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KORUS: Good for South Korea, but Who Else?

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President Obama recently signed the KORUS FTA trade deal with South Korea. The advantages for S. Korea are obvious, but what impact will it have on the U.S. economy, and how will it affect relations with the rest of Asia?

The deal lowers trade barriers for both sides. President Obama boasts it will boost the domestic auto industry and support tens of thousands of American jobs by lowering S. Korean tariffs on American cars. The other side of the story, however, is that in five years the 2.5% tariff on Korean cars sold in the U.S. will be lifted. The real effect on the economy hinges on how many autos American manufacturers can sell in S. Korea, compared to the potential hike in Korean models imported here. While the U.S. manufacturers generally favor the deal, some of the big unions fear that it will actually result in a loss of jobs in their plants.

American autos sold in S. Korea will still have to meet their safety requirements, something which has stood in the way in the past. Asians prefer reliable, very small, fuel-efficient cars (to the extent that the Honda Civic is considered too big and is being discontinued in Japan). Quality issues continue to plague domestic models, with The Big Three having 50% more reported serious problems than Asian models. American automakers have shown little love for developing this type of vehicle, which is the reason that there are so many Asian cars on our roads. In 2009, Asian imports were nearly 50% of all light vehicles sold here.

Other issues, including the high subsidies paid to farmers in S. Korea may make this deal’s passage through congress less than certain. Beef exports (Korea has been reluctant to accept American beef since the mad-cow scare) is a sticking point for meat producers in the mid-west states, and the tariffs on pork products won’t be dropped until 2016. S. Korea produces a surplus of rice, and would like to protect itself from foreign competition to keep prices up.

KORUS is already being seen by other Asian trading partners as giving an unfair advantage to S. Korea. The Taiwan Ministry of Economic Affairs has come out against the pact, feeling that Taiwanese exports to the U.S. will be squeezed out by similar products from S. Korea. Others, including China, will undoubtedly condemn this agreement, as failing to give all competitors a level playing-field.

While KORUS is a diplomatic way of supporting an ally, it also has the serious side effect (by boosting trade with the south) of further isolating the north . While barriers are lowered for S. Korea, sanctions are increasingly strangling the economy in North Korea. In the volatile atmosphere of recent months, tipping the scales any more can only increase tensions. What seems a well-intentioned show of support, may actually push the two sides closer to war.

Barack Obama, of course, can’t lay claim to this accord, as it was originally negotiated by George W. Bush, but never signed due to unresolved issues. Mr. Obama’s recent visit to South Korea gave him the opportunity to iron out some remaining problems, and now he is the one left with the job of getting it passed. KORUS, however, is far from a done deal, as the President hasn’t done that well with his legislation in the past, and since the midterms, getting his bills passed into law will be tougher than before.

Even some of Barack Obama’s critics are giving grudging respect for this pact, even though it doesn’t deal with all outstanding issues, and its effect on our relations with other Asian countries is still unknown. What remains to be seen is whether it is good enough to convince those who get to decide its future.

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About Ian Stevenson