Friday, December 3, 2010

"Success": Obama Administration Finalizes Already-Finished Free Trade Agreement by Making It Less Free

At long last, the US-Korea FTA looks to be headed for the very-delayed finish line:
The United States and South Korea have a reached a deal on auto issues that have blocked congressional approval of a free-trade agreement for three years, sources familiar with the talks said on Friday.

As part of the deal, South Korea agreed to let the United States keep a 2.5 percent tariff on Korean-built cars for five more years, rather than cut it immediately, the sources said.

U.S. negotiators wrapped up several days of talks with South Korean official early on Friday and left the hotel venue north of Washington in a jubilant mood.

"We made substantial progress in our discussions," U.S. Trade Representative Ron Kirk said in a statement after a final meeting with South Korean Trade Minister Kim Jong-hoon.

"It's time for the leaders to review this progress before we move forward," Kirk said.

Once that has been done, "then we will synchronize the same time and date to go into a detailed announcement," the South Korean trade minister said before heading to the airport.
First, allow me to publicly congratulate American and Korean trade negotiators for - what appears to be at least - successfully modifying the completed-and-signed-in-2007 KORUS in a way that (a) makes the Obama administration now feel warm and fuzzy about sending the deal to Congress; and (b) kept the Koreans from walking away in disgust.

So congrats, USTR!  I must admit that, after you and the President totally flubbed  his original, self-imposed deadline for re-completing the deal and then he publicly pussyfooted with Congress' most trade-averse members, I had my doubts that you could get it done.  But you persevered, navigated the political minefield and (tentatively) finished the job.  And now it appears that the long-stalled, multi-billion-dollar trade agreement will move forward.  Nice work!

Ok, now that I have the much-deserved kudos out of the way, let's start the (totally inevitable) laundry-list of gripes.  (USTR, you might want to stop reading at this point.)

The vast majority of my issues stem from the "deal" that the negotiators achieved to reach an agreement.  It appears that, as noted above, a major breakthrough in the negotiations was that, instead of immediately eliminating its 2.5% tariff on (non-truck) passenger vehicles from Korea, the US will maintain it for 5 years and then eliminate it.  Of course, this "achievement" comes at a price: according to National Journal, Korea's 8% tariff on similar American cars will no longer be eliminated immediately and instead will be halved, with the remaining 4% eliminated pursuant to the same 5 year schedule. 

But wait, there's more! 

According to the White House factsheet on today's deal (not online at presstime), the US now also gets to maintain its 25% truck tariff until the FTA's eighth year:
The 2007 agreement would have required the United States to start reducing its tariff on Korean trucks immediately and phase it out by the agreement’s tenth year. The 2010 supplemental agreement allows the United States to maintain its 25 percent truck tariff until the eighth year and then phase it out by the tenth year – but holds Korea to its original commitment to eliminate its 10 percent tariff on U.S. trucks immediately
You did not read that wrong: the tariff is 25%, and now it won't budge until the EIGHTH YEAR.  That's seven glorious years of huge domestic market protectionism.  Too bad, American truck consumers! 

The factsheet lists other goodies, but these are the two biggest, in my humble opinion.  And have no doubt: these are big deals.  But the whole thing smells pretty bad, and here's why:
  • That USTR was able to complete these negotiations only 3 weeks after a very public and embarrassing episode by the President in Seoul does not inspire much confidence in this administration's political competence.  After the President announced the G20 deadline in June, USTR waited months to approach the Koreans, never got a deal done, and the President ended up looking pretty foolish.  Yet the two sides were able to hammer it out only a few weeks later?  Two words come to mind here: amateur hour.
  • That the the fate of KORUS hinged on these tariffs makes clear that the public objections of Ford, the UAW and their congressional allies like Rep. Levin (D-MI) - i.e., that Korea's market was too closed, and that Korean non-tariff barriers prevented "fair" trade - were window-dressing at best and total BS at worst.  Instead, this was about protectionism (from Korean car and truck imports), plain and simple. (Of course, if you had listened to your humble correspondent, you would have already known this.)  Indeed, relative to the original agreement, this deal actually closes the Korean market to US cars, and yet, as that National Journal article above makes clear, the US automakers are totally on board!  What a crock.  (And how does the administration plan to reconcile this deal's closing of the Korean auto market with Obama's big "National Export Initiative"?  Anyone?)
  • As noted by the WSJ this morning, the elimination of that 2.5% tariff is pretty economically meaningless for two big reasons: (i) the Koreans (Kia and Hyundai) are already selling tons of cars here tariff-free because they produce them in the United States (at non-unions shops in the South, by the way) - in fact, according to the Journal, half of Hyundai's US sales are of US-made cars; (ii) normal currency fluctuations would "dwarf" the economic impact of the 2.5% tariff reductions ("In November alone, the dollar rose 0.4% against the South Korean won, virtually equivalent to the level a one-year tariff reduction would provide").  In short, during the worst economic period since the Great Depression, we delayed - for 2 years! - implementation of an FTA worth anywhere from $17 to $40 billion for (among other things) what amounts to a rounding error.  Seriously?
  • And that's just the economic pain caused by this ridiculous delay.  It's totally unclear just how much damage the debacle in Seoul has done to the United States' ability to negotiate other trade agreements, including the Trans-Pacific Partnership and the sorta-revived WTO Doha Round.  Just think of it this way: if you were a US trading partner, and you just saw the White House's willingness to publicly embarrass itself and jeopardize a hugely valuable trade deal just to placate a powerful domestic constituency who was (loudly) complaining about a relatively tiny amount of trade, would you put forth your best efforts to get a deal done?  Would you, say, put forth an ambitious Doha Round market access offer that hinged on the Obama administration standing up to the US Farm Lobby?  Ummmmmmm.
  • Finally, think about what just happened here, and the awful lesson it provides.  The Obama administration sat on a signed-and-completed multi-billion dollar free trade agreement for two years, just so that they could re-open it and increase tariffs at home and abroad - to make the agreement less free.  If this is a "victory," then what's the point of all those other nasty tariff reductions?  Talk about a horrible lesson for the kids out there.  Then again, this is the same administration that "solved" the problem of our WTO-illegal cotton subsidies by subsidizing the complaining Brazilian cotton farmers, so we shouldn't really be surprised that they're not really worried about setting a good free trade example, now should we?
I actually have several other issues with today's deal, but I think those will suffice for now.  But, hey, despite these gripes, let's not get too upset here.  We are talking about a relatively insignificant aspect of a very big, very good FTA.  And we are seeing the first proactive commitment of the Obama administration to free trade in any way, shape or form (albeit a pretty ugly form).  And if Congress passes the deal, it will finally reaffirm to our trading partners that the United States is still open for business and not about to fall into the protectionist abyss.  So in the grand scheme of things, it's a good day. 

But it's certainly not a Great Day, and, with a little planning, principle and backbone, it easily could have been. 

I guess that's just too much to ask with this administration.   But at this stage, I'll take what I can get.

[UPDATE: The White House KORUS fact sheets are available here.  Note another protectionist addition: a special "safeguard" mechanism which allows the US to ramp up tariffs on Korean autos if they "surge" into the US market after the agreement's implementation. ]


Anonymous said...

I like the fact that you said "Ford [and] the UAW" rather then "Ford and GM". Ford is still Ford, but GM is truly now the UAW's company

Anonymous said...

Congratulations on getting some recognition at the Power Line blog. I hope more blogs start to link to you.

Keep up the good work!