, 2010, Statement by the President announcing the US-Korea Free Trade Agreement, December 3, retrieved December 22, 2014, from http://www.whitehouse.gov/the-press-office/2010/12/03/statementpresident-announcing-us-korea-trade-agreement; (10) B. Williams, M. E. Manyin, R. Jurenas, M. D. Platzer, 2014. The US-South Korea Free Trade Agreement (KORUS FTA): Provisions and implementation, Congressional Research Service, September 16, 2014, Retrieved December 23, 2014, from https://www.fas.org/sgp/crs/row/RL34330.pdf.
Go online and read President Obama's National Export Initiative. To what extent did KORUS contribute to the main goal of this initiative