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United States and South Korean trade officials completed an historic agreement in 2007 that should expand two-way trade and investment in goods and services well beyond the more than $100 billion recorded last year and buttress the already solid bilateral trade relationship. In terms of U.S. trade and investment interests, the KORUS Free Trade Agreement (FTA) is the largest bilateral U.S. trade initiative since the North American Free Trade Agreement (NAFTA). However, implementation of the Korea-United States Free Trade Agreement (KORUS FTA) has not progressed and remains a major challenge for both governments in 2008. This short paper assesses the current status of the debate in each country and sets out recommendations for advancing the ratification process so that the pact can enter into force in 2009.
At the start, it is worth recalling why each country pursued the KORUS FTA. The idea of a bilateral FTA had been vetted off and on for the past two decades. Original overtures came from Korea in the 1980s, driven primarily by concerns that the U.S.-Canada FTA (and later NAFTA) would put Korean exporters at a competitive disadvantage vis-à-vis North American firms in the U.S. market. Each time, however, U.S. demands that the negotiations include liberalization of agricultural trade put an end to the preparatory consultations.
Times change and so, too, do national objectives and the global economic environment in which trade and investment takes place. From the 1990s on and accelerating since the turn of the century, Korea has faced increasingly strong competition from China—even as Korean trade and investment with China has soared and China has replaced the United States and Japan as Korea’s leading trading partner.
Keeping up with China (and recently India) and the broad challenges of globalization, adapting to the changing demographics of Korean society, and planning ahead for closer integration with North Korea led Korean policymakers to rethink their economic development strategy. Since 2000, new studies have been commissioned in both countries to assess the economic and political benefits and costs of negotiating a comprehensive FTA. While agriculture remained a formidable obstacle to trade talks, Korean officials realized by mid-decade that they had to do something to increase investment and accelerate productivity growth in their economy. The solution included both domestic reforms and trade liberalization. Korean officials hoped that FTA disciplines would “lock in” economic reforms and thus yield a more open and competitive domestic market, spurring innovation in Korean industry, inflows of foreign direct investment (FDI), and knock-on improvements in corporate governance, the accounting system, and government bureaucracy. These gains, in turn, would enhance prospects for achieving the broader vision of becoming the economic and financial hub of northeast Asia.
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