The Proposed U.S.-South Korea Free Trade
Agreement (KORUS FTA): Provisions and
Implications
William H. Cooper, Coordinator
Specialist in International Trade and Finance
Mark E. Manyin
Specialist in Asian Affairs
Remy Jurenas
Specialist in Agricultural Policy
Michaela D. Platzer
Specialist in Industrial Organization and Business
October 4, 2011
Congressional Research Service
7-5700
www.crs.gov
RL34330
CRS Report for Congress
Pr
epared for Members and Committees of Congress
The Proposed U.S.-South Korea Free Trade Agreement (KORUS FTA)
Summary
On October 3, 2011, President Obama submitted draft legislation (H.R. 3080/S. 1642) to
implement the proposed U.S.-South Korea Free Trade Agreement (KORUS FTA) to both houses
of Congress. If implemented, the KORUS FTA, signed on June 30, 2007, would be the second-
largest U.S. FTA (next to NAFTA). South Korea is the seventh-largest trading partner of the
United States, and the United States is South Korea’s third-largest trading partner. The proposed
KORUS FTA covers a wide range of trade and investment issues and, therefore, could have
substantial economic implications for both the United States and South Korea. The agreement
will not enter into force unless Congress approves implementation legislation. A possible action-
forcing event is the scheduled state visit of South Korean President Lee Myung-bak to
Washington on October 13, 2011.
Implementing legislation for the KORUS FTA is eligible for expedited congressional
consideration (no amendments, limited debate) under the trade promotion authority (TPA). Under
TPA, the President has the discretion on when to submit the implementing legislation to
Congress. President Bush did not submit the legislation because of differences with the
Democratic leadership over treatment of autos and beef, among other issues. On December 3,
2010, after a series of arduous negotiations and missed deadlines, President Obama and President
Lee announced that they had reached an agreement on addressing the outstanding issues related to
the KORUS FTA. As a result, U.S. and South Korean negotiators agreed, in the form of an
exchange of letters and agreed minutes, to modifications to the commitments made in the 2007
agreement. These modifications include changes in phase-out periods for tariffs on autos, a new
safeguard provision on autos, and concessions by South Korea on allowing a larger number of
U.S. cars into South Korea under U.S. safety standards than was the case under the original
KORUS FTA provisions. Though the issue of full U.S. beef access was not resolved because of
its political sensitivity in South Korea, the Obama Administration plans to request consultations
on this matter as soon as the KORUS FTA goes into effect. The South Korean National Assembly
is expected to vote on the agreement soon after Congress has acted.
A broad swath of the U.S. business community supports the KORUS FTA . With the
modifications in the commitments reached in December, this group also includes the three
Detroit-based auto manufacturers and the United Auto Workers (UAW) union. It still faces
opposition from some labor unions and other groups, including Public Citizen. Many U.S.
supporters view passage of the KORUS FTA as important to secure new opportunities in the
South Korean market, while opponents claim that the KORUS FTA does not go far enough to
break down South Korean trade barriers or that the agreement will encourage U.S. companies to
move their production offshore at the expense of U.S. workers. Other observers have suggested
the outcome of the KORUS FTA could have implications for the U.S.-South Korean alliance as a
whole, as well as on U.S. Asia policy and U.S. trade policy, particularly in light of the Korea-
European FTA that went into effect on July 1, 2011.
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The Proposed U.S.-South Korea Free Trade Agreement (KORUS FTA)
Contents
The KORUS FTA in a Nutshell ....................................................................................................... 3
Agriculture................................................................................................................................. 3
Automobiles .............................................................................................................................. 4
Other Key Provisions ................................................................................................................ 6
Estimates of the Overall Economic Effects of a KORUS FTA ....................................................... 6
An Overview of the U.S.-South Korean Economic Relationship.................................................... 8
U.S. and South Korean Objectives in an FTA ................................................................................. 9
Sector-Specific Issues and the KORUS FTA................................................................................. 11
Agriculture and Sanitary and Phytosanitary Issues ................................................................. 11
Overview ........................................................................................................................... 11
Beef ................................................................................................................................... 13
Rice ................................................................................................................................... 16
Oranges ............................................................................................................................. 17
Pork ................................................................................................................................... 17
Geographical Indications for Dairy Products.................................................................... 18
Sanitary and Phytosanitary Provisions.............................................................................. 19
Autos ....................................................................................................................................... 19
Expected Impact and Industry Reaction............................................................................ 22
Textiles and Apparel ................................................................................................................ 26
Other Manufactured Goods ..................................................................................................... 28
Capital Goods Machinery and Equipment ........................................................................ 28
Electronic Products and Components................................................................................ 29
Steel................................................................................................................................... 29
Pharmaceuticals and Medical Devices .................................................................................... 30
Financial and Other Services................................................................................................... 32
Visas .................................................................................................................................. 35
General Provisions......................................................................................................................... 35
Trade Remedies ....................................................................................................................... 35
Kaesong Industrial Complex ................................................................................................... 38
Foreign Investment.................................................................................................................. 40
Intellectual Property Rights..................................................................................................... 42
Labor Rights and Conditions................................................................................................... 42
Government Procurement........................................................................................................ 44
Environment Protection........................................................................................................... 44
Transparency ........................................................................................................................... 45
Institutional Provisions and Dispute Settlement...................................................................... 45
Other Technical Provisions...................................................................................................... 45
Legislative Action.......................................................................................................................... 46
Implications for South Korea and the U.S.-ROK Alliance............................................................ 47
Implications for U.S. Trade Policy and U.S. Asia Policy .............................................................. 49
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The Proposed U.S.-South Korea Free Trade Agreement (KORUS FTA)
Figures
Figure 1. South Korean Passenger Vehicle and Light Truck Exports to the United States............ 52
Tables
Table 1. Annual U.S.-South Korea Merchandise Trade, Selected Years.......................................... 8
Table 2. Asymmetrical Economic Interdependence (2010) ............................................................. 9
Appendixes
Appendix A. South Korean Motor Vehicle Manufacturing ........................................................... 51
Contacts
Author Contact Information........................................................................................................... 54
Congressional Research Service
The Proposed U.S.-South Korea Free Trade Agreement (KORUS FTA)
n October 3, 2011, President Obama submitted draft legislation (H.R. 3080/S. 1642) to
both houses of Congress.1 If approved, the KORUS FTA would be the second-largest FTA
O South Korea has signed to date (next to the agreement with the European Union (EU)).2 It
would be the second-largest (next to the North American Free Trade Agreement) in which the
United States currently participates. South Korea is the seventh-largest trading partner of the
United States and the KORUS FTA, if enacted, is expected to expand bilateral trade and
investment flows according to some studies.
The text of the proposed free trade agreement (FTA) covers a wide range of bilateral economic
activities: trade in manufactured goods, agricultural products, and services; foreign investment;
government procurement; intellectual property rights; and worker rights and environment
protection, among other issues.
The negotiations were conducted under the trade promotion authority (TPA), also called fast-track
trade authority, that Congress granted the President under the Bipartisan Trade Promotion Act of
2002 (P.L. 107-210). Under TPA the President has the discretion on when to submit the
implementing legislation to Congress. President Bush did not submit the legislation because of
differences with the Democratic leadership over treatment of autos and beef, among other issues.
On December 3, 2010, U.S. and South Korean leaders announced that they had reached
agreement on addressing the outstanding issues related to the KORUS FTA. As a result , U.S.-and
South Korean negotiators had agreed to modifications to some of the commitments made in the
2007 agreement. These modifications which were signed on February 10, 2011, are in the form of
an “exchange of letters” and two “agreed minutes.” They pertain mostly to the auto provisions
and include changes in phase-out periods for tariffs on autos, a new safeguard provision on autos,
and concessions by South Korea on allowing a larger number of U.S. cars into South Korea under
U.S. safety standards than was the case under the original KORUS FTA provisions. Though the
issue of full U.S. beef access was not resolved because of its political sensitivity in South Korea,
the Obama Administration plans to request consultations on this matter as soon as the KORUS
FTA goes into effect. On July 7, 2011, the House Ways and Means committee and the Senate
Finance Committee held simultaneous “mock mark-up” sessions on preliminary draft
implementing legislation for the KORUS FTA, as well as for the FTAs with Colombia and
Panama.
The United States and South Korea entered into the KORUS FTA as a means to further solidify
an already strong economic relationship by reducing barriers to trade and investment between
them and to resolve long-standing troublesome economic issues. The United States specifically
sought increased access to South Korean markets for agricultural products, services, and foreign
investment. For South Korean leaders, the KORUS FTA is a mechanism to promote reform in its
own economy and also to gain a competitive advantage in the U.S. market for autos and other
manufactured goods.
1 For more specific information, you may contact the following CRS analysts: William Cooper, x7-7749 (general
questions on the KORUS FTA); Michaela Platzer, x7-5037 (autos and other industrial goods); Remy Jurenas, x7-7281
(agricultural trade); and Mark Manyin, x7-7653 (the U.S.-South Korean bilateral relationship and security issues).
2 On July 1, 2011, the EU–South Korea free trade agreement entered into force. The agreement consists of 15 Chapters,
3 protocols and several annexes and appendices. The EU-27 market is larger than the U.S. market when measured by
population (500 million vs. 300 million) and GDP ($14.9 trillion vs. $14.4 trillion)
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Presidents Obama’s Statements on the KORUS FTA
President Obama and South Korean President Lee Myung-bak met for the first time on April 2, 2009, in London on
the sidelines of the G-20 summit. Afterward, an Obama Administration official said that President Obama told Lee he
wants to “make progress” on the agreement, and that the two leaders agreed that the two countries’ staffs should
“discuss how to move forward.”3
The two presidents met again on June 16, 2009, in Washington, DC. In a joint statement released at the summit, they
said: “We will continue to deepen our strong bilateral economic, trade and investment relations. We recognize that
the Korea-U.S. (KORUS) Free Trade Agreement could further strengthen these ties and we are committed to
working together to chart a way forward.” In answering a question at a joint press conference, President Obama
stated, “What I have done is to affirm to [South Korean] President Lee that we want to work constructively with the
Republic of Korea in a systematic way to clear some of these barriers that are preventing free trade from occurring
between our two countries.”4 However, President Obama did not indicate a timeframe for consideration of
legislation to implement the KORUS FTA.
At a joint press conference with President Lee in Seoul in November 2009, President Obama said the agreement
“holds out the promise of serving our mutual interests. And together, we're committed to working together to move
the agreement forward.” President Lee said the two leaders agreed to “redouble” their efforts toward this end.5
Prior to his meeting with President Lee, President Obama said in a Fox News interview that “I want to get the deal
done.... Overall, I think it's a potential good deal for US exporters. But there's certain sectors of the economy that
aren't dealt with as effectively and that's something that I'm going to be talking to President Lee about.”6
During his January 27, 2010, State of the Union address, President Obama, without mentioning the KORUS FTA
per se, expressed the need for the United States to strengthen its trade ties in Asia “with partners like South Korea.”
During a question-and-answer session at the January 29, 2010, House Republican issues conference, the President
referred to the need to seize trade opportunities, mentioning South Korea in particular.
On June 26, 2010, President Obama announced that he would direct U.S. Trade Representative Ron Kirk to work
with the South Korean trade minister to resolve outstanding issues on the KORUS FTA by the time President Obama
and South Korean President Lee meet again in Seoul in November 2010 for the G-20 summit. The President said that
he intends “in the few months” after the November meeting to present Congress with the implementing legislation
for the agreement. The President made the announcement at a joint press conference following his meeting with
President Lee prior to the G-20 summit in Toronto.
On November 11, 2010, in Seoul, after the two presidents announced that the two sides had not resolved the
outstanding issues, President Obama said that the U.S. and South Korean negotiating teams would be working “in the
coming days and weeks ahead” to reach agreement. He said that an FTA “done right” would be a “win-win” for both
countries.
On December 4, 2010, President Obama announced that U.S. and South Korean negotiators had reached agreement
on modifications to the KORUS FTA making the agreement a win for the United States and for “our ally and friend”
South Korea.
On July 8, 2011, the President made the following remarks as part of his statement on the latest U.S. employment
report: “There are bills and trade agreements before Congress right now that could get all these ideas moving. All of
them have bipartisan support. All of them could pass immediately. And I urge Congress not to wait. The American
people need us to do everything we can to help strengthen this economy and make sure that we are producing more
jobs.”
3 White House Office of the Press Secretary, “Background Readout by Senior Administration Officials to the Travel
Pool on the President’s Meeting with President Lee Of The Republic Of Korea,” April 2, 2009.
4 International Trade Daily. June 17, 2009.
5 White House Press Release, “Remarks by President Barack Obama and President Lee Myung-Bak of Republic of
Korea in Joint Press Conference,” November 19, 2009.
6 “TRANSCRIPT: Fox News Interviews President Obama,” FOXNews.com, updated November 18, 2009.
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Supporters of the FTA in the United States argue that failure to approve the KORUS FTA would
allow those opportunities to slip away, particularly if Seoul’s strategy of negotiating a web of
FTAs, with South Korea at the center, is successful. On July 1, 2011, South Korea’s FTA with the
European Union (EU) went into effect. However, some opponents of the KORUS FTA argued
that the agreement as originally concluded in June 2007 failed to go far enough in addressing
South Korean trade barriers and would be a lost opportunity if approved in its current form. A
congressionally mandated study by the United States International Trade Commission (USITC)
concluded that investment and trade between the United States and South Korea would increase
modestly as a result of the KORUS FTA.7 This result is in line with other similar studies. In
general and in the short-to-medium term, the KORUS FTA’s largest commercial effects are
expected to be microeconomic in nature. The U.S. services and agriculture industries, for
instance, are expected to reap significant benefits if the agreement is implemented.
Many observers have argued that in addition to its economic implications, the KORUS FTA
would have diplomatic and security implications. For example, they have suggested that it would
help to deepen the U.S.-South Korean alliance. The United States and South Korea have been
allies since the United States intervened on the Korean Peninsula in 1950 and fought to repel a
North Korean takeover of South Korea. Over 33,000 U.S. troops were killed and over 100,000
were wounded during the three-year conflict.8 South Korea subsequently has assisted U.S.
deployments in other conflicts, most recently by deploying over 3,000 troops to play a non-
combat role in Iraq. However, some counter this by positing that the KORUS FTA need not be
seen as a necessary, let alone sufficient, condition for enhancing the U.S.-ROK alliance. Mutual
interests on critical issues pertaining to North Korea and the rest of the region will continue to
require close cooperation between the two countries in the national security sphere. Indeed, in
many respects, the KORUS FTA’s fate may have more profound implications for U.S. trade
policy and East Asia policy than for U.S.-South Korean relations.
This report is designed to assist Members of Congress as they consider the costs and benefits of
the KORUS FTA. It examines the provisions of the KORUS FTA in the context of the overall
U.S.-South Korean economic relationship, U.S. objectives, and South Korean objectives. The
report will be updated as events warrant.
The KORUS FTA in a Nutshell
Some highlights of the results of the agreement are provided below. Background information and
a more detailed examination of the agreement’s provisions are provided in the main sections of
this report.
Agriculture
Under the KORUS FTA’s agricultural provisions, South Korea immediately would grant duty-free
status to almost two-thirds of current U.S. agricultural exports. Tariffs and import quotas on most
7 United States International Trade Commission (USITC). U.S.-Korea Free Trade Agreement: Potential Economy-wide
and Selected Sectoral Effects. Investigation No. TA-2104-24. USITC Publication 3949. September 2007.
8 For more on the U.S.-South Korean alliance, see CRS Report RL33567, Korea-U.S. Relations: Issues for Congress,
by Larry A. Niksch.
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other agricultural goods would be phased out within 10 years, with a few commodities and food
products subject to provisions that phase out such protection by year 23. However, because of
their sensitivity, access for several U.S. products would slowly expand in perpetuity but remain
subject to Korean import quotas.
Much effort went into negotiating provisions covering three agricultural commodities of export
interest to the United States. Under the KORUS FTA, South Korea agreed to eliminate its 40%
tariff on beef muscle meats imported from the United States over a 15-year period. However,
negotiators did not reach a breakthrough by the end of the talks on the separate but parallel issue
of how to resolve differences on the terms of access for all U.S. beef in a way that would address
Korea’s human health concerns arising from the 2003 discovery of mad cow disease in the U.S.
cattle herd. Though sales of U.S. boneless beef from cattle aged less than 30 months did resume
in April 2007 under a separate agreement reached in early 2006, sales of bone-in beef (e.g., ribs)
only began in July 2008 after the conclusion of a difficult series of negotiations—accompanied by
widespread public protests in Korea—on a more comprehensive agreement. Under the terms of a
commercial understanding sanctioned by both governments, exports are limited to all cuts of beef
(boneless and bone-in) from cattle less than 30 months old when slaughtered. Both countries view
this “voluntary private-sector” arrangement as a transitional step intended to improve Korean
consumer confidence in U.S. beef.
Negotiations on access for U.S. rice and oranges into the Korean market also were contentious.
Rice was a “make-or-break” issue for Seoul, and excluded at Korea’s insistence out of U.S.
recognition that if pushed, the talks would likely have collapsed. Special treatment for U.S.
oranges was struck at the last moment, when negotiators compromised on a multi-part solution
expected to increase U.S. navel orange exports over time. More recently, Korea secured an
extension in the tariff phase-out for one commercially important line of U.S. frozen pork product
in the December 2010 commitment modifications in return for the modifications to commitments
under the auto and other provisions. In June 2011, South Korea’s trade minister clarified that the
use of generic names by U.S. cheese exporters selling to that market would not be restricted by
provisions in the EU-Korea (KOREU) FTA.
Automobiles
Trade in autos and auto parts proved to be among the most difficult issues tackled by U.S. and
South Korean negotiators. In December 2010, the United States and South Korea made several
significant modifications to commitments contained in the 2007 agreement.9 These changes
included revisions to the automotive provisions, which would alter the original tariff elimination
schedule for passenger cars and trucks. A special vehicle safeguard was added. The modified
commitments also increased the exemption for U.S. car manufacturers from South Korean safety
standards so long as they meet U.S. federal safety standards. These adjustments, among others,
were deemed necessary before all three U.S. automakers would support the KORUS FTA.
Increasingly, U.S. car makers find themselves challenged by South Korean motor vehicle
manufacturers who are seeking to increase their market share through imports and increased car
production in the United States and other major automotive markets like the European Union. In
negotiating the KORUS FTA, U.S. industry argued that South Korea should eliminate policies
9 In a December 2010 press release, USTR refers to the 2010 amendments as a “supplemental agreement.” Some
international trade observers note that by referring to the revisions as a “supplemental agreement” it might fall outside
the original 2007 agreement, which has been changed by the 2010 pact.
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and practices that seemingly discriminate against U.S. auto imports. Another apparent objective
was to safeguard the U.S. market from a possible surge in South Korea auto imports. A detailed
discussion of the auto-specific provisions is provided later in this report. A few of the most
important provisions are highlighted below:
• The December 2010 commitment modifications adjust the tariff elimination
schedule for passenger cars and trucks. A longer phase-out period was a key
priority for Ford Motor Company and the United Auto Workers (UAW). The
United States and South Korea agreed to delay the full elimination of their
respective tariffs on passenger cars of 2.5% and 8% until year five after KORUS
FTA implementation, rather than remove the tariffs immediately as agreed in
2007. South Korea would reduce its passenger car tariff to 4% immediately upon
entry into force of the FTA. A notable exception is the acceleration of the phase-
out of tariff rates on electric cars and hybrid vehicles, a possible new market for
U.S. and South Korean automakers. Electric car tariffs would be phased out over
five years instead of 10 years as negotiated in the 2007 KORUS FTA.10 The
United States would keep its 25% truck tariff in place for a longer period than
under the 2007 agreement. It would remain for seven years and would be phased
out completely by year 10. South Korea kept its commitment to immediately
eliminate its 10% duty on U.S. trucks. The snapback provision would allow the
United States to reapply the 2.5% passenger car tariff once the tariffs have been
phased out under the FTA if U.S. automakers claim and the dispute settlement
panel finds that South Korea is in violation of the KORUS FTA agreement. The
snapback could also be imposed due to violations regarding imports of trucks.
South Korean commitments regarding a specified group of new and already
proposed regulations on automobile fuel economy and greenhouse gas emissions
do not seem to be enforceable under the dispute settlement provisions of the
KORUS FTA; presumably snapback would not apply to these commitments.11
• Several other significant auto-specific changes were also part of the revised
commitments. For the first time, both sides agreed to a special motor vehicle
safeguard. It would allow the United States to take action if there are “any
harmful surges in Korean auto imports due to the agreement.” As a remedy under
the auto-specific safeguard, the U.S. would be able to re-impose the 2.5%
passenger vehicle tariff which would be eliminated under the KORUS FTA.
South Korean auto manufacturers have substantially increased their production in
the United States since 2005, so it seems unlikely that there would be a surge in
automobile imports from South Korea. U.S. vehicle production at South Korean
auto manufacturers’ U.S. plants in Alabama and Georgia was approximately
450,000 in 2010, an increase from just over 210,000 in 2009.12 The 2010
modifications also substantially increased the threshold in the number of
automobiles U.S. automakers could export to South Korea without complying
with South Korean safety standards if they meet U.S. federal safety standards.
10 In the original 2007 agreement the United States and South Korea had agreed to phase out their respective electric
car tariffs of 2.5% and 8%, respectively, over 10 years.
11 For more information see pp. 2-4 of CRS Report R-41544, Trade Promotion Authority and the U.S.-South Korea
Free Trade Agreement, by Emily Barbour.
12 Automotive News, “North America Light Vehicle Production by Assembly Plant,” January 10, 2011,
http://www.autonews.com
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The exemption was raised from a ceiling of 6,500 per U.S. automaker per year to
as many as 25,000 cars per U.S. automaker per year, which would include
foreign-owned automakers with U.S.-based production such as BMW, Mercedes-
Benz, or Nissan if they export directly from the United States to South Korea and
meet the KORUS FTA domestic content provisions. The revised commitments
also give U.S. automakers some flexibility to be considered in compliance with
new South Korean fuel economy and greenhouse gas emissions standards.
Other Key Provisions
The KORUS FTA would cover a broad range of other areas. According to the Office of the
United States Trade Representative (USTR), 95% of U.S.-South Korean trade in consumer and
industrial products would become duty-free within five years after the agreement enters into
force, and virtually all remaining tariffs would be lifted within 10 years. The two countries agreed
to liberalize trade in services by opening up their markets beyond what they have committed to do
in the World Trade Organization (WTO). About 60% of U.S.-South Korea trade in textiles and
apparel would become duty-free immediately, and the KORUS FTA would provide a special
safeguard mechanism to reduce the impact of textile and apparel import surges.
Trade remedies were a critical issue for South Korea and a sensitive issue for the United States.
The FTA allows for the United States to exempt imports from South Korea from a “global”
escape clause (Section 201) measure if they are not a major cause of serious injury or a threat of
serious injury to the U.S. domestic industry. The FTA would also provide for a binational
consultative committee for information sharing on trade remedy matters.13
In addition, South Korea and the United States agreed to establish an independent body, a
Medicines and Medical Devices Committee, to review recommendations and determinations
regarding South Korean pricing and government reimbursement for pharmaceuticals and medical
devices and to improve transparency in the process for making those determinations.
Furthermore, one year after the KORUS FTA enters into force, a binational committee would be
formed to study the possibility of eventually expanding the agreement’s coverage to products
from “Outward Processing Zones,” including the Kaesong Industrial Complex and/or other future
zones located in North Korea.
Estimates of the Overall Economic Effects of a
KORUS FTA
Economists have released several studies estimating the potential effects of the KORUS FTA. As
required by the TPA statute, the USITC conducted a study in 2007 of the KORUS FTA at the
request of the President.14 The USITC study concludes that U.S. GDP would increase by $10.1
13 Trade Remedy Piece of Korea FTA Ignores Korean ADF Demands. Inside U.S. Trade. April 13, 2007.
14 Section 2104(f) Trade of 2002. P.L. 107-210. United States International Trade Commission (USITC). U.S.-Korea
Free Trade Agreement: Potential Economy-wide and Selected Sectoral Effects. Investigation No. TA-2104-24. USITC
Publication 3949. September 2007. (Hereafter referred to as USITC (2007).) In March 2011, the USITC released a
study updating its analysis of the KORUS FTA’s impact on the U.S. passenger vehicle market as a result of the
(continued...)
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billion to $11.9 billion (approximately 0.1%) if the KORUS FTA is fully implemented, a
negligible amount given the size of the U.S. economy. The USITC based this estimate primarily
on the removal of tariffs and tariff-rate-quotas, that is, barriers that can be relatively easily
quantified. The study concludes that U.S. exports of goods would likely increase by $9.7 billion
to $10.9 billion, primarily in agricultural products, machinery, electronics, transportation
equipment, including passenger vehicles and parts. U.S. imports would increase $6.4 billion to
$6.9 billion, primarily in textiles, apparel, leather products, footwear, machinery, electronics, and
passenger vehicles and parts.15
The range does not take into account the impact of the reduction of barriers to trade in services
and to foreign investment flows and the impact of changes in regulations as a result of the
KORUS FTA. The study notes that U.S. exports in services would increase as a result of South
Korean commitments under the KORUS FTA, and that changes in the regulatory environment in
both countries would also help to increase bilateral trade and investment flows.
The study estimates that changes in aggregate U.S. employment would be negligible given the
much larger size of the U.S. economy compared to the South Korean economy. However, while
some sectors, such as livestock producers, would experience increases in employment, others
such as textile, wearing apparel, and electronic equipment manufacturers would be expected to
experience declines in employment.16
Other studies draw the same basic conclusions, although the magnitudes differ because they
employ different models from the USITC study. For example, a University of Michigan analysis
commissioned by the Korea Economic Institute estimates that U.S. GDP would increase by
$25.12 billion (0.14% of U.S. GDP). This is larger than the USITC estimate, but in part this is
because its authors quantified the effects of liberalization in services trade.17 The authors also
analyzed the impact of a KORUS FTA before the final text had been released and assumed,
among other things, that rice trade would be liberalized, which, in the end, was not the case.
In December 2005, the Korea Institute for International Economic Policy (KIEP) published a
study measuring the potential economic impact of a U.S.-South Korean FTA on South Korea
alone. The study estimated some of the dynamic, or long-run, economic effects in addition to the
static, or one-time, effects of the FTA on South Korea. The KIEP study estimated that the FTA
would eventually lead to a 0.42% to 0.59% increase in South Korea’s GDP according to a static
analysis, and 1.99% to 2.27% according to a dynamic analysis.18
(...continued)
December 2010 modifications, U.S.-Korea Free Trade Agreement: Passenger Vehicle Sector Update, Investigation No.
332-523, USITC Publication 4220, March 2011.
15 USITC (2007). pp. xvii-xviii.
16 USITC (2007). p. xix.
17 Kiyota, Kozo and Robert M. Stern. Economic Effects of a Korea-U.S. Free Trade Agreement. Korea Economic
Institute, Special Studies 4. 2007.
18 Lee, Junyu and Hongshik Lee. Feasibility and Economic Effects of a Korea-U.S. FTA. Korean Institute for
International Economic Policy. December 2005. p. 86.
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An Overview of the U.S.-South Korean
Economic Relationship
South Korea is a major economic partner for the United States. In 2010, two-way trade between
the two countries totaled $86.9 billion, making South Korea the United States’ seventh-largest
trading partner. (See Table 1.) South Korea is among the United States’ largest markets for
agricultural products. Major U.S. exports to South Korea include semiconductors, machinery
(particularly semiconductor production machinery), aircraft, and agricultural products.
Table 1. Annual U.S.-South Korea Merchandise Trade,
Selected Years
(billions of U.S. dollars)
Year
U.S. Exports
U.S. Imports
Trade balance
Total trade
1990 14.4
18.5
-4.1
32.9
1995 25.4
24.2
1.2
49.6
2000 26.3
39.8
-13.5
66.1
2003 22.5
36.9
-14.4
59.5
2004 25.0
45.1
-20.1
70.1
2005 26.2
43.2
-17.0
69.4
2006 30.8
44.7
-13.9
75.5
2007 33.0
45.4
-12.4
78.4
2008 33.1
46.7
-13.6
79.8
2009 27.0
38.7
-11.7
65.7
2010 38.0
48.9
-10.9
86.9
Major U.S. Export Items Industrial machinery; chemicals; semiconductor circuits; corn & wheat; specialized
instruments.
Major U.S. Import Items Cell phones; semiconductor circuits; cars & car parts; iron & steel.
Sources: 1990 and 1995 data from Global Trade Information Services. 2000-2008 data from U.S. International Trade
Commission. The 2000-2010 U.S. export data are for U.S. domestic exports and the data for U.S. imports are for
imports on a consumption basis.
South Korea is far more dependent economically on the United States than the United States is on
South Korea. In 2010, the United States was South Korea’s third-largest trading partner, second-
largest export market, and the third-largest source of imports. It was among South Korea’s largest
suppliers of foreign direct investment (FDI). In 2003, China for the first time displaced the United
States from its perennial place as South Korea’s number one trading partner. In 2005 Japan
overtook the United States to become South Korea’s second-largest trade partner.
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The Proposed U.S.-South Korea Free Trade Agreement (KORUS FTA)
Table 2. Asymmetrical Economic Interdependence (2010)
Total Trade
Export Market
Source of Imports
Source of FDI
For the U.S., South Korea ranks
# 7
# 8
# 7
# 16
For South Korea, U.S. ranks
# 3
# 2
# 3
# 1
Sources: U.S. Department of Commerce, U.S. Census Bureau and Bureau of Economic Analysis; Bank of Korea.
Increased economic interaction between the United States and South Korea has been
accompanied by numerous disagreements over trade policies. In general, U.S. exporters and trade
negotiators identify the lack of transparency of South Korea’s trading and regulatory systems as
the most significant barriers to trade with South Korea in almost every major product sector.
Many U.S. government officials also complain that Seoul continues to use government
regulations and standard-setting powers to discriminate against foreign firms in politically
sensitive industries, such as automobiles and telecommunications. Another major cross-sectoral
complaint is that rigidities in the South Korean labor market, such as mandatory severance pay,
raise the cost of investing and doing business. Finally, the United States and other countries have
pressed South Korea to open further its agricultural market, which is considered one of the most
closed among members of the Organization for Economic Co-operation and Development
(OECD).19 Many of these issues arose during the KORUS FTA negotiations.
The intensity of these disputes has diminished considerably since the late 1980s and early 1990s,
in part because South Korea enacted a set of sweeping market-oriented reforms as a quid pro quo
for receiving a U.S.-led $58 billion package from the International Monetary Fund (IMF)
following the near collapse of the South Korean economy in 1997. In particular, as a result of the
reforms, South Korea opened its doors to foreign investors, ushering in billions of dollars of
foreign portfolio and foreign direct investment (FDI). The result is that foreign companies,
including U.S. firms, now are significant shareholders in many prominent industrial
conglomerates (chaebol); at one point earlier in the decade, foreign firms owned about one-third
of the South Korean banking industry and an estimated 40% of the value of the shares traded on
South Korea’s stock exchange. Since the 1997 crisis, FDI commitments by U.S. companies have
totaled over $25 billion.20
Additionally, the United States and South Korea appear to have become more adept at managing
their trade disputes. This may be partly due to the quarterly, working-level “trade action agenda”
trade meetings that were initiated in early 2001. Both sides credit the meetings, which appear to
be unique to the U.S.-South Korean trade relationship, with creating a more constructive dialogue
that helped pave the way for the two sides to feel sufficiently confident to launch FTA
negotiations.
U.S. and South Korean Objectives in an FTA
U.S. and South Korean policymakers shared certain goals in launching and completing the
negotiations on the KORUS FTA. Both governments saw in the FTA a logical extension of an
19 OECD, Economic Surveys - Korea, 2007.
20 Korea Economic Institute, “Current Economic Info, South Korean Economic Data,” at http://www.keia.org, January
2, 2008.
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already important economic relationship that would provide a means by which the two trading
partners could address and resolve fundamental issues and, thereby, raise the relationship to a
higher level. For the United States these issues have included the high tariffs and other
restrictions on agricultural imports. For South Korea, these difficult issues have included
perceived U.S. discrimination toward South Korean imports in the application of trade remedies
and treatment of products made at the Kaesong Industrial Complex in North Korea.
While sharing some broad objectives, U.S. and South Korean leaders also approached the
KORUS FTA from different perspectives that were reflected in the conduct and outcome of the
negotiations. A primary objective of the United States was to gain access to South Korean
markets in agricultural products, pharmaceuticals and medical equipment, some other high-
technology manufactured goods, and services, particularly financial and professional services—
areas in which U.S. producers are internationally competitive but for which South Korean barriers
seemed to be high.
For South Korea, gaining a large increase in market access was not as critical a priority since
South Korean exporters already have a significant presence in areas in which they have proved to
be competitive—consumer electronics and autos, for example, and in which they already face
only low or zero U.S. tariffs. However, South Korea arguably did seek to preserve its share of the
U.S. market in the face of growing competition from emerging East Asian producers from
Thailand, Malaysia, Vietnam, and possibly China. South Korea likely also aimed to improve its
competitive position in the U.S. market vis-à-vis Japan where the elimination of even low tariffs
might give South Korean exporters some price advantage.
Launching the FTA negotiations was largely at the initiative of South Korea. Its main objective in
securing an FTA with the United States was much broader than gaining reciprocal access to the
U.S. market. Entering an FTA with the United States meshed with a number of former South
Korean President Roh Moo-hyun’s long-term economic and strategic goals. Roh made an FTA the
top economic priority for the remainder of his tenure, which expired in February 2008.21 Soon
after his election in 2002, Roh committed himself to raising South Korea’s per capita gross
domestic product (GDP) to $20,000 by the end of the decade and to transforming South Korea
into a major “economic hub” in Northeast Asia by expanding the economic reforms begun by his
predecessor following the 1997 Asian financial crisis. Ongoing competitive pressure from
Japanese firms, increased competition from Chinese enterprises, and the rapid ageing of the South
Korean workforce has heightened the sense of urgency about boosting national competitiveness.
Continuing along this line of argument, ex-Prime Minister Han Duk-soo has said that a failure to
adopt significant economic changes will mean that “Korea’s long term growth potential is likely
to deteriorate.”22 Lee Myung-bak, who was elected President in December 2007, made the
economy the centerpiece of his campaign and has supported the KORUS FTA as part of a larger
program to promote South Korean economic growth.
During the negotiations, South Korean officials and other South Korean proponents of the
KORUS FTA tended not to focus on the increased access to the U.S. market. Rather, they
emphasized the medium and long-term gains that would stem from increased allocative efficiency
21 “ROK Editorial: Roh’s ‘Special Lecture’,” The Korea Times, posted on the Open Source Center,
KPP20060329042002, March 29, 2006.
22 Ministry of Finance and Economy Weekly Briefing, “Korea-US FTA Projected to Boost the Korean Economy,”
March 9, 2006.
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The Proposed U.S.-South Korea Free Trade Agreement (KORUS FTA)
of the South Korean economy, particularly in the services industries. This would presumably be
brought about by an influx of U.S. investment and technology into South Korea and by the spur
of increased competition with U.S. firms.23 Senior officials in particular emphasized the need to
boost the competitiveness of South Korean service industries. An FTA with the United States,
they argued, will help address South Korea’s increased economic polarization by spurring job
creation in fields such as medical, legal, education, and accounting services in a free trade
agreement.24 Some, however, say an FTA will worsen South Korea’s income gap.25 Also, during
the talks, there were continuous and often large scale anti-FTA protests, generally led by South
Korean farmers and trade unionists.
The absence of mirror-image or reciprocal U.S. and South Korean objectives in the negotiations
is reflected in the structure of the KORUS FTA. Except for some provisions dealing with issues
specific to U.S.-South Korea economic relations, for example, South Korea taxation of autos and
the Kaesong industrial complex, the structure of the KORUS FTA largely resembles the structure
of other FTAs, such as Dominican Republic-Central American FTA (DR-CAFTA), that the United
States has entered into. This conclusion does not suggest that South Korea did not bring to the
table its own specific demands, which it did (such as the exclusion of rice) and held to them
firmly.
Sector-Specific Issues and the KORUS FTA
Under the KORUS FTA, U.S. and South Korean negotiators addressed a number of sector-
specific issues. Some issues, such as elimination of tariffs on most manufactured goods, were not
very controversial and were dealt with in early stages of the negotiations. Other issues, such as
trade in agricultural products and in autos, were the most difficult and were not completed until
the final hours of the 2007 negotiations. The two sides signed the agreement on June 30, 2007.
On December 3, 2010, U.S. and South Korean negotiators agreed to modifications to some of the
commitments made under the KORUS FTA, that pertain largely to the auto trade, in order to
assuage concerns raised by some members of the auto sector and Members of Congress.
Agriculture and Sanitary and Phytosanitary Issues
Overview
Attaining comprehensive market access for U.S. agricultural products to South Korea’s large
market and finding a way to resolve Korea’s continued restrictions on U.S. beef purchases
(imposed to protect human health following the late 2003 discovery of mad cow disease in the
U.S. cattle herd) were the two primary objectives pursued by U.S. agricultural negotiators.
Though South Korea ranks among the leading agricultural importing countries in the world, its
farm sector is highly protected with high tariffs and quotas.26 This reflects its farmers’ long-
23 See, for instance, Junkyu Lee and Hongshik Lee, Feasibility and Economic Effects of a Korea-U.S. FTA (Seoul:
Korea Institute for International Economic Policy, 2005), pp. 116-117; Inbom Choi and Jeffrey Schott, Free Trade
between Korea and the United States? (Washington, DC: Institute for International Economics, 2001), pp. 79-82.
24 “Roh’s ‘Special Lecture’,” The Korea Times, March 26, 2006.
25 Korea Broadcast System, March 31, 2006, Broadcast.
26 South Korea’s average applied agricultural tariff in 2009 was almost 49%, compared to 4.7% for the United States,
(continued...)
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The Proposed U.S.-South Korea Free Trade Agreement (KORUS FTA)
standing political influence (particularly that of rice producers) and its urban population’s deep
ties to its rural roots.
In concluding the KORUS FTA on April 1, 2007, the United States secured nearly complete
access for all U.S. agricultural commodities and food products into Korea’s market. However, a
breakthrough on the beef issue (technically not part of the FTA talks but nevertheless the subject
of high-level discussions) did not occur until June 2008. This reflected the then newly elected
Korean President Lee’s view that an agreement spelling out the rules that apply to beef imports
from the United States had to be in place before President Bush would consider sending this
agreement to Capitol Hill. Several Members of Congress had for months stated that South Korea
must agree to fully reopen its market to U.S. beef under scientifically based international rules
and in commercially significant quantities before Congress considers or approves the agreement.
U.S. agricultural groups, well aware of this deal’s potential benefits for producers, had then also
conditioned their support on the resumption of U.S. beef exports.
More recently, the late 2010 negotiations to address outstanding FTA issues did not result in the
full opening of South Korea’s market to U.S. beef as sought by the Obama Administration and
some Members of Congress. The only change made to the agreement’s agricultural provisions is a
concession (among others) requested by South Korea in return for changes sought by USTR in
the auto provisions. The United States accepted a two-year extension in the phasing out of
Korea’s tariff on the largest category of pork imports from the United States. Responding to the
conclusion of these talks, the U.S. beef and pork sectors have expressed their support for the
KORUS FTA, emphasizing that its approval as soon as possible is vital to realizing the gains
negotiated before other countries’ FTAs with South Korea take effect.
In 2010, South Korea was the fifth-largest market for U.S. agriculture, as export sales totaled $5.3
billion. Under the KORUS FTA’s agricultural provisions, South Korea immediately would grant
duty-free status to almost two-thirds of current U.S. agricultural exports. Tariffs and tariff-rate
quotas (TRQs)27 on most other agricultural goods would be phased out within 10 years, with a
few commodities and food products subject to provisions that phase out such protection by year
23. Seven U.S. products (skim and whole milk powders, evaporated milk, in-season oranges,
potatoes for table use, honey, and identity-preserved soybeans for food use) would be subject to
Korean import quotas that slowly expand in perpetuity. However, the agreement does not give
U.S. rice and rice products additional access to South Korea’s market (see below).28
(...continued)
from WTO, “Country Profiles” for South Korea and the United States, March 2011, available at
http://stat.wto.org/CountryProfiles/KR_e.htm and http://stat.wto.org/CountryProfiles/US_e.htm.
27 A TRQ is a two-part tool used by countries to protect their more sensitive agricultural and food products, often while
transitioning over time to free trade. The quota component provides for duty-free access of a specified quantity of a
commodity, which in an FTA usually expands over time. Imports above this quota are subject to a prohibitive tariff that
in an FTA frequently declines over time. At the end of a product’s transition period to free trade under an FTA, both
the quota and tariff no longer apply (with a few exceptions), allowing for its unrestricted access to the partner’s market.
28 Summaries of commodity-specific market access provisions (tariff reduction schedules, transition periods, TRQ
amounts and growth rates, and safeguards) are found in the USDA fact sheets “U.S. - Korea Trade Agreement,”
December 2010, available at http://www.fas.usda.gov/itp/KORUS%20One-Page%20Fact%20Sheet.pdf, and “U.S.
Korea Trade Agreement - Benefits for Agriculture,” December 2010, available at
http://www.fas.usda.gov/itp/KORUS%20Detailed%20Fact%20Sheet%202010.pdf. Detailed fact sheets on the
agreement’s commodity provisions and prospective impacts for agriculture in 45 states are available at
http://www.fas.usda.gov/info/factsheets/Korea/us-koreatafactsheets.asp.
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The Proposed U.S.-South Korea Free Trade Agreement (KORUS FTA)
With the immediate elimination or phase-out of most of South Korea’s relatively high agricultural
trade barriers under the KORUS FTA, the U.S. agricultural and food processing sectors would
noticeably benefit from additional exports. The USITC estimates that the increase in U.S. exports
of agricultural commodities and processed foods would account for up to one-third of the entire
projected increase in total U.S. exports to South Korea’s market once the KORUS FTA’s
provisions are fully implemented. Sale of agricultural products would be from $1.9 billion to $3.8
billion (44% to 89%) higher than exports under a no-agreement scenario. Almost half of this
export increase would accrue to the U.S. beef sector, based on the USITC’s assumption that U.S.
beef exports recover to the level before South Korea imposed its import restrictions in late 2003.
About 20% of the export increase would benefit U.S. producers and exporters of pork, poultry
and other meat products.29 In another analysis, the American Farm Bureau Federation (AFBF)
projects that U.S. agricultural exports by the end of the transition period (2027) would be more
than $1.5 billion (45%) higher under the KORUS FTA than would be the case otherwise. Sales of
beef, poultry, and pork would account for $644 million (or 42%) of this increase.30
Because South Korean agricultural exports to the United States are small ($298 million in 2010)
and largely complementary, there was no controversy in negotiating access to the U.S. market.
The United States agreed to phase out tariffs and quotas on all agricultural imports from South
Korea under seven phase-out periods ranging up to 15 years. One 10-year TRQ would apply to
imports of fluid milk and cream, among other specified dairy products. The USITC projects that
imports of agricultural products (primarily processed food products) from South Korea under the
KORUS FTA would be from $52 million to $78 million (12% to 18%) higher than such imports
under a no-agreement scenario.
Beef
Market Access
Under the KORUS FTA, South Korea agreed to eliminate its 40% tariff on beef muscle meats
imported from the United States over a 15-year period. Also, South Korea would have the right to
impose safeguard tariffs on a temporary basis in response to any potential surge in imports of
U.S. beef meats above specified levels. The trigger for this additional tariff would be 270,000
metric tons (MT) in year 1, which would increase 2% annually; in year 15, the trigger would be
354,000 MT.31 In year 16, this protective mechanism would no longer apply. The 18% tariff on
imports of beef offals (tongues, livers, tails, and feet), and tariffs ranging from 22.5% to 72% on
other beef products, would also be eliminated in 15 years.
Assuming that South Korea fully lifts its restrictions on U.S. beef and bilateral beef trade returns
to normal, the USITC estimates that the phase-out of South Korea’s beef tariff and safeguard
29 Derived by CRS from Table 2.2 in USITC, U.S.-Korea Free Trade Agreement: Potential Economy-wide and
Selected Sectoral Effects, Publication 3948, September 2007, pp. 2-8 and 2-9.
30 Derived by CRS from the AFBF’s Implications of a South Korea-U.S. Free Trade Agreement on U.S. Agriculture,
July 2007, p. 17. To be consistent with the agricultural and food product categories used to derive the USITC’s
estimate, AFBF’s exports of fish products are not included in the estimated increase in agricultural exports and
agriculture’s share stated above.
31 In 2003, U.S. exports of beef muscle meats to South Korea totaled 213,083 MT. The safeguard level in year 1 would
allow for duty-free access for about 20% more U.S. beef than the average 2002-2003 level of U.S. beef exports to the
South Korean market.
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The Proposed U.S.-South Korea Free Trade Agreement (KORUS FTA)
could increase U.S. beef exports from about $600 million to almost $1.8 billion (58% to 165%)
above what would be the case otherwise. Under the KORUS FTA, the AFBF projects that U.S.
beef sales would be $265 million higher as the United States recaptures its historic share of the
South Korean market. However, its analysis notes that the market share of U.S. beef likely will
not increase over time. That is because South Korean tastes have developed a preference for
grass-fed Australian beef, according to the AFBF, and will continue to be competitive in price
against U.S. beef even with the current 40% tariff removed.
Sanitary Rules
On April 18, 2008, U.S. and South Korean negotiators reached agreement on the sanitary rules
that Korea will apply to beef imports from the United States. It allows for imports of all cuts of
U.S. boneless and bone-in beef and other beef products from cattle, irrespective of age, as long as
specified risk materials known to transmit mad cow disease are removed and other conditions are
met. However, to address subsequent Korean concerns, both sides revised this deal on June 21,
2008, to limit sales of U.S. beef from cattle less than 30 months old.
South Korea quickly published rules to put this agreement into effect, and began to inspect U.S.
beef shipments. The U.S. Department of Agriculture similarly began to implement a new program
to verify that the beef sold is processed from cattle under 30 months old. U.S. beef exporters have
since worked to recapture a key overseas market.
In 2003, South Korea was the third-largest market for U.S. beef exports, prior to the ban imposed
after the first U.S. cow infected with mad cow disease, or BSE (bovine spongiform
encephalopathy), was discovered. Korea’s commercial significance is reflected in the position
taken by some Members of Congress, who have stated that congressional consideration of, and
support for, the KORUS FTA depends upon South Korea fully opening its market to U.S. beef.
While the U.S. beef industry and U.S. policymakers welcomed the initial April deal, Korean TV
coverage of the issue and Internet-spread rumors that questioned the safety of U.S. beef resulted
in escalating protests and calls for the beef agreement to be renegotiated or scrapped. U.S.
officials countered that measures already in place to prevent the introduction of BSE in U.S.
cattle herds meet international scientific standards. To address mounting public pressure, the
Korean government twice pursued talks with the United States to find ways to defuse public
concerns without “renegotiating” the beef agreement. In late June 2008, both governments
confirmed a “voluntary private sector” arrangement that allows Korean firms to import U.S. beef
produced only from cattle less than 30 months old. Both viewed this as a transitional step until
Korean consumers regain confidence in the safety of U.S. beef.
Under this arrangement, exports of U.S. beef (including bone-in cuts) to South Korea resumed in
mid-2008, and by year-end reached almost $300 million, more than one-third of the record 2003
sales level. In 2009, with the drop off in beef sales worldwide due to the economic recession, U.S.
beef sales to Korea fell to $216 million. For 2010, sales more than doubled over the previous year
to reach $518 million.32 Though Australia is the main competitor, U.S. beef exporters have gained
noticeable market share since the Korean market reopened. The U.S. share (in quantity terms)
rose from 15% in 2008, 26% in 2009, 32% in 2010, and 37% in the first half of 2011 (compared
32 National Cattlemen’s Beef Association, “Statement from NCBA Chief Economist Gregg Doud on US, Korea Trade
Deal,” December 3, 2010.
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to 69% in 2003). Promotional efforts to rebuild consumer confidence in U.S. beef, aggressive
marketing efforts by large store chains, and much lower retail prices for foreign than for Korean
beef, account for the continued growth in U.S. beef sales in Korea.33
Obama Administration officials, following the President’s June 26, 2010, announcement of his
decision to present the KORUS FTA to Congress, stated their intent was to resolve the beef and
auto issues with South Korea by November 2010 once consultations with Congress and
stakeholders were complete. In the negotiations concluded on December 3, 2010, the beef issue
reportedly received little discussion as both sides focused on revising the auto provisions.
President Obama, in discussing the supplemental agreement, indicated that the United States will
continue to work toward “ensuring full access for U.S. beef to the Korean market.”34
Congressional reaction on the outcome of the beef issue was mixed. Senator Baucus (chairman of
the Senate Finance Committee), who had advocated for full access for U.S. beef irrespective of
the age of cattle in accordance with international scientific standards, expressed “deep
disappointment” that the supplemental deal “fails to address Korea’s significant barriers to
American beef exports.” He stated his commitment to right “this wrong” and to work with the
Administration to ensure that ranchers “are not left behind.” More recently, Sen. Baucus said he
will not support the KORUS FTA until South Korea opens up its beef market. A few other
Senators, though concerned with the lack of progress on beef, viewed the deal positively and
welcomed the prospect for considering the KORUS FTA in 2011.35 Meat industry groups
expressed support for this trade agreement that they expect over time will significantly increase
their exports to South Korea, and urged Congress to move quickly to ratify it. Beef interests, also
supportive, called for continued efforts to secure full market access.36
Memories of the size and intensity of the 2008 anti-beef agreement protests in South Korea
appear to have directly influenced the position taken on the beef issue by Korean negotiators.
Reflecting this political sensitivity, they reportedly rejected any discussion on this matter in the
negotiations held in early November leading up to the summit between Presidents Obama and
Lee and in the final talks leading to the supplemental agreement. Their position was that this issue
“did not fall under” the FTA concluded in 2007. Since then, South Korea’s trade minister has
confirmed that there will be no more discussions on ending the age limits of U.S. cattle
slaughtered for beef. This stance was more recently affirmed by its ambassador to Washington in
late January 2011.37 The outcome appears to have been successful in that it has not altered the
33 For more information, see CRS Report RL34528, U.S.-South Korea Beef Dispute: Issues and Status, by Remy
Jurenas and Mark E. Manyin.
34 White House, Office of the Secretary, “Remarks by the President at the Announcement of a U.S.-Korea Free Trade
Agreement,” December 4, 2010.
35 Senate Finance Committee, “Baucus Deeply Disappointed With Announcement on Korea Trade Deal, Commits to
Keep Fighting for American Ranchers,” December 3, 2010; Senate Agriculture Committee, “Sen. Chambliss Statement
on U.S.-South Korea Free Trade Agreement,” December 3, 2010; Senator Grassley, “Conference Call with Farm
Broadcasters,” December 7, 2010; Washington Post, "Senator's objection may slow trade pact," February 3, 2011, p.
A4.
36 Meatingplace.com, “U.S.-Korea FTA deal leaves beef unchanged, phases out tariffs,” December 6, 2010; Ibid.,
National Cattlemen’s Beef Association; American Meat Institute, “AMI Statement on Finalized U.S. Free Trade
Agreement with South Korea,” December 3, 2010.
37 Inside U.S. Trade, “Korean Negotiators Refused To Engage On Beef Issue In Seoul,” November 19, 2010;
Washington Trade Daily, “The KorUS Supplemental Agreement,” December 6, 2010, p. 3; Washington Post, Political
Economy Blog, “Obama, Lee outlined U.S.-Korea trade deal in Seoul, official says,” December 6, 2010; Bloomberg,
“South Korea’s Kim Rules Out Negotiations on U.S. Beef Imports,” December 6, 2010; Inside U.S. Trade, “Baucus to
(continued...)
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political debate expected to occur in South Korea on the KORUS FTA. However, if changes had
been made to the terms of current U.S. beef access, opponents would have been given an opening
to shift the debate on the agreement.
Seeking to move closer toward submitting the KORUS FTA to Congress for consideration, the
USTR on May 4, 2011, announced two measures to be taken on the U.S. beef access issue. In a
letter to Senator Baucus, the Administration committed to request consultations with South Korea
on the “full implementation” (e.g., opening Korea’s market “to all ages and all cuts of U.S. beef”)
of the protocol as soon as this trade agreement takes effect,. The letter referenced one specific
provision that stipulates bilateral consultations on the interpretation or application of the
protocol’s terms “shall be held within seven days” of a request. On the same day, USDA
announced a $1 million award to the U.S. Meat Export Federation (USMEF) to be used in
FY2011 to promote U.S. beef sales in South Korea, and its intent to consider future funding
requests from the USMEF to implement its planned five-year market beef promotion strategy in
this key market. Senator Baucus welcomed both steps, stating he will support the KORUS FTA
and work with the Administration on a package of trade measures that includes all three FTAs and
renewing trade adjustment assistance and trade preference programs.
Rice
South Korean negotiators succeeded in excluding the entry of U.S. rice on preferential terms—its
prime objective in negotiating agriculture in the KORUS FTA. This reflects Korea’s efforts to
maintain its stated policy of self-sufficiency in rice production, the national sentiment that
preserving rice production is inseparable from the country’s identity, and the political reality that
rice farming preserves the basis for economic activity in the countryside. That rice was a make-
or-break issue for Seoul is seen in the comment made by a top U.S. trade official, Deputy United
States Trade Representative Karan Bhatia, the day after the talks concluded: “Ultimately, the
question that confronted us was whether to accept a very, very good albeit less perfect agreement
or to lose the entire agreement because South Korea refused to move on rice.”38 On rice, the
KORUS FTA would only require South Korea to continue to abide by its multilateral trade
commitments to increase rice imports.
At present, U.S. rice exporters have access to the South Korean market under (1) a 24% share
(50,076 MT) of the rice import quota established under that country’s multilateral World Trade
Organization (WTO) commitments in 1995, and (2) a separate quota available to all countries.39
Rice entering under both quotas faces a 5% tariff. Entries above each quota are prohibited—a
unique concession that South Korea received in the 1993 Uruguay Round of multilateral trade
negotiations. U.S. rice exports against both quotas have fluctuated, but since 2005 have risen to
(...continued)
Oppose Korea FTA Unless More Progress Made on Beef Issue,” December 10, 2010, p. 3; International Trade Daily,
"Korea Has No Plans to Discuss Beef Prior to Action on FTA, Ambassador Says," February 1, 2011.
38 Inside U.S. Trade, “USTR Says Beef Market Access Must Precede Signing of Korea FTA,” April 6, 2007, p. 5.
39 Following the 2004 renegotiation of South Korea’s WTO agricultural commitments, the United States and most other
rice exporting countries beginning in 2005 have been able to take advantage of this other rice quota. Expanding by
20,347 MT each year through 2014, market access is on a first-come, first served basis. By 2014, both rice import
quotas (under country allocations made to four countries including the United States, and the quota available to any
country) will total 408,700 MT. For background on Korea’s market access and domestic policies for rice, see USDA,
Economic Research Service, South Korea Briefing page titled “Policy,” available at http://www.ers.usda.gov/Briefing/
SouthKorea/policy.htm#ricemarket.
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reach $74 million (104,721 MT) in 2008. Future U.S. sales are expected to grow slowly in line
with the expansion of the most recently established rice quota.
Though the U.S. rice industry expressed disappointment with the rice exclusion, the United States
will have other opportunities to negotiate access for additional U.S. rice in Korea’s market. A
further opening of the South Korean rice market could occur in the process of concluding a
multilateral agreement to further liberalize agricultural trade in the WTO’s Doha Development
Round. Also, the United States and other rice exporting countries could press for additional
access when Korea’s current WTO minimum market access agreement expires in 2014.
Oranges
Differences on how quickly to liberalize trade in fresh oranges were not resolved until just before
the negotiations concluded. The United States sought the complete elimination of Korea’s border
protection on all citrus products, while South Korea wanted to retain its quotas and tariffs,
primarily because of the importance of the citrus industry to the economy of Cheju Island. At
present, South Korea imposes a 50% tariff on all imports of oranges, irrespective of whether they
enter within or outside an existing TRQ.
In reaching a compromise, negotiators agreed to a multi-part solution. First, a small duty-free
quota would be created for “in-season” U.S. navel oranges (a variety that is not produced in
Korea) that would enter between September 1 and the end of February—a period that coincides
with the Island’s unshu (mandarin) orange harvest season. The initial 2,500 MT TRQ would
increase at a compound 3% annual rate in perpetuity. Shipments in excess of the quota amount
during this six-month period would continue to be subject to the 50% tariff. Second, in the first
year, this high tariff would be reduced to 30% for “out-of-season” oranges that enter between
March 1 and August 31, and then be completely phased out in stages by year 7. Third, South
Korea’s 144% tariff on other mandarin oranges would be phased out over 15 years.
The cost of selling to what already is a leading U.S. export market for fresh oranges would be
significantly reduced as Korea’s high 50% tariff is phased out. In 2010, South Korea ranked
second (after Canada), with U.S. orange sales totaling $114 million (118,945 MT). The U.S.
Department of Agriculture (USDA) estimates that the value of the in-season 2,500 MT quota and
tariff reductions on all orange exports in the first year that the agreement is in effect would be
almost $18 million. Over seven years, USDA estimates the cumulative value of savings
associated with these orange access provisions at $208 million.40
Pork
According to the December 2010 modifications to the commitments, South Korea would phase
out its 25% tariff on one tariff line of frozen pork cuts on January 1, 2016. This change would
affect about 75% of all U.S. pork exports, as recorded by 2010 value. This is two years later than
what both sides had agreed upon in the 2007 text (i.e., January 1, 2014). Korea’s tariffs on other
U.S. pork products would be phased out by January 1, 2014, or over 10 years. South Korea
40 USDA, Foreign Agricultural Service, Fact Sheet “U.S.-Korea Free Trade Agreement—What’s At Stake for Fresh
Citrus and Orange Juice,” September 2008.
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secured a safeguard to protect against import surges of some of these fresh pork products, which
would expire at the end of 10 years.
In 2010, South Korea was the fourth-largest market for U.S. pork (fresh, chilled and frozen), with
sales of almost 84,000 MT valued at $161 million. The National Pork Producers Council
acknowledged that, even with the last minute concession on pork in order to resolve the auto
issue, the KORUS FTA is “a good deal.” It expects the agreement to “be one of the most lucrative
for the U.S. pork industry,” with a substantial increase projected in exports to South Korea, live
hog prices, and direct jobs.41
Geographical Indications for Dairy Products
The U.S. dairy sector has expressed concern that the geographical indications (GI) provisions that
apply to various EU cheeses in the KOREU FTA would undercut the potential benefits negotiated
under the KORUS FTA for U.S. cheeses with identical names that sell into the Korean market.
GIs (similar to a trademark) refer to marks that “identify a good as originating in the territory of a
country, or a region or locality in that territory, where a given quality, reputation or other
characteristic of the good is essentially attributable to its geographical origin.”42 To illustrate,
“champagne” and “Idaho potatoes” are examples of GI designations. Products so designated are
eligible for relief from acts of infringement and/or unfair competition under a country’s trademark
laws and regulations. Because GIs are commercially valuable in the international trade of
agricultural products, wines, and spirits, the EU in negotiating its bilateral trade agreements has
sought to secure additional protection for its GI-designated agricultural and beverage products in
FTA-partner country markets beyond what multilateral trading rules currently provide.
More than 50 Members of the House requested the USTR to ensure that as South Korea develops
regulations to implement the KOREU FTA’s GI provisions, those rules “do not undercut the dairy
market gains secured” in the KORUS FTA. They expressed concern that the U.S. dairy industry
will not be able to increase cheese exports if (1) the United States does not “combat European
efforts to carve out the sole right for their producers to use … cheese names most familiar to
consumers around the world (e.g., feta, gorgonzola, muenster, parmesan, provolone),” and (2) act
to safeguard against possible threats to the use of such generic terms as cheddar and mozzarella
“that could arise as a result of recent EU legal precedents” to protect the names of some EU wines
and spirits.
A June 2011 exchange of letters between the USTR and Korea’s trade ministry clarified that the
use of generic terms used to identify types of cheeses (e.g., camembert, mozzarella, emmental,
grana, parmesan, brie, cheddar) will not be restricted by the Korea-EU FTA. In other words, U.S.
exporters will be able to sell these cheeses into the important Korean market trade minister. A
U.S. trade official stated the United States is satisfied with the clarifications provided by Korea’s
trade minister. U.S. milk and dairy product groups welcomed these assurances, noting that Korea
already is one of the largest export markets for U.S. cheese.43
41 NPPC, “U.S.-South Korea FTA Remains A Good Deal For U.S. Pork Producers,” December 3, 2010.
42 Uruguay Round Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), Article 22.1.
43 Letter from Korea’s Trade Minister Jong-Hoon Kim to USTR Ron Kirk, June 20, 2011; Inside U.S. Trade, South
Korea Clarifies GI Provisions in EU-Korea FTA to USTR Satisfaction, June 24, 2011; U.S. Dairy Industry press
release, “U.S. Rights to Export Variety of Cheeses to Korea Upheld,” June 23, 2011, available at
http://www.usdec.org/files/PressReleases/NMPFUSDECIDFA-
(continued...)
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Sanitary and Phytosanitary Provisions
As found in most other U.S. FTAs, the KORUS FTA establishes a bilateral standing committee to
address food safety and animal/plant life or health issues that frequently emerge in agricultural
trade. However, there are no commodity-specific sanitary and phytosanitary (SPS) provisions to
address outstanding issues, such as Korea’s import health requirements on U.S. beef imports or
Korean standards that have prevented sales of some U.S. horticultural products to that market.
The Committee on SPS Matters would serve as a forum to implement the WTO’s Agreement on
the Application of SPS Measures, enhance mutual understanding of each country’s SPS rules,
resolve future bilateral SPS disputes that arise, coordinate technical assistance programs, and
consult on issues and positions in the WTO and other international bodies where SPS issues are
considered. The text of the SPS chapter specifically states that neither the United States nor South
Korea has recourse to pursue dispute settlement to address any SPS issue that arises. Instead, any
matter would be resolved using the formal process established under the WTO’s SPS Agreement.
U.S. beef producers had argued until the 2008 bilateral agreement was reached that Korea’s
stance on U.S. beef imports must be scientifically based upon internationally recognized
guidelines issued by the World Organization for Animal Health, also known as OIE by its French
acronym.44 Other agricultural groups also have raised concerns about Korea’s implementation of
SPS measures on food additives and those that have restricted U.S. fruit and vegetable exports.
This new standing committee potentially could be used as the venue to attempt to resolve future
SPS disputes, taking into account latest available scientific findings and knowledge.
Autos
The U.S. and South Korea modified the commitments on trade in automobiles in December 2010.
The Obama Administration claimed this was a necessary step in moving the agreement forward
because “the [original] U.S.-Korea trade agreement did not go far enough to provide new market
access to U.S. auto companies and to level the playing field for U.S. auto manufacturers and
workers.”45
The main automotive trade provisions, including the December 2010 provisions, may be
summarized as follows:
• Elimination of South Korean tariffs on U.S.-made motor vehicles. South Korea
would immediately reduce its 8% tariff on U.S.-built passenger cars, including
electric vehicles and plug-in hybrids, to 4% and would immediately reduce its
10% tariff on trucks to zero.46 In year five, tariffs on U.S.-made motor vehicles,
including electric cars and plug-in hybrids, would be reduced to zero.47 Tariffs
(...continued)
U.S.RightstoExportVarietyofCheesestoKoreaUpheld.pdf.
44 This stance is reflected in testimony by the National Cattlemen’s Beef Association before the USITC on June 20,
2007.
45 White House. “Increasing U.S. Auto Exports and Growing U.S. Auto Jobs Through the U.S.-Korea Trade
Agreement,” (December 3, 2010).
46 Tariffs on trucks cover pickup trucks, panel vans, and commercial vehicles. Many light trucks (i.e., SUVs and
minivans) are counted as cars.
47 Tariffs for electric cars and plug-in hybrids would be phased out over five years, whereas passenger car tariffs would
(continued...)
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would be immediately reduced to zero in each country for auto parts imported
from the other.48
• Elimination of U.S. tariffs on South Korean-made automobiles and a “snapback”
clause. The United States would keep its passenger vehicle tariff (which would
also cover electric and plug-in hybrid vehicles)49 of 2.5% until the fifth year of
the agreement. In the original agreement, the tariff would have been eliminated
immediately on imports of South Korean cars with small gas engines. Tariffs on
passenger vehicles with larger gas engines and diesel engines would be phased
out over three years. The elimination of the 25% duty on trucks, a residual rate
dating from an earlier trade dispute with Europe, would be delayed. It would stay
in place for the first seven years after the agreement enters into force and would
then be phased out in equal installments in years 8, 9, and 10 based on the 2010
revision.50 In the original agreement, the tariff eliminations would have been
phased out in 10 equal installments. The FTA, in Annex 22-A, also establishes a
special bilateral dispute settlement panel, designed to resolve automotive issues
within six months. If the panel finds a violation of an auto-related commitment or
the nullification/impairment of expected benefits, the complaining Party may
suspend its tariff concessions on passenger vehicles and assess duties at the
prevailing MFN rate (i.e., ‘snapback’ any tariff reductions provided by the
FTA).”51 The renegotiated agreement does not extend the snapback to the higher
25% truck tariff. But measures affecting trucks could lead to the snap back of the
2.5% passenger car tariff.52 It does appear the revisions would strengthen the
snapback with the White House fact sheet stating “the 2010 supplemental
agreement substantially increases Korea’s obligations in a number of areas
subject to this strong enforcement mechanism.”
• Reduction of alleged discriminatory effects of engine displacement taxes.
Automotive-specific taxes, which play an important role in determining the final
price of a vehicle, are viewed by U.S. automakers as another barrier to foreign
car sales in South Korea. The U.S. complaint centers on South Korea’s steeply
ascending vehicle tax schedule, with very high rates on vehicles with larger
engine capacities such as might be exported by U.S. producers, makes U.S.
imported cars more expensive than smaller South Korean cars. Moreover, the tax
system has a “cascade” effect, so that subsequent taxation rates incorporate, for
example, the 8% duty paid on an imported vehicle. Currently, a special
consumption tax, an educational tax, a value-added tax, a registration tax, and a
(...continued)
remain in place at 2.5% until year five.
48 Office of USTR. Report of Industry Trade Advisory Committee on Automotive and Capital Goods (ITAC 2) (April
27, 2007), p. 2.
49 The staging of the U.S. tariff for electric cars and plug-in hybrids differs from that of passenger cars as these tariffs
would be reduced immediately from 8% to 4%, and then reduced by 1% annually until free in the fifth year of the
agreement.
50 The 2007 agreement would have required the U.S. to begin phasing out its 25% tariff on light truck imports
immediately until full elimination in year 10 following implementation of KORUS FTA.
51 USTR, “Auto-Related Provisions,” p. 1; USITC. U.S.-Korea FTA, p. 3-80 (Box 3-4). In the case of the United States
the MFN tariff (HTS 8703) would be 2.5% and for South Korea it would be 8%.
52 The truck tariff applies to “motor vehicles for the transport of goods (HTS 8704)” which would include trucks like
the Ford F-150.
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subway bond are among the taxes which apply to motor vehicles, and these taxes
are often higher on vehicles with engines 2,000 cubic centimeters (cc) or larger.53
The 2007 agreement would reduce tax rates and eliminate the discrepancy in the
rates between imported and domestic vehicles.
• Improved regulatory transparency for new automotive regulations. South Korea
also committed to an improvement in its regulatory process in two ways. U.S.
auto companies would be given one year between the time a final regulation
relating to autos is issued and when U.S. automakers must comply with the new
regulation. South Korea also agreed to develop a new post-implementation
review system within two years after the agreement takes effect to ensure that
existing auto regulations are applied in the least burdensome manner possible.
• Regulations on harmonization of automotive safety and environmental standards.
U.S. manufacturers complain that South Korea sets automotive safety and
environmental regulations in a manner that is closed to outsiders and not
transparent. This results in standards idiosyncratic to South Korea. South Korean-
based producers, who hold the lion’s share of the domestic market, can afford to
operate one line for domestic production, and another for export. Foreign
companies have difficulty affording the high unit cost of customizing a small
number of vehicles for the South Korean market.54 This problem is addressed in
the KORUS FTA (Chapter 9—”Technical Barriers to Trade”) and in an exchange
of “confirmation letters” of June 30, 2007, between USTR Susan Schwab and
South Korean Trade Minister Hyun Chung Kim. The 2010 agreement provides
for self-certification to U.S. federal safety standards for a limited number of U.S.-
exported vehicles raising the ceiling to 25,000 per automaker per year compared
to no more than 6,500 per year per U.S. automotive manufacturer as agreed to in
2007. Under the 2010 agreement, U.S. auto manufacturers would be given some
flexibility in meeting new higher South Korean environmental standards.55 U.S.
automakers would be considered in compliance with new South Korean fuel
economy or greenhouse gas emissions standards if “they meet a target level that
is 19% more lenient than the relevant target level provided in the regulation that
would otherwise be applicable to that manufacturer.”56 This provision applies to
U.S. carmakers that sold fewer than 4,500 cars in South Korea in calendar year
2009.
53 One measurement of car engines is displacement. An engine in cubic centimeters shows the volumes displaced by
the cylinders through one revolution. The higher the number, typically the more powerful the engine. Engine
displacement can also be measured in liters (e.g., a 1.4 liter engine is equivalent to 1,400 cc and a 1.8 liter engine is
equivalent to 1,800 cc). A small car engine is generally around 1.6 liter such as the Hyundai Elantra; a larger one is the
Ford Fusion at 2.5 liters; and even larger is the Chevy Impala with an engine as large as 5.3 liters.
54 Examples of how specific South Korean automotive standards discourage imports were provided by Stephen J.
Collins, President of the Automotive Trade Policy Council, in testimony to the U.S. House. Committee on Ways and
Means. Subcommittee on Trade (March 20, 2007), pp. 3-5. Dr. Thomas Becker of the German Verband der
Automobilindustrie confirmed that European exporters confront the same problem in South Korea (CRS interview,
March 12, 2007).
55 South Korea’s new environmental regulations will become more stringent over the next five years. These new
regulations, which are still being developed, are set to take effect in 2012 and are expected to remain in place until
2015. South Korea will raise the average fuel economy of automobiles seating 10 or fewer passengers to 17 kilometers
per liter and will lower the standard for carbon dioxide emissions to 140 grams per kilometer by 2015. Automobile
importers would be able to choose either standard to satisfy the requirement.
56 USTR. Agreed Minutes, February 10, 2011, http://www.ustr.gov/webfm_send/2555
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• Creation of an “Automotive Working Group.” Under terms of Annex 9-B, the
two parties agreed to create an Automotive Working Group, which would meet at
least annually, and would review and resolve “issues with respect to developing,
implementing and enforcing relevant standards, technical regulations and
conformity assessment procedures.”57
• Inclusion of a Special Motor Vehicle Safeguard. The original KORUS FTA text
signed in June 2007, did not include a motor vehicle safeguard, whereas under
the 2010 KORUS revisions South Korea committed to add a special safeguard
for motor vehicles to ensure that the U.S. auto industry is not hurt as a result of
any “harmful surges” in South Korea auto imports as a result of the trade
agreement. The new auto-specific safeguard provision would allow the United
States to impose extra duties if there is an import surge. Any higher tariff that
might be imposed could be applied for four years, instead of three under the
general safeguard. The auto safeguard would continue for 10 years after the full
elimination of tariffs. Thus, the safeguard could be in place until at least 2031 in
case of truck tariffs. Another feature of the safeguard is that it could be applied to
a particular auto product more than once in the event of a recurring surge that
causes serious injury to U.S. production of that product. The White House fact
sheet also notes that “fewer procedural steps are required to speed up the
application of the safeguard when workers need faster relief.”58 This would seem
to make it easier for the United States apply the safeguard if there are complaints.
Under the exchange of letters, U.S. tariffs on imports of South Korean cars will fall more slowly
than agreed in 2007 and could be raised in case of an import surge, while South Korean tariffs
will fall more quickly, albeit not as fast as in the original agreement. The new auto-specific
provisions would protect the U.S. auto industry for a longer period of time possibly stemming the
number of South Korean cars coming into the United States.
Neither the original nor the revised commitments would affect domestic production of South
Korean cars. South Korean manufacturers now make hundreds of thousands of cars in the United
States and they are poised to grow their local production capacity. Thus, a surge in automobile
imports from South Korea seems unlikely in the next few years. GM Daewoo, the South Korean
arm of U.S. automaker GM, manufactured over 100,000 cars in South Korea every year since
2005. See Appendix A for an overview of South Korea’s motor vehicle manufacturing industry.
Expected Impact and Industry Reaction
The USITC simulation model of the KORUS FTA estimates that while U.S. automotive exports
to South Korea would increase by a range of 45% to 59%, this would only amount to about $300
million-$400 million because of the low current baseline.59 It states that tariff elimination “would
57 USTR. Text of U.S.-Korea Free Trade Agreement, p. 9-9. The details of the FTA on automotive technical barriers are
summarized in Office of the USTR. “Fact Sheet on Auto-Related Provisions in the U.S.-Korea free Trade Agreement,”
Trade Facts (April 3, 2007); and, USITC. U.S.-Korea FTA, p. 3-80 (Box 3.4).
58 White House. “Increasing U.S. Auto Exports and Growing U.S. Auto Jobs Through the U.S.-Korea Trade
Agreement,” December 3, 2010,
http://www.whitehouse.gov/sites/default/files/fact_sheet_increasing_us_auto_exports_us_korea_free_trade_agreement.
pdf
59 Ibid., Table 2.2.
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likely have a positive effect on U.S. exports ... further, the overall tax burden on the South Korean
consumer who purchases an imported vehicle would be reduced, more or less equalizing the total
taxes paid on imported and domestic vehicles.”60 It particularly emphasizes the potential gain for
U.S.-exported hybrid vehicles to South Korea. Whether this will eventually happen remains
uncertain. Most hybrids in the U.S. market today are imported from Japan.61 The Japanese
automaker Toyota, with its Prius, accounted for over half, or 140,900, of all hybrid electric
vehicles sold in the United States in 2010.62 The Detroit-based U.S. manufacturers have increased
their hybrid electric vehicle sales in recent years, rising from 0 in 2003 to over 40,000 in 2010. It
is possible, however, that Japanese manufacturers of hybrid electric vehicles could use the United
States as an export platform to South Korea and other overseas markets. More competition could
also come from South Korean automakers who are also planning to enter the hybrid segment of
the U.S. market. Hyundai’s entrant is the Sonata hybrid, which will be the first South Korean
hybrid sold in the United States.63
With respect to automotive imports from South Korea into the United States, the USITC
simulation estimates an “increase by $1.3-1.7 billion (9-12%).” However, it also finds that
“approximately 55-57% [would be] represented by diverted imports from other trade partners.”64
Jeffrey Schott of the Peterson Institute for International Economics states that South Korea gave a
“priority to eliminating the small U.S. tariff primarily because of Japanese competition. Hyundai
and Kia seem to be considering the development of pickup trucks that could be sold in the U.S.
market, although whether they will be produced, and where (in the United States or South Korea),
in the near future remains unclear.65 Hyundai and Kia do already produce small pickup-type
vehicles in South Korea, but they would not appear to be suitable in design or style for the United
States.66
U.S. industrial interests’ and labor union views on KORUS FTA may be described as follows:
• The Detroit Three were split on the 2007 KORUS FTA. Ford and Chrysler were
opposed to the original agreement, while General Motors (GM) was neutral. Ford
changed its position based on the amended 2010 agreement stating it “provides
Ford greater confidence that we will be able to better serve our Korean
customers.”67 Ford was also concerned about competition from South Korean
60 Ibid., p. 3-78.
61 Ibid.
62 Energy Efficiency and Renewable Energy, U.S. Department of Energy, Alternative Fuels & Advanced Vehicles Data
Center, HEV Sales by Model, 1999-2010, http://www.afdc.energy.gov/afdc/data/vehicles.html.
63 Hyundai, "2011 Sonata Hybrid Delivers the Best Highway Fuel Economy of any Mid-size Sedan on the Market,"
press release, 2010, http://www.hyundainews.com/Media_Kits/2011_Models/Sonata_Hybrid/Press_Release.asp.
64 Ibid., pp. 2-12 and 3-82, and Table 2.2. Dr. Nam’s simulations from the paper cited above produce somewhat more
modest results. He estimates a net Korean export gain of about $900 million, a U.S. gain of about $130 million, leading
to an increase in the U.S. bilateral deficit of about $770 million. As with the ITC findings, he concludes, “bilateral tariff
elimination between Korea and the United States ... will increase the two countries’ exports and imports of automobiles
and parts at the expense of other countries;” p. 10.
65 Mike Levine, Hyundai Rumored to be Considering Full-Size Pickup Truck, May 8, 2010,
http://news.pickuptrucks.com/2010/05/hyundai-rumored-to-be-considering-fullsize-pickup-truck.html
66 According to Ward’s Automotive Yearbook, in 2006, Hyundai produced 98,000 “Porters,” and Kia produced 72,000
“Bongos,” both described as pickups.
67White House, Statements of Support for the U.S-Korea Trade Agreement, December 3, 2010,
http://www.whitehouse.gov/the-press-office/2010/12/03/statements-support-us-korea-trade-agreement
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automakers in the U.S. market and the revised commitments would keep U.S.
tariffs in place for a longer period of time than originally proposed. In particular,
the truck tariff phase-out would be delayed for eight years before being
eliminated in year 10 following the implementation of the agreement.
• Automotive parts suppliers have been supportive of the 2007 agreement because
of their strong export-based business with Korean customers.
• Broader-based industry organizations hold favorable views of the 2007
agreement and have also weighed in positively on the 2010 agreement.
• Labor groups are split. The United Auto Workers (UAW)68 announced they
would support the agreement, while others like the AFL-CIO,69 United
Steelworkers (USW),70 and the International Association of Machinists and
Aerospace Workers (IAM)71 remain opposed.
• Until the 2010 modifications to some of the commitments were announced, both
the management side and the labor side of the domestically owned U.S.
automotive industry used the word “unbalanced” to describe the benefits that
could flow from the implementation of the KORUS FTA. This may seem odd,
given that the agreement has many provisions in various chapters dealing with
specific South Korean policies and practices, and virtually none on the U.S. side,
beyond the elimination of tariffs. Their views could be colored by the global
competitive problems currently affecting the unionized, domestically owned
sector of the U.S. motor vehicle industry which go well beyond the scope of the
KORUS FTA to solve.72 Indeed, given major differences in the profiles of the
U.S. and South Korean motor vehicle markets, it remains to be seen whether the
Detroit Three (GM, Ford, and Chrysler), which tend to specialize domestically in
the production of larger vehicles, would ever gain more than a fractional position
in the South Korean market through exports from the United States. Unlike Ford
and Chrysler, GM has secured a solid investment position in South Korea that it
is integrating into its global strategy, which helps explain its neutral position.
• The original views were reflected in the September 2009 statements submitted to
the Interagency Trade Policy Staff Committee on the US-Korea Free Trade
Agreement. In the April 2007 report of the Industry Trade Advisory Committee
on Automotive and Capital Goods (ITAC 2) to USTR, the chair noted that,
“Generally, the manufacturers of capital goods see [the FTA] as an important
milestone in providing market access to a country and region historically
68 UAW, "UAW Statement on the Proposed U.S.-Korea Free Trade Agreement," press release, December 6, 2010,
http://www.uaw.org/articles/uaw-statement-proposed-us-korea-free-trade-agreement.
69 AFL-CIO, “Statement by AFL-CIO President Richard Trumka on Korea Trade Deal,” press release, December 9,
2010, http://www.aflcio.org/mediacenter/prsptm/pr12092010b.cfm
70 United Steelworkers, "USW Opposes Passage of Revised U.S.-Korea Trade Agreement," press release, December 9,
2010, http://www.usw.org/media_center/releases_advisories?id=0344.
71 International Association of Machinists and Aerospace Workers, "IAM Statement regarding Proposed U.S.-South
Korea Free Trade Agreement," press release, December 9, 2010,
http://www.goiam.org/publications/pdfs/12_09_2010_Machinists_Union_Strongly_Opposes_Korea_Trade_Deal.pdf.
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protectionist.... However, in terms of U.S. automotive equipment manufacturers,
the outcome is mixed.”73
Both the U.S. motor vehicle industry representatives and the whole of ITAC 2 initially
recommended an “unconventional” approach on automotive issues in the negotiations. It would
have “precondition[ed] the phase-out of U.S. automotive tariffs on the demonstration of South
Korean market openness in terms of improved import penetration that is on par with that of other
OECD countries.”
Some of the earlier opposition to the agreement by some Members of Congress seems to have
abated. For example, Representative Sander Levin, who has long opposed the auto provisions as
negotiated in the 2007 agreement, said, “the changes announced in the U.S.-Korea Free Trade
Agreement (FTA), today are a dramatic step toward changing the one-way street to a two-way
street for trade between the U.S. and South Korea.”74 Similar views were expressed by the United
Auto Workers (UAW) union, which until the December 2010 announcement was one of the main
opponents to the FTA.75 The renegotiated auto provisions were also positively viewed by Ways
and Means Ranking Members Dave Camp and the Trade Subcommittee Ranking Member Kevin
Brady. However, some Members remain opposed to the renegotiated agreement, most notably
Representative Michael Michaud, chairman of the House Trade Working Group, an informal
working group in the House of Representatives who are pushing for a fair trade agenda, who
stated,
I had hoped for more from this White House, which campaigned on the need to change the
way we negotiate trade agreements so that they truly benefit American workers and
businesses. The deal reached today, while beneficial to the auto industry, falls far short of
that goal.76
In November 2010, the House Trade Working Group wrote to President Obama listing changes
they viewed as critical before they would endorse the KORUS FTA, including protection of
worker’s rights, promotion of U.S. manufacturing through reciprocity, and increased export
opportunities for small and medium manufacturers.77 The AFL-CIO has come out against the
revised trade agreement with South Korea, citing major concerns over provisions that the union
believes would encourage the offshoring of U.S. jobs.78
The revised commitments did not include earlier demands by some for managed trade. In 2007,
15 Members of Congress, including Representative Charles Rangel, then chair of the House Ways
and Means Committee, proposed a “performance metric” approach, which was also suggested by
ITAC 2. Their proposal would have delayed full elimination of the U.S. import tariff cut for at
73 ITAC 2 report, p. 1.
74 Chairman Levin Statement on U.S.-South Korea Free Trade Agreement, December 3, 2010,
http://www.house.gov/apps/list/press/mi12_levin/PR1232010.shtml
75 UAW statement on the proposed U.S.-Korea Free Trade Agreement, December 6, 2010,
http://www.uaw.org/articles/uaw-statement-proposed-us-korea-free-trade-agreement
76 Michaud Responds to Deal on Korea-US Trade Agreement, December 3, 2010,
http://www.michaud.house.gov/index.php?option=com_content&task=view&id=1163&Itemid=1
77 Congressman Mike Michaud, “House Members Meet with Obama on a New Way Forward on Korea FTA,”
November 18, 2010, http://www.michaud.house.gov/index.php?option=com_content&task=view&id=1155&Itemid=1
78AFL-CIO, "Statement by AFL-CIO President Richard Trumka on Korea Trade Deal," press release, December 9,
2010, http://www.aflcio.org/mediacenter/prsptm/pr12092010b.cfm.
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least 15 years, while U.S. representatives assessed South Korea’s performance in opening its
market for U.S. exports. A formula would be used each year to determine the number of South
Korean-produced vehicles that would receive duty-free treatment in return. Such an approach
would have created a one-for-one linkage in which the U.S. tariff would be lowered on one South
Korean car whenever one U.S. car was sold in South Korea.
Textiles and Apparel
Textiles and apparel are a small and dwindling portion of U.S. manufactured imports from South
Korea. In 2010, textiles accounted for 1.4% of total U.S. imports from South Korea and apparel
accounted for less than 1%.79 South Korea’s shares of the U.S. market for textiles and apparel has
shrunk in relative and absolute terms over the years. In 1990, for example, South Korea was the
third-largest source of U.S. imports of apparel with an 13.0% share, but by 2010, it had dropped
to the 27th-largest source with a 0.4% share. This decrease came largely as the result of the surge
in China’s share of U.S. apparel imports, which grew from 13.7% in 1990, to 40.9% in 2010. In
1990, South Korea was the third-largest source of U.S. textiles and fabric imports with a 9.8%
share, which dropped to 7.9% in 2010.80 The United States exports small volumes of apparel to
South Korea—$112 million of apparel in 2010.81
The KORUS FTA would eliminate U.S. tariffs immediately on 52% (in terms of value) U.S.
imports of South Korean textiles and apparel, and would phase out U.S. tariffs on 21% over five
years and on the remaining 27% over 10 years.82 Currently, the average U.S. MFN tariff on
textiles is 7.9% with a maximum applied tariff of 34.0% and with 16.1% of textiles categories
already entering the United States duty free. The average applied U.S. MFN tariff on apparel
imports is 11.5% with a maximum tariff of 32%, and 3.3% of the tariff lines entering duty free.83
The average South Korean applied tariff on textiles is 9.2% with a maximum of 13% and 0.3% of
tariff lines entering duty free. The average South Korean tariff on apparel is 12.6% with none
entering duty free and with a maximum tariff of 13%.84 The KORUS FTA, would eliminate South
Korean tariffs immediately on 77% (by value) of U.S. exports of textiles and apparel and would
phase out tariffs on 13% over three years and the remaining 10% over five years.85
The KORUS FTA, with some exceptions, would use the yarn-forward rule of origin for apparel
imports; that is, apparel made from yarn or fabric originating in either the United States or South
Korea would be eligible for duty-free treatment under the FTA. The FTA also includes a special
safeguard provision whereby, if imports of textiles or wearing apparel to one KORUS FTA
partner country from the other increases at such a rate as to cause or threaten to cause serious
injury to the domestic industry of the importing country, the importing country can suspend
79 The textile and apparel statistics are based on three NAICS codes (NAICS 313: Textiles & Fabrics; NAICS 314:
Textile Mill Products; and, NAICS 315: Apparel Manufacturing) and were compiled using the International Trade
Administration’s Trade Stats Express, http://tse.export.gov/TSE/TSEhome.aspx.
80 These statistics are based on NAICS 313: Textiles & Fabrics.
81 These statistics are based on NAICS 315: Apparel Manufacturing.
82 United States International Trade Commission. U.S.-Korea Free Trade Agreement: Potential Economy-Wide and
Selected Sectoral Effects. USITC Publication 3949. September 2007. pp. 3-52.
83 World Trade Organization. Tariff Profiles 2006. Located at http://www.wto.org.
84 Ibid.
85 USITC. pp. 3-52.
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further reduction of tariffs, or it can increase the duty on the imported product to (the lesser of)
the MFN rate applicable at the time the action was taken or the MFN duty that was in force when
the FTA went into effect. The safeguard action can be in place for two years with a possible
extension of two years but no more than a total of four years. However, the importing country
will have to compensate the exporting country by making additional trade liberalizing
concessions equivalent in value to the additional duties expected to result from the safeguard
action. The concessions would be limited to textiles and apparel unless the two countries agree
otherwise.
The USITC has estimated that, if implemented, the KORUS FTA would over time lead to an
increase in U.S. imports of South Korean textiles of $1.7 billion to $1.8 billion and of apparel of
$1.0 billion to $1.2 billion, with the major portion of the increase being diverted from other
countries. The USITC also has estimated that the KORUS FTA would lead to an increase in U.S.
exports of textiles of $130 million to $140 million and of apparel of $39 million to $45 million to
South Korea.86
The KORUS FTA would allow some fibers, yarns, and fabrics originating outside the United
States and South Korea to become eligible for preferential treatment if the product is not available
domestically in commercial quantities in either country. The agreement also provides for the
establishment of a Committee on Textile and Apparel Trade Matters to raise concerns under the
FTA regarding mutual trade in these products.
The textile and apparel industry appears split on their views of the KORUS FTA according to the
Industry Trade Advisory Committee on Textiles and Clothing (ITAC-13).87 Some representatives
of the textile producers support the yarn-forward rule as benefitting their industry and also
conforming to provisions in other U.S. FTAs but also argue that it should be broader by including
sewing thread, narrow fabrics and pocketing fabrics, which are excluded from the rule. Others,
including some textile representatives and representatives from the apparel industry with supply
chains in other countries, have criticized the yarn-forward rule as being restrictive and limiting
trade opportunities.
Members of the industry are also divided on the lack of cumulation provisions in the FTA, that is
provisions which allow preferential treatment for limited amounts of apparel woven from
components outside the FTA area. Textile producers supported the lack of cumulation provisions
while apparel producers would have wanted them included. They also split on the phase-out
periods for tariffs with textile producers arguing that some sensitive products were given
immediate duty-free treatment. Apparel producers argued that all apparel and textiles should have
been given immediate duty-free treatment. Footwear and travel goods are also covered under the
FTA. Producers of both categories strongly support the FTA and how their products would be
treated.88
86 Ibid. pp. 3-53.
87 Report of the Industry Trade Advisory Committee on Textiles and Clothing (ITAC-13) on the South Korea/U.S.
(KORUS) Free Trade Agreement. April 27, 2007.
88 Ibid.
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Other Manufactured Goods
The provisions of the KORUS FTA affect a wide range of other industries beyond the automotive
sector and textiles and apparel. Cross-sectoral trade associations that represent broad ranges of
U.S. manufacturers have indicated their support for the agreement, not only because of the
general elimination of South Korean tariffs on U.S. exports, but also because of such provisions
as those promising to increase cooperation in the reduction of technical barriers to trade and the
improvement in South Korea of the protection of U.S. companies’ intellectual property rights.89
Similarly, most sectoral trade associations expressed support, although some noted reservations
with specific provisions.90 The steel industry in particular was a notable dissenter.
Capital Goods Machinery and Equipment
U.S. machinery exports could be the largest single sectoral gainer from the FTA with South
Korea. According to the USITC’s simulation analysis, the sector stands to gain nearly $3 billion
in exports if the agreement is approved.91 The tariffs on U.S. machinery and equipment imported
into South Korea range from 3% to 13%, but U.S. products are already competitive in many
cases, and already account for 15%-20% of total South Korean imports. (A specific example is
U.S.-made computer-numerically controlled machine tools.) Most machinery tariffs would be
immediately eliminated; others would be phased out over three to 10 years.92 As noted in the
previous section on autos, the capital goods machinery industry representatives in ITAC 2 split
with the motor vehicle industry representatives and supported the agreement. The ITAC report
specifically cited, “U.S. manufacturers of electrical equipment [who] will benefit substantially by
South Korean tariff reductions and eliminations, where the sector has already returned to running
a trade surplus with South Korea.”93 The USITC report further noted the export potential of
electrical-power generating equipment, for which South Korean duties range up to 8% currently.
U.S. exporters are nonetheless already leading suppliers of turbines, generators and nuclear
reactors to South Korea.94 The National Electrical Manufacturers Association (NEA) stated that
U.S. exports to South Korea had risen steadily, by a total of 62%, since 2002, and that there was a
U.S. surplus in bilateral trade. It calls for:
legislators in both countries to ratify the Agreement as soon as possible. While the U.S.
electrical equipment industry still has concerns relating to non-tariff barriers and intellectual
property protection in South Korea, the overall FTA package would improve conditions for
89 National Association of Manufacturers (NAM). “Support the U.S.-Korea Free Trade Agreement,”
ManuFacts(September 2007); U.S. Chamber of Commerce, “Chamber Welcomes Announcement of U.S.-Korea Free
Trade Agreement” news release 07-57 (April 2, 2007), and “U.S. Chamber Welcomes Signing of U.S.-Korea Free
Trade Agreement” news release 07-126 (June 30, 2007); Business Roundtable, “Business Roundtable Applauds Deal
on U.S.-Korea Trade” (April 2, 2007).
90 Thus, in its submission to the ITC, the NAM indicated, “the FTA is not perfect and noted concerns expressed by U.S.
automakers about the FTA’s tariff and nontariff provisions and the questions raised by the U.S. steel industry about
trade rules and other barriers.” USITC. U.S.-Korea FTA, pp. 3-73.
91 Ibid., Table 2.2.
92 Ibid., pp. 3-68 and 3-71.
93 ITAC 2, p. 1.
94 USITC. U.S.-Korea FTA, p. 3-71.
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selling there by featuring the elimination—most of it immediate—of remaining tariffs on
goods in NEA’s product scope.95
Another major capital goods item in which the United States has a strong bilateral trade position
is aircraft. Total 2010 aircraft and parts exports to South Korea were $2.6 billion.96 However,
civilian aircraft imports are already duty-free in South Korea.97
Electronic Products and Components
Both South Korean and U.S. tariffs on most electronics products, such as semiconductors,
telecommunications equipment, and computers, are already zero, as they are included in the
multilateral Information Technology Agreement eliminating tariffs among more than 70
countries. In 2010, the United States posted a trade deficit in computer and electronic products
with South Korea of $11.1 billion, compared to $9.7 billion in 2009. The U.S. trade deficit with
South Korea in semiconductors and other electronic components with South Korea reached a
record high of $3 billion in 2010.98
Sectoral organizations representing these industries supported the KORUS FTA. It was argued the
FTA would extend tariff-free treatment to consumer electronics products and could guarantee
improvements for U.S. products in South Korea with respect to intellectual property protection,
technical barriers, government procurement, and competition policy.99
Steel
The American steel industry registered a strongly negative position on the KORUS FTA through
its industry advisory body to USTR, ITAC 12 (Steel). Its report noted that the agreement “does
not provide for changes in U.S. AD-CVD statutes” and that each party retains its full rights under
World Trade Organization rules. However, ITAC 12 objected to “changes to the related legal
processes” in the KORUS FTA chapter on trade remedies with respect to three “key areas:”
• By Article 10.7.3, parties are required to notify each other whenever an AD-CVD
application is filed, and prior to initiation of a formal investigation. They must
afford the other government an opportunity to consult on the application. The
steel industry objects to “improperly politicizing the consideration of a trade
remedy provision filed by a U.S. industry, in a process that is already transparent
and open,” particularly in antidumping cases.
• In Article 10.4, either party must afford to the other an adequate opportunity for,
and due consideration of, price undertakings by respondent companies, “which, if
accepted may result in suspension of an investigation” without imposition of
95 NEMA. “U.S.-South Korea Free Trade Agreement,” NEMA Issue Brief (April 2007).
96 The aerospace products and parts statistics are based on NAICS code (NAICS 3364: aerospace products and parts)
and were compiled using the International Trade Administration’s Trade Stats Express,
http://tse.export.gov/TSE/TSEhome.aspx
97 USITC. U.S.-Korea FTA, p. 3-68 and Table 3.13.
98 These statistics are based on NAICS codes for computers and electronic products (NAICS 334) and semiconductors
and other electronic components (NAICS 3344), http://tse.export.gov/TSE/TSEHome.aspx.
99 Ibid., pp. 3-68 through 3-73.
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penalty duties. The steel industry is concerned that the provision “would
encourage the use of suspension agreements and the injection of foreign
governments into the trade law process.”
• The steel industry opposes the provision to establish a bilateral Commission on
Trade Remedies (Article 10.8) as “unprecedented, unnecessary and would
provide yet more opportunities for South Korea to weaken U.S. trade law
enforcement.”100
The specific details of the trade remedies chapter are discussed elsewhere in this report. Beyond
these specific issues ITAC 12 also made a number of other critical points. It argued that the rules
of origin provisions did not follow earlier precedents and there were concerns with products
eventually being produced in the Kaesong Industrial Complex of North Korea. (See the section
on the “Kaesong Industrial Complex.”) It objected to the proposed KORUS FTA’s ignoring
currency manipulation issues. They also supported their U.S. automotive customers’ view that the
FTA failed to insure adequately access to the South Korean market for U.S.-made motor vehicles.
On these grounds, “especially with regard to the proposed AD-CVD provisions, ITAC 12 cannot
conclude at this time that the KORUS FTA promotes the economic interests of the United States
and provides for equity and reciprocity within the steel sector.”101
Pharmaceuticals and Medical Devices
While pharmaceuticals and medical devices (P&M) are a relatively small part of U.S.-South
Korean trade, they are products in which U.S. producers compete well in the South Korean
market and ones in which manufacturers see increasing export opportunities as the South Korean
economy matures. For years, the U.S. industry and government have complained about a number
of South Korea’s pharmaceutical policies that allegedly are designed to protect South Korean
industry, which predominately produces generic drugs.
South Korea is among the world’s top 12 largest markets for pharmaceuticals, accounting for
about $8 billion in sales annually.102 The South Korean market for medical devices accounts for
roughly $2.5 billion in sales annually and is expected to grow 10%-15% each year in the next
several years, in part due to the rapid aging of the population.103 While potentially lucrative,
South Korea is a market in which U.S. P&M manufactures claim government regulations have
limited their ability to penetrate that market.
In 2010, the United States exported $538 million in medical equipment and supplies to South
Korea, accounting for 2.1% of total U.S. exports of those products and 1.7% of total U.S.
manufactured exports to South Korea. In 2010, the United States exported $825 million in
pharmaceuticals and medicines to South Korea accounting for 1.7% of total U.S. exports of
pharmaceuticals and 2.1% of total U.S. merchandise exports to South Korea.104 In the same year
100 Office of the USTR. Industry Trade Advisory Committee on Steel (ITAC 12). The U.S.-Korea Free Trade
Agreement (April 27, 2007). Main views are summarized in pp. 1-2.
101 Ibid., p. 2.
102 USITC. p. 3-64.
103 Ibid. p. 3-91.
104 The pharmaceuticals and medicines statistics are based on NAICS 3254 and medical equipment and supplies
NAICS 3391 were compiled using the International Trade Administration’s Trade Stats Express,
http://tse.export.gov/TSE/TSEhome.aspx
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South Korea exported $197.3 million in medical equipment and supplies and $80.9 million in
pharmaceuticals to the United States.
Of major concern was the South Korean government’s May 2006 change in how it determined
reimbursement amounts. Prior to the change, it maintained a “negative list” system, under which
products would be eligible for reimbursement unless they appeared on the list. With the change,
the South Korean government has switched to a “positive list” requiring a product to be listed
before it would be eligible making it potentially more difficult for a product to become eligible.
Announcement of the policy came without prior notification to U.S. officials or affected U.S.
manufacturers and occurred at an early point in the negotiations placing a cloud over them.
Despite complaints from the United States, South Korea went ahead with implementing its
positive list system.
P&M manufacturers also have cited the South Korean government’s policies on reimbursements
for pharmaceuticals and medical devices under its single-payer health insurance program. U.S.
manufacturers have argued that the policies discriminate against innovative pharmaceuticals
because they establish relatively low reimbursement amounts for medicines thus not taking into
account the costs that producers of leading-edge pharmaceuticals incur and that are reflected in
higher prices. The manufacturers wanted the KORUS FTA to establish transparency as an
important principal in South Korea’s development and implementation of pricing and
reimbursement policies, including an appeal process for decisions going against U.S.
manufacturers.
In response, South Korea agreed in the KORUS FTA to allow U.S. pharmaceutical makers to
apply for increased reimbursement levels based on safety and efficacy. South Korea also agreed
to publish proposed laws, regulations, and procedures that apply to the pricing, reimbursement,
and regulation of pharmaceuticals and medical devices in a nationally available publication and to
allow time for comment. In addition, South Korea agreed to establish a process for U.S.
manufacturers to comment on proposed changes in laws and regulations and for them to obtain a
review of administrative determinations that adversely affect them.
Intellectual property rights protection in South Korea has been a critical issue for U.S.
pharmaceutical manufacturers. Specifically, the failure of the South Korean government to
protect from competitors proprietary data that manufacturers must submit for market approval. In
addition, the South Korean government has, in some cases, approved marketing of some
pharmaceuticals before it has determined that the applicant is the rightful owner of the patent and
trademark.105
In response, under the KORUS FTA’s data exclusivity provisions, South Korea would not allow a
third company, such as a generic drug manufacturer, from marketing a new pharmaceutical using
the safety and efficacy data, supplied by an original U.S. manufacturer as part of the market
approval process, without the permission of the original U.S. maker for five years from the date
of marketing approval for the original product. In addition, if a third party submits safety or
efficacy information for a product that an FTA partner government had already approved, the
government is to notify the original patent holder of the identity of the third party and is to
105 Primosch, William. Testimony of Senior Director, International Business Policy, National Association of
Manufacturers on the Proposed United States-Korea Free Trade Agreement for the Trade Policy Staff Committee,
Office of the U.S. Trade Representative. March 14, 2006. p. 6.
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prevent the marketing of the third party’s product on its territory if permission had not been
granted by the original patent holder. In a side letter, the United States and South Korea originally
agreed to not invoke the data exclusivity provision until the FTA has been in effect 18 months.
Under the modifications to the commitments, the United States agreed to double to 36 months, or
three years, the time South Korea will have to put in place a system of patent linkages for
pharmaceuticals that is required under the FTA. Furthermore, South Korea agreed to a patent-
linkage system; that is, neither government is to approve the marketing of a generic drug while
the original patent is still in effect. Another provision, known as patent-term extension, would
require each FTA government to adjust the length of the effective period for patents on
pharmaceuticals to take into account delays incurred in receiving patent approval and marketing
approval. The KORUS FTA states that no provision would prevent either government from taking
measures to protect the public health of its residents from HIV/AID, tuberculosis, malaria, and
other epidemics, by ensuring access to medicines. The FTA would reaffirm each country’s
commitment to the WTO TRIPS/health Declaration.
Reactions within the pharmaceutical and medical devices industries were somewhat split on the
KORUS FTA. Makers of innovative products supported the provisions that are designed to
preserve the rights of patent holders and provisions that are designed to make the South Korean
regulatory, pricing, and reimbursement process more transparent and open to comments and
procedural reviews. At the same time, industry representatives remain critical of South Korea’s
new reimbursement procedures and argue that the new system does not take into account the
benefits of innovative drugs that cause drug prices to be higher. Generic drug manufacturers
argue that the KORUS FTA does not contain provisions guaranteeing the availability of
affordable drugs.106
Financial and Other Services
U.S. service providers exported $15.5 billion in services to South Korea in 2010. Among them
were South Koreans’ travel to the United States ($2.6 billion); other transportation, such as freight
services ($3.3 billion); royalties and license fees ($4.0 billion); and other private services, such as
professional services, business services, banking, insurance, and other financial services ($5.9
billion).107 However, this amount probably undervalues the total volume of U.S. sales of services
to South Korea as services are also sold through three other modes of delivery: by U.S.
companies with a long-term presence in South Korea, by U.S. providers to South Korean
residents located temporarily in the United States, and by U.S. providers temporarily located in
South Korea.
In 2010, the United States imported $10.4 billion in services, including other transportation ($3.0
billion), U.S. travel to South Korea ($2.0 billion), expenditures by U.S. military ($2.7 billion),
and other travel ($1.6 billion).108 This figure does not include services sold to U.S. residents by
South Korean firms through the other modes of delivery.
106 Report of the United States Industry Trade Advisory Committee for Chemicals, Pharmaceuticals, Health/Science
Products, and Service (ITAC-3) on The United States-South Korea Trade Promotion Agreement. April 24, 2007.
107 Data obtained from U.S. Department of Commerce. Bureau of Economic Analysis.
108 Ibid.
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U.S.-South Korean trade in services cuts across several chapters of the KORUS FTA—Chapter
12 (cross-border trade in services); chapter 13 (financial services); and Chapter 15
(telecommunications); chapter 11 (foreign investment); among others. A major U.S. objective in
the KORUS FTA negotiations was to obtain South Korean commitments to reduce barriers to
trade and investment in its services sector, especially in professional, financial, and
telecommunications services.
In general the two countries would commit to:
• provide national treatment and most-favored-nation treatment to the services
imports from each other;
• promote transparency in the development and implementation of regulations in
services providing timely notice of decisions on government permission to sell
services;
• prohibit limits on market access, such as a caps on the number of service
providers, on the total value of services provided, on the total quantity of services
provided, and on the total number of persons that can be employed by services
providers;
• prohibit foreign direct investment requirements, such as export and local content
requirements and employment mandates; and
• prohibit restrictions on the type of business entity through which a service
provider could provide a service.
U.S. and South Korean negotiators agreed to several concepts under the KORUS FTA that could
apply the agreements’ provisions to a broad scope of services. The two countries agreed to the
“negative list” approach in making commitments in services. That is, the KORUS FTA is to apply
to all types of services unless identified as an exception in the relevant annexes. In addition, the
commitments are ratcheted—when new services emerge in the U.S. or South Korean economies,
those services are automatically covered by the FTA unless identified as an exception; if either
country unilaterally liberalizes a measure that it had listed as an exemption, it is automatically
covered under the FTA. Furthermore, if one KORUS FTA partner extends preferential treatment
to service providers from a third country under another FTA, it is to extend the preferential
treatment to its KORUS FTA partner.
The United States sought greater reciprocity in the treatment of professional services and thereby
gain increased access to the South Korean market for U.S. providers. The United States and South
Korea agreed to form a professional services working group to develop methods to recognize
mutual standards and criteria for the licensing of professional service providers. Under the
KORUS FTA, South Korea would allow U.S. law firms and U.S. licensed attorneys to provide
advisory services on U.S. and international law on entry into force of the KORUS FTA. South
Korea would also permit U.S. legal representative offices to establish cooperative operations with
a South Korean firm to handle matters pertaining to domestic and foreign legal matters, and, no
later than five years after the agreement’s entry into force, would allow U.S. law firms to form
joint ventures with South Korean firms. However, South Korea would still reserve the right to
restrict the activities of foreign lawyers.
Regarding financial services, under the KORUS FTA, if a domestic provider in one partner
country develops and sells a new financial service in its home market, providers from the FTA
partner country would be able to sell a like service in that market. The agreement would allow an
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FTA partner government to impose restrictions on the sale of financial services by providers from
the other partner country for prudential reasons, for example, to protect investors, depositors,
policy holders, or persons to whom a fiduciary duty is owed. The FTA would also permit either
partner government to restrict monetary transfers in order to ensure the soundness of financial
institutions.
The South Korean insurance market is the seventh-largest in the world. The USITC estimates,
therefore, that U.S. insurers would be poised to obtain sizeable gains in a liberalized South
Korean services market.109 U.S. insurance companies have been concerned that the state-owned
Korea Post and the cooperative insurance providers—the National Agricultural Cooperative
Federation and the National Federation of Fisheries Cooperative—are not regulated by the
Korean Financial Supervisory Commission or by the Financial Supervisory Service, while both
private-sector foreign and domestic providers are so regulated.110 Under the KORUS FTA, South
Korea agreed that those entities would be subject to an independent state regulator as opposed to
being self-regulated.111 In addition, Korea Post would not be allowed to offer new insurance
products. The two countries would allow a partner country financial services provider to transfer
electronically information from its territory as necessary in the course of doing business.112 This
is a provision that the U.S. industry highlighted as being particularly important.
In telecommunications services, South Korea would reduce government restrictions on foreign
ownership of South Korean telecommunications companies. Two years after the KORUS FTA
enters into force, U.S. companies would be able to own up to 100% of voting shares in domestic
South Korean telecommunications companies, and those companies would be able to own up to
100% of a facilities-based licensee.113 These provisions do not apply to KT Corporation nor to SK
Telecom Co for which a 49% foreign ownership limit would remain. In addition, each KORUS
FTA partner would ensure that telecommunications providers from the other would have access to
and use of its public telecommunications network for purposes of interconnection under non-
discriminatory conditions and would guarantee dialing portability among other conditions.114
Those who represent U.S. services providers have been enthusiastic about the KORUS FTA and
have urged its approval. In a statement, Robert Vastine, president of the Coalition of Services
Industries claimed:
We commend Ambassador Schwab and the team of negotiators who secured significant
benefits for U.S. services providers in this agreement.... Korea is a key market for U.S.
service companies, and this is a very high-quality agreement that merits swift passage by the
Congress because it creates new commercial opportunities that will support new jobs.115
109 USITC. p. 4-8.
110 Office of the United States Trade Representative. 2007 National Trade Estimates Report—Foreign Trade Barriers.
p. 366.
111 The United States-Korea Free Trade Agreement (KORUS FTA). Report of the Industry Trade Advisory Committee
on Services and Finance Industries (ITAC 10) April 2007.
112 The Free Trade Agreement Between South Korea and the United States (KORUS FTA). Chapter 13 (Financial
Services)—Confirming Letter.
113 Annex -I (Korea).
114 KORUS FTA Chapter 14 Telecommunications.
115 Coalition of Service Industries. Coalition of Service Industries Expresses Strong Support for U.S.-Korea FTA;
Urges Swift Congressional Passage. Press release. June 30, 2007.
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Visas
For years, a priority for South Korea has been to convince the United States to ease restrictions on
the issuance of visas for South Korean business representatives. The visa issue—along with South
Korea’s request to be added to the Visa Waiver program (VWP), which allows visa free travel for
short-term visitors—was addressed in discussions outside of the KORUS FTA negotiations. On
October 17, 2008, President Bush announced that South Korea was one of seven countries that
would be admitted into the program in 4-6 weeks.116 With this step, the VWP is likely to no
longer be an issue in bilateral relations. South Korea is one of the United States’ largest sources of
foreign visitors. In FY2007 there were 811,251 short-term visitors for business or pleasure from
South Korea.117
On a separate track, as part of the package of modifications agreed to on December 3, 2010, the
United States agreed to extend the initial validity period of L-1A visas for South Korean
nationals. These visas are used by foreigners entering the United States to work at U.S.-subsidiary
of a foreign company. One group of these visas are used for foreigners coming to establish a U.S.
subsidiary and the initial validity period was extended from one to five years. A second group is
used for foreigners coming to work at an already established subsidiary and the initial validity
period was extended from three to five years.118
General Provisions
The KORUS FTA text contains a number of provisions that cut across in many sectors in bilateral
trade. Many of these provisions have become standard fare and have become part of the template
for FTAs in which the United States participates.
Trade Remedies119
Trade remedies, laws, and actions designed to provide relief to domestic industries that have been
injured or threatened with injury by imports, are regarded by many in Congress as an important
trade policy tool to mitigate the adverse effects of lower priced imports on U.S. industries and
workers.
The three most commonly used trade remedies are antidumping (AD), countervailing duty
(CVD), and safeguard actions. Antidumping (19 U.S.C. §1673 et seq.) actions provide relief from
the adverse impact of imports sold at prices shown to be less than fair market value, and
countervailing duty (19 U.S.C. §1671 et seq.) actions provide similar relief from goods that have
been subsidized by a foreign government or other public entity. Safeguard actions (19 U.S.C.
§2251 et seq.) are designed to give domestic industries an opportunity to adjust to new
116 White House Office of the Press Secretary, “President Bush Discusses the Visa Waiver Program,” October 17,
2008. South Korea’s path to entry into the VWP was made possible by reforms of the VWP that were embodied in H.R.
1 (P.L. 110-53), the Implementing the 9/11 Commission Recommendations Act of 2007. For more on the U.S. Visa
Waiver Program, see CRS Report RL32221, Visa Waiver Program, by Alison Siskin.
117 Department of Homeland Security, Temporary Admissions in Yearbook of Immigration Statistics: 2007 Table 28.
118 Inside U.S. Trade, December 10, 2010.
119 This section on trade remedies was written by Vivian C. Jones, Specialist in International Trade and Finance,
Foreign Affairs, Defense, and Trade Division, CRS.
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competition and are triggered by import surges of fairly traded goods. The relief provided in a
safeguard case is a temporary import duty, temporary import quota, or a combination of both,
while the relief in an antidumping or countervailing duty action is an additional duty placed on
the dumped or subsidized imports. These actions are authorized by the WTO as long as they are
consistent with the rights and obligations of Article XIX of the General Agreement on Tariffs and
Trade (GATT) 1994, the WTO Agreement on Safeguards and Countervailing Measures (Subsidies
Agreement), and the WTO Agreement on Implementation of Article VI of the GATT 1994
(Antidumping Agreement).120
Many Members of Congress have expressed support for maintaining and strengthening U.S. trade
remedy laws in the face of growing import competition. As a result, the preservation of U.S.
authority to “enforce rigorously its trade laws” was a principal negotiating objective included in
presidential Trade Promotion Authority (TPA) in the 107th Congress.121
According to news reports, the “single most important South Korean demand” in the bilateral
talks was changes to U.S. antidumping rules.122 This may be due, in part, to the significant
number of U.S. trade remedy cases brought by U.S. industries on South Korean goods. As of
February 12, 2010, antidumping duties were being collected on 12 South Korean imports (mostly
on stainless steel specialty products such wire rod and pipe fittings), and countervailing duties
were being assessed on 3 South Korean products, while South Korea had no trade remedy
measures in place against U.S. products.123 The U.S. global safeguard cases imposed on steel in
February 2000 (line pipe) and March 2002 (many steel products) also significantly reduced South
Korean steel imports to the United States.124 Of the 14 WTO dispute resolution complainant cases
South Korea has brought to date, 8 have been disputes against U.S. trade remedy actions.125 South
Korea is also a member “Friends of Antidumping” group in the WTO Doha Round that insists on
implementing changes to the Antidumping and Subsidies Agreements in any new multilateral
agreement.
In the bilateral negotiations between the United States and South Korea, talks broke down in early
December 2006 when South Korea presented the United States with a list of specific changes to
U.S. antidumping laws on a “basically” take-it-or-leave-it basis,126 but in mid-January 2007,
South Korean officials softened their stance after accepting the assurances of U.S. negotiators that
120 For more information, see CRS Report RL32371, Trade Remedies: A Primer, by Vivian C. Jones.
121 P.L. 107-210, Trade Act of 2002, Section 2102(b)(14).
122 “South Korea Retracts Key Demand in Anti-Dumping Rules: Leaked Government Report,” Yonhap (South Korea),
January 19, 2007.
123 USITC. “Antidumping and Countervailing Duty Orders In Place As of September 10, 2008, by Country.” Available
at http://www.usitc.gov. Korea Trade Commission, TR Measures, available at http://www.ktc.go.kr/en/kboard_child/
list.jsp?bm=86&pg=1.
124 Schott, Jeffrey J., Bradford, Scott C., and Moll, Thomas. Negotiating the Korea - United States Free Trade
Agreement, Institute for International Economics, June 2006.
125 World Trade Organization dispute settlement statistics, http://www.wto.org/english/tratop_e/dispu_e/
dispu_by_country_e.htm. South Korea was one of the complainants in the WTO dispute brought against the U.S.
safeguard measures on steel, as well as that against the Continued Dumping and Subsidy Offset Act (“Byrd
Amendment”).
126 “Cutler says U.S.-Korea Talks Hit Snag in Three Negotiating Groups, FDA Week, December 8, 2006. Although the
particulars of South Korean demands were not made public, according to news reports, one of Korea’s demands was to
be excluded from the cumulation of imports used to determine injury in a safeguards case, if its share of imports into
the U.S. are below a certain threshold.
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Trade Promotion Authority had granted the Bush Administration only limited flexibility to make
concessions on trade remedy issues.127
The KORUS FTA, just as in earlier FTAs the United States has entered into, proposes that each
party to the agreement would retain all rights and obligations under the WTO agreements—
meaning that the trading partners would be permitted to include each other in global safeguard
actions (although, as in other FTAs, it does extend a possible exemption from global safeguard
measures to either party if its imports are not a substantial cause of serious injury) and to
implement AD and CVD actions against each other. Additionally, as in earlier FTAs, the trade
remedies article would also authorize either party to the agreement to apply a transitional
safeguard measure against imports of the other party if, as the result of the reduction or
elimination of a duty mandated by the agreement, a product is being imported in increased
quantities as to be a substantial cause of serious injury to a domestic industry that produces a like
or directly competitive good.128
In the case of a safeguard, the party imposing it must provide a mutually agreed-upon amount of
compensation. If the parties do not agree, the other party may suspend concessions on imports of
the other party in an amount that has trade effects substantially equivalent to the safeguard
measure.129
As such, the agreement does not require any changes to U.S. AD or CVD laws, or regulations.
However, in an apparent departure from previous FTAs, the KORUS FTA seems to require a few
additional administrative steps prior to initiation of a trade remedy investigation involving goods
from the other party. First, each party would have to notify the other if an antidumping petition is
received regarding the other party’s imports, as well as provide an opportunity for a meeting
between the parties before an investigation is initiated.130 Additionally, the party initiating an AD
or CVD investigation would be required to provide written information regarding its procedures
for negotiating a price or quantity undertaking (known in U.S. law as a suspension agreement),131
and, after a preliminary affirmative determination is reached, “provide due consideration and
adequate opportunity for consultations regarding proposed price undertakings” which could result
in suspension of the investigation without imposition of duties provided a mutually agreeable
undertaking is reached.132
The KORUS FTA would also establish a Committee on Trade Remedies (which would meet at
least once a year) made up of representatives from each party who have responsibility for trade
remedies matters. Committee functions would include enhancing knowledge of the parties’ trade
remedy laws and practices, overseeing the implementation of the trade remedies chapter of the
agreement, improving cooperation between the parties, developing educational programs on trade
127 “South Korea Retracts Key Demand on Anti-dumping Rules: Leaked Government Report.” Yonhap, January 19,
2007.
128 See Chapter 10, Section A, Article 10.1 Application of a Safeguard Measure and Article 10.5 Global Safeguard
Actions.
129 Article 10.4, Compensation.
130 Chapter 10, Section B. Antidumping and Countervailing.
131 CVD: 19 U.S.C. 1671c; AD: 19 U.S.C. 1673c. Under these statutes, a quantitative restriction or price offset
suspension agreement must completely eliminate the injurious effect of the dumping or subsidy, must be in the public
interest and must be able to be effectively monitored by U.S. authorities.
132 Chapter 10, Section B. Antidumping and Countervailing Duties, Article 10.7, paragraphs 3 and 4.
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remedy laws, and providing a forum for exchange of information on trade remedies and other
topics of mutual interest.133
As discussed earlier, the Industry Trade Advisory Committee on Steel (ITAC 12) believes that the
procedural concessions made on trade remedies could politicize trade remedy actions, thus
possibly weakening U.S. trade laws. In particular, the ITAC 12 stated that the U.S. AD-CVD
investigative process is already transparent and that the pre-initiation notification and consultation
requirements would delay and politicize the process.134 It also objected to the “undertakings”
provisions, saying that these provisions would encourage the use of suspension agreements and
introduce actions of foreign governments into trade remedy procedures.135 (For more information
on the steel industry’s reaction, see discussion in section on “Other Manufactured Goods.”)
The ITAC 12 also opposes the establishment of a Committee on Trade Remedies, saying that it
such a forum would give South Korea an opportunity to attempt to further try to weaken U.S.
trade remedy laws.136 Speaking in April 2007, Assistant U.S. Trade Representative for Korea,
Japan, and APEC Wendy Cutler, the chief U.S. negotiator, implied that the consultative
committee would focus on information sharing and “will not provide a forum to discuss specific
cases.”137 She also mentioned that the committee could be a benefit to the United States by
providing a platform for discussing certain industrial subsidies that the South Korean government
may be supplying to manufacturing firms, and that negotiators worked out an “accommodation”
that was beneficial to both sides’ needs on a very contentious part of the negotiations.138
Kaesong Industrial Complex139
A consistent and significant goal for South Korea in the FTA talks was securing preferential
treatment for products made in the Kaesong Industrial Complex (KIC) in North Korea, a position
the United States adamantly opposed throughout most of the negotiations. Located near the North
Korean city of Kaesong (also spelled “Gaesong”), 40 miles north of Seoul, the KIC is designed
for South Korean companies to employ North Korean workers. As of the end of 2010, over 120
medium-sized South Korean companies were employing over 47,000 North Korean workers to
manufacture products in Kaesong. The facility, which in 2010 produced $323 million in output,
has the land and infrastructure to house two to three times as many firms and workers. Products
vary widely, and include clothing and textiles (71 firms), kitchen utensils (4 firms), auto parts (4
firms), semiconductor parts (2 firms), and toner cartridges (1 firm).
The KIC has generated controversy because it provides an ongoing revenue stream to the Kim
Jong-il regime in Pyongyang, by virtue of the share the government takes from the salaries paid
to North Korean workers. South Korean and U.S. officials estimate this revenue stream to be
around $20 million per year. On the other hand, the KIC arguably helps maintain stability on the
133 Chapter 10, Section C. Committee on Trade Remedies, Article 10.8, paragraph 2.
134 ITAC (12) on Steel, Advisory Committee Report, April 27, 2007, p. 7.
135 Ibid., p. 4
136 Ibid.
137 “Trade Remedy Piece of Korea FTA Ignores Korean AD Demands,” Inside U.S. Trade, April 13, 2007.
138 Ibid.
139 For more, see CRS Report RL34093, The Kaesong North-South Korean Industrial Complex, by Mark E. Manyin
and Dick K. Nanto.
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Peninsula and provides a possible beachhead for market reforms in the DPRK that could
eventually spill over to areas outside the park and expose tens of thousands of North Koreans to
outside influences, market-oriented businesses, and incentives.
In the final KORUS FTA agreement, the two sides reached a compromise on the KIC. On the one
hand, the agreement does not include any reference to the complex, and KIC products are not
eligible for the agreement’s special treatment provisions.140 On the other hand, a binational
committee will be formed to study the possibility of eventually incorporating products from
“Outward Processing Zones” (OPZs), including those—like the KIC—that are located in North
Korea.141 The agreement identifies three general categories for which the committee is to develop
more detailed criteria: progress in the denuclearization of North Korea, developments in intra-
Korean relations; and wages, business management practices, the environment, and labor
standards. For the third category of issues, the committee is to consider relevant international
norms as well as the “situation prevailing elsewhere on the Peninsula.” After the committee has
developed criteria, the OPZ provisions in the FTA lay out a three- step process by which products
made in the KIC could be incorporated into the FTA. First, the committee must deem that an
outward processing zone meets the criteria it has established. Second, the two governments must
agree that the FTA should be amended accordingly. Third, both governments must seek
“legislative approval for any amendments to the Agreement with respect to outward processing
zones.” The agreement does not lay out the size or composition of the committee, or how
committee members will be chosen, or the procedures by which the committee is to arrive at
decisions, except that decisions would have to be reached by unified consent.142
For years, neither the Bush nor Obama Administrations specified what form “legislative
approval” for OPZ-related amendments to the KORUS FTA would take. In March 2011, the
office of the United States Trade Representative (USTR) issued a statement that Congress “would
need to pass, and the President would need to sign, a law to extend any KORUS FTA tariff
benefits to products made in Kaesong or any OPZ.”143
Some observers, particularly many opponents of the KORUS FTA, argue that the agreement
could lead to increased U.S. imports of goods or components made in North Korea. The scenario
they suggest involves South Korean firms obtaining low-cost Kaesong-made goods or
components, incorporating the latter into finished products such as electronics or automobiles,
and then reshipping the goods to the United States with “Made in [South] Korea” labels. If the
KORUS FTA were in effect, the argument runs, these goods might receive preferential treatment.
However, a close analysis of the agreement and the nature of trade flows reveals that unless the
KIC is brought into the KORUS FTA, the FTA would likely have only a marginal impact on
whether the United States imports North Korean finished products or goods that contain North
Korean components. Instead, the extent of the problem of North Korea imports will be largely
140 In July 2011, South Korea's largest opposition party, the Democratic Party, called for the KORUS FTA to be re-
written to recognize KIC-made products as South Korean in origin.
141 Chapter 22, Annex B, Committee on Outward Processing Zones on the Korean Peninsula.
142 April 2007 interviews with U.S. and Korean officials; remarks by Assistant U.S. Trade Representative for Japan,
Korea and APEC Affairs Wendy Cutler at an April 5, 2007, Korea Economic Institute forum; “Behind the Korea FTA
Negotiations,” Washington Trade Daily, April 12, 2007.
143 March 2011 document issued by the Office Of The United States Trade Representative, “Outward Processing
Zones, Kaesong, and the U.S.-Korea Trade Agreement Frequently Asked Questions”; Deputy United States Trade
Representative reiterated this point in April 7, 2011, testimony before the House Ways and Means Trade
Subcommittee.
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determined by the degree to which North Korean producers become integrated into the global
economy. In addition, imports from North Korea require U.S. government approval. This
restriction includes finished goods originating in North Korea as well as goods that contain North
Korea-made components.
Another criticism of the KORUS FTA has been that it could constrain the United States’ ability to
restrict imports of North Korean goods or components, for instance, by invoking the agreement’s
dispute settlement procedures to challenge a U.S. decision to prohibit the entry of a South Korean
product that contains North Korean components. However, provisions in the KORUS-FTA would
appear to allow either the United States or South Korea to impose or maintain trade restrictions
against the goods of a third country (such as North Korea); thus the agreement would accord each
Party the right to restrict trade with the other Party in implementing any such embargo.
In the KORUS FTA negotiations, the United States backed away from the principle of its initial
position of not ever expanding the KORUS FTA to North Korea-made products, a significant
achievement for South Korea. At the same time, the United States appeared to give up little in
substance in the near-to-middle term. The United States apparently would be able to control the
decision to and pace of any move to grant preferential treatment to North Korea-made products.
Any perceptions of foot-dragging by the United States, however, may come at a diplomatic price
if future South Korean governments push for more rapid integration of North Korean industrial
zones into the FTA.
Foreign Investment
Foreign investment is becoming an increasingly significant element in the U.S.-South Korean
bilateral economic relationship. Over the past decade, the stock of U.S.-South Korean foreign
direct investment (FDI), valued on an historical cost basis, has increased substantially, due in no
small part to the market-oriented reforms South Korea undertook after its 1997 financial crisis. In
1997, the value of stock of U.S. FDI in South Korea was $6.5 billion and had increased to $26.9
billion by the end of 2009 (latest data available). In 2009, 41% of U.S. FDI in South Korea was in
manufacturing, especially in computers and electronic products, chemicals, and other
manufacturing facilities. The remainder of the FDI was in services, with U.S. FDI in banking and
other financial services accounting for much of this investment. South Korean FDI in the United
States has also increased substantially in the last 11 years, albeit from a much lower base. In
1997, the stock of South Korean FDI in the United States was valued at $0.6 billion and had
increased to $12.0 billion by the end of 2009 (latest data available).144
Foreign investment has been a sensitive issue in U.S.-South Korean relations for many years as
U.S. investors have tried to make inroads into the South Korean economy. U.S. investors’
criticisms have included restrictions on foreign investment in key sectors, such as
communications, and the lack of adequate protection for intellectual property. (See section on
“Intellectual Property Rights.”) Efforts to establish bilateral rules have failed in the past. In the
1990s, the two countries tried to negotiate a bilateral investment treaty (BIT), that would commit
each party to provide national treatment to the investments from the other party and abstain from
performance requirements for foreign investments from the other party. But the negotiations
collapsed largely over U.S. opposition to South Korea’s so-called screen quota on domestic films
144 CRS calculations based on data from U.S. Department of Commerce. Bureau of Economic Analysis, at
http://www.bea.gov.
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and the latter’s resistance to lifting or reducing it. (The South Korean government reduced the
screen quotas by half just before the KORUS FTA negotiations were launched in February 2006.)
The KORUS FTA chapter on investment essentially contains the commitments that would
otherwise have been in a BIT.
The FTA sets down general principals for the treatment by South Korea and the United States of
investors and investments from one partner in the territory of the other.145 The principle of
national treatment—that one party to the agreement will treat covered investments and investors
from the other party no-less favorably than it treats domestic investors and investments—is
paramount. The FTA allows each party to make exceptions to the national treatment principle, but
those exceptions must be specified in the relevant annexes to the agreement.146 A second
fundamental principal is most-favored-nation treatment (MFN)—the two parties agree to treat
investors and investments from the other no less favorably than it treats investors and investments
from third, non-party countries. A third principle is minimum standard of treatment, that is, each
party shall accord to all covered investments treatment in accordance with customary
international law, including fair and equitable treatment and full protection and security.
The KORUS FTA would set limits on government expropriation of covered investments—that
they be only for public purpose and carried out in a non-discriminatory manner, and affected
investors would be provided with prompt and adequate compensation (fair market value). It also
would require each KORUS FTA partner-country government allow for the free transfer of
financial capital pertaining to covered investments both into and out of the country with
exceptions, such as cases related to criminal offenses. The KORUS FTA would prohibit the U.S.
and South Korean governments from imposing performance requirements (domestic content
requirements, export-ratios, import limits, etc.) on the investments from the other. It would allow
exceptions for measures intended to accomplish social objectives, such as to increase
employment in certain regions of the country, promote training of workforce, and protect the
environment. The agreement would also prohibit a requirement that senior managers be of a
particular nationality but would allow a requirement that the majority of board of directors be of a
particular nationality.
Similar to other U.S. FTAs, the KORUS FTA would establish procedures for the settlement of
investor-state disputes involving investments covered under the agreement where the investor
from one partner-country alleges that the government of the other partner-country is violating his
rights under the FTA. The FTA stipulates that the two parties should try to first resolve the dispute
through consultations and negotiations. But, if that does not work, the agreement would provide
for arbitration procedures and the establishment of tribunals as provided under the “Convention
on the Settlement of Investment Disputes Between States and Nationals of Other States.”
The USITC concluded that U.S. investors, especially investors in financial services, would likely
gain from the KORUS FTA.147 (See section on “Financial and Other Services.”) The United
145 A range of factors determine the climate for foreign investment—government regulations, skills of local labor,
general economic conditions, intellectual property rights protection, among others. Therefore, U.S.-South Korean
investment ties could be affected by not only the provisions of the investment chapter of the agreement, but other
chapters as well.
146 The USITC report on the KORUS FTA points out that South Korea’s list these “nonconforming measures” in the
KORUS FTA is longer than in previous FTAs that the United States has signed; however, industry representatives
generally believe that the KORUS FTA would still render significant opportunities for U.S. investors. USITC. p. 6-5.
147 USITC. p. 6-5.
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States has been the predominate partner in terms of foreign investment and stands to gain the
most from the protections provided by the KORUS FTA. However, South Korean investments in
the United States are increasing, and therefore, South Korea could benefit as well.
Intellectual Property Rights
In addition to those sections addressing pharmaceutical manufacturing (see discussion above), the
KORUS FTA contains other provisions on intellectual property rights (IPR) protection in U.S.-
South Korean trade. Under the FTA the United States and South Korea would reaffirm their
commitments under the WTO Trade-Related Aspects of Intellectual Property Rights (TRIPS)
agreement and other international agreements and conventions on intellectual property. But the
two countries would make IPR commitments beyond those agreements with provisions that
would:
• require each government to extend national treatment to IPR holders from the
other country;148
• require transparency through the publication of regulations and laws regarding
intellectual property rights;
• facilitate the registration of and protection of trademarks and established
limitations on the use of geographical indications;
• ensure the right of authors, performers, producers of recordings to determine use
of copyrighted products;
• require copyright protection for no less than 70 years; thus, South Korea agrees
to extend its copyright protection term, an objective of U.S. copyright holders;
• protect copyrighted material against piracy and provide penalties for those who
abet piracy including the seizure and destruction of pirated and counterfeit
products;
• protect copyrighted performances on the internet; and
• protect encrypted programming over satellites and cable signals.
Labor Rights and Conditions
On May 10, 2007, a bipartisan group of congressional leaders and the Bush Administration
released a statement that provided language to be included in pending FTAs, including KORUS
FTA. Among other things, the statement, or framework, called “The New Trade Policy for
America,” requires U.S. FTA partners to commit to enforcing the five basic international labor
standards and would require that the commitment be enforceable under the FTA.149 Neither
148 A national treatment exception is made with respect to the secondary uses of recordings by means of analog
communications, including over-the-air broadcasts, whereby a Party can limit the rights of performers and producers of
sound recordings from the other Party on its own territory. This exception was a disappointment to U.S. industry, which
otherwise praise the agreement. Korea-U.S. Free Trade Agreement: Benefits to America’s Entertainment Industries.
Testimony Before the U.S. International Trade Commission by Greg Frazier, Executive Vice-President Worldwide
Government Policy Motion Picture Association of America. June 6, 2007. p.7.
149 The FTA would require each Party to adopt and maintain five internationally accepted labor rights that are contained
in the ILO Declaration on Fundamental Principles and Rights at Work and Its Follow-Up (1998) (ILO Declaration)
(continued...)
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country is to waive or otherwise derogate from its labor statutes that reflect the five labor rights in
a manner that affects trade or investment between the two FTA countries. Each country is to
ensure that those affected by their respective labor laws have access to tribunals that enforce their
rights under those laws. During his nomination process, USTR Ron Kirk stated the Obama
Administration’s position that the KORUS FTA appropriately incorporates the May 10th
understanding.150
Under the KORUS FTA the two countries are to form a Labor Affairs Council made up of
officials from the respective labor ministries and agencies, that will meet within the first year
after the agreement enters into force. At least one session of the council will be devoted to
meeting with the public in each country to discuss matters related to the enforcement of the labor
provisions of the FTA. Disputes regarding labor matters under the FTA are to be resolved first by
consultations, but if those fail, the parties in dispute may take the matter to the Labor Council and
eventually to a dispute settlement panel if these mechanisms fail to resolve the dispute. The
KORUS FTA also calls for the establishment of a Labor Cooperation Mechanism whereby the
two countries would develop and work in areas pertaining to labor rights in each country.
To many outside observers, South Korea’s labor rights regime is generally considered to be strong
for regular workers. South Korea ranks in the top third of the OECD’s thirty members in terms of
employment protection for regular workers.151 Indeed, for years, a major complaint of U.S.
multinationals is that restrictions in the South Korean labor market, such as mandatory severance
pay, significantly raise the cost of investing and doing business in Korea. In contrast, U.S. union
representatives argue that recent changes to make South Korean labor markets more flexible are
reducing the rights of South Korean workers.152 Korea’s unions have earned a reputation for
activism; the number of working days lost to strikes is regularly among the highest in the OECD.
Hyundai Motors, for instance, has experienced a strike every year since 1994. Moreover, strikes
in South Korea are notable in that they are sometimes accompanied by violence and the
occupation of workplaces and public spaces (such as highways), to which the government often
responds with police action. In its comments on the KORUS FTA, the Labor Advisory Committee
for Trade Negotiations and Trade Policy (LAC), criticized South Korea for the imprisonment of
around 200 unionists who were “exercising basic labor rights” and for mobilizing riot police
against union activity.153
(...continued)
Article 19:2 specifies these rights as the freedom of association, the effective recognition of the right to collective
bargaining, the elimination of all forms of compulsory or forced labor, the effective abolition of child labor and the
elimination of discrimination in respect of employment and occupation. The framework also requires FTAs to adhere to
seven major multilateral environmental agreements and for this commitment to be enforceable under the FTA. “The
Trade Policy for America” was completed after President Bush notified Congress on April 1, 2007, of his intention to
sign the KORUS FTA but prior to the signing on June 30. At first, South Korean officials balked at opening
negotiations to add the language but eventually agreed to do so. After, the two sides held negotiations, they included
the language in the final text that was signed on June 30, 2007.
150 In Questions for the Record posed by members of the Senate Finance Committee, USTR Kirk was asked “Do you
think that the labor and environment provisions of the U.S.-Korea FTA are appropriate?” He responded that “the U.S.-
Korea FTA incorporates the May 10th Agreement, which established a strong foundation for bipartisan progress on
trade.” United States Senate Committee on Finance, “Finance Committee Questions For The Record. Hearing on
Confirmation of Mr. Ronald Kirk to be United States Trade Representative,” March 9, 2009.
151 OECD, Economic Survey—Korea 2007, p. 138.
152 Report of the Labor Advisory Committee for Trade Negotiations and Trade Policy (LAC) on the KORUS FTA,
April 27, 2007, p. 9.
153 Ibid.
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Korea’s labor pool is divided into two segments: (1) South Korean “salarymen” (salaried workers,
overwhelmingly men, in large corporations) comprise less than one-third of the workforce. Over
half of this segment of the workforce is represented by powerful unions. (2) The remainder of the
workforce is comprised of employees in small-scale firms plus the country’s temporary and day
laborers. Few of these workers are unionized. The proportion of temporary workers has grown
markedly, to nearly one-third of the workforce, one of the highest rates in the industrialized
world.154 These workers tend to receive low wages and receive limited coverage by the social
safety net, points highlighted by the LAC. Labor markets are notoriously rigid.
Government Procurement
A great deal of business is conducted by governments through the purchase of goods and services
for their own use. Most governments, including the United States have laws (The Buy American
Act) which require such goods and services to be of domestic origin. However, the General
Agreement on Tariffs and Trade (GATT) and now the WTO have some provisions, the WTO
Government Procurement Agreement (GPA), under which the countries agree to open up some of
their government procurement business, to foreign companies as a way to promote trade. This
agreement is plurilateral, that is it only applies to those WTO members that have signed it. The
United States and South Korea are among the 41 signatories to the GPA. The GPA established
rules for governments to publish information about contract tenders, including technical
specification, about qualification for suppliers, the awarding of contracts, with a specific
emphasis on nondiscrimination and transparency in the conduct of government procurement.
The KORUS FTA reaffirms the GPA as a baseline for government procurement but would expand
the criteria to include more contracts. The GPA applies to contracts valued at around $203,000
and above. The KORUS FTA would apply agreement to contracts valued at $100,000 and above,
potentially increasing the value of bilateral government-procurement trade. The GPA applies only
to contracts tendered by 79 U.S. federal government agencies and by 42 South Korean central and
subcentral agencies listed in the annex. Under the KORUS FTA, South Korea would add nine
more agencies to be covered.
Environment Protection
In keeping with the May 10, 2007, understanding on labor and the environment between the Bush
Administration and congressional leaders, under the KORUS FTA, the United States and South
Korea would commit to enforce a list of seven multilateral environmental agreements to which
both are parties and to add to the list when other agreements enter into force. (See the “Labor
Rights and Conditions” section above.)155 In addition, the FTA would prevent the two countries
from easing environmental standards in order to allow firms on their territory from gaining a
competitive trade advantage. Furthermore, violations of the environmental provisions are to be
handled in the same manner as commercial provisions through the dispute settlement mechanism
of the KORUS FTA and subject to trade sanctions, unprecedented for U.S. FTAs. As mentioned
154 OECD, Economic Survey—Korea 2007, pp. 128-40.
155 The seven agreements are: the Convention on International Trade in Endangered Species; the Montreal Protocol on
Ozone Depleting Substances; the Convention on Marine Pollution; the Inter-American Tropical Tuna Convention; the
Ramsar Convention on the Wetlands; the International Convention for the Regulation of Whaling; and the Convention
on Conservation of Antarctic Marine Living Resources.
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earlier, the Obama Administration has indicated that the May 2007 agreement is incorporated into
the KORUS FTA.156
Transparency
Making information publically available is a fundamental principle imbedded in international
trade rules and in each of the FTAs that the United States has entered into. For years U.S.
exporters and trade negotiators identified the lack of transparency of South Korea’s trading and
regulatory systems as one of the most significant barriers to trade with South Korea, in almost
every major product sector. Under KORUS FTA, the United States and South Korea would
commit to publish relevant regulations and administrative decisions as well as proposed
regulations; to allow persons from the other party to make comments and to ask questions
regarding proposed regulations; to notify such persons of administrative proceedings and to allow
them make presentations before final administrative action is taken; and to allow such persons to
request review and appeal of administrative decisions.
Institutional Provisions and Dispute Settlement
The KORUS FTA would provide several options for the United States and South Korea to resolve
disputes arising under the agreement, in addition to the special dispute settlement provisions
under the foreign investment chapter and other chapters. KORUS FTA would require the two
countries to establish a joint committee chaired by the USTR and the Minister of Foreign Trade or
their designees to supervise the implementation of the agreement. The trade agreement would
provide for the establishment of a panel to adjudicate disputes between the two countries under
the agreement, if consultations do not lead to a resolution of the dispute. Annex 22A of the
KORUS FTA contains provisions for the settlement of disputes regarding motor vehicles,
specifically the snap-back provision. (See discussion in section on “Autos.”) Annex 22-B
provides for eventual discussion of the inclusion of products made in outward processing zones in
North Korea. (For more information, see discussion in “Kaesong Industrial Complex” section.)
Other Technical Provisions
The KORUS FTA includes other sets of provisions intended to facilitate market access. Technical
barriers to trade are standards and regulations that are intended ostensibly to protect the health
and safety of consumers and for other legitimate non-trade purposes but may through design and
implementation discriminate against imports. The KORUS FTA would commit both countries to
uphold their obligations under the WTO Agreement on Technical Barriers to Trade (TBT). In
addition, South Korea and the United States would promote transparency, by allowing persons
from the other party to participate in the development of standards, technical regulations, and
conformity assessment procedures.
Regarding customs administration and trade facilitation, the KORUS FTA would promote joint
cooperation to ensure compliance with each other’s customs laws and regulations. For example, it
156 United States Senate Committee on Finance, “Finance Committee Questions For The Record. Hearing on
Confirmation of Mr. Ronald Kirk to be United States Trade Representative,” March 9, 2009.
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The Proposed U.S.-South Korea Free Trade Agreement (KORUS FTA)
would require the two countries to adopt procedures and regulations to facilitate express delivery
shipments.
Rules of origin define what are goods that originate in the FTA region and therefore are eligible
for preferential treatment. (Textiles and apparel have separate rules of origin.) The KORUS FTA
would require that goods must be wholly obtained or produced in the territory of both countries or
country. The FTA would set a regional value threshold to be met to be considered originating in
the FTA territory and provides formulas for determining the regional values.
National competition laws and regulations are intended to ensure that one firm does not so
dominate a sector of the economy as to inhibit market entry and stifle competition. Among other
things, the KORUS FTA would require that the United States and South Korea inform persons,
who are subject to administrative actions, of hearings and provide them the opportunity to make
their case. The two countries would cooperate in enforcing competition laws through the
exchange of information and consultation. In addition, designated monopolies and state-
enterprises would have to operate in conformance with the agreement and in accordance with
commercial considerations.
The KORUS FTA includes provisions to facilitate trade via electronic commerce (e-commerce).
They would prohibit discrimination against digital products and imposing customs duties on these
products. They would also require the recognition of electronic authentication and electronic
signatures and would promote consumer access to the Internet.
Legislative Action
The United States concluded and entered into (signed) the KORUS FTA within the parameters of
the Trade Promotion Authority (TPA) under the Bipartisan Trade Promotion Act of 2002. (P.L.
107-210). Therefore, any implementing legislation would be subject to expedited procedures, that
is mandatory congressional consideration, limited debate, no amendments, and an up-or-down
vote. TPA does not impose a deadline on the President to submit the draft implementing bill.
For most trade agreements entered into under TPA or its “fast-track” predecessor, Congress and
the Administration have engaged in an informal, “mock-mark up” process that gives the relevant
committees the opportunity to review and comment on a preliminary draft of the implementing
legislation. Committees may offer comments in the form of “amendments” which the President
may take into account at his own discretion. Once the President submits the actual implementing
bill for approval, the TPA-stipulated deadlines and procedures apply.
On July 7, 2011, the House Ways and Means Committee and the Senate Finance Committee held
simultaneous “mock mark-up” sessions on informal draft implementing legislation for the
KORUS FTA, as well as the FTAs with Colombia and Panama. In the case of the KORUS FTA,
the two committees considered different preliminary draft bills. The Senate Finance Committee
considered a draft bill that would contain renewal of a trade adjustment assistance (TAA)
program. The committee approved the draft bill (13-11) along party lines with Democrats
supporting the bill and Republicans opposing it, largely over the issue of the inclusion of the TAA
provision The Ways and Means Committee considered a draft bill that did not contain the TAA
provision, which passed along party lines with 22 Republicans voting for and 15 Democrats
voting against, largely on the issue of whether to include the TAA in the bill.
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The White House and congressional leaders, after a number of discussions, agreed to procedures
under which the TAA renewal and the three FTAs would be considered in tandem but in separate
legislation. On October 3, 2011, President Obama submitted draft legislation (H.R. 3080/S. 1642)
to implement the proposed the KORUS FTA to both houses of Congress. A possible action
forcing event is the scheduled October 13, 2011, state visit of South Korean President Lee
Myung-bak to Washington.
Implications for South Korea and the U.S.-ROK
Alliance
In South Korea, the KORUS FTA must be approved by a majority vote in the unicameral
National Assembly to take effect. The Assembly is controlled by President Lee Myung-bak’s
Grand National Party, which officially supports the agreement. Unlike in the United States, trade
agreements are not subject to any fast-track time lines. President Lee Myung-bak, who was
elected in December 2007, has made passage of the KORUS FTA a priority for his government.
Most opinion polls generally have shown a majority of South Koreans in favor of the agreement,
and most observers believe it has enough support in the National Assembly to pass.
Opposition to the KORUS FTA has been intense from South Korea’s opposition parties and rural
interests, among others. In July 2011, South Korea’s largest opposition party, the Democratic
Party, issued a “ten plus two” list of objections to the KORUS FTA, including demands that ten
items be re-negotiated.157 The Democratic Party is resisting the ruling Grand National Party’s
push to have a vote on the KORUS FTA during a special session of the National Assembly in
August 2011. Some South Korean KORUS FTA supporters worry that if a vote is not taken
before the Assembly’s regular session begins in September, the agreement will become
increasingly difficult to pass due to South Korea’s political calendar. South Korea’s traditional
season for debating the central government’s budget begins in September and usually runs
through the end of the year. Then, in 2012, the country will hold national elections for a new
National Assembly in April and for a new president in December.
For South Korea, entering an FTA with the United States meshes with a number of Lee’s
economic and strategic goals. Ongoing competitive pressure from Japanese firms, increased
competition from Chinese enterprises, and the rapid aging of the South Korean workforce has
heightened the sense of urgency to boost national long-term competitiveness, particularly in the
services industries, where South Korean productivity typically lags compared to other
industrialized countries. Indeed, former President Roh and other South Korean officials have
argued that the KORUS FTA is essential for South Korea’s economic survival.158 Similarly, if less
grandiosely, President Lee has argued that passage of the KORUS FTA will help revitalize South
Korea’s economy. To accelerate Korea’s reform efforts—and also to avoid being left out from
other FTAs being created globally and in Asia—Presidents Roh and Lee have pursued an
157 These demands included: postponing the start of the phase-out of South Korea’s agricultural and beef tariff;
expanding the KORUS FTA’s provisions to include products made in the Kaesong Industrial Complex in the KORUS
FTA; creating stronger safeguards in the auto and financial sectors; and eliminating the agreement’s investor-state
provisions.
158 Korea Broadcast System, March 31, 2006, Broadcast in Korean, summarized by the Open Source Center, “ROK TV
Carries Economic Minister’s Comments on ROK-US FTA,” April 10, 2006, FEA20060410021900. (Han was Finance
Minister when he made these remarks.) South Korean Blue House, “Address to the Nation,” April 2, 2007.
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aggressive effort to negotiate FTAs. South Korea has entered into FTAs with Chile, Singapore,
the European Free Trade Association (EFTA), the Association of Southeast Asian Nations
(ASEAN), and India. It has signed an agreement with the European Union and is negotiating
FTAs with other countries, including Canada, Mexico, and Australia.159
The United States and South Korea negotiated the KORUS FTA in part as a means to restore the
health of a critical foreign policy and national security alliance.160 While the talks were ongoing,
the KORUS FTA sometimes was discussed as a possible counterweight to the bilateral friction
that was occurring over issues such as how to manage relations with North Korea and the
repositioning of U.S. troops in South Korea. These tensions decreased markedly in 2007,
following the Bush Administration’s decision to place greater emphasis on engagement and
negotiations with North Korea. The election of Lee, who has stressed the importance of
rebuilding U.S.-South Korean ties has improved relations further. Thus, with the alliance
apparently on firmer ground, the KORUS FTA no longer appears as an exceptional area of
bilateral cooperation.
Although the FTA’s utility as an acute salve for the alliance has been reduced, some argue it could
help to boost the alliance, over the medium and longer term, by deepening bilateral economic and
political ties. Entering into an FTA, some argue, is a way to help reorient the alliance to adapt to
the changes on the Korean Peninsula and in East Asia. However, in concrete terms, it is difficult
to see how the KORUS FTA would make a significant difference in the strategic relationship, as it
is unlikely to alter either country’s fundamental interests on the Peninsula or in Northeast Asia.
In contrast, while the passage of the KORUS FTA is unlikely to have a major substantive impact
on the strategic relationship, a collapse of the KORUS FTA would probably have a profound
symbolic effect, particularly upon the way South Koreans view the alliance. If the KORUS FTA
is rejected or subjected to a prolonged delay by the United States, it would be a psychological
blow to many South Korean policymakers, many of whom would likely see it as a betrayal. This
would be particularly true since, in their eyes, they made politically costly concessions on autos,
beef, labor, and the environment to help ensure the agreement would be more favorably received
in the U.S. Congress. The KORUS FTA’s failure in the United States, according to some Korean
politicians and policymakers, would lend credence to arguments in South Korea that the U.S.
commitment to Korea and Northeast Asia is declining. If these perceptions take hold, it would
increase the political costs of South Korean leaders’ taking unpopular decisions on behalf of the
alliance, such as increasing South Korean payments for relocating U.S. troops on the Peninsula. If
the KORUS FTA is rejected or delayed in the United States, U.S. policymakers could attempt to
somewhat ameliorate the negative symbolic effects in South Korea by taking high profile steps to
expand U.S.-ROK strategic, rather than economic, relations.
President Obama’s moves to prioritize the KORUS FTA have occurred as strategic relations
between the United States and South Korea have become deeper and broader. Cooperation
between the two allies over North Korea policy, already at a high point, has grown even closer
since the March 2010 sinking of a South Korean naval vessel, the Cheonan, in waters disputed by
North and South Korea has dominated the news. A multinational investigation team led by South
Korea determined that the ship was sunk by a North Korean submarine. The growing affinity
159 EFTA is comprised of Iceland, Norway, Switzerland, and Liechtenstein. ASEAN consists of Brunei, Cambodia,
Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.
160 For more, see CRS Report RL33567, Korea-U.S. Relations: Issues for Congress, by Larry A. Niksch.
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between the Obama and Lee Administrations also has been illustrated by U.S. backing for South
Korea’s successful bids to host the G-20 summit that took place in Seoul in November 2010 and
the second international Nuclear Security Summit scheduled to take place in 2012
Implications for U.S. Trade Policy and U.S. Asia
Policy
On the KORUS FTA and other trade-related issues, President Obama faces competing pressures.
On one side are those, including business community representatives and pro-trade Members of
Congress, who view the KORUS FTA as an important opportunity for the United States to
increase trade and investment with an important East Asian market and ally. They also are
concerned about U.S. manufacturers and investors losing out to the their EU competitors since the
EU-Korea FTA entered into force before the KORUS FTA on July 1, 2011. On another side, are
those who have argued that the KORUS FTA does not sufficiently address South Korean barriers
to imports of manufactured goods, particularly cars and some appliances, and these deficiencies
would have to be fixed before a bill could pass Congress. The Obama Administration, including
the President himself, has expressed such views and has indicated that they are in the process of
seeking solutions.
The KORUS FTA faces even deeper opposition from those who are skeptical about the benefits of
FTAs, in general, at least as pursued under current trade policy. Much of this opposition comes
within the Democratic Party in Congress and is manifested in legislation, the TRADE Act of
2009, (H.R. 3012 (Michaud), S. 2821 (S. Brown)) introduced in the 111th Congress. At this
writing, the House bill has 136 co-sponsors and the Senate bill has 6 co-sponsors. Each bill calls
for a review of KORUS FTA and the other two pending agreements to ensure that U.S. interests
are served and also calls for review of some FTAs already in force, and would subject them to
possible renegotiation if they are deemed failing to serve U.S. interests.
But the commitment modifications contained in the exchange of letters appear to have
accomplished their primary objective. They have shifted the politics surrounding the KORUS
FTA debate in the United States, where the original agreement was encountering strong resistance
and without fundamentally altering the politics in South Korea, where the agreement has broad
support. Shortly after the announcement, a number of U.S. groups and individuals who had
previously opposed the agreement, including several Members of Congress, announced their
support. In South Korea, the modifications do not appear to have shifted the terms of political
debate over the FTA, which generally has been expected to be approved by the National
Assembly. Most South Korean media commentators have observed that the balance of
concessions in the December deal were in the United States’ favor, a dynamic that the
agreement’s opponents have seized upon as another reason to criticize the FTA. In contrast, South
Korean supporters of the agreement appear to accept the concessions as regrettable but tolerable.
The fate of the KORUS FTA could affect U.S. efforts to institutionalize its economic presence in
East Asia, a goal the Bush Administration pursued in part through FTAs. In addition to the
KORUS FTA, the United States has an FTA with Singapore. The Bush Administration initiated
FTA negotiations with Malaysia and Thailand, but they ultimately stalled. In November 2009,
President Obama announced the United States would enter into negotiations on a Trans-Pacific
Partnership (TPP) trade agreement, a trade liberalization negotiation among Australia, Brunei
Darussalam, Chile, New Zealand, Peru, Singapore and Vietnam. Some observers worry that the
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TPP negotiations, which began in March 2010, could assume a higher priority for the
Administration than the economically more significant KORUS FTA.161
Since the early 2000s, U.S. use of FTAs in Asia also has been a proposed response to the plethora
of bilateral and multilateral FTAs that are being negotiated in the region. None of the actual or
proposed multilateral agreements include the United States. Failure of the KORUS FTA could be
viewed as a serious blow to the U.S. “competitive liberalization” strategy. With FTAs throughout
East Asia proliferating, a failure of the KORUS FTA to be implemented would also likely mean
that the United States would be shut out of regional economic groupings in East Asia. In contrast,
the implementation of the KORUS FTA could spark interest of other East Asian countries, such as
Japan, to negotiate FTAs with the United States in order not to lose their share of the huge U.S.
market to South Korea. Thus, if the proponents of the “competitive liberalization” argument are
correct, the fate of the KORUS FTA could play an important role in accelerating or decelerating
the move to open market regionalism in East Asia.
Similarly, the fate of the KORUS FTA is likely to be seen as a bellwether for broader U.S. trade
policy, which is now in a period of reevaluation. In addition to the KORUS FTA, U.S. FTAs with
Colombia and Panama are pending. The Doha Development Agenda round in the WTO is, for all
intent and purposes, on life support. This raises questions in the minds of U.S. policymakers and
other experts, regarding the future role of the WTO and multilateral negotiations in shaping the
international trading framework. The KORUS FTA will likely play a role in this reassessment.
For better or worse, its rejection or indefinite delay might call into question the viability of FTAs
as a serious U.S. tool to strengthen economic ties with major trading partners
161 “Lack of Movement on Korea Auto Fix May Mean No FTA Vote in Near Term,” Inside US Trade, January 15,
2010.
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Appendix A. South Korean Motor Vehicle
Manufacturing
South Korea came late to the table of major motor vehicle manufacturing nations. Government
attempts to foster a domestic automobile industry began in 1962 when the South Korean
government enacted the Automobile Industry Protection Law, with assembly line production of
automobiles in Korea beginning that year using complete knock down kits imported from
Japan.162 The 1980 edition of the Automotive News Market Data Book, an authoritative industry
source, listed no South Korean company among the top 50 global producers. By 1988, according
to the same publication’s 1990 edition, total South Korean car and truck production exceeded one
million units. By 2010, according to the International Organization of Motor Vehicle
Manufacturers, total South Korean production of cars and commercial vehicles was given as 4.3
million units, which ranks South Korea as the global number four national producer, behind, in
order, China, Japan, and Germany.163 Yet, South Korea remains only a mid-level consumer of
motor vehicles, with domestic sales of 1.5 million. Exports account for nearly 65% of Korea’s
motor vehicle production volume, a figure that is matched by no other major motor vehicle
producing country.164
South Korea has aggressively developed and protected its automotive manufacturing base. Motor
vehicle imports were prohibited in South Korea until 1987, and imports from Japan were banned
until 1999.165 Originally the South Korean government promoted the development of a fleet of
domestically owned producers, but this strategy failed. In the shakeout after South Korea’s
economic crisis of 1997-98, only one major South Korean-owned company was left, Hyundai,
which also took control of the number-two producer by volume, Kia. Others were marginalized,
out of the business altogether, or controlled by foreign companies. Korea’s third producer, and
their only other major manufacturer left in the business, Daewoo, is now controlled by General
Motors.166 The lone major South Korean-owned producer, the Hyundai-Kia combination, in 2009
produced 4.2 million vehicles worldwide, ranking it fifth globally.167
Hyundai is a world-class global competitor, with current and planned assembly operations in the
United States, the European Union, and other countries. The export orientation of the South
Korean motor vehicle industry, the quality of South Korean cars, and the relatively low U.S. tariff
on all imported motor vehicles, except trucks, has made the United States a good market of
opportunity for South Korean automobile exports. Currently, the United States imposes a 2.5%
duty on imported passenger vehicles and a 25% duty on trucks. South Korean auto makers
162 Andrew Green, "South Korea's Automobile Industry: Development and Prospects," Asian Survey, vol. 32, no. 5
(May 1992), pp. 413-414.
163 International Organization of Motor Vehicle Manufacturers, World Motor Vehicle Production, World Ranking of
Manufacturers, 2010 Provisional Production Statistics, http://oica.net/category/production-statistics/
164 American Automotive Policy Council, “Statistical Overview of the Korean Automotive Industry/Market & U.S.
Trade Relationship, 1990-2010,” http://www.aapc.us/industry-facts?page=1
165 USITC. Industry and Trade Summary: Motor Vehicles (USITC Publication 3545, September 2002), p. 60.
166 Ibid., pp. 60-61; Graeme P. Maxton and John Wormald, Time for a Model Change: Re-Engineering the Global
Automotive Industry. Cambridge, U.K.: Cambridge University Press, 2004. pp. 101-2; CRS Report RL32883, U.S.
Automotive Industry: Recent History and Issues, pp. 75-76.
167 International Organization of Motor Vehicle Manufacturers, World Motor Vehicle Production, World Ranking of
Manufacturers, Year 2009, 2008, http://oica.net/wp-content/uploads/ranking-2009.pdf
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exported many more cars to the United States than U.S. car manufacturers export to South Korea.
Total South Korean motor vehicle exports to the United States peaked at more than 860,000 units
in 2004, according to U.S. Commerce Department data, and have dropped every year through
2009, but increased to nearly 516,000 passenger vehicles and light trucks in 2010 (see Figure 1).
U.S.-based automobile exporters, which could include South Korean and other foreign-owned
manufacturers, shipped more than 15,600 passenger cars and light trucks to South Korea in 2010 ,
which was more than double the 7,663 cars and light trucks in 2010.168
Figure 1. South Korean Passenger Vehicle and Light Truck Exports
to the United States
2004-2010
860,100
730,400
695,100
674,700
615,800
515,586
476,800
2004
2005
2006
2007
2008
2009
2010
Source: U.S. Department of Commerce, Office of Transportation and Machinery.
Another important development affecting automotive exports and imports are the investments
South Korean automakers have made in the U.S. market since the mid-2000s. Hyundai and Kia
have established production facilities in the United States. Thus, Hyundai’s Montgomery, AL,
plant and Kia’s West Point, GA, facilities allow them to substitute for some imports. In 2010,
Hyundai sold over 894,000 cars in the United States, of which over 40%, or 381,505 units, were
produced in the United States.169 Kia has also begun to assemble automobiles in the United States
from U.S. and globally sourced parts. At the end of 2009, the first U.S.-built Kia vehicle rolled
off its production line.170 By the end of 2010, 130,000 Kia Sorento’s and 17,000 Hyundai Santa
Fe’s were produced at the Georgia manufacturing facility.171 At full capacity, the Georgia Kia
plant will be able to produce 300,000 vehicles. Meanwhile, GM Daewoo Auto & Technology
(GMDAT), which is the South Korean arm of U.S. automaker GM, builds and sells cars in South
168 U.S. Dept. of Commerce. International Trade Administration. Office of Aerospace and Automotive Industries
(Commerce Dept. OAAI). U.S. Motor Vehicle Industry Domestic and International Trade Quick-Facts (yearend 2010
data and earlier years).
169 “U.S. Light Vehicle Sales by Nameplate, December & YTD,” Automotive News, January 4, 2011,
http://www.autonews.com
170 Ihlwan, Moon, “Korea’s Kia Opens Auto Plant in U.S.,” Business Week, November 17, 2009.
http://www.businessweek.com/globalbiz/blog/eyeonasia/archives/2009/11/koreas_kia_open.html
171 “North American Light Vehicle Production by Assembly Plant,” Automotive News, January 10, 2011,
http://www.autonews.com.
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Korea. In 2010, GMDAT sold 125,730 domestically built cars.172 Since these vehicles are not
exported they are not covered by the free trade agreement.
The total value of South Korean automotive exports to the United States, including parts, was
$11.4 billion in 2010, compared to U.S. exports of similar products to South Korea of $873
million. Thus, the bilateral trade deficit in autos totaled $10.6 billion in 2010. This compares to
trade deficits earlier in the decade of $11.7 billion in 2006, $11.2 billion in 2007, $10,6 billion in
2008, and $7.9 billion in 2009, but up over the long term from a deficit of $5.5 billion in 2000,
and $1.5 billion in 1990.173 One analyst who examined the effects of the proposed FTA, found in
simulation models of projected market changes, South Korea would always gain relative to the
United States from bilateral liberalization, “because Korea has a comparative advantage over the
United States in the automobile sector; in other words, Korea has been much more successful in
accessing the U.S. market than the United States has been in accessing the Korean market.”174
Through aggressive and successful marketing, Hyundai and Kia together have significantly
increased U.S. market share between 2009 and 2010. Both brands saw a jump in their U.S. sales
(for Hyundai sales of both their domestic and imported vehicles increased by 27% from 2009 to
2010 and Kia’s car and light truck sales were up by 19% during the same time period). Overall
sales of U.S. light vehicles were also up, but did not grow as fast increasing by 11% in 2010
compared to 2009. South Korean automakers share of the U.S. market jumped from 5.1% in 2008
to 7.0% in 2009 and 7.7% in 2010. By comparison, sales of Chevrolet’s Aveo model, which is
imported from South Korea, grew by 26% between 2009 and 2010.175 Stronger U.S. sales growth
have been recorded in 2010 for all major automakers, including Hyundai-Kia, which combined
increased their U.S. sales in 2010 by 22% compared to the same period in 2009, with sales of
over 894,000 cars in the United States.176
South Korean policies that allegedly restrict imports of foreign-made motor vehicles have been a
major target of U.S. trade policy. In 1995 and 1998, the USTR negotiated memoranda of
understanding (MOUs) with South Korea, aimed at reducing formal and informal South Korean
policies that were said to discriminate against imports of U.S.-made vehicles and other foreign
imports. U.S. policy primarily focused on motor vehicle taxation policies and South Korean
motor vehicle standards, which supposedly did not conform to international standards, or those
widely used in major markets.177 The import share of the domestic market in South Korea has
increased since the MOUs were signed. According to data from the Korea Automobile
Manufacturers Association and the Korea Automobile Importers and Dealers Association, total
imports grew from a low of less than 1% of the market (4,400 units) in 2000 to almost a 7%
market share by 2010 (90,562 units). Together, European manufacturers accounted for 65% of
imported cars in the South Korean market in 2010 and Japanese manufacturers combined
comprised another 26%. U.S.-headquartered automakers made up the remainder with a 8% share
172 American Automotive Policy Council, Facts About the Korean Auto Industry and Economy,
http://www.aapc.us/industry-facts?page=1.
173 2000, 2007, 2008, 2009, and 2010 data from Commerce Dept. OAAI. Data for 1990 quoted from CRS Report
RL32883, U.S. Automotive Industry: Recent History and Issues, Appendix 5.
174 Sang-yirl Nam, “Implications of Liberalizing Korea-U.S. Trade in the Automobile Sector: Potential Impact of the
Korea-U.S. Free Trade Agreement,” Korea Economic Institute Academic Paper Series, III:1 (February 2008), p. 10.
175 Automotive News data base, “U.S. Light-Vehicle Sales by Nameplate, December & YTD,” January 11, 2010.
176 Automotive News, “U.S. Light-Vehicle Sales by Nameplate, December & 12 months 2010,” January 11, 2011.
177 CRS Report RL32883, U.S. Automotive Industry: Recent History and Issues, p. 60.
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The Proposed U.S.-South Korea Free Trade Agreement (KORUS FTA)
of new imported cars sold in South Korea (i.e., Ford at 4,018, Chrysler at 2,638, and GM at
749).178
Author Contact Information
William H. Cooper, Coordinator
Remy Jurenas
Specialist in International Trade and Finance
Specialist in Agricultural Policy
wcooper@crs.loc.gov, 7-7749
rjurenas@crs.loc.gov, 7-7281
Mark E. Manyin
Michaela D. Platzer
Specialist in Asian Affairs
Specialist in Industrial Organization and Business
mmanyin@crs.loc.gov, 7-7653
mplatzer@crs.loc.gov, 7-5037
178 To complete the picture, General Motors has sold over 100,000 cars annually since 2005 through its South Korean
subsidiary, the GM Daewoo operations. The rest of its production, which totaled nearly 882,000 vehicles, were shipped
abroad. General Motors Corporation and Korea’s Daewoo Motor Company launched the GM Daewoo Auto &
Technology Company in 2002. GM holds a 72% stake in the Korean car maker, with the rest of the company controlled
by the state run Korea Development Bank. GM Daewoo operates five manufacturing facilities in Korea and one
assembly plant in Vietnam.
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