KORUS Outlook Grim, Adds Insult To Injury

In the latest news from Seoul, talks on the Korea-US Free Trade Agreement (KORUS-FTA) have faltered, as President Obama and his South Korean counterpart Lee Myung-bak were unable to reach a compromise on contentious beef and auto provisions. This latest development comes on the heels of the European Parliament’s groundbreaking passage of the Korea-EU FTA, which is also a blow to US trade advocates. The KORUS-FTA provides an illustrative foil contrasting the myopic time horizon of US politics, often subordinated to electoral cycles, with more long-term macroeconomic objectives of economics and trade.As the KORUS-FTA and KOREU-FTA developed alongside one another, trade insiders urged action by the US. The US would sacrifice significant first-mover advantages should the EU agreement go into effect first. First-mover advantages imply that a country is the first to gain preferential access to a foreign market and has ‘dibs’ on available market share. New entrants encounter diminishing and worse market share. As supply chains develop to bring goods and services to market, systemic lock-in prevents future market penetration by new competitors. Passage of the KORUS-FTA prior to that of the KOREU-FTA codified a pareto-optimal solution. Pareto-optimal outcomes are the most efficient or best option. Movements towards from suboptimal outcomes towards the pareto-optimal outcome signify pareto improvements. Having witnessed the preferred option be snatched up by the US’s largest competitor, further obstacles or delays add insult to injury.The date of provisional application for the KOREU-FTA is slated for July 1, 2011. The goal for Congress should be to pass the KORUS-FTA before the end of the year so that the agreement could be implemented as close to this date as possible, mitigating grave diminution of market share.The KORUS-FTA portends to unlock nontrivial welfare gains. Costs of inaction are even more intense. The US International Trade Commission (ITC) predicts a $10.1-11.9 billion increase in GDP, a $9.7-10.9 billion increase in merchandise exports to Korea, and significant increases in service exports to Korea. Unfortunately, these estimates were made pre-ratification of the KOREU-FTA and, as such, may overestimate benefits.Obama responded to pundits’ questions with the assertion, according to Inside US Trade, that, “the concern is very simple. We have about 400,000 Korean autos in the US and a few thousand American cars here in Korea.” The concern is not simple and deserves much deeper and targeted consideration. The global nature of trade, and globalized supply chains in particular, complicate trade theory.Beef and auto special interests have dogged the KORUS-FTA from its inception. While beef producers finally appear to have received the memo on first-mover advantages, cooler heads have not prevailed in the auto sector. Reasons touted by the automobile industry against signing the KORUS-FTA have been suspect from the start. Automobile special interests attempt to link trade agreements to the shipment of jobs overseas. Upon closer inspection, it becomes apparent that one does not necessarily lead to the other.To begin with, General Motors, the largest US automobile manufacturer has withheld from the debate entirely due to its ownership of South Korean automaker Daewoo. American automakers operate abroad so they can build where they sell. Tens of thousands of American brand vehicles are sold for domestic consumption, but actually come in as imports. Accounting for supply chain disaggregation discredits claims made that trade liberalization causes relocation of jobs overseas.Even if Obama holds firm for regulatory issues such as safety standards, fuel efficiency standards, and emissions standards (autos’ bones of contention), enhanced ability to export does not ceteris paribus translate to increased sales. Koreans will not purchase automobiles they do not like. Korean social norms look down upon ostentatious exhibitions of wealth, especially when it comes to automobile purchases. Information asymmetries exist. US auto companies should take advantage of the positive informational externalities arising from the dialogue with Korea to better understand Korean consumer preferences. Trade protections are a band-aid prescription for a much more fundamental and structural problem with the US automobile industry. Trade is an easy scapegoat for underlying competitiveness issues.The services sector merits attention. Speaking at a November 9, 2010 event at the Korea Economic Institute (KEI) in Washington artfully titled “Thinking Outside the Box: How Can US Service Providers Benefit from the KORUS-FTA?” John Patrick Goyer, vice president of the Coalition of Service Industries, emphasized that services comprise 75% of the US economy and 80% of US employment. The US is the largest and most competitive exporter of services and Korea is our third largest services export market behind China and Japan as of 2009. Gains for services will more directly impact job numbers and economic output than manufacturing. Obama cites “a few thousand exports” of automobiles. How many US jobs depend on such a number? A conservative estimate may be one thousand. The potential benefits of the KORUS-FTA far outweigh the costs. The concerns of a select few should not succeed in making the entire US economy less efficient vis-à-vis our competitors.In attendance at the same event, Laura Lane, managing director and head of international government affairs of Citigroup, quipped that the KORUS-FTA, “seems like a no-brainer. You do not need to think inside or outside the box, you just need to think and more importantly to act.” Referencing the US recession, Lane posits active engagement through trade agreements as the surest way forward into economic prosperity. The time to act is now. Lack of effort towards effective cooperation should be seen as willful defiance of logic. This image is being used under Creative Commons licensing. The original source can be found here.