A Free Trade Agreement with South Korea

By June 30, 2007Trade

Ambassador Susan Schwab and South Korean Trade Minister Kim Hyun-chong signed the U.S.-Korean Free Trade Agreement at 10 a.m. this morning on Capitol Hill.

A statement from President Bush:

I am pleased that United States Trade Representative Susan C. Schwab and Republic of Korea Trade Minister Kim Hyun-chong today signed the United States-Korea Free Trade Agreement. This Agreement will generate export opportunities for U.S. farmers, ranchers, manufacturers, and service suppliers, promote economic growth and the creation of better paying jobs in the United States, and help American consumers save money while offering them greater choices. The Agreement will also further enhance the strong United States-Korea partnership, which has served as a force for stability and prosperity in Asia. I call on Congress to ratify this landmark Agreement, to the considerable benefit of the American people.

From The Korea Herald, an English-language paper, this news report, with a statement from Prime Minister Han Duck-soo:

If the amendments are not reflected in the agreement, the Korea-U.S. FTA may not be endorsed by the U.S. Congress…Korea also decided to accept the U.S. proposal to block further requests by the U.S. Congress on automobiles, rice, and other items.

NAM President John Engler upon the signing of the agreement (from our news release):

The U.S. – Korea negotiation resulted in a comprehensive agreement that came together in a short time and provides a broad scope of opportunities to most of America’s manufacturers. It contains the best IPR provisions and the strongest pro-competitive provisions we have ever seen in a trade agreement and its passage will be a real plus for most U.S. industries…

The negotiations were difficult for both sides, and this FTA is not perfect – U.S. auto makers have raised serious concerns with tariff and non-tariff provisions they feel are not adequately addressed and that will continue to block meaningful access to Korea’s auto market. The NAM is encouraging continued discussions to address these legitimate concerns.

Reuters story is here. And a news report from the Korean embassy.

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  • Steve Biegun says:

    If you wish to understand Ford Motor Company’s deep concerns about the Korea FTA in its current form, please read below. Thank you.

    June 20, 2007

    United States International Trade Commission’s Hearing
    U.S. – Korea Free Trade Agreement:
    Potential Economy Wide and Sectoral Effects

    Stephen E. Biegun
    Vice President, International Governmental Affairs
    Ford Motor Company

    Thank you for the opportunity to provide Ford Motor Company’s views on the impact of the U.S.-Korea Free Trade Agreement on the U.S. automotive industry.

    Ford Motor Company is a world leader in the manufacturing and sale of automotive products with 260,000 employees worldwide and over 100,000 employees here in the United States. We have a long and proud history. Founded in 1903, we actively compete in over 200 markets worldwide and our brand is among the most recognized and respected around the globe.

    Ford has been operating in South Korea since 1995 and today has one surviving dealership selling both the Ford and Lincoln brands. The majority of vehicles sold by Ford in Korea are built in the United States. Our number one selling vehicle in Korea is the Ford Taurus assembled at our Chicago assembly plant. We also sell the Ford Explorer, Escape, Mondeo, Freestyle, Mustang and Lincoln models.

    From a global perspective, South Korea is an important automotive market with annual sales of over 1 million vehicles, ranking it 9th in overall size just behind Canada and India. For that reason, Ford Motor Company has dedicated sizable resources over the past 12 years to try to expand our presence in this market.

    Unfortunately, today, after 12 years of continuous effort and investment, Ford Motor Company sells less than 1,700 vehicles a year in South Korea. That is fewer vehicles than we sold in Korea a decade ago.

    The United States auto industry has spent a considerable amount of time over the past decade trying to understand why it is so difficult to get cars into the Korean market.

    First we considered whether it was the quality of imported cars. Are Toyotas or Chevrolets or Fords or Volkswagens inferior to Hyundai in quality? We did a comparison of quality among imports and Korean-made vehicles during this period and found that in fact just the opposite is true – most imports would equal or far exceed Korean quality.

    We also considered whether it is the cost that keeps imports out of the Korean market. Certainly the Korean tax and tariff structure are specifically designed by the Korean government to make imports more expensive, but still this alone would not be enough to explain the low level of imports.

    We also considered whether Korean consumers are so particular that they prefer a different mix or type of vehicle than U.S., European or Japanese customers. Again, a simple look at the major volume vehicles sold in the Korean market today will show that in every case there is a comparable – and better – non-Korean choice available on the global market from another international company.

    In the end, we are left to ask whether there is something more insidious that is occurring in the Korean market to keep exports out.

    Understanding issues like this is one of my responsibilities at Ford. With the able assistance of an international team co-located with Ford’s manufacturing presence around the world, our group monitors, analyzes and participates in negotiations involving free trade agreements. Inside Ford we are a core part of the business team that evaluates export opportunities in markets like Korea.

    Let me be clear from the start – Ford Motor Company supports trade liberalization. In fact, our industry provided the original impetus for United States free trade policy when, joined by General Motors and Chrysler, we successfully pushed for the U.S.-Canada Auto Pact in 1965. This free trade agreement, with our close ally and neighbor in Canada, became the foundation for the U.S.-Canada Free Trade Agreement, which itself soon expanded to become the North American Free Trade Agreement. Since then we have supported every free trade agreement that has been signed by the United States government.

    As global company, it is our confirmed belief that the very best business conditions exist when trade barriers and tariffs are fully removed – allowing for the free flow of goods and services. These conditions permit the development of a healthy and efficient business, and they are proven to produce a customer base that is gainfully employed, upwardly mobile and able to make rational choices about purchases such as the vehicle they will drive.

    As much as the United States automobile industry has supported open, global trade in our products, there are some competitors who are noteworthy exceptions to this rule. Korea is a perfect example.

    Today, Korea ranks at the very bottom — 30th out of 30 among the largest automotive markets — in terms of auto import market access. While the average among major developed economies is approximately 40% market penetration by imported automobiles, in 2006, the total of import vehicles from all global manufacturers in all countries entering the Korean market was around 3.6% — approximately 40,000 vehicles in a market that buys over one million vehicles annually.

    Put another way, more than 96% of the vehicles sold in Korea are built in Korea. This defies market trends worldwide, it defies the logic of consumer choice, and it is a situation that would be impossible to sustain without the active intervention of the Korean government. And let me be clear, lest anyone suggest it is a problem with American-made cars, no manufacturer from any country can import significant volumes into the Korean market–not Ford, not General Motors, not Chrysler, not Toyota, not Volkswagen, not anyone.

    While the total import penetration into Korea remains low, Korean manufacturers freely export 70% of their total production around the globe, including into the U.S. market. In 2006 alone, Korean auto producers exported 700,000 vehicles into the U.S. while U.S. auto companies exported 4,000 vehicles into South Korea. As a result, and to no surprise, over 80% of the $13 billion U.S. trade deficit with South Korea is in automotive products.

    The U.S. government has not been disengaged from the issue of auto market access into Korea — far from it. In 1995, in response to objections from the U.S. auto industry about the problems with market access, the U.S. government negotiated and signed a bilateral agreement with South Korea to deal head on with the issue of non-tariff barriers (NTBs). When this failed to open the market, a second auto agreement was negotiated and signed in 1998. The intent of both agreements was clear — to deal with the persistent nature of South Korean NTBs and substantially increase the market access for import vehicles. Unfortunately, despite great attention and effort, the real effects of the agreements were minimal and market access into South Korea continued to be denied to importers.

    We know from this experience – and years of working to build a business in the market — that real market access for imported vehicles into Korea is prevented not by price, quality or consumer preference but rather by an elaborate layering and ever-changing presence of non–tariff barriers that work to effectively block imported products.

    Non-tariff barriers in Korea take three forms: regulations and certification; tax structure; and anti-import bias. Korea’s automotive safety and environmental regulations and certifications are often non-transparent and out of sync with international standards. While such regulatory changes do come at some cost even for Korean domestic manufacturers, when amortized across the sales of hundreds of thousands of vehicles they are an affordable expense. But for an importer like Ford, with less than 1,700 sales in the market, the changes can be so costly as to destroy the business case to remain in the Korean market.

    When combined with other measures such as discriminatory taxation on imported vehicles and harassment of import buyers by tax authorities, it is easy to understand why the Korean market is comprised of more than 96% Korean made vehicles — and why our company has a deep skepticism about Korean willingness to open its automotive market under the recently negotiated free trade agreement with the United States.

    I stated at the outset that Ford Motor Company supports free trade, but I suppose we may be old fashioned in one important respect: when our government negotiates a free trade agreement we want the other party in the negotiation to support free trade too. Nothing in Korea’s approach to this negotiation – nor to the negotiations in 1995 and 1998 – suggests to the automobile industry that the Korean government has the slightest intention to open their market.

    It did not have to be like this. Given Korea’s status as a major global automotive player, its closed market to imports and the long history of unsuccessful U.S. efforts to gain import access to the market, the U.S. auto industry believed that these FTA negotiations were our last best chance to achieve real and meaningful results in Korea. At the same time, we were clear that we would not be satisfied with yet another hollow promise from the Korean government for market access. We needed a new approach.

    We are convinced that a traditional negotiating approach – that is, to negotiate around the edges of the current NTBs — as was the case in 1995 and 1998 — will not have meaningful results for our industry. That method places the burden on Korea’s trading partners to first identify the techniques used to block imports and then to come up with the solutions. This is like the old arcade game of Wac-a-Mole – new regulations pop up each time we whack one down.

    Our business planners simply cannot justify spending millions of dollars on product designs to meet the peculiar requirements of the Korean market, only to see those requirements change again to keep our products out. Our sales and marketing division cannot enlist Korean entrepreneurs to invest their life’s savings in establishing a Ford dealership to sell our vehicles if we cannot guarantee a steady supply of vehicles. There has to be a better way.

    The three U.S.-based auto manufacturers proposed early on in these FTA negotiations a non-traditional approach to gain real, sustained and meaningful access into the South Korean market. We insisted that the Korean government be incentivized to come up with its own solutions, to remove the obstacles that they impose upon imports, to cease and desist from imposing new barriers, and to allow the Korean consumer the same, full range of choices that the American consumer has. This would put the burden on Korea to open its market – after all, they broke their market and only they know how to fix it.

    Specifically we proposed that Korea immediately eliminate its 8% auto tariff and eliminate all of its NTBs. Preferential tariff reductions into the U.S. market for Korean vehicles would then occur only after meaningful and sustained market access was achieved in Korea by global manufacturers. By tying U.S. market preference to real market access into Korea, we were creating the right incentives for Korea to eliminate, and not reinstitute, new NTBs.

    Unfortunately, the U.S. automotive industry’s proposal was rejected and as a result, the agreement reached on April 1st with South Korea falls well short of free trade in autos. It provides Korean exporters with the immediate elimination of U.S. auto tariffs without the commensurate requirement for real market access into Korea for our products.

    USTR worked hard to understand what techniques the Koreans are using today to block U.S. imports. In fairness, the FTA negotiations attempted to ameliorate the most egregious examples of the current set of Korean NTBs. But from the perspective of a company that has fought to build a business in Korea, it all looks the same.

    For a third time in just over a decade, the Korean government has made a promise to modify its current set of NTBs. Our experience with this market over two decades does not suggest to us that this promise will be honored. There simply is no proper incentive for the Koreans to do so.

    While the agreement puts in place a temporary dispute settlement panel, ostensibly to address new non-tariff barriers, it is extremely disappointing that after a 20 year history of using Korean NTBs to effectively close the Korean market, and two failed MOUs (1995, 1998), the burden continues to fall on U.S. auto companies to demonstrate the existence of NTBs, to demonstrate “injury” before any appropriate remedy is applied, and in effect to litigate our way into the Korean market. This would be costly, highly uncertain and simply does not pass the test for business planning.

    I would also note that the 25% U.S. truck tariff is not included in the snapback provisions available under dispute settlement. At a minimum the agreement should have used the full leverage of all automotive duties as leverage to open the Korean market.

    We do not doubt that we will see new NTBs in the Korean market. At best, the agreement creates some temporary easing of restrictions for U.S. auto exporters – though the only option that would really make a convincing business case for a U.S.-based exporter would be to take the small volume exceptions that were carved into each of the NTBs.

    Instead of using the leverage of U.S. tariffs to drive market access into Korea, this agreement gives away the U.S. tariff and merely establishes another legal obstacle course for U.S. companies seeking market access into Korea.

    We do not believe any company manufacturing automobiles in the United States today will tell you that this agreement will open the Korean market to significant U.S. exports. In sum, our business planners at Ford Motor Company view this agreement at best as an opportunity to bring endless disputes against Korea — and that is not our business.

    On the other hand, the immediate and clear beneficiary of vehicle tariff provisions arising out of the U.S.-Korea FTA will be manufacturers exporting vehicles from Korea to the U.S.

    Today, Hyundai and Kia have approximately 1,300 dealers operating across the United States. Compare this to the one surviving Ford dealer operating in Korea today. On day one that this agreement came into effect, 90% of Korea’s 700,000 auto exports would receive immediate duty free access into the U.S. This will quickly climb to 100% by year three of the agreement. By way of comparison, a mere 4,000 U.S. produced vehicles are expected to enjoy duty free access into Korea.

    Were this agreement to come into force, Korean dealers would have the opportunity to make fast gains in market share and profits in the U.S. market. Meanwhile, under the crushing weight of Korean trade barriers the sales network for U.S. companies in Korea remains minimal. This too is why our business planners see the upside for U.S. exports under this negotiated agreement as very limited.

    In our view the immediate elimination of the U.S. vehicle tariff, following 20 years of closed market access into Korea, will only serve to further lock-in the one-sided nature of automotive trade between Korea and the U.S.

    The United States automobile industry is in the midst of a difficult restructuring. We have made painful decisions to shed jobs and idle plants in order to become more competitive and restore profitability to our business in the face of tough competition. We operate in what is already by any objective measure the most open auto market in the world. Yet, you have not heard our industry ask for protectionist policies to close off opportunity for importers in the U.S. market, and you will not do so today. To the contrary, all we have asked for is the same level of access to our competitors’ markets.

    We do not support this agreement in its current form precisely because we do support free trade, and this is not free trade. However, we stand ready to work with our government if there is a desire to improve the agreement.

    The United States passenger car market is today the most free and open in the world – and anyone can do business here. As a company that operates and competes in 200 markets globally Ford sees the real and tangible benefits of such policies. Free trade lowers transaction costs, improves efficiency and enables us to more cost effectively meet the demands of our customers here in the U.S. and abroad. But free trade must truly be free, not encumbered by the layers of restrictions that are set up only to protect domestic industries. That is why we were hopeful that this negotiation, our last best chance, would have resulted in real and meaningful market access for our products into Korea. It does not, and that is why we have recommended to Congress that the agreement not be approved in its current form.

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