With the deal finally passed ...
Will the Korea-U.S. FTA be good for Korea?


Rocky road to ratification

After years of bitter dispute, the Korea-U.S. Free Trade Agreement passed the National Assembly on Nov. 22 in dramatic fashion. But opposition to the controversial pact, which is expected to come into effect in January, has far from evaporated. Thousands of protestors have taken to the streets demanding the pact be scrapped or renegotiated, leading one local newspaper editorial to speculate whether demonstrations could end up on a similar scale to the 2008 beef protests.

For opponents, the gripes are many, from the projected negative effects of the deal on local industry and agriculture, to the perceived unfairness of the investor-state dispute settlement system. Supporters, however, argue that the FTA will boost trade, thereby creating wealth and jobs. To them, the benefits of eased access to the biggest market on the planet for an economy as dependent on exports as Korea’s are obvious. Time and experience will determine which viewpoint the majority of Koreans subscribe to in the long haul.

Yes: Free trade means greater prosperity

Out of a curious sense that Korean companies deserve special government privileges at the expense of Korean consumers ― specifically, immunity from competition ― hardline members of the opposition Democratic Party did their best to torpedo the free trade agreement between Korea and the United States.

These DP legislators, additionally believing that no man is ever too old to indulge his childish instincts, finally resorted to physical violence after failing to nitpick the deal to death. Fortunately, the benefits to both countries from this agreement will ultimately overshadow such shameless antics.

Korea’s political left has lately been in a state of pique over a technical little corner of the FTA known as investor-state dispute settlement, which allows a private investor from one country to seek compensation for damage the investor suffers as a result of policies enacted by another state which are not consistent with the terms of the trade agreement.

Dating back to the North American Free Trade Agreement, ISD provisions have come under fire for their lack of transparency, which critics say undermines democracy and national sovereignty. The ISD provisions contained in NAFTA were based on commercial arbitration models, which typically operate free from public scrutiny and which undermined public support for the process. Beginning in 2006, however, the International Center for the Settlement of Investment Disputes amended its rules to allow greater public participation, in particular by accepting amicus curiae briefs. As a result, private citizens and NGOs who are not directly party to a given case may now submit their own opinions to assist the arbitrator in reaching an informed and transparent decision.

As in Korea, however, political opposition to the ISD settlement procedure is typically premised not on any high-minded defense of political ideals but rather on politicians’ ability to dole out goodies to favored constituencies. No wonder, then, that Mexican politicians were miffed when, in the mid-2000s, three U.S. producers of corn syrup had the gall to challenge a Mexican tax on soft drinks made with corn syrup but which did not apply to those sweetened with sugar cane. A NAFTA tribunal agreed that such a tax was plainly a policy intended to protect a powerful local interest group, even as it punished consumers, and awarded the American companies a combined total of $169 million in damages. DP members in the National Assembly obviously knew that the same could happen to their plans to coddle favored patrons if the KORUS FTA was approved, and said as much in the local press.

As expected, once their protestations against ISD lost steam, and when the KORUS was finally brought to a vote, DP lawmakers instigated the latest “Rumble in Yeouido,” wherein National Assembly legislators found themselves on international television behaving like adolescent boys. Such violence, of course, is a poetic commentary on the matter at hand, specifically trade restrictions. After all, as the writer P.J. O’Rourke has noted, a restriction is hardly a restriction unless coercion ― that is, violence, real or threatened ― is involved. For years, Korean consumers have been coerced into aligning their purchasing decisions with the whims of the political class, a power which certain politicians will not relinquish without a literal fight.

The KORUS FTA is far from a perfect document ― to be sure, it does not go far enough in liberalizing Korea’s markets ― but it is a step in the right direction. If the Democrats had been serious in their critique of the ISD resolution procedure, they would have offered an alternative model of neutral dispute resolution, one that would protect investors of both nations against injurious policies and governmental breach of contract. Their unwillingness to do so merely underscores their fear of a predictable rule of law to which they themselves would be subject.

Since at least the times of Adam Smith and David Ricardo, economists have understood the practical benefits of free trade. In the same way that cooperating with people outside of your own home makes you more prosperous than you would be if you tried to live a life of total self-sufficiency (imagine the poverty!), trade between people of different nations allows humans to more fully exploit the benefits of specialization and become wealthier than if they insisted on producing everything within their own borders.

This is especially pertinent in a resource-poor area like South Korea, which would quickly revert to a primitive standard of living were its citizens to insist on complete autarky. Indeed, beginning the early 1960s, Korea’s entrance into a rapidly expanding global market allowed it to embark upon a path that has led to unprecedented levels of prosperity for all Koreans. The KORUS FTA, which in tandem with the Korea-EU FTA gives Korea improved access to the world’s two largest markets, will be one more step along this road. 

By Aaron McKenzie

Aaron McKenzie is a research fellow at the Center for Free Enterprise in Seoul. ― Ed.


No: It only helps the richest 1 percent

When it comes to the benefits of the Korea-U.S. FTA, a simple binary comparison between Korea and the U.S. is misleading. For big corporations the deal is good regardless of their nationality. From the pact, Samsung may sell more Galaxy products in the U.S. Also Pfizer may make more money in Korea when the deal goes into effect. But it is unclear if the general public either in the U.S. or in Korea stands to benefit from the FTA. Its preamble says the deal desires “to raise living standards, promote economic growth and stability, create new employment opportunities, and improve the general welfare” in both countries. The mechanism to achieve this wish, however, has little to do with the welfare or living standards of the general public: The FTA regards any measures to protect public health, the environment and healthy communities as trade barriers that should be reduced or eliminated.

For instance, protection of small and medium sized companies is an obligation of the Korean state imposed by the Constitution. To fulfill this duty, lawmakers last year agreed, with difficulty, to provide statutory protective measures for mom-and-pop shops. And last year the Korean government established a so-called “win-win growth” committee to support SMEs. The main function of the committee is to select business sectors or products that are proper only for SMEs and to recommend big corporations to reduce or stop doing business in the selected sectors. But none of these measures are permitted in the FTA. The protective measures of mom-and-pop shops conflict with the market access obligation under Article 12.4 and the function of the win-win growth committee may provoke an investor-state dispute under Chapter 11 of the FTA. Moreover, the school lunch program cannot be operated in a way to provide kids with local food, which is currently running in the U.S.

Our food system, which is backed by the domestic agricultural industry, is the most vulnerable sector. The market opening of agriculture is incomparable with other trade agreements. In the case of the Korea-Chile FTA, 29 percent of agricultural products are exempt from tariff removal. But in the Korea-U.S. FTA, only 1.9 percent products are excluded from the tariff elimination. According to the American Farm Bureau Federation, American farmers’ exports to Korea will increase by $1.8 billion every year under the FTA. And the governmental subsidy to the U.S. agricultural industry is as much as $20 billion every year. Korean farmers are not in a position to compete with U.S. farmers, and in this sense the FTA is not fair.

From last month more and more Korean people began to express their opposition to the deal. This is because they got to know, partly inspired by the Occupy movement, the FTA is not for them, it’s only for the 1 percent. Nonetheless, the ruling Grand National Party rushed the deal through last week. It seems to me that they have a religion: FTAs are always good for our country and what they are doing serves national interests. But even to them the concept of the national interest is vague and undefined. It is rhetoric only used to decorate their groundless attitude.

From my experience with debates in the National Assembly, nobody in the ruling party fully understands what the Korea-U.S. FTA is. I haven’t seen anybody in the GNP who has actually read the text of the agreement. They don’t understand the true meaning of the issues that the opposition party members called “thorny.” The FTA is very complicated legal document. It covers extensively diverse subject matter. Along with commercial products, it contains tens of hundreds of provisions on intellectual property, investment, government procurement, financial services, environment, labor, telecommunications, electronic commerce, anti-trust and so on. There is a saying: The devil is in the details. If the members of the ruling party do not understand the specific provisions, they are not eligible to vote on the deal, needless to mention compromise with the opposition parties.

Nevertheless, the governing party passed the deal in an anti-democratic process. When the chairperson of the Nation Assembly called for the competent committee to finish its discussion on the FTA bill, there remained less than one hour and most of the committee members of the GNP sit in the plenary session room. For the chairperson to bypass the committee and introduce the deal to the plenary session, the committee has to fail to complete its discussion without any good reason. But at that time, there was a good reason. Further, the plenary session on Nov. 22 was not on the calendar. If they believed that they were doing for it the national interest and for our people, why they did they do it in an anti-democratic way and behind closed doors?

Now, what the people, the 99 percent, should do is stop the deal entering into force. But if the deal goes into effect next year as planned by both governments, the people must turn over the political power structure in the coming general election and the presidential election next year and terminate the agreement. Technically, termination of the deal is very simple. According to Article 24.5(2), the agreement shall terminate 180 days after the date either party notifies the other party that it wishes to terminate the agreement. 

By Nam Hee-sob

Nam Hee-sob is a chief member of the policy committee of the Korean Alliance against the Korea-U.S. FTA ― Ed.