Korea is an important trading partner for the United States, supplying the United States with $56 billion in product in 2011 and taking U.S. exports valued at $41.3 billion last year, for combined two-way trade of nearly $100 billion. The Free Trade Agreement was negotiated under President George W. Bush, modified under President Obama, and submitted for implementing legislation in the United States last year. With both countries having taken the steps each views as necessary to fulfill the obligations of the Agreement, the Agreement goes into effect today, March 15th. Many tariffs in both countries are eliminated on the other’s goods effective today, with additional duty reductions on other products over the next few years. In the United States, the U.S. International Trade Commission has published the U.S. tariff eliminations and reductions in Modifications to the Harmonized Tariff Schedule of the United States to Implement the United States-Korea Free Trade Agreement, USITC Pub. 4308 (February 2012). Tariffs are eliminated today in the U.S. on thousands of tariff items for merchandise that qualifies under the FTA’s rules of origin as eligible. Tariff eliminations and reductions in the Korean tariff schedule can be reviewed here.
Similarly, USTR estimates that 80% of non-agricultural goods and some two-thirds of agricultural goods exported from the U.S. will enter duty free into Korea starting today. There are significant additional market opening opportunities in the services area as well. But just the duty reductions that occur today are impressive, with additional liberalization occurring in the next years. Korea is the world’s twelfth largest economy, making this FTA the most commercially significant one since the U.S. concluded the NAFTA. The Agreement covers more than trade in goods and services, including provisions on intellectual property rights, investment, and dispute settlement provisions, to name just a few.
But the easiest benefits to understand are the reduced tariffs both abroad and in the U.S. Tariffs in Korea are significantly higher, on average, than tariffs in the United States. For example, in the 2011 World Tariff Profiles put out by the WTO, ITC and UNCTAD, the simple average applied tariff rate in the U.S. on all products in 2010 was 3.5% (the U.S. bound rate was the same at 3.5%) while in the Republic of Korea the simple average applied rate on all products was 12.1% (with a bound rate 16.6%).
The Obama Administration believes that entry into force of the FTA will spur exports, helping the Administration meet its goal of doubling exports in five years and add jobs to the U.S. economy. Press accounts also predict that the removal of tariff and non-tariff barriers in Korea will help reduce the bilateral trade deficit with Korea (The U.S. deficit with Korea was $14.7 billion in 2011, up from $2.9 billion in 1996). See Wall Street Journal, March 15, 2012, at A11, “On Eve of Trade Deal, Seoul Awaits Cheaper Fish, Cars”.
Certainly the reduction in duties will speed up trade volumes in both directions and lead to expanded investment opportunities and increased investment flows between the countries. A study by the U.S. International Trade Commission in 2003 that looked at both FTAs and tariff reductions from trade rounds indicated that “Estimates of the direct effect of trade policy changes on trade growth attribute 15 to 25 percent of the historical increases in U.S. trade across all sectors to tariff reductions.” The Impact of Trade Agreements: Effect of the Tokyo Round, U.S.-Israel FTA, U.S.-Canada FTA, NAFTA, and the Uruguay Round on the U.S. Economy, Inv. TA-2111-1, USITC Pub. 3621 at xxv (August 2003); FTAs clearly broaden the scale and sectors of trade between countries. Id.
How large the increases will be will depend on a number of variables, but changes will not be uniform across sectors. Indeed, current trade trends reveal that substantial portions of the trade flows between the two countries are in just a few sectors of agriculture and industrial goods. Thus, U.S. imports from Korea are presently concentrated in three 2-digit HS categories, Chapters 84 (machinery and appliances), 85 (electrical machinery, TVs, etc.) and 87 (vehicles), which collectively account for $38.2 billion of the total $56.0 billion in U.S. imports of goods from Korea. The U.S. has a broader array of categories of merchandise that it would likely export to Korea, including many agricultural products where improved market access (if not blocked by non-tariff barriers) could significantly expand U.S. market opportunities. To review U.S. trade flows with Korea (imports, exports and trade balances), click here.
Critics will be watching to see whether the rights of the U.S. are fully respected by Korea, particularly in areas like agricultural access and rule of origin provisions for products like automobiles. In the rules of origin area, for example, concerns have been raised that the provisions may prove to permit non-FTA parties to benefit through large scale parts incorporation via assembly in Korea. Hopefully, the Obama Administration and the Congress will monitor developments closely and pursue U.S. rights if problems develop.
For now, may the market opening be a cause for celebration for America’s exporters and achieve that which the Administration has advertised and American companies, farmers and workers need and expect.
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