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Policy

Trade Deal In Limbo

Exporters seek ratification of U.S.-Korea trade pact amid rising protectionist sentiment in Congress

by Glenn Hess
January 11, 2010 | A version of this story appeared in Volume 88, Issue 2

ALLIES
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Credit: Lee Yong-ho/Pool/Sipa/Newscom
Lee (right) and Obama vowed to work toward ratification of the U.S.-Korea Free Trade Agreement during their meeting in Seoul on Nov. 19, 2009.
Credit: Lee Yong-ho/Pool/Sipa/Newscom
Lee (right) and Obama vowed to work toward ratification of the U.S.-Korea Free Trade Agreement during their meeting in Seoul on Nov. 19, 2009.

Business groups are calling on President Barack Obama to follow through on his recent pledge to win congressional approval of a long-delayed free-trade agreement between the U.S. and South Korea. This pact has significant implications for chemical manufacturers and other big exporting industries.

“Words must now be matched by actions,” says Thomas J. Donohue, president and chief executive officer of the U.S. Chamber of Commerce, the nation’s largest business lobby. “Expanding exports are our best ticket for creating jobs, reducing deficits, and restoring prosperity. The rest of the world is not standing around waiting for the U.S.”

The U.S. and South Korea signed the world’s largest bilateral free-trade agreement in 2007. But the deal’s ratification has been put on hold in both nations because of strong opposition by some stakeholders, particularly automakers and labor unions in the U.S.

The U.S. chemical industry, which shipped almost $5 billion worth of products to South Korea in 2008, wants to see chemical tariffs in the Asian nation eliminated as quickly as possible. South Korea is among the top 10 chemical-producing countries in the world and is the sixth-largest market for U.S. chemical exports.

“Our members view the South Korea free-trade agreement as the most commercially significant of the three pacts that have been negotiated and are awaiting votes in Congress,” says Justine Freisleben, assistant manager of government relations at the Society of Chemical Manufacturers & Affiliates (SOCMA), a trade group that lobbies on behalf of nearly 300 small and medium-sized chemical companies. “It represents a huge market for them.”

In addition to the deal with South Korea, bilateral trade promotion agreements with Colombia and Panama have also been on hold for more than two years. The Administration of former president George W. Bush negotiated all three pacts but was unable to persuade the Democratic-controlled Congress to approve any of them.

Obama has moved slowly on trade while focusing attention on health care reform and climate-change legislation. But on the last leg of his Asian tour in November 2009, the President indicated that he would strive to clear the obstacles that have blocked ratification of the U.S.-Korea trade accord.

“I am a strong believer that both countries can benefit from expanding our trade ties,” Obama remarked at a press conference in Seoul with South Korean President Lee Myung-bak. “I have told President Lee and his team that I am committed to seeing the two countries work together to move this agreement forward.”

Analysts have said that a free-trade pact between the two nations could lead to tens of thousands of new jobs in the U.S. The deal is the biggest of its kind for the U.S. since signing the North American Free Trade Agreement with Canada and Mexico in 1993. It is also Washington’s first bilateral trade pact with a major Asian economy.

South Korea is the seventh-largest U.S. trading partner, with two-way trade between the two nations reaching almost $83 billion in 2008. But the U.S. has been losing ground to its competitors in the Asia-Pacific region.

After being ranked as South Korea’s top trading partner in 2004, the U.S. now trails China, Japan, and the European Union. U.S. companies primarily export organic chemicals, agricultural products, aircraft, and machinery, and Korean firms sell cars, telecommunications equipment, and electronics in the U.S.

Under the U.S.-Korea accord, nearly 95% of trade between the two countries in industrial and consumer products would become duty-free within three years after the pact’s enactment, and most remaining tariffs would be eliminated within 10 years. The pact would also ensure that American investors in South Korea have the same rights as Korean investors and that intellectual property rights are protected.

For decades, both Republican and Democratic presidents have pursued free-trade agreements that opened markets for U.S. products. But many Democrats have become deeply skeptical of the free-trade agenda that has dominated U.S. policy, blaming it for heavy job losses, particularly in the manufacturing sector.

Obama sided with unions and other opponents of the Korean and Colombian agreements during the 2008 presidential election campaign. But since taking office, he has inched toward embracing the deals. In March 2009, Obama ordered the White House trade office to conduct a comprehensive review of the pending agreements, and he vowed to make tougher labor and environmental standards prerequisites for concluding trade deals in the future.

The main opposition to the pact with South Korea comes from the U.S. auto sector. It contends that the agreement does little to address nontariff barriers that would continue to give Korean car manufacturers open access to the U.S. market while doing almost nothing to increase U.S. exports to South Korea. “This deeply flawed trade deal contains no enforceable measures to open Korean markets to U.S.-built goods,” says Ron Gettelfinger, president of the United Auto Workers, an auto industry labor union.

South Korea imported just 10,000 U.S.-made vehicles in 2008 but exported more than 600,000 cars and light trucks to the U.S. That difference accounted for most of the $13.3 billion trade deficit the U.S. had with South Korea that year. “Something is obviously wrong with this picture, and this trade agreement will do nothing to make it right,” Gettelfinger asserts.

TRADING PARTNER
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Credit: Air Products & Chemicals
Although chemical plants in South Korea, such as this Air Products facility, depend on imported raw materials, the country has become a significant chemical producer.
Credit: Air Products & Chemicals
Although chemical plants in South Korea, such as this Air Products facility, depend on imported raw materials, the country has become a significant chemical producer.

Lawmakers in large car-producing states, such as Michigan, Illinois, and Ohio, have led the congressional opposition to the agreement, and they have demanded that additional safeguards be put in place to boost U.S. auto shipments to South Korea. On Nov. 19, 2009, Rep. John D. Dingell (D-Mich.) introduced a resolution in the House of Representatives calling on the Korean government to end its “unfair trade practices” related to the automotive industry.

“Before we move forward with the U.S.-Korea Free Trade Agreement, I feel it necessary to remind my colleagues in Congress that the draft agreement allows Korean discriminatory treatment of imported U.S. automobiles to perpetuate,” Dingell said in a statement. “While U.S. automakers continue to have grave difficulties accessing the Korean market, Congress should insist that the free-trade agreement between our two countries remedy this patently unbalanced state of affairs.”

At the news conference in Seoul on Nov. 19, South Korean President Lee signaled that his country was willing to revisit elements of the deal negotiated by the Bush Administration. “If there is a problem in the auto sector, I think we can have an opportunity to talk about this issue again. We are ready to do it,” Lee said. South Korea had previously opposed any formal renegotiation of the pact.

Industry officials are worried that further delay will undermine the competitiveness of U.S. products in a key Asian market, citing South Korea’s move to forge similar pacts with other countries. The Korean government signed a free-trade agreement with the EU in October 2009 and is actively seeking deals with China, Japan, Mexico, Canada, Colombia, and Peru.

“The clock is now ticking for the Administration and Congress to ensure that U.S. businesses and workers can stay competitive in Korea’s market,” says Tami Overby, vice president for Asia at the Chamber of Commerce. If the U.S. pact with South Korea is not in place when Korea’s agreement with the EU takes effect, “our global competitors will enjoy significant new market access in Korea before U.S. businesses do,” Overby notes. “This will cut us off from significant opportunities to create new U.S. economic growth and jobs at a time when our workers and businesses need them most.”

The failure to ratify the deal is alarming because South Korea is one of the fastest growing Asian markets for U.S. chemical exports, SOCMA’s Freisleben says. “It’s definitely a concern that Korea and other countries are moving forward and signing agreements within the region,” she says. “It seems like everyone else is liberalizing trade while the U.S. is on the sidelines. It’s too big of a market for us to be left out.”

Supporters of the pending trade deal with South Korea include the U.S.-Korea FTA Business Coalition, whose 800 members include companies and trade associations such as 3M, the American Natural Soda Ash Corp. (ANSAC), and SOCMA.

3M shipped more than $300 million worth of products to South Korea in 2008, including fluorinated fluids and gases for the semiconductor industry and brightness-enhancing films for televisions and other liquid-crystal display screens. Eliminating the 6.5–8.0% tariffs on these products will make them “more widely accessible to Korean electronics manufacturers,” says Doug Whitman, 3M’s trade compliance manager. “Continuing efforts to promote free and fair trade is critical to 3M’s success and growth as a company.”

Likewise, immediate elimination of South Korea’s 4% duty on soda ash would provide a competitive boost to U.S. producers “in a market now flooded by low-price imports from China,” says John M. Andrews, president of ANSAC, the international marketing arm of U.S. soda ash producers FMC, General Chemical, Solvay Chemicals, and OCI Chemicals. “ANSAC expects that the elimination of Korea’s import duty will result in an estimated $18 million to $20 million annual increase in U.S. soda ash exports to Korea,” Andrews says.

On Dec. 15, 2009, U.S. Trade Representative Ron Kirk, the Obama Administration’s top trade official, said his office is developing proposals in preparation for new talks with South Korea that will try to move the bilateral trade pact forward. “We are working to address outstanding concerns with the U.S.-Korea Free Trade Agreement, particularly with respect to autos, so that this Administration can present the agreement to Congress,” Kirk told a forum hosted by the Washington International Trade Association.

Obama could face strong resistance from many members of his own party if he seeks congressional approval of the agreement in 2010, even if he negotiates side deals to address the automotive and other concerns that have held up the pact.

“I can’t understand why we would want to pass a Bush-negotiated trade agreement, even with some side agreements that might sweeten the pot a little bit,” says Sen. Sherrod Brown (D-Ohio). “I don’t think the President will move on that. I think he will have great opposition if he does.”

Brown, a labor ally who is one of the Senate’s staunchest opponents of recent trade pacts, is sponsoring legislation (S. 2821) that would require a comprehensive review of the economic impact of existing trade agreements before any new deals could be negotiated.

“Trade done right means new jobs and new industry at home and means lifting up workers in developing nations,” Brown remarked at a Nov. 30, 2009, press conference. “For too long our nation’s trade policy has exploited workers, betrayed middle-class families, and destroyed communities. It is time for a trade policy that works for everyone, not just a few.”

A similar proposal (H.R. 3012), introduced in June 2009 by Rep. Michael Michaud (D-Maine), has gained the support of 130 Democratic cosponsors—nearly half of the party’s caucus in the House.

Free-trade advocates say they have to do a much better job of convincing members of Congress that deals such as the agreement with South Korea will bring net economic benefits to their states and districts.

“I think there needs to be a huge education effort to help people understand what the benefits of trade are, what happens when companies are exporting, and how it helps to create jobs here at home,” Freisleben says. “In talking with certain House members, there seems to be a misunderstanding about what’s going on. Trade can benefit domestic manufacturing; we aren’t exporting jobs abroad.”

A study released by the Chamber of Commerce this past November estimates that the U.S. could suffer a net loss of nearly 350,000 jobs and $35 billion in export sales if it fails to implement the pending trade agreement with South Korea while the EU and Korea move ahead with their bilateral pact.

“If the U.S. fails to advance its trade agenda, American workers will pay a price and lose jobs,” says John G. Murphy, the chamber’s vice president of international affairs. “There is no time for delay. If we fail to move forward with the trade agenda, the upshot will be more loss of jobs.”

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Freisleben says the chemical industry is encouraged that Administration officials have stated that boosting exports is a crucial part of the President’s economic agenda. Federal agencies, such as the Small Business Administration and the Export-Import Bank of the U.S., “are really putting a focus on export-oriented growth, particularly with small to medium-sized manufacturers, realizing that is where innovation takes place and where job growth comes from,” she remarks.

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