[Ip-health] Asia Times: Bumpy road for US-Korea FTA talks

[Mike Palmedo]

[snip]

Although an FTA would provide overall economic benefits, the impact
would differ by sector. South Korea's automobile, textile and apparel,
and electronic-appliance sectors would benefit while agricultural,
petrochemical, telecommunications, financial, and pharmaceutical
companies would face greater challenges. In both countries, those
sectors that will fare poorly in a more competitive environment will
lobby their governments for restrictions or exemptions as "sensitive
industries". The South Korean agricultural and film industries will
remain the most strongly opposed to the FTA. US automobile,
film-industry and pharmaceutical firms will press Washington for greater
access to South Korean markets, while US textile companies will request
protection.

[snip]

Pharmaceutical: The US will demand resolution to outstanding
transparency, pricing and regulatory issues. The US Trade Representative
has complained that Seoul is protective of South Korean pharmaceutical
companies, which predominantly produce generic drugs. The US will press
for more stringent intellectual-property-rights standards and more
aggressive efforts by authorities to combat illegal copying of US drugs.
It will also demand that South Korea rescind discriminatory requirements
that foreign drugs must undergo redundant local testing prior to
governmental approval. The president of the American Chamber of Commerce
in Korea even characterized the pharmaceutical sector as one of the most
corrupt in Korea.

[snip]
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http://www.atimes.com/atimes/Korea/HF03Dg01.html

Bumpy road for US-Korea FTA talks

By Bruce Klingner
Jun 3, 2006
Asia Times

Negotiations for a US-South Korean free-trade agreement will begin on
Monday, with strong political support from both countries' presidents
tempered by skepticism in the legislatures and cautious public support.
Both sides recognize the political and economic benefits of an FTA and
will push negotiators to complete an agreement by next March so that
both sides can approve the deal by the following July.

President Roh Moo-hyun's willingness to face down strong domestic
opposition to resolve long-standing bilateral trade disputes will
provide further positive momentum for the initial negotiating rounds.
That said, the negotiations will be contentious and could be derailed by
several core issues. Although talks will focus on trade, the degree of
public and legislative support will be  affected by bilateral disputes
over unrelated political and security issues, including differences over
policy toward North Korea. To be successful, negotiations will require
strong presidential commitment and intervention to overcome the
inevitable deadlocks and attain legislative approval.

The United States and South Korea announced in February that formal FTA
negotiations would commence on June 5 and be completed by spring 2007.
The accelerated pace is necessary to obtain US congressional approval
before the expiration of President George W Bush's trade-promotion
authority in June next year.

Although estimates vary greatly, the FTA is anticipated to provide
significant economic advantages to both countries. To garner domestic
support, Roh will also tout additional strategic benefits such as
improving South Korean competitiveness by forcing additional economic
reforms, increasing the potential for raising South Korea's credit
ratings, and providing a competitive advantage over regional rivals
China and Japan. For the US, an FTA would strengthen bilateral ties by
broadening the relationship beyond the military alliance; reverse South
Korea's growing trade ties with China; potentially regain the US
position as Seoul's pre-eminent trade partner; and counter perceptions
of Beijing's increasing influence over South Korea.

Although an FTA would provide overall economic benefits, the impact
would differ by sector. South Korea's automobile, textile and apparel,
and electronic-appliance sectors would benefit while agricultural,
petrochemical, telecommunications, financial, and pharmaceutical
companies would face greater challenges. In both countries, those
sectors that will fare poorly in a more competitive environment will
lobby their governments for restrictions or exemptions as "sensitive
industries". The South Korean agricultural and film industries will
remain the most strongly opposed to the FTA. US automobile,
film-industry and pharmaceutical firms will press Washington for greater
access to South Korean markets, while US textile companies will request
protection.

Long-standing trade disputes will hinder progress
Negotiations will be complicated by strongly divergent positions on
several key sectors. As many as 17 working groups will be established to
negotiate a range of issues, including several that previously prevented
concluding a bilateral investment treaty. The talks will most likely
reach an impasse, however, over those topics that both sides have
identified as non-negotiable, such as rice, beef, automobiles, and goods
produced in the Kaesong enterprise zone in North Korea.

# Agriculture: Seoul will insist that rice be excluded from the FTA,
citing its importance to "the nation's food security". South Korea will
also point out that the US exempts some of its own industries in other
FTAs. Furthermore, Seoul will claim that its 2005 World Trade
Organization accord, which incrementally opened the country to foreign
imports, supersedes the need for a separate bilateral agreement.
However, the public has grown increasingly impatient with rural
extremism and will likely support the FTA if it perceives that farmers
have been adequately compensated by the government. US officials will
insist that a comprehensive agreement must include all agricultural
products. In particular, the US farming lobby and Congress will demand
that the Bush administration obtain significant agricultural
concessions. The head of the American Farm Bureau Federation stated on
March 14 that the US market share of South Korea's agricultural products
market had plummeted from 45% in 1996 to 30% in 2004.

# Beef: South Korea agreed in January to resume imports of US beef
products, reversing a two-year ban imposed after "mad cow disease" was
discovered in US meat. Seoul agreed to import US beef from cows under 30
months old but excluded beef ribs, which had accounted for 60% of US
beef imports (many Korean dishes use rib meat, which Koreans regard as
superior). South Korean agricultural groups will protest Washington's
insistence on a resumption of imports of all beef products and a
reduction in tariffs, arguing that domestic beef prices might drop by
40%. These groups will appeal to continuing domestic fears over the
safety of imported meat. A December 2005 poll indicated that only 4% of
Korean consumers believed US beef was safe to eat. For its part, the Roh
administration will not be deterred by farmer protests, but it will
press for more stringent inspections of US beef to allay safety
concerns. National Assembly legislators may advocate a comprehensive aid
package for domestic cattle producers to offset lost revenue and
long-term reform measures to retain their competitiveness.

# Kaesong: A critical negotiating requirement for Seoul is US
acquiescence to designating goods produced in the Kaesong (also
transliterated Gaesong) inter-Korean industrial complex as "made in
South Korea". The Kaesong project, located in North Korea, represents
the flagship initiative of Seoul's engagement policy toward Pyongyang.
The local-content designation is critical to the economic viability of
Kaesong exports and is intended to induce additional South Korean and
foreign firms to join the venture. The issue is politically sensitive
for the US, however, since it would dilute Bush administration efforts
to pressure North Korea over its nuclear-weapons programs by restricting
Pyongyang's sources of foreign currency. Washington will not agree to
South Korea's demand. Moreover, US labor unions will declare that "slave
labor" in Kaesong would provide South Korea an unfair competitive
advantage. As a fallback position, Seoul might request that the US allow
a percentage of Kaesong-produced components in a South Korean
end-product. Seoul's FTA with the European Free Trade Association
provides duty-free status to Kaesong products if more than 60% of the
contents are from South Korea.

# Automobiles: The US Congress has stipulated that gaining greater
access to the South Korean auto market is a key requirement for
approving an FTA. An enormous disparity continues to exist in the two
countries' auto trade: in 2005, South Korea sold 730,000 cars in the
United States (a 4.3% market share) while the US reciprocally sold only
5,700 cars in South Korea (a 0.7% market share). Gaining market share in
the South Korean auto sector is generally prevented by regulations, not
traditional tariffs or quotas, and Seoul has inconsistently and
retroactively applied such regulations. Washington will accordingly
press Seoul to restructure discriminatory tax systems (at one time
owners of foreign cars were singled out for tax audits), overcome
domestic anti-import sentiment and reduce South Korea's 8% auto tariff,
which is three times the US rate. South Korea will dispute US assertions
that the local market is closed to foreign sales. The National Tax
Service commented in February that no penalties, official or otherwise,
are imposed on Koreans who own or buy foreign cars. The Korea Automobile
Importers and Distributors Association reported that March sales of
foreign cars were up by 75% year-on-year.

# Pharmaceutical: The US will demand resolution to outstanding
transparency, pricing and regulatory issues. The US Trade Representative
has complained that Seoul is protective of South Korean pharmaceutical
companies, which predominantly produce generic drugs. The US will press
for more stringent intellectual-property-rights standards and more
aggressive efforts by authorities to combat illegal copying of US drugs.
It will also demand that South Korea rescind discriminatory requirements
that foreign drugs must undergo redundant local testing prior to
governmental approval. The president of the American Chamber of Commerce
in Korea even characterized the pharmaceutical sector as one of the most
corrupt in Korea.

# Government practices: Although Roh advocates breaking down trade
barriers that hinder competition, foreign firms have complained that an
entrenched bureaucracy uses vaguely written regulations and tax policies
to engage in protectionist policies. Moreover, Seoul is seen as having
encouraged the selection and periodically dictated the incorporation of
Korean-standard technology to limit foreign access to the
telecommunications sector. South Korean regulators have historically
favored firms with large market share, which intrinsically provides an
advantage to established domestic firms. Wendy Cutler, assistant US
trade representative and chief negotiator for the FTA talks, said on
April 20 that the FTA would require provisions beyond those in other
FTAs to address South Korea's unique trade barriers. For its part, Seoul
will request changes to US trade remedy practices, including
anti-dumping and anti-counterfeiting, that it deems discriminatory.

Political, economic differences reinforce opposition

Although polls indicate a majority of South Koreans favor an FTA, the
populace remains apprehensive about opening the economy further to
international competition.

Furor over foreign firms gaining large, tax-free profits, combined with
a recent hostile takeover attempt of a local corporation by a foreign
entity, has caused a domestic backlash against overseas firms. FTA
opponents may also try to undermine the talks by warning that an
agreement will leave South Korean firms vulnerable to takeover.

Difficult negotiations could increase anti-American sentiment, although
this is unlikely to spark widespread anti-US demonstrations. FTA
negotiations will be further complicated by growing strains in the
bilateral relationship, brought on by widely divergent foreign policies,
most notably over resolving the North Korean nuclear-weapons impasse.
The level of bilateral political discord could influence the degree to
which negotiators feel pressured to gain concessions as well as the
level of public and legislative support for approval of the FTA.

Declining influence hinders Roh's ability to deliver

To reduce growing domestic opposition, Seoul will seek to exclude
sensitive sectors from FTA negotiations as well as promising additional
governmental assistance programs to affected industries.

On March 28, 270 civic groups announced a coalition to oppose the FTA
with the US. South Korean officials will continue to issue strong
statements, partly to frame the upcoming negotiations, but also to
counter perceptions that Seoul will make too many concessions during the
negotiations. Roh has already been criticized for agreeing to the four
US preconditions for initiation of trade talks without demanding
reciprocal agreements. He has vowed to intercede to ensure the
completion of FTA, but his declining political influence will limit his
ability to gain approval even within his own political party.

Achieving an FTA within a year will be extremely difficult given the
comprehensive agenda, the number of potentially deal-breaking disputes
and historic difficulties in resolving previous trade disagreements. The
initial negotiating rounds in June and July will provide a better
indication of the two sides' commitment to reaching an agreement. The
degree to which negotiating differences are played out in the media will
also signal the potential for success. Frequent negative public comments
by either side will restrict negotiating flexibility and reduce the
potential for legislative approval.

Despite these challenges, there are causes for optimism, most notably in
that both presidents have so clearly committed themselves to its
success. Roh has publicly declared that achieving an FTA is one of his
two principal policy objectives for 2006, seeing it as a "legacy issue".
As such, Seoul may have set the bar low for negotiating requirements,
but there are certain matters that will be seen as non-negotiable. South
Korean negotiators cannot appear to be too accommodating lest they cause
a nationalist backlash among the populace and legislature. Despite the
South Korean propensity for violent street demonstrations, there is
strong US and Korean business support for an FTA. Several polls have
shown that 60-70% of South Korean businesses favor an FTA. A
wide-ranging business group was launched in April to advocate on behalf
of the FTA, including the Korea International Trade Association; the
Korea Chamber of Commerce and Industry; the Federation of Korean
Industries; and the Korea Federation of Small and Medium Businesses.

In the US, the US-Korea FTA Business Coalition, consisting of more than
100 leading US companies and trade associations, has declared strong
support.

Although achieving an FTA would improve the state of the US-Korea
alliance, it would not be a panacea for all the ills brought on by
steadily diverging policies. A failure to attain an FTA, however, would
have a significant and potentially devastating impact on both the
relationship and Roh's political standing. The conservative opposition
would see the collapse of talks as vindication of its criticism of Roh
and ramp up accusations that the president has severely damaged the
bilateral relationship with Washington. As such, the stakes are much
higher for Roh than for Bush.