Trading Without America

Trading Without America
August 7, 2007; Page A10
Wall Street Journal

Washington's political class likes to fret about China's rising influence, especially in Asia. So it's nothing short of astonishing that the U.S. Congress seems prepared to kill a U.S.-South Korea Free Trade Agreement that would strengthen America's economic and strategic position on China's doorstep for years to come.
[Trade Fever]
Only two months after pressuring Seoul to insert labor and environmental concessions, House Democrats now say they won't approve the FTA in any case. Their nominal excuse is that the car import provisions aren't good enough, but Senator Hillary Clinton also claims the pact will increase the U.S. trade deficit and cost middle-class jobs. Presidential hopefuls John Edwards and Barack Obama are taking the same AFL-CIO line. If they prevail, they'll be doing great harm to U.S. economic leadership in Asia and the world.
The U.S.-South Korea FTA is the most ambitious free trade agreement Washington has signed outside North America. Running to 1,400 pages, it represents a radical opening of Korea's market in multiple areas, including finance, services, agriculture and, yes, automobiles. Economists estimate liberalization could raise Korea's GDP by as much as 2% over time, as competition drives down prices and promotes innovation. Korea is the world's 10th-largest economy, and already America's 7th-largest export market, but the FTA would open the country to far more American goods.
The pact is also vital to continued U.S. influence in Northeast Asia. China is already South Korea's largest trading partner, and Chinese Premier Wen Jiabao has said he wants to negotiate an FTA with Korea "as soon as possible." This is part of the larger Chinese attempt to expand their political and economic influence throughout Asia and the Pacific: Beijing has signed a deal with the 11-member Association of Southeast Asian nations and is negotiating with Australia and New Zealand. By defeating the Korean FTA, Congress would be pushing Seoul further into China's orbit and diminishing American influence.
More broadly, as the Doha multilateral trade round sputters, the rest of the world is pursuing FTAs whether or not the U.S. joins the party. (See the nearby chart.) This is not a desirable trend if it means a world dividing into preferential trade blocs. We'd prefer a world with everyone trading by the same open-market rules. But if Doha is going to fail, it makes no sense for the U.S. to sit on the sidelines and let other countries give their companies and workers an edge over Americans in growing economies. While Congress fiddles, the European Union is pressing its own talks on a trade pact with Seoul.
In any case, the U.S.-Korea FTA is a big new opportunity for American goods and services. As soon as the deal goes into force, 95% of tariffs on consumer and industrial goods will be eliminated. Within a decade, almost all remaining tariffs will hit zero. In financial services, U.S. firms will have carte blanche to start up or acquire South Korean companies, part of Seoul's aspiration to become a regional financial hub.
Agriculture has long been a bulwark of Korean protectionism, but under the deal more than half of all U.S. farm exports will receive duty-free treatment. The pact also guarantees that U.S. investors will be treated on a level playing field in Korean courts. And it sets up an international arbitration panel for U.S. firms that believe they've been wronged by the Korean government.
Even in autos, the pact is a big improvement over South Korea's current protectionism. Last year Korea imported 4,344 U.S.-made passenger vehicles, while the U.S. imported more than 695,000 from Korea. Seoul has also failed to follow through on its 1995 and 1998 auto agreements with the U.S., but the biggest losers on that score have been Korean consumers. The free-trade pact would eliminate South Korea's 8% tariff on passenger cars (versus 2.5% in the U.S.), and it would introduce a new mechanism to provide a head's-up about Korea's bad habit of imposing non-tariff import barriers.
The problem with U.S. autos in Korea is more than trade barriers, by the way. European car makers are subject to similar barriers, but their sales are doing just fine. It's also worth noting that, while Ford and Chrysler oppose the FTA, General Motors does not, perhaps because it is doing well in its joint venture with Daewoo.
No bilateral trade agreement is ideal, but any pact should be judged on whether it opens markets more than current law and in a way that benefits the broad national interest. The U.S.-South Korea trade pact clearly meets those tests. Defeating it will send a message of American weakness and insularity to the fastest-growing region of the world.