U.S. Trade Policy & Korea

Why Do Recent Developments in U.S. Trade Policy Matter to Korea?

By Evelyn M. Suarez and Gillian Jaeger

Busan is the busiest port in Korea.This post originally appeared on The Spectrum Group website.

Over the past four decades South Korea has experienced incredible economic growth and global integration to become a high-tech industrialized economy. In 2004, South Korea joined the trillion-dollar club of world economies.  However, one of the long-term challenges that the South Korean economy faces today includes its heavy reliance on exports.[1]  Global markets are clearly of critical importance to South Korea.  In addition, Korean companies have major investments in many places around the globe, e.g., in the U.S., the EU and Mexico.  It is a fair statement that trade and investment are the lifeblood of South Korean economic growth.

The United States and Korea have strong economic ties in terms of trade and investment.  In fact, the U.S. and Korea already have a bi-lateral free trade agreement (Korea-U.S. Free Trade Agreement or KORUS).  Korea is the 6th largest trading partner of the U.S. and two-way trade in goods totaled $145 billion in 2014.  Nearly 95% of consumer and industrial products will be duty free by 2017, creating even more significant business opportunities for both countries.

So why should Korean companies care about the other agreements that the U.S. is negotiating?  One reason is its heavy dependence on export markets.  Also, Korean companies have investments in countries covered by those agreements.  For example, the Korean automotive sector has significant investments in Mexico, which could benefit greatly from the Trans-Pacific Partnership (TPP) (although they already receive benefits from NAFTA).

Korea also has strong ties to the EU, with whom they also have a free trade agreement. The EU and South Korea are important trading partners. South Korea is the EU’s eighth largest export destination, whereas the EU is South Korea’s fourth export destination (after China, U.S. and Japan). In 2014, EU imports from South Korea totaled 38.8 billion EUR, the main product categories are machinery and appliances, transport equipment and plastics. The EU records a significant surplus in trade in services with South Korea.  In 2013 EU exports of services to South Korea amounted to 10.6 billion EUR, compared to imports of 5.6 billon EUR.  South Korean investments in the EU have increased substantially from 13.1 billion EUR in 2010 to 18.9 billion EUR in 2013, representing 0.5% of the total inward foreign direct investment (FDI) in the EU. Over the same period, EU investments in South Korea decreased slightly from 37.5 to 32.6 billion EUR, representing 23.8% of the total FDI in South Korea.

International trade with the U.S. and EU has significant effects on the U.S, EU and the South Korean economies. Thus, the Trans-Atlantic Trade & Investment Partnership (TTIP) is important to all.  Korean investments in both the U.S. and the EU could benefit from the TTIP.

The analysis of the question of why Korean companies should care about TPP and TTIP is far from simple.  Let’s examine more closely the two major regional trade pacts that the U.S. is pursuing and consider how they impact South Korea.

TPP, a historic regional trade pact involving 12 countries, including the United States, Japan, Canada, Mexico, Australia, Vietnam, Malaysia, and Chile, was concluded on October 5, 2015.  TPP countries represent 40 percent of global GDP, 25 percent of global exports, and 30 percent of global imports.  TPP is a high standard 21st Century Agreement, which includes comprehensive market access, eliminating tariffs on all goods representing some 11,000 tariff lines as well as non-tariff barriers to goods and services and investment.

TPP seeks to promote a regional approach to commitments by facilitating the development of production and supply chains among TPP members and addresses crosscutting trade issues, such as regulatory coherence, competitiveness and business facilitation, digital trade among other things.  It also contains special provisions for small-and medium-sized enterprises to enable them to engage more effectively and successfully in the global marketplace and provides capacity building for lesser-developed countries in the pact.  TPP also builds on the labor and environment provisions of past free trade agreements.   The impact of TPP provisions, such as regulatory coherence, digital trade and covering small- and medium—sized enterprises should provide significant advantages to companies in the region.  TPP is notable in that it includes some of the biggest economies and also the least developed ones.

Why would Korea be interested in joining TPP?  According to Mireya Solis, Senior Fellow, Foreign Policy Center for East Asia Policy Studies:

For South Korea, the benefits of TPP membership are multifold: sizable gains from trade, greater bargaining power in ongoing negotiations with China and Japan to tackle non-tariff barriers, the rationalization of its FTA noodle bowl, and the consolidation of a forward-leaning alliance with the United States.  For a country with ambitions to become an international trade hub, absence from a major platform to promote Asia-Pacific economic integration would be a lost opportunity.[2]

Some of the benefits could include sizable potential gains from trade.  It is also said that a mega Free Trade Agreement (FTA), like TPP, can enhance production network efficiencies by allowing for accumulation of origin, significantly reducing costs of investing and trading for importing and exporting firms.  It can provide integration into the regional supply chain and rationalization of FTA spaghetti bowl rules and rules of origin.  Intermediate goods account for 68% of Korea’s total exports.  Loss of position in TPP intermediate goods market, which amounts to over $2 trillion, can have an adverse impact on all Korean industries.  Japan would be the biggest benefactor.  Inclusion in TPP could also provide greater bargaining power in dealings with China and Japan to address non-tariff barriers.  Finally, it could be important to Korea becoming international trade hub.

Yet, TPP was completed and Korea was not included.  The question is raised in regards to what should be the way forward for South Korea in regard to TPP?  Some say that once TPP is passed by the U.S. Congress that there may be a second tranche of countries, such as Korea, the Philippines, Colombia and others.   Of course, the first hurdle will be passage of TPP legislation by the U.S. Congress in an election year.  The second will be deciding whether TPP is good for Korea and if the answer is yes – negotiating its way into the pact.

Meanwhile, the United States is also negotiating with the European Union the Trans-Atlantic Trade and Investment Partnership (TTIP), which combined with TPP, would cover nearly 60 percent of global GDP.  TTIP is also described as an ambitious, comprehensive and high-standard trade and investment agreement.  It differs from TPP in that it is an agreement between two major trading partners as opposed to TPP, which involves 12 countries at different levels of development.  That said, TTIP is not an easy negotiation given that what is left to negotiate are the tough issues.  Also, certain issues such as Technical Barriers to Trade, Sanitary-Phytosanitary measures and regulatory cooperation tend to drill down to the 28- member state level thereby complicating the negotiations.  Nonetheless, the parties have committed to the ambitious goal of completing negotiations by the end of 2016.  The 13th Round was just completed in New York on April 29, 2016, and the parties plan to have additional rounds in July, September and December.

Why would Korea care about an agreement between the U.S. and the EU?   Like TPP, TTIP can have an impact on Korean companies given their investments in both the U.S. and the EU.  The regulatory aspects of the Agreement could also benefit Korean companies.

Moreover, pundits say that TPP and TTIP are templates for future economic agreements among the world’s most developed and least developed countries given the lack of success at the World Trade Organization (WTO).  Thus, at a minimum it makes sense for Korea pay attention to these developments.  The question is raised as to how proactive Korean companies would want their Government to become?

 Evelyn M. Suarez and Gillian Jaeger are members of The SPECTRUM Group, a premier government consulting and congressional relations firm in the Washington D.C. area since 1993.

[1] https://www.cia.gov/library/publications/the-world-factbook/geos/ks.html

[2] Solis, Mireya, South Korea’s Fateful Decision on the Trans-Pacific Partnership (Brookings Sept. 2013).

Feedback Request on AGOA

This post originally appeared on the Africa Syndicate Blog on March 31, 2016.

What’s Your Experience with the African Growth and Development Act (AGOA)?

AGOA - The African Growth and Renewal ActThe African Growth and Opportunity, originally enacted in 2000, was renewed in the summer of 2015 for an additional ten years until September 30, 2025. It is described by the U.S. as the cornerstone of the U.S. economic relationship with sub-Saharan Africa and the most generous trade preference program offered by the U.S. While it is good news that AGOA was renewed, at the same time both the U.S. and sub-Saharan countries have entered into trade agreements with third countries and other developed countries such as the European Union and Canada have migrated away from trade preference programs to reciprocal trade agreements. This has led the U.S. to consider policies and approaches beyond preferences for sub-Saharan Africa. Both the Administration and the Congress in reenacting AGOA have expressed an interest in exploring such changes.

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Newly Enacted Customs Law Lends Helping Hand

SMEs and State Export Promotion Efforts to Benefit from Bill Signed by Obama

This article originally appeared in Global Trade on March 18, 2016.

On February 24, 2016, President Obama signed the “Trade Facilitation and Trade Enforcement Act of 2015.” This is the first major customs legislation since the 1993 Customs Modernization Act.

The law updates U.S. customs laws to facilitate legitimate trade and strengthens trade enforcement. On the trade enforcement side of the equation it includes provisions to investigate evasion of antidumping and countervailing duty orders and to enhance U.S. Customs and Border Protection’s (CBP) ability to combat counterfeit imports and to protect intellectual property rights. It also has provisions to address concerns about potentially disreputable importers of record. The law statutorily establishes CBP within the Department of Homeland Security and authorizes the Centers for Excellence and Expertise (CEEs). It provides support for CBP’s automation systems, the Automated Commercial Environment (ACE) and the International Trade Data System (ITDS).

The law encourages CBP to consolidate the two CBP partnership programs, the Customs-Trade Partnership Against Terrorism (C-TPAT) and the Importer Self-Assessment (ISA) program and to provide participants with “commercially significant and measurable trade benefits.” The benefit specifically mentioned in the law is preclearance of merchandise for those importers that show the highest levels of compliance. The law amends the drawback statute and contains a number of miscellaneous customs provisions, including a raised de minimis for very low value shipments that can be entered without the payment of duties. It also expresses a sense of Congress expressing a commitment to reinstituting the miscellaneous tariff bill legislative process.

Title V, referred to as the “Small Business Trade Enhancement Act of 2015” or the “State Trade Coordination Act,” may provide an important boost to state and local international trade economic development programs. In particular, the law authorizes grants for state trade expansion programs at $30 million a year through fiscal year 2020. It makes matching-fund awards to states to assist small businesses enter and succeed in the global marketplace. The grants to the states are for programs that support eligible small business concerns that wish to export by helping them with: participation in foreign trade missions; a subscription to services provided by the U.S. Department of Commerce; the payment of website fees; the design of marketing media; trade show exhibition; participation in training workshops; reverse trade missions; and procurement of consultancy services (after consultation with the U.S. Department of Commerce to avoid duplication).

This type of assistance can be very helpful to small businesses who do not have the financial resources for marketing and consultancy services useful critical to successful engagement in foreign markets.

The customs law seeks to improve coordination between the federal government and the states and local governments on export promotion and export financing and to reduce duplication of effort and overlapping functions. It establishes a working group selected by the Secretary of the U.S. Department of Commerce of representatives from state trade agencies representing regionally diverse areas.

The law also directs the Secretary of Commerce, in coordination with representatives of state trade promotion agencies, to develop a comprehensive plan to integrate resources and strategies of state trade promotion agencies into the overall federal trade promotion program.

The law directs a federal working group to identify a diverse group of small businesses, representatives of small businesses, or a combination thereof, to provide the working group the views of small businesses in the manufacturing, services, and agriculture industries on the potential effects of a trade agreement for which the president has provided notification of the president’s intent to enter into negotiations. These provisions are aimed at ensuring that small businesses are not harmed by and are able to take advantage of new trade agreements.

In sum, the new customs law contains measures to help SMEs and state export promotion efforts which should not be overlooked.