Korea-U.S. FTA opens new doors for local industries

The Korea-U.S. Free Trade Agreement was finally approved by Korea’s National Assembly on Tuesday after years on the backburner.

The initial negotiations were concluded on April 2, 2007 and the accord was signed on June 30 after two rounds of additional talks.

However, the process of implementing the pact stagnated for more than three years faced with stiff opposition from certain quarters in both countries.

The process only gained momentum following the additional negotiations last December, when Korea made a number of concessions including those regarding the automotive industry.

Regardless of the delays, the Korean government and businesses expect the deal to be a significant boost for the country’s economy.

According to the government’s estimates, the pact will result in Korea’s actual gross domestic product growing by about 0.48 percent in the long term, and by 5.66 percent when improvements in productivity are taken into account.

In addition, the Trade Ministry estimates that implementing the pact will result in the creation of 350,000 new jobs.

For international trade, the ministry estimates that the pact’s implementation will allow Korea’s exports to the U.S. to increase by an annual average of $1.285 billion over the next 15 years. The ministry projects that imports from the U.S. will rise by $1.147 billion and improved Korea’s trade balance with the U.S. to improve by $138 million each year over the same period.

One of the main evidence the government points to in supporting the projections that the Korea-U.S. FTA will be beneficial to the Korean economy is the changes seen in trade with countries with which Korea has valid free trade pacts in place.

According to the Korea International Trade Association’s data, Korea’s exports to Singapore went from $7.407 billion in the year before the implementation of the Korea-Singapore FTA to $15.244 billion in the fifth year after its implementation.

While the value of imports from the Southeast Asian country has also increased, by about $2 billion over the same period, the trade balance has more than tripled in favor of Korea.

Figures regarding the free trade deal with the Association of Southeast Asian Nations also support the argument. Korea’s exports to the region have gone from about $32 billion in 2005 to $53 billion in 2009. Over the same period, imports from ASEAN nations increased from $30 billion to $44 billion, more than quadrupling trade surplus for Korea.

The Korea-Singapore FTA was implemented in March 2006, while that with the ASEAN took effect in June 2007.

Although the government and major business lobbies have hailed the Korea-U.S. FTA as a landmark deal that will bring major benefits to the Korean economy, those opposed to the deal have raised worries that the pact will damage Korea’s trade balance with the U.S.

As evidence for such claims, the opposition has cited changes seen in the trade balance with the EU since the implementation of the Korea-EU FTA.

In July, the first month with the Korea-EU FTA in place, the monthly Korea-EU trade balance dipped into the red for the first time. In the following month, Korea recorded trade surplus of about $90 million, but the balance tipped back in favor of Europe in September.

However, according to a report from the LG Economic Research Institute, such developments do not support the argument that the trade deals, with the EU and the U.S., will have a damaging effect on Korea’s trade balance in the long term.

According to the report, the drop in Korea’s exports to the EU began in June. In addition, the year-on-year drop seen in June and July were caused in part by the unusually high increase in exports to Europe seen in the same months of 2010. In June 2010, Korea’s exports to the region jumped 42.1 percent from a year ago, while July figure was 42.2 percent higher, the report said.

In addition, the report projects that as large companies are the main players in exporting to the U.S., as is the case with trade with the EU, Korea will quickly utilize the pact. According to the report, more than half of exporters are already using the Korea-EU FTA to their advantage.

The automotive industry is the sector believed to stand to gain the most from the implementation of the pact.

Although the country’s two largest carmakers ― Hyundai Motor Co. and Kia Motors Corp. ― both operate production facilities in the U.S., the country remains the largest importer of Korean automobiles.

According to the Korea Automobile Manufacturers Association, Korean carmakers shipped about 431,000 units to the U.S. during the first nine months of the year. In comparison, Korea’s overall automobile exports for the period came in at 2.27 million units.

With flights to North America taking up the largest proportion of local carriers’ flights, the country’s airlines are also among those considered to benefit the most from the deal.

“We carry passengers but we also operate cargo flights, and we expect the volume of cargo, as well as passengers on North American routes to increase once the FTA is in place,” a Korean Air official said. According to the Korean Air official, passenger flights to North American destinations accounted for 32 percent of all Korean Air flights last year, while 42 percent of cargo flights were to and from the region. The situation is similar for Asiana Airlines, with 20 percent of passenger flights and 44 percent of cargo flights during the first half of the year being to and from the region.

At the other end of the scale are the agriculture and pharmaceutical industries.

According to the government estimates, local agriculture and fisheries industries will lose 700 jobs in the short term and 2,000 jobs in the long term due to the pact.

As for the pharmaceuticals industry, the introduction of the patent linkage system is expected to result in a drop of as much as 120 billion won in drug production each year over a period of 10 years.

Under the patent linkage system, pharmaceuticals companies are unable to produce and market generic drugs until the patent on the original product expires.

The government, however, is hoping that measures in place will be sufficient to minimize damages. The two sides have agreed to hold off the patent linkage system for three years after the pact takes effect, during and after which the government plans to provide R&D support for local pharmaceuticals firms.

By Choi He-suk  (cheesuk@heraldcorp.com)