Sunday, June 04, 2006

A Return, and FTA Talks

I should be taken out in to the street, beat bloody, and shot for this post. It has been too long since I have posted. However lazy summer days are here for me, and I can resume some blogging activity it seems. It remains to see with how much frequency however, especially since I am leaving for a one-week vacation in two days.
This morning I realized I should finish up my FTA posts, since the talks are in the news more and more. I originally planned a rather exhaustive look at both sides and the impact. However the US side got longer, and longer, and longer. My view of the US side is currently eight pages, and frankly most of that is intro and small piddling requests the US will make of the FTA. The real core the US would really like to change may take me three or four times the time and effort the piddling issues took.
Getting back to it, all this work reinforces one of my arguments about the US-ROK FTA. Without getting too much into it, let me explain. Compare these two quotes from a Heritage Foundation report on economic freedom:
United States


Score: 2.0

The World Bank reports that the United States' weighted average tariff rate in 2004 was 1.8 percent, down from the 2.6 percent for 2002 reported in the 2005 Index, based on World Bank data. According to the Economist Intelligence Unit, the government imposes non-tariff barriers, including quotas, tariff rate import quotas, anti-dumping provisions, countervailing duties, and licensing requirements, on a number of goods. Based on the lower tariff rate, as well as a revision of the trade factor methodology, the United States' trade policy score is 0.5 point better this year.
South Korea


Score: 3.5

According to the World Bank, South Korea's weighted average tariff rate in 2002 (the most recent year for which World Bank data are available) was 10 percent. (The World Bank has revised the figure for 2002 upward from the 5.7 percent reported in the 2005 Index.) According to the World Trade Organization, "The Korean tariff remains a relatively complex instrument and as such constitutes a potential distortion to competition." Korea also restricts imports through a negative list of over 1,000 items and utilizes export subsidies. Based on the higher tariff rate, as well as a revision of the trade factor methodology, South Korea's trade policy score is 0.5 point worse this year.
After reading those I ask you “Who will have to change the most in these FTA talks”. The Koreans will likely ask something, but the US side will likely come with a laundry list (actually a novella) of complaints. 10% vs. 1.8% alone on tariffs is pretty substantial, and then you have all all sorts of non-tariff barriers that Korea will have to change.
This gets us to the nub of something I have felt for a long time, at least 50% of the trade barriers in Korea are structural in nature. There a general law or regulation that applies to imported goods no matter what the origin is. This means any change for the US-ROK FTA is not a preferential change for the US, but may likely end up as a general change in Korean law and will fundamentally change ROK trade policy.
For example, one of the more onerous regulations is drug testing. Let us say you are French pharmaceutical company. You make some miracle drug, and as a default you test it in the US in order to sell it there. It passes with flying colors, and the US and Europe is very happy.
So you want to import into Korea. Korean regulations say you need testing to make sure the drug is safe. The catch is that testing needs to be done in Korea. So in order to sell it here, you have to pay for another expensive clinical trial the market. This testing is seen as a non-tariff barrier for your drug since the FDA testing results in the US is logically same as KFDA testing in Korea.
So if the US wants to change this as part of the FTA talks, the law would need to be changed to accept US testing data. This has the nice side effect of eliminated the trade barrier for you as a French company since you already have done the US testing.
I could go on with examples like these (motorcycles, advertising, legal work, etc.) however you get the idea. Any change to accommodate the US in a FTA will likely broadly change Korea’s regulatory laws and economic policy.
Which brings me to my prediction on the future of the talks, I am afraid that they will fail horribly. It will be political difficult for Korea to change so much for an FTA, especially in an environment where Koreans feel they have already sacrificed so much for the United States already. If you think protests are bad now with farmers and second-rate moviemakers, just wait.
What do you think the reaction of Taepyeongyang will be when it finds out that the restrictions on importing cosmetics have been changed? What do you think the reaction will be among the chaebols when the US demands more protections from illegal trade subsides through Korean banks? What do you think the unions will do when they find out? Guess how much the well connected Kim and Chang Law Firm will lobby against a change that mortally threatens their 60%+ share of work from foreign companies in Korea? Even better, how do you think KBS will react when they find out US TV shows can be shown by competitors more often? I can hear the KBS news team now swinging into action!
Combine all this with the anti-American sentiment in Korea these days and you have a potent and explosive mix. In fact if I were Roh Moo-Hyun I would be trying my damnedest to find a way out without looking like a bumbling idiot. “Lets see what to do…what to do…”
This gets me to the reason why Korea is making a big issue of Kaesong Industrial Complex (made in North Korea) being included into the FTA. They know that this will poison the talks, the US will give up, AND it allows them to take the moral highroad out. Korea does not have the change anything, gracefully allows them to back out, still they can be seen as for free trade, and panders to the anti-American part of the electorate to boot. Pretty neat trick!
Of course the downside to this all is the US is left holding the bag, and I wonder what the backlash would be. A failure will defiantly end up being at least one more straw on the back of the fragile alliance.
And that my friends, in a nutshell, is how I see the FTA winding up…unfortunately for everyone.


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