U.S. FTA brings cheaper goods, expands exports

Same tariff incentives will apply to online, offline purchases of American goods


The Korea-U.S. Free Trade Agreement went into effect on Thursday, making Korea the first Asian country to have FTAs in effect with the world’s largest economy and the European Union.

Tariffs were immediately removed for 82.1 percent of U.S. items such as shirts, jeans, cosmetics, handbags and wine, and 80.5 percent of Korean items. Tariffs on American cars will be removed gradually.

The effectuation, which experts predict will be a milestone in improving relations between Korea and the United States, came nearly five years after the two countries concluded the free trade pact in 2007.

The FTA is likely to raise the competitiveness of Korean products in the world’s largest importing nation.

The relative size of the United States as a trade partner of Korea has continued to shrink. Korea’s trade intensity index in the U.S. fell from about 1.7 in 1990 to below 1 since 2008. If the trade intensity index is lower than 1, that means Korea exports less, as a percentage, to the United States than the world does on average.

The FTA is expected to bring a turnaround in Korea’s exports to America as exports in general face a shaky outlook amid the eurozone debt crisis. 

Economic effects

According to 10 state-funded think tanks, including the Korea Institute for International Economic Policy, Korea’s gross domestic product will increase by up to 5.66 percent and 350,000 new jobs will be created in the 10 years after the FTA goes into effect.

Korea’s trade surplus with the United States will also surge by $138 million on average annually for the next 15 years, they said.

Korea’s average annual exports to the United States are projected to rise by $1.29 billion and imports to $1.15 billion.

The improved investment environment will boost annual foreign investment in Korea by between 2.3 billion won and 3.2 billion won ($2.8 million) on average, according to the think tanks.

Thanks to the lowered prices due to the removal of tariffs and widened range of choices for consumers, they are forecast to reap benefits worth 32.19 billion won over the next 10 years.

Consumers in Korea will be able to buy American products from clothes to cheese at cheaper prices.

Tariffs on U.S. apparel (13 percent), shirts (13 percent), ties (8 percent), handbags (8 percent), hats (8 percent) and cosmetics (8 percent) were eliminated immediately as the FTA took effect.

Tariffs on American orange juice (50 percent), grape juice (45 percent), cheese (36 percent), cherries (24 percent), raisins (21 percent), wine (15 percent) and almonds (8 percent) have also been removed.

After the Korea-EU FTA took effect in July, the prices of French and Italian wine dropped by between 13 and 15 percent.

The duty on American cars was immediately lowered from 8 percent to 4 percent, and will be eliminated in four years.

A growing number of Koreans are buying American clothes and bags through online shopping sites and purchasing agencies.

Internet shoppers had to pay tariffs on products that cost more than 150,000 won.

But under the Korea-U.S. FTA, the same tariff benefits apply to offline and online purchases. The immediate duty elimination on bags and apparel will allow online consumers to buy them at cheaper prices.

Taxes on cars

As the FTA went into effect, complicated domestic taxes on cars were simplified in addition to the tariff cuts.

Before the FTA, anyone who bought a car had to pay a consumption tax of 5 percent for cars with engine displacements of between 1 and 2 liters, and 10 percent for more than 2 liters. Vehicles with engine displacements below 1 liter were exempt from the tax.

Now, the consumption tax on cars with engine displacements of over 2 liters is 8 percent and will be cut to 7 percent next year, 6 percent two years later and 5 percent three years later. So starting March 15, 2015, it will be five percent for engine displacements over 1 liter, and zero for smaller ones.

The vehicle tax levied on anyone who owns a car will also be cut to 80 won per cc for engine displacements under 1 liter, 140 won per cc for those between 1,001 and 1,600 cc, and 200 won per cc for over 1,600 cc.

Trade balances

The manufacturing sector will benefit the most, especially carmakers.

Market watchers expect Korean auto exports to rise by $722 million annually on average, and the auto trade surplus by $625 million, for the next 15 years. The U.S. auto market is eight times larger than Korea’s.

The average annual trade surplus increase is estimated at $81 million for textiles, $16 million for electronics and $5 million for steel products.

The agricultural and fisheries sectors, however, are expected to see trade deficits increase by $424 million and $11 million on annual average for the next 15 years, respectively.

Damage limitation

The Korean government has announced a plan to provide 24.1 trillion won to support the agricultural and fisheries sectors, and another 29.8 trillion won in tax benefits.

If the price of an agricultural product falls below 90 percent of the average price due to increased imports, the government will provide 90 percent of the difference to the producers.

ISD renegotiation

A committee on service and investment will be set up within 90 days from March 15 to discuss the clauses on investor-state disputes.

If Seoul and Washington agree on the ISD clause revision, they will report it to the Joint Committee of trade ministers so it can take effect.

A 15-member taskforce including nine nongovernmental experts has begun discussions to settle Korea’s position for the ISD renegotiation.

Seoul, however, is not considering the removal of ISD clauses.

By Kim So-hyun (sophie@heraldcorp.com)