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FTA FACTS
WHAT IS FTA?
Free trade area is the second degree of the preferential trading arrangement. There are five forms of economic integration: the preferential tariff arrangement, free trade area, customs union, common market, and economic union. In adopting a free trade area agreement, member countries have to remove trade barriers both tariff and non-tariff among themselves, while continuing individually to set their own trade barriers with non-member countries.
FTA = Free Trade Agreement
GDP = Gross Domestic Product
Sources: International Monetary Fund, World Economic Outlook Database (April 2007); U.S. Department of Commerce, International Trade Administrations, and Bureau of the Census
WHAT ARE THE IMPACTS OF FTA?
From a theoretical standpoint, free trade agreements are likely to affect the national welfare of the participating countries in two ways: firstly, through static effects measured in terms of increasing the effectiveness of production, and secondly, by means of dynamic effects impacting the overall economic growth rate of member countries in the long term.
The Static Effects
The static effects include both the trade creation and trade diversion effects.
Trade creation occurs when a member country imports goods from the other member countries rather than producing them more expensively itself, whereas previously tariffs resulted in the prices of imported goods being higher than those of domestic goods. After the creation of a free trade area, the tariffs between members are lowered, and the imported goods become cheaper than the domestic products due to the lower costs of production. Consequently, the domestic consumers will increase their consumption, while the domestic producers will try to improve their productivity to compete against the producers from the other member countries. As a result, it leads to the creation of specialization between the member countries in the productive activities in which they each have a comparative advantage.
Trade diversion happens when the setting up of a free trade area drives the prices of the imported goods from member countries lower than those from the non-member countries, leading to a switch from importing from non-member countries to importing from member countries within the group. Consequently, imported goods from lower-cost producers in non-member countries will be replaced by imported goods from higher-cost producers in the member countries.
The Dynamic Effects
The dynamic effects of free trade agreements are the most important effects in that they may lead to increases in the economic growth and real income of member countries relative to the case under protectionism.
An increase in market size as a result of trading agreement will create more competition between producers in the same industry, and this will lead to improvements in production efficiency within member countries. Moreover, the larger market will create economies of scale in production. From this point of view, it will make the individual countries become more attractive for multinational enterprises to invest in producing goods in response to the needs of the larger number of consumers within member countries combined.
FTA AND BUSINESS OPPORTUNITY
Free Trade Agreements can help your company to enter and compete more easily in the global marketplace. FTAs help strengthen business climates by eliminating or reducing tariff rates, easing investment rules, improving intellectual property regulations, opening government procurement opportunities, and much more. Free trade agreements help level the international playing field and encourage foreign governments to adopt open and transparent rulemaking procedures, as well as non-discriminatory laws and regulations.
KOREA'S FTA
The Republic of Korea is recognized as a country that has made exemplary use of the multilateral trading system established under the General Agreement on Tariffs and Trade (GATT). Since entering the GATT in 1976, the nation pursued export oriented economic growth for thirty years and maintained such growth - also known as the "Miracle of Han River." In the process, the Republic of Korea heavily relied on the multilateral trading system without paying much attention to regional trade agreements.
Yet in the process of overcoming the 1997 Asian financial crisis, the Republic of Korea reevaluated its foreign trade policy and as a result, the Korean government turned to the FTA.
The ROK's FTA policy went into effect in November 1998, with Chile as the ROK's first FTA partner. Ever since, the ROK's FTA negotiations have expedited in pace and expanded in scope. The Roh Moo-hyun administration strengthened the momentum by negotiating FTAs on a multi-track basis.
In 2003, there were only two countries who did not conclude any FTA among the WTO member countries, which was the Republic of Korea and Mongolia. However, since the Korea-Chile FTA came into effect in April 2004, the Korean government pursued a vigorous FTA policy with its major trading partners.
Currently, FTAs with Chile, Singapore, the European Free Trade Association (EFTA) , and the Association of Southeast Asian Nations (ASEAN) are in force and that made 15 countries the ROK's free trading partners. Building upon these results, the KORUS FTA was signed in June 2007, and currently the Republic of Korea is in the course of carrying out FTA negotiations or pre-FTA discussions with 41 countries including the European Union (EU), Canada, Mexico and India. In 2007, the Republic of Korea achieved significant progress in negotiations with major trading partners, such as the EU, Canada, India and Mexico and also held successful pre-FTA discussions with China. Possible FTAs with MERCOSUR and the Gulf Cooperation Council (GCC) have been carefully reviewed and discussed. Meanwhile, six rounds of negotiations have taken place with Japan since December 2003, but due to Japan's proposal of an excessively low level of concessions in agricultural products, negotiations have been suspended without reaching an agreement in November 2004.
The Facts
About the KOREA-U.S. FTA
THE FACTS ABOUT
THE KOREA-U.S. FREE TRADE AGREEMENT (KORUS FTA)
THE KORUS FTA¡¦
Is the Most Commercially Significant FTA for the United States in More Than a Decade. The Korean economy is now the 11th largest in the world. The Republic of Korea is already America¡¯s 7th largest trading partner and 6th largest importer of U.S. agricultural goods. Moreover, every U.S. state has a stake in the Korea-U.S. trade and investment relationship. A Free Trade Agreement with the Republic of Korea will be America¡¯s largest and commercially most significant FTA in more than a decade.
THE KORUS FTA¡¦
Will Bring Real Economic Benefits and Enormous Opportunities to both the U.S. and the Republic of Korea. According to an independent study on the KORUS FTA by the U.S. International Trade Commission, the KORUS FTA will boost U.S. exports to the Republic of Korea and increase U.S. national income.
The increase in exports to the Republic of Korea is expected to happen across the full spectrum of U.S. sectors, from machinery, chemical, rubber and plastic products to meat and diary products, corn, fruit, vegetables, wearing apparel and services.
The U.S. agricultural sector in particular stands to gain substantially from the KORUS FTA. Nearly two-thirds of U.S. agricultural products will enjoy immediate duty-free access to the Korean market upon implementation of the agreement.
U.S. automakers will also benefit from strong and unprecedented measures to ensure greater access to the Korean auto market.
All major service sectors in the Republic of Korea, including financial, professional, audiovisual, and telecommunications services, will be further liberalized, providing exciting opportunities to the U.S. service sector.
The FTA also has state-of-the-art intellectual property rights protection measures that will serve as a model for future FTAs.
THE KORUS FTA¡¦
Will Take the Alliance to a New Level. The robust economic relationship that the Republic of Korea and the United States share is embedded in a solid alliance built upon shared values in democracy, the principle of open and free markets, and human rights. A Free Trade Agreement will take the Korea-U.S. relationship to the next level, so that our two countries will be ready to meet the challenges of the new century in Northeast Asia. The KORUS FTA will be the first FTA that the United States concludes in Northeast Asia. Given the economic as well as strategic interests at stake, the importance of strengthening the U.S. presence in this region cannot be overemphasized.
1. The Most Commercially Significant FTA for the United States in More Than a Decade
The Republic of Korea is a large, developed and vibrant economy, and is a key player in world trade. A free trade agreement with the Republic of Korea will be America¡¯s largest and commercially most significant FTA in more than a decade.
The Korean economy is now the world¡¯s 11th largest. The Republic of Korea is already America¡¯s 7th largest trading partner and 6th largest importer of U.S. agricultural goods. Moreover, every U.S. state has a stake in the Republic of Korea?U.S. trade and investment relationship. Given such robust and sound economic partnership, the Korea-U.S. FTA (KORUS FTA) promises to provide numerous exciting opportunities for the United States.
The Korean economy is one of the world¡¯s largest. With an annual GDP of nearly $1 trillion, The Republic of Korea is the 11th largest economy in the world. Per capita income is fast approaching $20,000.
The ROK¡¯s economy is not only large, but vibrant. The Korean economy has been growing at annual rates of 5 to 10 percent over the last 10 years. According to OECD Secretary General Angel Gurria, ¡°¡¦[T]he OECD has learned much from the Republic of Korea, which is one of our most dynamic members¡¦ The Republic of Korea is a very unique and remarkable success story of rapid economic development.¡±
The Korea-U.S. FTA is the largest the United States has negotiated in years. The ROK¡¯s trade with the United States ($78 billion) is almost equal to the combined trade of all CAFTA countries, Chile and Australia with the United States. Also, the Korea-U.S. FTA covers nearly three times the combined goods of the other three pending trade agreements ? those with Peru, Panama, and Colombia.
Source: U.S. Census Bureau
Two-way trade between the United States and the Republic of Korea has doubled since 1990, reaching $78 billion in 2006. The ROK¡¯s current standing as the 7th largest U.S. trading partner places it ahead of France, Brazil and India. In turn, the United States is the ROK¡¯s fourth largest trading partner after China, the EU, and Japan.
Korean direct investment in the United States is fast increasing, with the stock of investment reaching $16.7 billion in 2006. Korean Investments such as a state-of-the-art automobile manufacturing plant in Alabama (Hyundai) and Georgia (Kia), and a computer chip manufacturing plant in Texas (Samsung) have generated numerous new jobs, benefits and opportunities for the American people. In turn, the United States is the largest source of foreign direct investment for the Republic of Korea, with the stock of U.S. investment in the Republic of Korea surpassing $36.6 billion in 2006.
U.S.-Korea Trade in Goods, 1990-2006 (U.S. $ in Billions)
Source: U.S. Census Bureau
Every U.S. state has a stake in the Korea-U.S. trade and investment relationship. Trade and investment activity with the Republic of Korea is spread around the country. It includes the East and West Coasts, the ¡°Manufacturing Belt¡± and Midwest, and the North and South. The Republic of Korea ranks in the top 5 as an export destination for 9 states (Alaska, California, Idaho, Maine, Missouri, Oregon, Texas, Vermont, Washington) and is in the top 25 for 49 states.
2. Bringing Real Economic Benefits to Both the United States and the Republic of Korea
The U.S. International Trade Commission¡¯s independent study on the economic effects of the Korea-U.S. FTA (September, 2007) concludes that a free trade agreement between Korea and the United States will have a very positive effect on the overall U.S. economy by boosting U.S. exports to the Republic of Korea and increasing U.S GDP.
The Korea-U.S. FTA is expected to result in a greater increase in U.S. exports to the Republic of Korea than in U.S. imports from the Republic of Korea. In addition, the estimated increase of imports from the Republic of Korea is estimated to have a negligible effect on U.S. employment. The overall U.S. GDP is expected to increase by as much as $11.9 billion.
U.S. exports to the Republic of Korea will increase substantially. According to the 2007 USITC report on KORUS FTA, once the KORUS FTA is fully implemented, U.S. exports to the Republic of Korea are expected to increase by $9.7~10.7 billion. This increase in exports is expected to happen across the full spectrum of products the United States exports to the Republic of Korea, from machinery, chemicals, rubber and plastic products to meat and diary products, corn, fruit, vegetables and wearing apparel. Services trade is also expected to grow significantly.
U.S. imports from the Republic of Korea will have a negligible impact on employment in import-sensitive sectors. The 2007 USITC report predicts that U.S. imports from the Republic of Korea will increase by $6.4~6.9 billion. However, because much of the import increase in textiles and passenger vehicles would likely be diverted from other import sources (85~90% for textiles, 55~57% for passenger vehicles), the USITC report estimates that the effect on employment for ¡°textiles and apparel and the broader passenger vehicles and parts sector would likely be negligible.¡±
U.S. national income and spending power will also increase. The USITC report expects the U.S. GDP to increase by $10.1~11.9 billion as a result of the full implementation of the KORUS FTA. This equates to additional new spending power for the economy of $1.8~2.1 billion.
3. Enormous Opportunities for American Farmers and Ranchers
The Republic of Korea is the 6th largest market for U.S. agricultural goods. Total U.S. agricultural exports to the Republic of Korea have recently averaged $3 billion annually. The average tariff applied by the Republic of Korea on agriculture imports is 52% ? nearly four times that of the United States. According to the U.S. International Trade Commission, the U.S. agricultural sector in particular stands to gain substantially from the KORUS FTA.
Tariffs will be immediately eliminated on almost two-thirds of U.S. agricultural exports (worth over $1.9 billion) with the implementation of the KORUS FTA. These include wheat, corn, soybeans for crushing, hides and skins, cotton, almonds, pistachios, bourbon whiskey, wine, raisins, grape juice, fresh cherries, frozen french fries, fresh asparagus, eggplants, celery, cucumbers, spinach, and tomato paste.
Source: U.S. Census Bureau
Also, the Republic of Korea will be eliminating tariffs completely over time on key products such as beef (15 years), pork (7 to 10 years), and poultry (10 to 12 years). In particular, the USITC (2007) expects the U.S. meat sector to experience the largest increase in output, and the U.S. beef export to increase by $600 million to $1.8 billion.
In addition, tariffs on avocados, lemons, dried prunes, and sunflower seeds will be phased out over 2 years; tariffs on chocolate and chocolate confectionary, sauces and preparation, breads and pastry, grapefruit and dried mushrooms over 5 years.
Tariff rate quotas will be established for skim and whole milk powder, whey for food use, cheese, barley, popcorn and soybeans for food use.
4. Expanded Access to Services Markets and Enhanced Protection for U.S. Investors
The Republic of Korea is the 2nd largest export destination in Asia for U.S. services. In 2005, total trade in services with the Republic of Korea was over $16 billion, with the United States running a surplus of almost $4 billion.
The 2007 U.S. International Trade Commission study on the KORUS FTA concludes that ¡°the U.S.-Korea FTA would provide U.S. services firms with levels of market access, national treatment and regulatory transparency that generally exceed those currently afforded by the ROK¡¯s commitment under the GATS.¡± As a result, U.S. services export to the Republic of Korea is expected to increase significantly.
Key benefits for the United States in services:
The Republic of Korea is a significant market for the U.S. financial services industry. The Republic of Korea is the 7th largest insurance market in the world, making it the largest insurance market ever included in an FTA with the United States. U.S firms will have full rights to establish or acquire financial institutions in the Republic of Korea under the agreement and will also be able to offer the full spectrum of services in the Korean market. In addition, the Republic of Korea has pledged to undertake a variety of regulatory reform measures to enhance U.S. firms¡¯ access to the Korean financial market.
Telecommunications: U.S. firms will be able to have full ownership of a telecommunications operator in the Republic of Korea. The agreement also ensures access for U.S. firms to any public telecommunications network or services on reasonable and non-discriminatory terms and conditions.
Entertainment: U.S. broadcasting and audiovisual service providers will gain extensive access to the Korean market. The Korean television quotas for film and animation will be decreased, and U.S firms which establish a Korean subsidiary will be able to own 100% of a program provider. The motion picture screen quota will also be locked in at half of what it used to be.
Legal services: The Korean legal services market will be fully opened to U.S. legal consulting firms, and permit joint ventures between Korean and U.S. law firms. This is the first time that the Republic of Korea has opened its legal market to foreign firms.
Express Delivery: U.S. express delivery firms such as UPS and FedEx will enjoy greater access to the Korean express delivery service market.
Legal stability for U.S. investors operating in the Republic of Korea will be substantially enhanced as almost all forms of investment are protected under the agreement. In particular, investor protections will be backed by a transparent and binding investor-state dispute settlement mechanism.
5. State-of-the-Art Intellectual Property Rights Protection
The Korea-U.S. FTA provides state-of-the-art protection of intellectual property rights (IPR), making it a model for future FTAs. It provides a comprehensive set of strengthened protection measures for trademarks, copyrighted works, and patents. The FTA also has rigorous enforcement provisions against piracy and counterfeiting.
The 2007 U.S. International Trade Commission study on the KORUS FTA confirms that U.S. IPR-related industries stand to benefit from the strengthened IPR provisions.
Key features of the IPR chapter:
Copyrighted work protection
- Extension of the term of protection for copyrighted works to life of the author plus 70 years (currently it¡¯s the life of author plus 50 years in the Republic of Korea)
- Protection of temporary copies of copyrighted work (music, movies, text, etc.) on the Internet
- Anti-circumvention provisions to prevent tampering with technical protection measures
- Prohibition of recording of movies with a camcorder in movie theaters
Patent protection
- Extension of patent terms for undue delays in granting the original patent
- Abolition of revocation of patent due to non-usage
Penalties for piracy and counterfeiting
- End-user piracy criminalized
- Pirated and counterfeited goods, as well as the equipment used to produce them, to be seized and destroyed
Trademark protection
- Sound and scent marks receive trademark protection
- ¡°First-in, first-in-right¡± to trademarks
- Protection for Internet domain names
- On-line system for registration and maintenance of trademarks
6. Greater Access to the Korean Auto Market
The Korea-U.S. FTA addresses many concerns raised by the United States and contains strong and unprecedented measures to ensure greater access to the Korean auto market by the U.S. automotive industry.
The U.S. International Trade Commission concludes that ¡°U.S. exports of passenger vehicles to the Republic of Korea would likely experience a large percentage increase as a result of the FTA.¡± On the other hand, increases in U.S. imports of Korean passenger cars will be ¡°small in percentage terms,¡± and have ¡°a negligible¡± impact on U.S. employment.
Key features of the auto sections of the Agreement:
Tariffs
- The Republic of the Republic of Korea will eliminate its 8% automotive tariff immediately
- The United States will eliminate its 2.5% passenger tariff 1) immediately for vehicles with engines up to 3,000 cc and 2) over 3 years for larger vehicles
- U.S. pick-up truck tariff (25%) will be phased out over 10 years
Auto taxation
- The Republic of Korea has agreed to revamp its engine displacement taxation system so that larger vehicles will not be liable to pay higher taxes
- The special consumption tax on autos will be streamlined to a single rate of 5% on vehicles over 2,000 cc
- The Republic of Korea will not introduce new engine displacement taxes
Emission and other standards
- The Republic of Korea will provide special treatment for U.S. automakers with regard to emission standards
- The Republic of Korea will provide a grace period until 2008 for U.S. automakers to comply with new environment-related regulations(the ¡°On-Board Diagnosis¡± II issue)
- The Republic of Korea will grant a two-year grace period to U.S. automakers for application of new safety standards
Expedited dispute settlement process with snap-back
- Special expedited dispute settlement process with ¡°snap-back¡± (reinstatement of the pre-FTA tariff) mechanism.
Creation of Auto Working Group
- The Auto Working Group will address any future regulatory issues
What the 2007 USITC report on KORUS FTA says on autos:
- Removal of the 8 percent tariff on passenger cars and the 10 percent tariff on light trucks would likely have a positive effect on U.S. exports, potentially enabling U.S. exporters to lower their prices because of the tariff savings.
- Much of the import increase [in passenger cars] would likely be diverted from other import sources (55~57%). For this reason, declines in output or employment for the broader passenger vehicles and parts sector would likely be negligible.
- The overall tax burden on the the Republic of Korea consumer who purchases an imported vehicle would be reduced, more or less equalizing the total taxes paid on imported and domestic vehicles
Facts about the Korean automobile industry:
- Market share of foreign vehicles in terms of the number of vehicles sold in the Republic of Korea in 2006 was about 4.5%. But as foreign cars generally sell at relatively high prices, in terms of sales value, their market share in the Republic of Korea was 14% in 2006.
- Sales of foreign-owned automobile manufacturers (such as GM-Daewoo) and imported cars combined are around 30% of the total domestic market in the Republic of Korea now.
- The Republic of Korea is not the main source of the U.S. auto trade deficit. According to U.S. Department of Commerce statistics (2006), the U.S. recorded an automotive trade deficit of $43.2 billion with Japan, $25.1 billion with Canada, and $22.9 billion with the European Union, compared to $8.5 billion with the Republic of Korea.
- Korean manufacturers are opening state-of-the-art automobile manufacturing plants in the United States. The Hyundai plant in Alabama is a $1.1 billion investment and has created 3,000 new jobs. The Kia plant in Georgia, expected to be in operation by 2009, is a $1.2 billion investment that will generate around 2,500 new jobs.
7. The Strategic Dynamic: Taking Our Alliance to the Next Level to Meet the Challenges of the 21st Century in Northeast Asia
The robust economic relationship that the Republic of Korea and the United States share is embedded in a solid alliance built upon shared values in democracy, the principle of open and free markets, and human rights. A Free Trade Agreement will take the Korea-U.S. relationship to the next level, so that our two countries will be ready to meet the challenges of the new century in Northeast Asia.
An alliance that transcends the test of time. For more than half a century, The Republic of Korea and the United States have been strategic allies with shared beliefs in democracy, the principle of market economics, and human rights. We forged an alliance in the midst of the Korean War which placed the Republic of Korea on the front lines of the Cold War. Since then, Korean troops have fought with the United States in every single major international conflict of the past half-century. As of October 2007, the Republic of Korea maintains over 1,000 men and women in uniform in Iraq.
As demands upon the United States increase around the world, especially with the on-going war against terrorism, the Republic of Korea is taking on more responsibility as a true partner and stalwart ally to the United States.
The Korea-U.S. FTA will take our alliance to the next level. Approval of a free trade agreement between our two countries will not only boost the economic relationship and prosperity of both our countries, but will also further strengthen our alliance to effectively deal with the new challenges and opportunities of the 21st century.
The Korea-U.S. FTA will provide the United States with a strong foothold in Northeast Asia. The KORUS FTA will be the first FTA that the United States concludes in Northeast Asia. Given the economic as well as geo-political and strategic interests at stake, the importance of strengthening the U.S. presence in this region cannot be overemphasized.
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What is FTA?
