Thursday, November 11, 2010

The Unbelievable KORUS Collapse and the (Near)Death of US Trade Policy

The US trade community, including your humble correspondent, was shocked to wake up this morning to the utterly insane and depressing news that President Obama and Korean President Lee Myung-bak have failed to reach a final agreement on the US-Korea FTA that would have cleared the way for the White House to send the agreement - completed and signed in 2007 - to congress for an up-or-down vote in 2011:
After more than a week of negotiations to amend a Korea-U.S. free-trade deal, originally negotiated by the Bush administration in 2007, U.S. President Barack Obama and South Korean President Lee Myung-bak said they had missed their deadline.

The talks will continue, the two leaders said, but chances for a deal are bound to diminish. Without presidential pressure and a deadline, there's less impetus to break an impasse, leaving the free-trade deal in limbo.

Officials in both countries said that the discussions over South Korean restrictions on auto and beef imports had proved too vexing.

"We aren't at a place where we feel we have gotten the market access that we need and our auto manufacturers deserve," U.S. Trade Representative Ron Kirk said in an interview.
The failure of Presidents Obama and Lee to announce a resolution to their disagreements over KORUS is utterly insane and depressing for myriad reasons.  First, let's discuss the insanity.  As most everyone knows, the only two issues holding up the agreement were Korean market access for US beef and automobiles.  Yesterday, the US beef folks publicly announced that they were apparently cool with the agreement, thus signaling that they, and their congressional muscle (Senate Finance Chair Max Baucus (D-MT)), would support the FTA when it arrived in Congress next year.  So apparently, as of last night (yesterday morning in Seoul) the fate of the entire deal rested on automobiles, with Ford, Chysler and the UAW the only US stakeholders still loudly (in full-page newspaper ads, no less) protesting an Obama-Lee agreement.  The thought that these folks alone could scuttle the entire KORUS FTA was unbelievable for three big reasons:
  • The automobiles "problem" is a total canard.  The UAW, Ford/Chrysler and their congressional benefactors claim that the FTA doesn't do enough to guarantee US autos access to the Korean market, but that's absolute nonsense.  The only thing that the FTA doesn't do is guarantee US market share - and that's not "free" trade at all.  The FTA eliminates an 8% Korean tariff (and a 2.5% US tariff) on passenger autos; it eliminates all existing discriminatory non-tariff barriers; and it contains the strongest NTB provisions - including a "snap-back" provision which would immediately ratchet up tariffs upon the discovery of a new NTB - of any US FTA ever.  Thus, it's about as "free" a trade agreement as you can get.  The autos guys point to the lack of US cars in the Korean market as proof that guaranteed market share is the only way to, umm, guarantee that US passenger vehicles will penetrate the Korean market.  But that's absolute nonsense for two reasons.  First, as Chris Nelson (in today's Nelson Report) ably points out (again): 
Bloomberg almost gets it leads us right up to the promised land with this:
"Figures compiled by auto industry groups in South Korea show that it exported 449,403 vehicles to the U.S. last year, while South Koreans purchased 6,140 vehicles made by American manufacturers, based on vehicle registrations.
Those figures do not include the 200,371 vehicles sold in the U.S. last year by Hyundai that were made at its American plant nor the 114,845 sold in South Korea by GM Daewoo Auto & Technology Co., the South Korean unit of General Motors Co.
The U.S. auto market is about 10 times bigger than South Korea's. There were 10.4 million vehicles sold in the United States last year. There were about 1.4 million sold in South Korea in 2009, according to the Korea Automobile Manufacturers Association."
OK, now take out your pocket calculator and check our math: doesn't this show that Korea-owned producers had 6.24% of the US market, and the US-owned producers had 8.64% of the Korean market?
Sure, there's an important difference between imports and domestic production, but are you telling us that the production and sale of more than 300,000 autos don't even rate a place on the charts, much less in the political rhetoric? You saying that the US workers for Hyundai and the Korean workers for GM/Daewoo, their factories, the domestic content sourcing, local taxes, salaries and the local multiplier effect of "transplant industries" have nothing to do with KORUS?
Balderdash, we submit.
Balderdash, indeed, sir.  Balderdash indeed.  Second, as Cato's Dan Griswold pointed out last week (citing a new Cato Paper on KORUS), the Koreans aren't buying US cars simply because they don't like them: 
Although the FTA reduces South Korean tariffs, American automakers complain that the accord does not address non-tariff restrictions. … In fact, social and cultural barriers may be more important than government policies. One problem is auto size, since American cars are larger than those typically preferred by apartment-dwelling South Koreans. Even if all tariff and non-tariff-barriers were removed, the average Korean would still be much less inclined to buy a Ford F-150 pickup truck, a Chevy Suburban, or a Jeep Grand Cherokee than the average American would be inclined to buy a smaller, more fuel-efficient Korean-made vehicle such as a Hyundai Sonata. No free trade agreement can change fundamental consumer preferences.
In short, all of those UAW/automaker complaints are complete garbage.  Now, what isn't garbage are these guys' fears about (and opposition to) the eventual elimination of a 25% tariff on Korean-made trucks and SUVs, but they can't admit that, so we get more balderdash about the "closed" Korean market.
  • Even if it weren't a canard, automobiles market access is an insigificant issue in the grand scheme of the KORUS.  When people listen to the President and USTR Kirk whine about automobiles, they might just forget that this FTA covers a helluva lot more than cars and cows.  On goods, the agreement eliminates duties on 99 percent of all tariff lines by year 10 of the agreement.  Considering that the Harmonized Tariff Schedule of the United States contains over 17,000 tariff lines, and that passenger vehicles are about ten lines total, this means that automobiles represent less than 0.1% of all farm and industrial goods covered by the agreement.  Sure, it's higher in terms of value, but according to the US International Trade Commission, automobiles trade represents a small part of the total expected value of the agreement (estimated to be anywhere between $17 and $43 billion per year!).  Indeed, most experts have explained that KORUS' greatest benefits come not from expanded market access for US industrial goods but instead from dramatically improved access for US farm products, services and, to a lesser extent, investment.  Korea's market for these things is very, very closed right now, and the United States just so happens to dominate the entire world in these sectors (and, oh-by-the-way, we just saw major services export gains yesterday).  It's for these reasons that the entire business community, minus Ford and Chrysler of course, supports the agreement.  And, of course, there are the immense foreign policy benefits (*cough*Norks*cough*) associated with cementing economic relations with a critical ally in the Asian region.  So even if the US were getting royally screwed on autos market access (which they're not), that's absolutely no reason for the President - who is supposed to represent all American workers, consumers and businesses (even the ones not owned by the US government!) - to scuttle the deal.  None.
  • Time is of the essence.  The EU-Korea FTA goes into effect next year, and the Koreans are on the verge of completing FTAs with other US competitors in Australia and Canada.  If KORUS doesn't get completed soon, then US exporters will be at a serious competitive disadvantage in the Korean market vis a vis their European, Canadian and Australian counterparts.  The US Chamber has stated that the competitive disadvantages from the EU agreement alone could cost 340,000 American jobs.  'Nuff said.
Given these many facts, it is absolutely mind-boggling that President Obama didn't seal this deal today.

Mind.  Boggling.

Which brings me to the utterly depressing part of the picture.  If the Obama administration can't finalize this FTA - with its immense benefits, minimal costs, accelerating time-sensitivity and very, very public deadline for completion (which just so happens to be almost 2 years before the next election) - then they probably can't resolve anything but the tiniest, most insignificant trade issue in the coming years, even with a new Congress that promises to be more hospitable to trade.  And if that's the case, then US trade policy is completely dead until 2013 at the earliest.

As a doornail.

Now, not to toot my own horn, but such impending doom and depression was precisely the big potential problem that I predicted waaaayy back in June when Obama and Lee first announced their November G-20 deadline.  Most free traders were jumping for joy, but I was (unsurprisingly) a lot more skeptical:
[E]ven with that raging, nuke-craving psycho in North Korea, the President didn't promise to actually advance KORUS in the near future. He only promised a deadline for bilateral discussions, and not only is this deadline a really cowardly punt of the issue until after the November elections, but it also could be, contrary to the sunny optimism cited above, where things get really bad for KORUS and US trade policy more generally. Remember, this agreement was completed and signed in 2007, and USTR Ron Kirk's team has been meeting with "stakeholders" for the last 18 months. Yet the FTA's still not ready for primetime (i.e., Congress) and, even worse, the President has just made clear that it won't be ready until USTR and its Korean counterpart re-negotiate a few more details, namely Korean market access for US automobile and beef exports. So all we have is a deadline to complete negotiations over a fully-negotiated-and-completed trade agreement. Hmm. Now, it appears that the President's commitment to these new talks is real, as he forced Deputy USTR Demetrios Marantis to cancel his plans to go to Angola for TIFA negotiations in order to begin staff work on KORUS. But as Heritage's Anthony Kim explains in today's WSJ Asia, the Koreans aren't going to take this "re-negotiation" lightly:
From Seoul's point of view, the pact is signed and sealed. Mr. Lee has already stood up to trade unions and opposition parties to get his parliament to pass the deal. Especially after taking a beating in local elections earlier this month, he cannot afford to be seen making further concessions to the U.S.
Even if South Korea does come to the table, it's unclear whether the U.S. side can stand up to America's own trade unions, who likely want more concessions on U.S. access to Korea's beef and automobile markets. U.S. Trade Representative Ron Kirk said over the weekend that he would work "to ensure that our proposals adequately address outstanding concerns." Never mind that Congress has already demanded the Koreans renegotiate the deal's terms—twice.
A third attempt to push for concessions would further tarnish America's fading international credibility and leadership in free trade.
Kim's opinions are on very solid ground - the Koreans have repeatedly said over the last two years that yet another re-negotiation of the FTA is off-the-table. And why on earth would they? First of all, KORUS' automobile and "non-tariff barrier" provisions are the strongest of any US FTA ever, and yet the US automobile industry - in which this administration still has a political, emotional and financial stake - has promised to oppose the agreement unless it contains "meaningful market access" provisions (read: guaranteed market share). That's "managed trade," not "free trade," and it has no place in a "free trade agreement." Second, US trade stagnation over the last two years has given the Koreans a serious upper hand in any future negotiations because they've been signing trade deals - including a massive one with the EU - at a breakneck pace over that period.

So even if the President's commitment to advancing KORUS is, while admittedly less-than-courageous, genuine (and I have no reason to doubt that it is), there's still a very real chance that the Koreans stand firm, and that these new bilateral talks thus fail to produce anything new by this November. Maybe an innocuous side agreement or two, but re-opening the text of the FTA seems like a real longshot. And if that turns out to be the case, then the American automakers and their congressional allies (like Ways & Means chairman Sandy Levin (D-MI)) will almost certainly continue to oppose KORUS, and Obama's big November deadline could become a very big problem, rather than some great solution. Don't think that's possible? Well, just ask yourself the following questions:
If nothing changes between now and November, will the President - who thus far has caved to every anti-trader out there, no matter how small - really stand up to US automakers and labor unions, as well as a very a large swath of his Democrat allies in Congress, and advance the agreement next year as he promised in Toronto last weekend? Or will he cave to the political pressure and use the missed deadline as an excuse to bag KORUS altogether (something like "well, we tried, but we just can't agree on an agreement that truly provides a 'level playing field,' so we're abandoning our efforts")?
If Obama takes the former route, then his KORUS announcement could, as [AEI's Phil] Levy states, open the door to real movement on US trade policy in 2011. If he chooses the latter, then KORUS will die, and so will any hope for US trade policy in the next two years.

Now, are you really willing to bet that he'll choose door number one?  Because I sure as heck ain't.
Sometimes I hate it when I'm right.

So here we are, and it's time to call those bets.  And unless US and Korean trade negotiators can complete a last-second hail mary pass that not even their bosses could pull off (recall from above: "Without presidential pressure and a deadline, there's less impetus to break an impasse, leaving the free-trade deal in limbo"), KORUS is toast, and so is US trade policy for the foreseeable future.

And that bet's biggest losers will be the American people.


Colin said...

What an embarrassment. This is fumbling the ball on the 5 yard line.

Scott said...

Agreed, Colin. And in the playoffs, when everybody's watching.