The Proposed U.S.-South Korea Free Trade Agreement (KORUS FTA): Provisions and Implications
Prepared for Members and Committees of Congress
On June 30, 2007, U.S. and South Korean trade officials signed the proposed U.S.-South Korean
Free Trade Agreement (KORUS FTA) for their respective countries. If approved, the KORUS
FTA would be the largest FTA that South Korea has signed to date and would be the second
largest (next to North American Free Trade Agreement, NAFTA) in which the United States
participates. South Korea is the seventh-largest trading partner of the United States and the United
States is South Korea’s third largest trading partner. Various studies conclude that the agreement
would increase bilateral trade and investment flows.
The final text of the proposed KORUS FTA covers a wide range of trade and investment issues
and, therefore, could have wide economic implications for both the United States and South
Korea. The KORUS FTA includes issues on which the two countries achieved early agreement,
such as the elimination on tariffs on trade in most manufactured goods and the partial
liberalization in services trade. The agreement also includes provisions on a number of very
sensitive issues, such as autos, agriculture, and trade remedies, on which agreement was reached
only during the final hours of negotiations.
If the agreement is to enter into force, Congress will have to approve implementation legislation.
The negotiations were conducted under the trade promotion authority (TPA), also called fast-track
trade authority, that the Congress granted the President under the Bipartisan Trade Promotion Act
of 2002 (P.L. 107-210). The authority allows the President to enter into trade agreements that
receive expedited congressional consideration (no amendments and limited debate). The White
House has not indicated when it will send the draft implementing legislation to Congress. (The
TPA sets no deadline for the President to do this.)
While a broad swath of the U.S. business community supports the agreement, the KORUS FTA
faces opposition from some groups, including some auto and steel manufacturers and labor
unions. Agricultural groups and some Members of Congress now are monitoring the flow of U.S.
beef to South Korea following the Seoul government’s decision to accept such imports—a move
that South Korea hopes will make it easier for the White House to submit the agreement to
Congress. Some U.S. supporters view passage of the KORUS FTA as important to secure new
opportunities in the South Korean market, while opponents claim that the KORUS FTA does not
go far enough. Other observers have suggested the outcome of the KORUS FTA could have
implications for the U.S.-South Korean alliance as a whole, as well as on U.S. trade policy and
Asia policy. Differences between the White House and the Democratic leadership in the Congress
over the implications of the KORUS FTA have made the timing and even the likelihood of the
President’s submission and Congress’s subsequent consideration of implementing legislation
uncertain. This report will be updated as events warrant.
The KORUS FTA in a Nutshell.......................................................................................................2
Agriculture .................................................................................................................... ............ 2
Automobiles .............................................................................................................................. 3
Other Key Provisions................................................................................................................4
Estimates of the Overall Economic Effects of a KORUS FTA.......................................................5
An Overview of the U.S.-South Korean Economic Relationship...................................................6
U.S. and South Korean Objectives in An FTA................................................................................8
Sector-Specific Issues and the KORUS FTA..................................................................................9
Agriculture and Sanitary and Phytosanitary Issues...................................................................9
Overvi ew ....................................................................................................................... ...... 9
Beef .................................................................................................................................... 11
Rice ........................................................................................................................... ........ 12
Orange s ........................................................................................................................ ..... 13
Sanitary and Phytosanitary Provisions..............................................................................13
Autos ....................................................................................................................................... 14
Automotive Trade Provisions in KORUS FTA.................................................................15
Expected Impact and Industry Reaction...........................................................................17
Textiles and Apparel................................................................................................................20
Other Manufactured Goods.....................................................................................................22
Capital Goods Machinery and Equipment........................................................................22
Electronic Products and Components...............................................................................23
St eel .......................................................................................................................... ........ 23
Pharmaceuticals and Medical Devices....................................................................................24
Financial and Other Services...................................................................................................26
Vi sas .......................................................................................................................... ........ 29
Kaesong Industrial Complex...................................................................................................32
Intellectual Property Rights.....................................................................................................35
Labor Rights and Conditions..................................................................................................36
Tr ansparency ........................................................................................................................... 38
Institutional Provisions and Dispute Settlement.....................................................................38
Other Technical Provisions.....................................................................................................39
Next Steps, Implications, and the Emerging Debate.....................................................................39
Implications for South Korea and the U.S.-ROK Alliance...............................................40
Implications for U.S. Trade Policy and U.S. Asia Policy.................................................41
Table 1. Annual U.S.-South Korea Merchandise Trade, Selected Years......................................6
Table 2. Asymmetrical Economic Interdependence (2007)............................................................7
Appendix A. South Korea’s Rules on Imports of U.S. Beef.........................................................43
Appendix B. South Korean Motor Vehicle Manufacturing...........................................................44
Author Contact Information..........................................................................................................45
On June 30, 2007, United States Trade Representative Susan Schwab and South Korean Foreign
Trade Minister Kim Hyung-chong signed the proposed U.S.-South Korean Free Trade Agreement 1
(KORUS FTA) for their respective countries. If approved, the KORUS FTA would be the largest
FTA South Korea has signed to date and would be the second largest (next to the North American
Free Trade Agreement) in which the United States currently participates. South Korea is the
United States’s seventh-largest trading partner and the KORUS FTA, if enacted, is expected to
expand bilateral trade and investment flows according to some studies.
The final text of the proposed free trade agreement (FTA) covers a wide range of trade and
investment issues and, therefore, could have wide economic implications for both the United
States and South Korea. The subjects include ones on which the two countries achieved early
agreement, such as the elimination on tariffs on trade in most manufactured goods and the
liberalization in services trade. But the text also includes a number of very sensitive issues on
which agreement was reached only during the final hours of negotiations—autos, agriculture, and
trade remedies, among others.
Congress will have to approve implementation legislation for the KORUS FTA before it can enter
into force. The negotiations were conducted under the trade promotion authority (TPA), also
called fast-track trade authority, that the Congress granted the President under the Bipartisan
Trade Promotion Act of 2002 (the act) (P.L. 107-210). The authority allows the President to enter
into trade agreements that receive expedited congressional consideration (no amendments and
limited debate). The White House has not indicated when it will send the draft implementing
legislation to Congress. (The TPA sets no deadline for the President to do this.) South Korea’s
President, Lee Myung-bak, has said he hopes to have the South Korean National Assembly and
pass the agreement soon. However, an uproar in South Korea over the April 2008 beef agreement
appears to have made many politicians in Seoul wary of trying to pass the agreement before the
U.S. Congress votes.
The United States and South Korea entered into the KORUS FTA as a means to further solidify
an already strong economic relationship by reducing barriers to trade and investment between
them and to resolve long festering economic issues. The United States specifically sought
increased access to South Korean markets for agricultural products, services, and foreign
investment. Of importance to South Korea was a change in U.S. trade remedy procedures which it
considers to be discriminatory and U.S. recognition of products made in an industrial park in
North Korea as eligible for preferential treatment under the KORUS FTA.
Supporters of the FTA argue that failure to approve the KORUS FTA would allow those
opportunities to slip away. However, some opponents of the KORUS FTA have argued that the
agreement failed to go far enough in addressing South Korean trade barriers and would be a lost
opportunity if approved in its current form. A congressionally mandated study by the United
States International Trade Commission (USITC) concluded that investment and trade between the 2
United States and South Korea would increase modestly as a result of the KORUS FTA. This
1 For more specific information, you may contact the following CRS analysts: William Cooper, x7-7749 (general
questions on the KORUS FTA); Stephen Cooney, x7-4887 (autos and other industrial goods); Vivian Jones, x7-7823
(trade remedies); Remy Jurenas, x7-7281 (agricultural trade); and Mark Manyin, x7-7653 (the U.S.-South Korean
bilateral relationship and security issues).
2 United States International Trade Commission (USITC). U.S.-Korea Free Trade Agreement: Potential Economy-wide
and Selected Sectoral Effects. Investigation No. TA-2104-24. USITC Publication 3949. September 2007.
result is in line with other similar studies. In general and in the short-to-medium term, the
KORUS FTA’s largest commercial effects are expected to be microeconomic in nature. The U.S.
services and agriculture industries, for instance, are expected to reap significant benefits if the
agreement is implemented.
Many observers have argued that in addition to its economic implications, the KORUS FTA
would have diplomatic and security implications. For example, they have suggested that it would
help to deepen the U.S.-South Korean alliance. The United States and South Korea have been
allies since the United States intervened on the Korean Peninsula in 1950 and fought to repel a
North Korean takeover of South Korea. Over 33,000 U.S. troops were killed and over 100,000 3
were wounded during the three-year conflict. South Korea subsequently has assisted U.S.
deployments in other conflicts, most recently by deploying over 3,000 troops to play a non-
combat role in Iraq. However, some counter this by positing that the KORUS FTA need not be
seen as a necessary, let alone sufficient, condition for enhancing the U.S.-ROK alliance. Mutual
interests on critical issues pertaining to North Korea and the rest of the region will continue to
require close cooperation between the two countries in the national security sphere. Indeed, in
many respects, the KORUS FTA’s fate may have more profound implications for U.S. trade
policy and East Asia policy than for U.S.-South Korean relations. For instance, some have also
suggested that a KORUS FTA would help to solidify the U.S. presence in East Asia to
counterbalance the increasing influence of China while failure to pass it could harm the alliance.
This report is designed to assist Members of the 110th Congress as they consider the costs and
benefits of the KORUS FTA. It examines the provisions of the KORUS FTA in the context of the
overall U.S.-South Korean economic relationship, U.S. objectives, and South Korean objectives.
The report will be updated as events warrant.
The KORUS FTA was the product of much compromise. As negotiators from both countries
stated, each country was able to accomplish some of its objectives, but neither side got everything
it wanted. For example, South Korea made concessions in agriculture and services while the
United States made concessions on rice and textiles. Yet, U.S. car manufacturers felt that South
Korea did not go far enough in addressing barriers to auto imports and South Korea would have
liked to have more U.S. concessions on trade remedies.
Some highlights of the results of the agreement are provided below. Background information on a
more detailed examination of the agreement’s provisions is provided in the main sections of this
Under the KORUS FTA’s agricultural provisions, South Korea immediately would grant duty-free
status to almost two-thirds of current U.S. agricultural exports. Tariffs and import quotas on most
other agricultural goods would be phased out within 10 years, with the remaining commodities
3 For more on the U.S.-South Korean alliance, see CRS Report RL33567, Korea-U.S. Relations: Issues for Congress,
by Larry A. Niksch.
and products subject to provisions that phase out such protection by year 23. Exports of seven
U.S. products (skim and whole milk powders, evaporated milk, in-season oranges, potatoes for
table use, honey, and identity-preserved soybeans for food use) would be subject to import quotas
that slowly expand in perpetuity.
Much effort went into negotiating provisions covering three agricultural commodities of export
interest to the United States. Under the KORUS FTA, South Korea agreed to eliminate its 40%
tariff on beef muscle meats imported from the United States over a 15 year period. Also, South
Korea would have the right to impose safeguard tariffs on a temporary basis in response to any
potential surge in imports of U.S. beef meats above specified levels. However, negotiators did not
reach a breakthrough by the end of the talks on the separate but parallel issue of how to resolve
differences on the terms of access for all U.S. beef in a way that would address Korea’s human
health concerns arising from the 2003 discovery of mad cow disease in the U.S. cattle herd. Sales
of U.S. boneless beef from cattle aged less than 30 months, though, did resume in April 2007
under the terms of a separate agreement reached in early 2006. However, Korean inspectors’
discovery of prohibited cattle parts in some boxes of shipped beef that did not meet those terms in
October 2007 temporarily placed on hold retail sales of U.S. boneless beef. The new South
Korean president, seeking to remove this impediment to congressional consideration of the
KORUS FTA, instructed his negotiators to resolve this longstanding bilateral dispute. On April
18, 2008, both countries reached an agreement that will allow sales in the Korean market of
boneless and in-bone U.S. beef from all cattle, irrespective of age, as long as risk materials known
to transmit mad cow disease are removed. However, Korean public concerns about the safety of
U.S. beef and strong opposition to this agreement prompted the Korean government to seek
changes. In late June, both countries confirmed a “voluntary private sector” arrangement that will
allow Korean firms to import U.S. beef produced only from cattle less than 30 months old, and
announced some changes to the April agreement. Both countries view the voluntary arrangement
as a transitional step intended to improve Korean consumer confidence in U.S. beef.
The KORUS FTA does not give U.S. rice and rice products any preferential access to South
Korea’s market. The agreement only requires South Korea to continue to abide by its multilateral
trade commitments to increase rice imports. Access for U.S. citrus products was not settled until
just before the talks concluded. With South Korea protecting its orange sector by a 50% tariff,
negotiators compromised on a multi-part solution. A small duty free quota was created for “in-
season” U.S. navel oranges that would grow slowly in perpetuity. Sales during this September to
February period in excess of this quota would continue to face the high 50% tariff. For “out-of-
season” oranges that pose less competition to South Korea’s orange producing sector, the tariff
would be phased out by year 7.
Trade in autos and autoparts proved to be among the most difficult issues tackled by U.S. and
South Korean negotiators, pitting an increasingly competitive South Korean industry seeking to
increase its market share in the United States and a U.S. industry that wants South Korea to
eliminate policies and practices that seemingly discriminate against U.S. auto imports. The
KORUS FTA would:
• eliminate most South Korean tariffs on U.S.-made motor vehicles. South Korea would
immediately eliminate its 8% tariff on U.S.-built passenger cars and its 10% tariff on
• reduce discriminatory effects of engine displacement taxes. South Korea would
simplify its three-tier “Special Consumption Tax” and would also simplify its five-tier
“Annual Vehicle Tax” both of which are based on engine displacement by making it a
• harmonize standards and create an “Automotive Working Group.” The agreement
provides for self-certification on safety and emissions standards for a limited number of
U.S.-exported vehicles, and a commitment that South Korea will evaluate emissions
using the methodology applied by the State of California. South Korea also agreed “not
to adopt technical regulations that create unnecessary barriers to trade and to cooperate to
• eliminate of U.S. tariffs and provide for “snapback” clause. The United States would
immediately eliminate its 2.5% duty on gasoline-fueled passenger vehicles with engine
displacement up to 3000 cc, would phase out over three years the 2.5% duty on South
Korean imports with larger engine capacity or that are diesel-powered , and would phase
out over ten years the 25% duty on South Korean pickup trucks.
The KORUS FTA would cover a broad range of other areas. According to the Office of the
United States Trade Representative (USTR), most U.S.-South Korean trade in consumer and
industrial products would become duty-free within three years after the agreement enters into
force, and virtually all remaining tariffs would be lifted within 10 years. The two countries agreed
to liberalize trade in services by opening up their markets beyond what they have committed to
do in the World Trade Organization (WTO). About 60% of U.S.-South Korea trade in textiles and
apparel would become duty-free immediately, and the KORUS FTA would provide a special
safeguard mechanism to reduce the impact textile and apparel import surges.
Trade remedies were a critical issue for South Korea and a sensitive issue for the United States.
The FTA provides the United States could exempt imports from South Korea from a “global”
escape clause (section 201) measure if they are not a major cause of serious injury or a threat of
serious injury to the U.S. domestic industry. The FTA would also provide for a binational 4
consultative committee to review trade remedy decisions involving one another.
In addition, South Korea and the United States agreed to establish an independent body to review
recommendations and determinations regarding South Korean pricing and government
reimbursement for pharmaceuticals and medical devices and to improve transparency in the
process for making those determinations.
Furthermore, one year after the KORUS FTA enters into force, a binational committee would be
formed to study the possibility of eventually including products from “Outward Processing
Zones,” such as the Kaesong Industrial Complex, that use North Korean labor.
4 Trade Remedy Piece of Korea FTA Ignores Korean ADF Demands. Inside U.S. Trade. April 13, 2007.
Economists have released several studies estimating the potential effects of the KORUS FTA. As
required by the TPA statute, the USITC conducted a study of the KORUS FTA at the request of 5
the President. The USITC study concludes that U.S. GDP would increase by $10.1 billion to
$11.9 billion (approximately 0.1%) when the KORUS FTA is fully implemented, a negligible
amount given the size of the U.S. economy. The USITC based this estimate primarily on the
removal of tariffs and tariff-rate-quotas, that is, barriers that can be relatively easily quantified.
The study concludes that U.S. exports of goods would likely increase by $9.7 billion to $10.9
billion, primarily in agricultural products, machinery, electronics, transportation equipment,
including passenger vehicles and parts. U.S. imports would increase $6.4 billion to $6.9 billion,
primarily in textiles, apparel, leather products, footwear, machinery, electronics, and passenger 6
vehicles and parts.
The range does not take into account the impact of the reduction of barriers to trade in services
and to foreign investment flows and the impact of changes in regulations as a result of the
KORUS FTA. The study notes that U.S. exports in services would increase as a result of South
Korean commitments under the KORUS FTA, and that changes in the regulatory environment in
both countries would also help to increase bilateral trade and investment flows.
The study estimates that changes in aggregate U.S. employment would be negligible given the
much larger size of the U.S. economy compared to the South Korean economy. However, while
some sectors, such as livestock producers, would experience increases in employment, others
such as textile, wearing apparel, and electronic equipment manufacturers would be expected to 7
experience declines in employment.
Other studies draw the same basic conclusions, although the magnitudes differ because they
employ different models from the USITC study. For example, a University of Michigan analysis
commissioned by the Korea Economic Institute estimates that U.S. GDP would increase by
$25.12 billion (0.14% of U.S. GDP). This is larger than the USITC estimate, but in part this is 8
because its authors quantified the effects of liberalization in services trade. The authors also
analyzed the impact of a KORUS FTA before the final text had been released and assumed,
among other things, that rice trade would be liberalized, which, in the end, was not the case.
In December 2005, the Korea Institute for International Economic Policy (KIEP) published a
study measuring the potential economic impact of a U.S.-South Korean FTA on South Korea
alone. The study estimated some of the dynamic, or long-run, economic effects in addition to the
static, or one-time, effects of the FTA on South Korea. The KIEP study estimated that the FTA
5 Section 2104(f) Trade of 2002. P.L. 107-210. United States International Trade Commission (USITC). U.S.-Korea
Free Trade Agreement: Potential Economy-wide and Selected Sectoral Effects. Investigation No. TA-2104-24. USITC
Publication 3949. September 2007.
6 USITC. p. xvii-xviii.
7 USITC. p. xix.
8 Kiyota, Kozo and Robert M. Stern. Economic Effects of a Korea-U.S. Free Trade Agreement. Korea Economic
Institute, Special Studies 4. 2007.
would eventually lead to a 0.42% to 0.59% increase in South Korea’s GDP according to a static 9
analysis, and 1.99% to 2.27% according to a dynamic analysis.
South Korea is a major economic partner for the United States. In 2007, two-way trade between
the two countries exceeded $78 billion, making South Korea the United States’s seventh-largest
trading partner. (See Table 1.) South Korea is among the United States’s largest markets for
agricultural products. Major U.S. exports to South Korea include semiconductors, machinery
(particularly semiconductor production machinery), aircraft, and agricultural products.
Table 1. Annual U.S.-South Korea Merchandise Trade,
(Billions of U.S. Dollars)
Year U.S. Exports U.S. Imports Trade balance Total trade
1990 14.4 18.5 -4.1 32.9
1995 25.4 24.2 1.2 49.6
2000 26.3 39.8 -13.5 66.1
2003 22.5 36.9 -14.4 59.5
2004 25.0 45.1 -20.1 70.1
2005 26.2 43.2 -17.0 69.4
2006 30.8 44.7 -13.9 75.5
2007 33.0 45.4 -12.4 78.4
Major U.S. Export Items Semiconductor chips and manufacturing equipment; aircraft; corn and wheat; plastics.
Major U.S. Import Items Semiconductor circuits; televisions and flat panel screens; cars; steel.
Sources: 1990 and 1995 data from Global Trade Information Services. 2000-2007 data from U.S. International
South Korea is far more dependent economically on the United States than the United States is on
South Korea. In 2007, the United States was South Korea’s third-largest trading partner, second-
largest export market, and the third-largest source of imports. It was among South Korea’s largest
suppliers of foreign direct investment (FDI). In 2003, China for the first time displaced the United
States from its perennial place as South Korea’s number one trading partner. In 2005 Japan
overtook the United States to become South Korea’s second-largest trade partner.
9 Lee, Junyu and Hongshik Lee. Feasibility and Economic Effects of a Korea-U.S. FTA. Korean Institute for
International Economic Policy. December 2005. p. 86.
Table 2. Asymmetrical Economic Interdependence (2007)
Total Trade Export Market Source of Imports Source of FDI
For the U.S., #7 #7 #7 #28 (2004)
South Korea ranks
For South Korea, #3 #2 #3 #2
the U.S. ranks
Sources: U.S. Department of Commerce, U.S. Census Bureau and Bureau of Economic Analysis; Bank of Korea.
Increased economic interaction between the United States and South Korea has been
accompanied by numerous disagreements over trade policies. In general, U.S. exporters and trade
negotiators identify the lack of transparency of South Korea’s trading and regulatory systems as
the most significant barriers to trade with South Korea in almost every major product sector.
Many U.S. government officials also complain that Seoul continues to use government
regulations and standard-setting powers to discriminate against foreign firms in politically
sensitive industries, such as automobiles and telecommunications. Another major cross-sectoral
complaint is that rigidities in the South Korean labor market, such as mandatory severance pay,
raise the cost of investing and doing business. Finally, the United States and other countries have
pressed South Korea to open further its agricultural market, which is considered one of the most
closed among members of the Organization for Economic Co-operation and Development 10
(OECD). Many of these issues arose during the KORUS FTA negotiations.
The intensity of these disputes has diminished considerably since the late 1980s and early 1990s,
in part because South Korea enacted a set of sweeping market-oriented reforms as a quid pro quo
for receiving a U.S.-led $58 billion package from the International Monetary Fund (IMF)
following the near collapse of the South Korean economy in 1997. In particular, as a result of the
reforms, South Korea opened its doors to foreign investors, ushering in billions of dollars of
foreign portfolio and foreign direct investment (FDI). The result is that foreign companies,
including U.S. firms, now are significant shareholders in many prominent industrial
conglomerates (chaebol); at one point earlier in the decade, foreign firms owned about one-third
of the South Korean banking industry and an estimated 40% of the value of the shares traded on
South Korea’s stock exchange. Since the 1997 crisis, FDI commitments by U.S. companies have 11
totaled over $25 billion.
Additionally, the United States and South Korea appear to have become more adept at managing
their trade disputes. This may be partly due to the quarterly, working-level “trade action agenda”
trade meetings that were initiated in early 2001. Both sides credit the meetings, which appear to
be unique to the U.S.-South Korean trade relationship, with creating a more constructive dialogue
that helped pave the way for the two sides to feel sufficiently confident to launch FTA
10 OECD, Economic Surveys - Korea, 2007.
11 Korea Economic Institute, “Current Economic Info, South Korean Economic Data,” accessed at http://www.keia.org,
on January 2, 2008.
U.S. and South Korean policymakers shared certain goals in launching and completing the
negotiations on the KORUS FTA. Both governments saw in the FTA a logical extension of an
already important economic relationship that would provide a means by which the two trading
partners could address and resolve fundamental issues and, thereby, raise the relationship to a
higher level. For the United States these issues have included the high tariffs and other
restrictions on agricultural imports. For South Korea, these difficult issues have included
perceived U.S. discrimination toward South Korean imports in the application of trade remedies
and treatment of products made at the Kaesong Industrial Complex in North Korea.
While sharing some broad objectives, U.S. and South Korean leaders also approached the
KORUS FTA from different perspectives that were reflected in the conduct and outcome of the
negotiations. A primary objective of the United States was to gain access to South Korean
markets in agricultural products, pharmaceuticals and medical equipment, some other high-
technology manufactured goods, and services, particularly financial and professional services—
areas in which U.S. producers are internationally competitive but for which South Korean barriers
seemed to be high.
For South Korea, gaining a large increase in market access was not as critical a priority since
South Korean exporters already have a significant presence in areas in which they have proved to
be competitive—consumer electronics and autos, for example, and in which they already face
only low or zero U.S. tariffs. However, South Korea arguably did seek to preserve its share of the
U.S. market in the face of growing competition from emerging East Asian producers from
Thailand, Malaysia, Vietnam, and possibly China. South Korea likely also aimed to improve its
competitive position in the U.S. market vis-a-vis Japan where the elimination of even low tariffs
might give South Korean exporters some price advantage.
Launching the FTA negotiations was largely at the initiative of South Korea. Its main objective in
securing an FTA with the United States was much broader than gaining reciprocal access to the
U.S. market. Entering an FTA with the United States meshed with a number of former South
Korean President Roh Moo-hyun’s long term economic and strategic goals. Roh made an FTA the 12
top economic priority for the remainder of his tenure, which expires in February 2008. Soon
after his election in 2002, Roh committed himself to raising South Korea’s per capita gross
domestic product (GDP) to $20,000 by the end of the decade and to transforming South Korea
into a major “economic hub” in Northeast Asia by expanding the economic reforms begun by his
predecessor following the 1997 Asian financial crisis. Ongoing competitive pressure from
Japanese firms, increased competition from Chinese enterprises, and the rapid ageing of the South
Korean workforce has heightened the sense of urgency about boosting national competitiveness.
Continuing along this line of argument, ex-Prime Minister Han Duk-soo has said that a failure to
adopt significant economic changes will mean that “Korea’s long term growth potential is likely 13
to deteriorate.” Lee Myung-bak, who was elected President in December 2007, made the
12 “ROK Editorial: Roh’s ‘Special Lecture’,” The Korea Times, posted on the Open Source Center,
KPP20060329042002, March 29, 2006.
13 Ministry of Finance and Economy Weekly Briefing, “Korea-US FTA Projected to Boost the Korean Economy,”
March 9, 2006.
economy the centerpiece of his campaign and has supported the KORUS FTA as part of a larger
program to promote South Korean economic growth.
During the negotiations, South Korean officials and other South Korean proponents of the
KORUS FTA tended not to focus on the increased access to the U.S. market. Rather, they
emphasized the medium and long-term gains that would stem from increased allocative efficiency
of the South Korean economy, particularly in the services industries. This would presumably be
brought about by an influx of U.S. investment and technology into South Korea and by the spur 14
of increased competition with U.S. firms. The President and other senior officials in particular
emphasized the need to boost the competitiveness of South Korean service industries. An FTA
with the United States, they argued, will help address South Korea’s increased economic
polarization by spurring job creation in fields such as medical, legal, education, and accounting 15
services in a free trade agreement. Some, however, say an FTA will worsen South Korea’s 16
income gap. Also, during the talks, there were continuous and often large scale anti-FTA
protests, generally led by South Korean farmers and trade unionists.
The absence of mirror-image or reciprocal U.S. and South Korean objectives in the negotiations
is reflected in the structure of the KORUS FTA. Except for some provisions dealing with issues
specific to U.S.-South Korea economic relations, for example, South Korea taxation of autos and
the Kaesong industrial complex, the structure of the KORUS FTA largely resembles the structure
of other FTAs, such as Dominican Republic-Central American FTA (DR-CAFTA), that the United
States has entered into. This conclusion does not suggest that South Korea did not bring to the
table its own specific demands, which it did (such as the exclusion of rice) and held to them
Under the KORUS FTA, U.S. and South Korean negotiators addressed a number of sector-
specific issues. Some issues, such as elimination of tariffs on most manufactured goods, were not
very controversial and were dealt with in early stages of the negotiations. Other issues, such as
trade in agricultural products and in autos, were the most difficult and were not resolved until the
final hours of the negotiations.
Attaining comprehensive market access for U.S. agricultural products to South Korea’s large
market and finding a way to resolve Korea’s continued restrictions on U.S. beef purchases
(imposed to protect human health following the late 2003 discovery of mad cow disease in the
U.S. cattle herd) were the two primary objectives pursued by U.S. agricultural negotiators.
14 See, for instance, Junkyu Lee and Hongshik Lee, Feasibility and Economic Effects of a Korea-U.S. FTA (Seoul:
Korea Institute for International Economic Policy, 2005), p. 116-117; Inbom Choi and Jeffrey Schott, Free Trade
between Korea and the United States? (Washington, DC: Institute for International Economics, 2001), p. 79-82.
15 “Roh’s ‘Special Lecture’,” The Korea Times, March 26, 2006.
16 Korea Broadcast System, March 31, 2006 Broadcast.
Though South Korea in 2006 was the 14th largest agricultural importer in the world, its farm 17
sector is highly protected with high tariffs and quotas. This reflects its farmers’ longstanding
political influence (particularly that of rice producers) and its urban population’s deep ties to its
In concluding the KORUS FTA, the United States secured nearly complete access for all U.S.
agricultural commodities and food products into Korea’s market. However, a breakthrough on the
beef issue (technically not part of the FTA talks but nevertheless the subject of high-level
discussions) did not occur until June 2008. This appears to reflect the newly elected Korean
President’s view that an agreement spelling out the rules that apply to beef imports from the
United States had to be in place before President Bush could consider sending this agreement to
Capitol Hill. Several Members of Congress had for months stated that South Korea must agree to
fully reopen its market to U.S. beef under scientifically based international rules and in
commercially significant quantities before Congress considers or approves the agreement. U.S.
agricultural groups, well aware of this deal’s potential benefits for producers, had also
conditioned their support on the resumption of U.S. beef exports.
In 2007, South Korea was the 5th largest market for U.S. agriculture, as export sales totaled $3.5
billion. Under the KORUS FTA’s agricultural provisions, South Korea immediately would grant
duty-free status to almost two-thirds of current U.S. agricultural exports. Tariffs and tariff-rate 18
quotas (TRQs) on most other agricultural goods would be phased out within 10 years, with the
remaining commodities and products subject to provisions that phase out such protection by year
potatoes for table use, honey, and identity-preserved soybeans for food use) would be subject to
Korean import quotas that slowly expand in perpetuity. However, the agreement does not give 19
U.S. rice and rice products additional access to South Korea’s market (see below).
With the immediate elimination or phase out of most of South Korea’s relatively high agricultural
trade barriers under the KORUS FTA, the U.S. agricultural and food processing sectors would
noticeably benefit from additional exports. The USITC estimates that the increase in U.S. exports
of agricultural commodities and processed foods would account for up to one-third of the entire
projected increase in total U.S. exports to South Korea’s market once the KORUS FTA’s
provisions are fully implemented. Sale of agricultural products would be from $1.9 billion to $3.8
billion (44% to 89%) higher in 2008 than exports under a no-agreement scenario. Almost half of
this export increase would accrue to the U.S. beef sector, based on the USITC’s assumption that
U.S. beef exports recover to the level before South Korea imposed its restrictions import in late
17 South Korea’s average applied agricultural tariff (2006) was 48%, compared to about 12% for the United States.
WTO, Statistics Database, “Country Profile for Republic of Korea,” at http://stat.wto.org/CountryProfiles/KR_e.htm;
U.S. Department of Agriculture, Economic Research Service, Profiles of Tariffs in Global Agricultural Markets, AER-
796, January 2001, p. 26.
18 A TRQ is a two-part tool used by countries to protect their more sensitive agricultural and food products. The quota
component provides for duty-free access of a specified quantity of a commodity, which in an FTA usually expands
over time. Imports above this quota are subject to a prohibitive tariff that in an FTA frequently declines over time. At
the end of a product’s transition period to free trade under an FTA, both the quota and tariff no longer apply (with a few
exceptions), allowing for its unrestricted access to the partner’s market.
19 A summary of commodity-specific market access provisions (tariff reduction schedules, transition periods, TRQ
amounts and growth rates, and safeguards) is found in the USDA fact sheet “U.S. - Korea Free Trade Agreement
Benefits for Agriculture,” July 2007, available at http://www.fas.usda.gov/info/factsheets/korea.asp. Detailed fact
sheets on the agreement’s commodity provisions and prospective impacts for agriculture in selected states are available
2003. (For information on bilateral efforts that recently led to an agreement on new Korean rules
that will apply to U.S. beef imports, see Appendix A.) About 20% of the export increase would 20
benefit U.S. producers and exporters of pork, poultry and other meat products. In another
analysis, the American Farm Bureau Federation (AFBF) projects that U.S. agricultural exports by
the end of the transition period (2027) would be more than $1.5 billion (45%) higher under the
KORUS FTA than would be the case otherwise. Sales of beef, poultry, and pork would account 21
for $644 million (or 42%) of this increase.
Because South Korean agricultural exports to the United States are small ($233 million in 2007)
and largely complementary, there was no controversy in negotiating access to the U.S. market.
The United States agreed to phase out tariffs and quotas on all agricultural imports from South
Korea under seven phase-out periods ranging up to 15 years. One 10-year TRQ would apply to
imports of fluid milk and cream, among other specified dairy products. The USITC projects that
imports of agricultural products (primarily processed food products) from South Korea under the
KORUS FTA would be from $52 million to $78 million (12% to 18%) higher than such imports
under a no-agreement scenario.
Under the KORUS FTA, South Korea agreed to eliminate its 40% tariff on beef muscle meats
imported from the United States over a 15 year period. Also, South Korea would have the right to
impose safeguard tariffs on a temporary basis in response to any potential surge in imports of
U.S. beef meats above specified levels. The trigger for this additional tariff would be 270,000
metric tons (MT) in year 1, which would increase 2% annually; in year 15, the trigger would be 22
354,000 MT. In year 16, this protective mechanism would no longer apply. The 18% tariff on
imports of beef offals (tongues, livers, tails and feet), and tariffs ranging from 22.5% to 72% on
other beef products, would be similarly eliminated in 15 years.
Assuming that South Korea fully lifts its restrictions on U.S. beef and bilateral beef trade returns
to normal, the USITC estimates that the phase out of South Korea’s beef tariff and safeguard
could increase U.S. beef exports from about $600 million to almost $1.8 billion (58% to 165%)
above what would be the case otherwise. Under the KORUS FTA, the AFBF projects that U.S.
beef sales would be $265 million higher as the United States recaptures its historic share of the
South Korean market. However, its analysis notes that the market share of U.S. beef likely will
not increase over time. That is because South Korean tastes have developed a preference for
grass-fed Australian beef, which will continue to be competitive in price against U.S. beef even
with the current 40% tariff removed.
On April 18, 2008, U.S. and South Korean negotiators reached agreement on the requirements
that will apply to Korean imports of U.S. beef and beef products. Imports of boneless and in-bone
20 Derived from Table 2.2 in USITC, U.S.-Korea Free Trade Agreement: Potential Economy-wide and Selected
Sectoral Effects, pp. 2-8 and 2-9.
21 Derived from American Farm Bureau Federation’s (AFBF) Implications of a South Korea-U.S. Free Trade
Agreement on U.S. Agriculture, July 2007, p. 17. To be consistent with the agricultural and food product categories
used to derive the USITC’s estimate, AFBF’s exports of fish products are not included in the estimated increase in
agricultural exports and agriculture’s share stated above.
22 In 2003, U.S. exports of beef muscle meats to South Korea totaled 213,083 MT. The safeguard level in year 1 would
allow for duty-free access for about 20% more U.S. beef than the average 2002-2003 level of U.S. beef exports to the
South Korean market.
beef, and other beef products, from cattle irrespective of age will now be allowed entry, but are
subject to various conditions that U.S. beef exporters and the U.S. government must meet.
Against the backdrop of mounting public protests in Korea against this agreement, calls by
opposition parties that it be renegotiated, and the Korean President’s apologies for how his
government mishandled this matter, the Korean government secured changes intended to allay
public concerns about the safety of U.S. beef. Under a transitional arrangement agreed to on June
beef began on June 27, 2008. Since then, new sales have begun to take off, but the pace of future
U.S. beef exports now will depend on how quickly Korean consumers resume purchases, in light
of the controversy that swirled around this issue (See Appendix A for additional details.)
South Korean negotiators succeeded in excluding the entry of U.S. rice on preferential terms—its
prime objective in negotiating agriculture in the KORUS FTA. This reflects Korea’s efforts to
maintain its stated policy of self sufficiency in rice production, the national sentiment that
preserving rice production is inseparable from the country’s identity, and the political reality that
rice farming preserves the basis for economic activity in the countryside. That rice was a make-
or-break issue for Seoul is seen in the comment made by a top U.S. trade official, Deputy United
States Trade Representative Karan Bhatia, the day after the talks concluded: “Ultimately, the
question that confronted us was whether to accept a very, very good albeit less perfect agreement 23
or to lose the entire agreement because South Korea refused to move on rice.” On rice, the
KORUS FTA only requires South Korea to continue to abide by its multilateral trade
commitments to increase rice imports.
At present, U.S. rice exporters have access to the South Korean market under (1) a 24% share
(50,076 MT) of the rice import quota established under that country’s multilateral World Trade 24
Organization (WTO) commitments in 1995, and (2) a separate quota available to all countries.
Rice entering under both quotas faces a 5% tariff. Entries above each quota are prohibited—a
unique concession that South Korea received in the last round of multilateral trade negotiations.
U.S. rice exports against both quotas have fluctuated, but since 2005 have risen to reach $43
million (73,283 MT) in 2007. Future U.S. sales are expected to grow slowly in line with the
expansion of the most recently established rice quota.
Though the U.S. rice industry expressed disappointment with the rice exclusion, the United States
will have other opportunities in the future to negotiate access for additional U.S. rice in Korea’s
market. This could occur in the process of concluding a multilateral agreement (possibly by 2010)
to further liberalize agricultural trade in the WTO’s Doha Development Round, which might
require South Korea to further open its rice market. Also, the United States and other rice
exporting countries could press for additional access when Korea’s current multilateral rice access
provisions expire in 2014.
23 Inside U.S. Trade, “USTR Says Beef Market Access Must Precede Signing of Korea FTA,” April 6, 2007, p. 5.
24 Following the 2004 renegotiation of South Korea’s WTO agricultural commitments, the United States and most other
rice exporting countries beginning in 2005 have been able to take advantage of this other rice quota. Expanding by
20,347 MT each year through 2014, market access is on a first-come, first served basis. By 2014, both rice import
quotas (under country allocations made to four countries including the United States, and the quota available to any
country) will total 408,700 MT. For background on Korea’s market access and domestic policies for rice, see USDA,
Economic Research Service, South Korea Briefing page titled “Policy,” available at http://www.ers.usda.gov/Briefing/
Differences on how quickly to liberalize trade in fresh oranges were not resolved until just before
the negotiations concluded. The United States sought the complete elimination of Korea’s border
protection on all citrus products, while South Korea wanted to retain its quotas and tariffs,
primarily because of the importance of the citrus industry to the economy of Cheju Island. At
present, South Korea imposes a 50% tariff on all imports of oranges, irrespective of whether they
enter within or outside an existing TRQ.
In reaching a compromise, negotiators agreed to a multi-part solution. First, a small duty-free
quota would be created for “in-season” U.S. navel oranges (a variety that is not produced in
Korea) that enter between September 1 and the end of February—a period that coincides with the
Island’s unshu (mandarin) orange harvest season. The initial 2,500 MT TRQ would increase at a
compound 3% annual rate in perpetuity. Shipments in excess of this amount during this six-month
period would continue to be subject to the 50% tariff. Second, in the first year, this high tariff
would be reduced to 30% for “out-of-season” oranges that enter between March 1 and August 31,
and then be completely phased out in stages by year 7. Third, South Korea’s 144% tariff on
mandarin oranges would be phased out over 15 years.
The cost of selling to what already is a leading U.S. export market for fresh oranges would be
significantly reduced as Korea’s high 50% tariff is phased out. In 2007, South Korea ranked
second (after Canada), with U.S. sales totaling $85 million (88,335 MT). USDA estimates that the
value of the in-season 2,500 MT quota and tariff reductions on all orange exports in the first year
would be almost $18 million. Over seven years, USDA estimates the cumulative value of savings 25
associated with these orange access provisions at $208 million.
As found in most other U.S. FTAs, the KORUS FTA establishes a bilateral standing committee to
address food safety and animal/plant life or health issues that frequently emerge in agricultural
trade. However, there are no commodity-specific sanitary and phytosanitary (SPS) provisions to
address outstanding issues, such as Korea’s import health requirements on U.S. beef imports or
Korean standards that have prevented sales of some U.S. horticultural products to that market.
The Committee on SPS Matters would serve as a forum to implement the WTO’s Agreement on
the Application of SPS Measures, enhance mutual understanding of each country’s SPS rules,
resolve future bilateral SPS disputes that arise, coordinate technical assistance programs, and
consult on issues and positions in the WTO and other international bodies where SPS issues are
considered. The text of the SPS chapter specifically states that neither the United States nor South
Korea has recourse to pursue dispute settlement to address any SPS issue that arises. Instead, any
matter would be resolved using the formal process established under the WTO’s SPS Agreement.
U.S. beef producers had argued until the April 2008 agreement was reached that Korea’s stance
on U.S. beef imports must be scientifically based upon internationally recognized guidelines 26
issued by the World Organization for Animal Health, also known as OIE by its French acronym.
25 USDA, Foreign Agricultural Service, Fact Sheet “U.S.-Korea Free Trade Agreement—What’s At Stake for Fresh
Citrus and Orange Juice,” September 2008.
26 This stance is reflected in testimony by the National Cattlemen’s Beef Association before the USITC on June 20,
Other agricultural groups also have raised concerns about Korea’s implementation of SPS
measures on food additives and those that have restricted U.S. fruit and vegetable exports. This
new standing committee potentially could be used as the venue to attempt to resolve future SPS
disputes, taking into account latest available scientific findings and knowledge.
The export orientation of the South Korean motor industry, combined with the relatively low U.S.
tariff of 2.5% on all imported motor vehicles except pickup trucks, has made the United States a
good market of opportunity for South Korean exports. (For a discussion of the South Korean auto
industry, see Appendix B.) Total Korean motor vehicle exports to the United States peaked at
730,000 units in 2005, 695,000 units in 2006, and 675,000 units in 2007. Hyundai has
established a major U.S. assembly plant, thus substituting for some imports. Kia also plans to 28
open a U.S. assembly plant by 2009. Falling imports from Korea probably were affected by a
general softening of the U.S. market. U.S. exporters, including South Korean and other foreign-
owned manufacturers, shipped a total of 12,571 vehicles to South Korea in 2007.
The total value of South Korean automotive exports to the United States, including parts, was
$12.1 billion in 2007, compared to U.S. exports of similar products to South Korea of $976
million. That meant a U.S. bilateral deficit in autos of $11.2 billion, growing over the long term 29
from a deficit of $5.5 billion in 2000, and $1.5 billion in 1990. Sang-yirl Nam, in an academic
analysis of the effects of the proposed FTA, found in simulation models of projected market
changes, Korea would always gain relative to the United States from bilateral liberalization,
“because Korea has a comparative advantage over the United States in the automobile sector; in
other words, Korea has been much more successful in accessing the U.S. market than the United 30
States has been in accessing the Korean market.”
But Tom Walsh, writing in the Detroit Free Press, presents data to show that while the net U.S.
bilateral automotive deficit will probably not decline substantially, the trends are favorable to the
United States since 2004. Data attached to his article show that while the total value of U.S.
imports from Korea rose by less than 1% from 2004 to 2007, the total value of U.S. exports in the 31
other direction nearly doubled (up 87%).
South Korean policies that allegedly restrict imports of foreign-made motor vehicles have been a
major target of U.S. trade policy. In 1995 and 1998, the USTR negotiated memoranda of
understanding (MOUs) with South Korea, aimed at reducing formal and informal South Korean
policies that were said to discriminate against imports of U.S.-made vehicles, and other foreign
imports. U.S. policy primarily focused on motor vehicle taxation policies and South Korean
motor vehicle standards, which supposedly did not conform to international standards, or those
27 U.S. Dept. of Commerce. International Trade Administration. Office of Aerospace and Automotive Industries
(Commerce Dept. OAAI). U.S. International Trade Data for Road Motor Vehicles series.
28 Federal Reserve Bank of Atlanta. EconSouth, “West Point Restarts Its Engines” (1st Qtr. 2008), pp. 3, 9.
29 2007 data from Commerce Dept. OAAI. Data for 1990 and 2000 quoted from CRS Report RL32883, U.S.
Automotive Industry: Recent History and Issues, Appendix 5.
30 Sang-yirl Nam, “Implications of Liberalizing Korea-U.S. Trade in the Automobile Sector: Potential Impact of the
Korea-U.S. Free Trade Agreement,” Korea Economic Institute Academic Paper Series, III:1 (February 2008), p. 10.
31 Tom Walsh, “Time for an Honest Chat About Trade,” Detroit Free Press (April 24, 2008).
widely used in major markets.32 The import share of the domestic market in South Korea has
increased since the MOUs were signed—according to data calculated by CRS from standard
industry sources cited above, total imports grew from a low of less than 1% of the market (5,000 33
units) in 2000 to a 3% market share by 2005. But such a rate of progress has evidently been too
slow for both the U.S. government and the domestically owned motor vehicle industry.
The Office of the USTR states that KORUS FTA, “Includes a broad and unprecedented range of
focused provisions designed to open up Korea’s auto market to U.S. cars and ensure that U.S. 34
automakers have a fair opportunity to compete in Korea.” These provisions may be summarized
• Elimination of most South Korean tariffs on U.S.-made motor vehicles. “Korea would
immediately eliminate its 8% tariff on U.S.-built passenger cars and its 10% tariff on 35
pickup trucks,” Tariffs would be immediately reduced to zero in each country for 36
autoparts imported from the other.
• Reduction of alleged discriminatory effects of engine displacement taxes. A major
U.S. complaint has been that South Korea has a steeply ascending vehicle tax schedule,
with very high rates on vehicles with larger engine capacities, such as might be exported
by U.S. producers. Moreover, the tax system has a “cascade” effect, so that subsequent
taxation rates incorporate, for example, the 8% duty paid on an imported vehicle.
According to the U.S. International Trade Commission (USITC) report on the agreement,
cc, with 54% in the range 1601-2000 cc. Currently, the consumer pays a “Special
Consumption Tax” on purchase of a vehicle: cars below 800 cc are exempt, cars in the
next range up to 2000 cc pay 5%, anything larger is charged 10%. After an interim
reduction period of three years, South Korea under the FTA would simplify this to a two-
tier system: under 1000 cc tax-free, anything larger would be taxed at 5%. Besides this
purchase tax, owners must pay an “Annual Vehicle Tax,” also based on engine
displacement. Currently, there are five different ranges in this system, and the owner of a
vehicle with an engine larger than the 1600-2000 cc market “sweet spot” pays an extra
10% per cc ownership tax. South Korea has agreed to simplify the ranges to three: 80
won/cc below 1000 cc engine capacity, 140 won/cc up to 1600 cc, and 200 won/cc for 38
anything larger. Both of these changes would include the majority of domestically
produced cars, as well as imports, in the highest tax bracket.
32 CRS Report RL32883, U.S. Automotive Industry: Recent History and Issues, p. 60.
33 The USITC calculated a 2006 import market share of 4.2%, of which 60% was from Europe, 27% from Japan, and
7% from the United States. USITC. U.S.-Korea Free Trade Agreement: Potential Economy-Wide and Selected Sectoral
Effects, Investigation no. TA-2104-24, USITC Publ. 3949 (September 2007), p. 3-74.
34 Office of the USTR. “Free Trade with Korea: Summary of the KORUSFTA,” Trade Facts (April 2007).
35 USITC. U.S.-Korea FTA, p. 3-79 (Box 3.4).
36 Office of USTR. Report of Industry Trade Advisory Committee on Automotive and Capital Goods (ITAC 2) (April
27, 2007), p. 2.
37 Ibid., p. 3-76 (Table 3.16).
38 Ibid., p. 3-78-8, incl. Box 3.4.
• Standards harmonization and creation of an”Automotive Working Group.” U.S.
manufacturers have complained that South Korea sets safety regulations and automotive
product standards in a manner that is closed to outsiders and not transparent, and that
consequently results in standards idiosyncratic to Korea. South Korean-based producers,
who hold the lion’s share of the domestic market, can afford to operate one line for
domestic production, and another for export. Foreign companies have difficulty affording
the high unit cost of customizing a small number of vehicles for the South Korean 39
market. This problem is addressed in the KORUS FTA (Chapter 9—”Technical Barriers
to Trade”) and in an exchange of “confirmation letters” of June 30, 2007 between USTR
Susan Schwab and South Korean Trade Minister Hyun Chung Kim. Essentially, the
agreement provides for self-certification on safety and emissions standards for a limited
number of U.S.-exported vehicles, and a commitment that South Korea will evaluate 40
emissions using “the methodology applied by the State of California ...” South Korea
also agreed “not to adopt technical regulations that create unnecessary barriers to trade 41
and to cooperate to harmonize standards.” Under terms of Annex 9-B, the two parties
agree to create an “Automotive Working Group,” which will meet at least annually, and
will review and resolve “issues with respect to developing, implementing and enforcing 42
relevant standards, technical regulations and conformity assessment procedures.”
• Elimination of U.S. tariffs and “snapback” clause. The major commitment on the
U.S. side with respect to automotive trade issues is the elimination of all tariffs on South
Korean-produced motor vehicles. The United States would immediately eliminate its
It would also phase out the same rate of duty on South Korean imports with larger engine
capacity or that are diesel-powered over three years. The 25% duty on pickup trucks, a
residual rate dating from an earlier trade dispute with Europe, would be phased out on 43
South Korean products over ten years. However, the FTA, in Annex 22-A, also
establishes a special bilateral dispute settlement panel, designed to resolve automotive
issues within six months. “If panel finds a violation of an auto-related commitment or the
nullification/impairment of expected benefits, the complaining Party may suspend its
tariff concessions on passenger cars and assess duties at the prevailing MFN rate (i.e., 44
‘snap-back’ any tariff reductions provided by the FTA).” The USITC notes in its report
that, “The dispute settlement provisions restrict the [U.S.] snapback penalty on light
trucks ... to the rate for passenger cars, 2.5%,” while South Korea could snap back to 45
39 Examples of how specific South Korean automotive standards discourage imports were provided by Stephen J.
Collins, President of the Automotive Trade Policy Council, in testimony to the U.S. House. Committee on Ways and
Means. Subcommittee on Trade (March 20, 2007), pp. 3-5. Dr. Thomas Becker of the German Verband der
Automobilindustrie confirmed that European exporters confront the same problem in South Korea (CRS interview,
March 12, 2007).
Quoted from letter of South Korean Minister H.C. Kim to USTR Schwab (June 30, 2007), p. 1.
41 USTR. “Summary,” p. 2.
42 USTR. Text of U.S.-Korea Free Trade Agreement, p. 9-9. The details of the FTA on automotive technical barriers are
summarized in Office of the USTR. “Fact Sheet on Auto-Related Provisions in the U.S.-Korea free Trade Agreement,”
Trade Facts (April 3, 2007); and, USITC. U.S.-Korea FTA, p. 3-80 (Box 3.4).
43 Ibid., Box 3.4.
44 USTR, “Auto-Related Provisions,” p. 1; USITC. U.S.-Korea FTA, p. 3-80 (Box 3-4).
45 Ibid., p. 3-82 and Box 3.4.
The USITC simulation model of the KORUS FTA estimates that while U.S. automotive exports
to Korea would increase by a range of 45% to 59%, this would only amount to about $300-400 46
million because of the low current baseline. It states that tariff elimination “would likely have a
positive effect on U.S. exports ... further, the overall tax burden on the South Korean consumer
who purchases an imported vehicle would be reduced, more or less equalizing the total taxes paid 47
on imported and domestic vehicles.” It particularly emphasizes the potential gain for U.S.-
exported hybrid vehicles to Korea, though failing to note that most hybrids in the U.S. market 48
today are imported from Japan. However, as the Detroit-based U.S. manufacturers have plans to
increase their hybrid fleets and there are no South Korean-produced hybrid vehicles at present,
the U.S. manufacturers could have a head start on these products (assuming Japanese-owned
companies in the United States do not also export hybrids from their incipient U.S. production to
the South Korean market).
With respect to automotive imports from South Korea into the United States, the USITC
simulation estimates an “increase by $1.3-1.7 billion (9-12%).” However, it also finds that 49
“approximately 55-57% [would be] represented by diverted imports from other trade partners.”
Jeffery Schott states that South Korea gave a “priority to eliminating the small U.S. tariff”
primarily because of Japanese competition. Since 2001, the won has strengthened against the U.S.
dollar, while the Japanese yen has weakened, creating a disadvantage in the U.S. market for
Hyundai, whose vehicles must compete against Japanese companies’ vehicles on price. One result 50
has been reported significant declines in Hyundai earnings. The USITC also notes plans by
Hyundai to begin producing vehicles based on hybrid technology, indications that Hyundai and
Kia were studying the development of pickup trucks, and actual exports of a small number of 51
pickups to third markets by Ssangyong, a smaller producer. Hyundai and Kia do already
produce small pickup-type vehicles in Korea, but they would not appear to be suitable in design 52
or style for the United States.
U.S. industrial interests’ views on KORUS FTA may be described as follows:
• The Detroit “Big Three” are split. Ford and Chrysler are opposed, while General
Motors (GM) is neutral.
• Automotive parts suppliers were reported to support the FTA.
46 Ibid., Table 2.2.
47 Ibid., p. 3-78.
49 Ibid., pp. 2-12 and 3-82, and Table 2.2. Dr. Nam’s simulations from the paper cited above produce somewhat more
modest results. He estimates a net Korean export gain of about $900 million, a U.S. gain of about $130 million, leading
to an increase in the U.S. bilateral deficit of about $770 million. As with the ITC findings, he concludes, “bilateral tariff
elimination between Korea and the United States ... will increase the two countries’ exports and imports of automobiles
and parts at the expense of other countries;” p. 10.
50 Jeffrey J. Schott. The Korea-US Free Trade Agreement: A Summary Assessment. Peterson Institute Policy Brief No.
PB07-7 (August 2007). p. 4.
51 USITC. U.S.-Korea FTA, p. 3-83.
52 According to Ward’s Automotive Yearbook, in 2006, Hyundai produced 98,000 “Porters,” and Kia produced 72,000
“Bongos,” both described as pickups.
• Broader-based industry organizations are favorable, despite the opposition of two
major motor manufacturers and some other sectoral groups.
These views were reflected in the April 2007 report of the Industry Trade Advisory Committee on
Automotive and Capital Goods (ITAC 2) to USTR of April 2007. The chair noted that,
“Generally, the manufacturers of capital goods see [the FTA] as an important milestone in
providing market access to a country and region historically protectionist.... However, in terms of 53
U.S. automotive equipment manufacturers, the outcome is mixed.”
Both the U.S. motor vehicle industry representatives and the whole of ITAC 2 initially
recommended an “unconventional” approach on automotive issues in the negotiations. It would
have “precondion[ed] the phase-out of U.S. automotive tariffs on the demonstration of South
Korean market openness in terms of improved import penetration that is on par with that of other
Fifteen Members of Congress, including Representative Charles Rangel, chair of the House Ways
and Means Committee, wrote President Bush on March 2, 2007, with a proposal along the lines
of the “performance metric” approach suggested by ITAC 2. Their proposal would have delayed
full elimination of the U.S. import tariff cut for at least 15 years, while U.S. representatives
assessed South Korea’s performance in opening its market to U.S. exports. A formula would be
used each year to determine the number of South Korean-produced vehicles that would receive
duty-free treatment in return. They also proposed a “snapback” safeguard provision on the U.S.
tariff should South Korean imports in the U.S. market be judged to increase too rapidly. The 25%
U.S. tariff on pickup trucks would remain in place, subject to a multilateral agreement on 54
automotive trade at the World Trade Organization.
Despite the fact that the final agreement did “not include a performance metric approach,” most 55
ITAC 2 members supported KORUS FTA anyway. The Ford Motor Company disagreed. In its
statement appended to the report, Ford accepted that “some progress was achieved with respect to
existing non-tariff barriers (NTBs).” But it noted that many of the exemptions for U.S.-made
vehicles with respect to NTBs were very limited in volume or were temporary, that South Korea
could continue to use a mix of U.S. and European standards, and that taxation rates were still
exceptionally high for the types of product foreign companies would most likely export to South
Korea. On the other hand, the immediate lifting of the U.S. 2.5% tariff on most South Korean
imports would be a “lopsided benefit” that in effect “will reward South Korean manufacturers for 56
20 years of unfair trade practices by the South Korean Government.” Similarly, a representative
of Chrysler testified before Congress that, because of the “imbalance in U.S.-Korea auto trade ... 57
we simply cannot support the U.S.-Korea Free Trade Agreement in its current form.”
53 ITAC 2 report, p. 1.
54 Letter to President George W. Bush from Reps. Rangel, Levin, Dingell, Kildee, Kind, Tauscher, Upton, Knollenberg,
Candice Miller, McCotter, and Ehlers, and Senators Levin, Voinovich, Bayh, and Stabenow (March 1, 2007).
55 ITAC 2 report, p. 2.
56 “Ford Motor Company Assessment of the Automotive Provisions of the US-Korea FTA,” appended to ITAC 2
57 U.S. Senate. Committee on Commerce, Science and Transportation, Subcommittee on Interstate Commerce, Trade
and Tourism. Hearing on the Imbalance in U.S.-Korea Auto Trade (September 24, 2008), Statement of John T.
Bozzella, Chrysler LLC, p. 3.
By contrast, a GM statement appended to the ITAC-2 report concluded that the proposed FTA
“has addressed the auto industry’s concerns.” But “given the current imbalance in trade between
the two countries,” GM foresaw that in the “near term” South Korea would be the greater
beneficiary, and therefore GM would be neutral on the agreement. It noted that tax policy changes
promised by the South Korean government would reduce the overall burden on the automotive
sector and that there were no caps on U.S.-exported vehicles meeting compliance with California
emission standards, because South Korea committed to establish emission requirements on the
same basis. GM also commented that the sector-specific “snapback” rule on tariff reductions was 58
a unique and positive addition to U.S. FTAs. It should be added that GM’s position is probably
influenced by the fact that it has become a major investor in the South Korean motor industry
through its acquisition of Daewoo. Since the acquisition, GM has increased Daewoo production 59
from 310,000 in 2003 to 1.3 million in 2007. GM in 2007 sold 67,000 Chevrolet Aveos in the 60
United States that were imported from its South Korean affiliate.
The United Auto Workers (UAW) union is strongly opposed to the FTA, and its literature on the
subject includes a joint statement of opposition issued together with the South Korean Metal 61
Workers’ Union (KMWU). In testimony before the House Ways and Means Committee’s Trade
Subcommittee, UAW Legislative Director Alan Reuther endorsed the negotiating strategy 62
proposed by Members of Congress, described above. He stated that the final agreement as
contemplated instead “would exacerbate the totally one-sided auto trade imbalance between 63
South Korea and the U.S. and jeopardize the jobs of tens of thousands of American workers.”
Reuther further criticized the labor rights record of South Korea as “very problematic.” He noted
“numerous areas of worker rights violations in South Korea,” cited in the U.S. Department of
State’s 2005 Country Reports on Human Rights Practices and the arrest of the KMWU president
in 2006 in a protest against government efforts to change South Korean labor laws in a manner 64
unfavorable to the union movement there. In a February 2008 speech in Washington, UAW
President Ron Gettelfinger criticized the proposed FTA in these terms: “That’s not free trade and 65
that’s not fair trade. That is the theft of American jobs.” President Gettelfinger reiterated these 66
views in testimony before Congress in September 2008.
Both the management side and the labor side of the domestically owned U.S. automotive industry
have used the word “unbalanced” to describe the benefits that may flow from the implementation
of KORUS FTA. This may seem odd, given that the agreement has many provisions in various
58 “General Motors Corporation Assessment of the Automotive Provisions of the US-Korea FTA,” appended to ITAC 2
59 Detroit News, “Korea Becomes GM’s Global Growth Engine” (May 9, 2008), http://www.detnews.com.
60 Automotive News, 2007automotive sales data.
61 “KMWU-UAW Joint Declaration in Opposition the Proposed Korea-U.S. Free Trade Agreement,” issued at Seoul,
Korea (May 1, 2007), available at UAW website.
62 U.S. House of Representatives. Committee on Ways and Means. Subcommittee on Trade. Testimony of Alan
Reuther (March 20, 2007), p. 3.
63 Quoted from letter of Alan Reuther to all members of the House (April 18, 2007), p. 2. A similar letter was sent to all
members of the Senate. It may be noted that, while all Detroit-based “Big Three” parts manufacturing and assembly
plants are organized by the UAW or other unions, there are virtually no union-organized U.S. motor vehicle assembly
plants operated by foreign-owned companies, including the Hyundai plant in Alabama; see CRS Report RL32883, U.S.
Automotive Industry: Recent History and Issues, pp. 37-43.
64 Reuther testimony, pp. 6-7. The Reuther letters to the House and Senate makes the same point more briefly.
65 Detroit Free Press, “South Korea Called Threat: UAW Chief Says Market Steals U.S. Jobs,” February 4, 2008.
66 Senate Commerce Committee Hearing (September 24, 2008), Statement of Ron Gettelfinger.
chapters dealing with specific South Korean policies and practices, and virtually none on the U.S.
side, beyond the elimination of tariffs. This could be because the global competitive problems
currently affecting the unionized, domestically owned sector of the U.S. motor vehicle industry 67
go well beyond the scope of this FTA to solve. Indeed, given major differences in the profiles of
the U.S. and South Korean motor vehicle markets, it would appear unlikely that the Detroit Big
Three, which tend to specialize domestically in the production of larger vehicles, could ever gain
more than a fractional position there through exports from the United States. Thus, the UAW,
Ford, and Chrysler oppose KORUS FTA as potentially only adding to the severe competitive
pressure their side of the domestic U.S. industry is facing. GM has secured a solid investment
position in South Korea that it is integrating into its global strategy. But possibly it may not want
to antagonize its unionized U.S. employees, and has taken a neutral position.
Textiles and apparel are a small and dwindling portion of U.S. imports from South Korea. In
2006, textiles accounted for 2.2% of total U.S. imports from South Korea and apparel accounted
for 1.2%. In 2006, the United States imported $1.0 billion in apparel and $0.6 billion in textiles
from South Korea. South Korea’s shares of the U.S. market for textiles and apparel has shrunk in
relative and absolute terms over the years. In 1991, for example, South Korea was the fourth
largest source of U.S. imports of apparel with an 8.0% share, but by 2006, it had dropped to the rd
23 largest source with a 1.2% share. This decrease came largely as the result of the surge in
China’s share of U.S. apparel imports, which grew from 15.1% in 1991, to 29.4% in 2006. South
Korea’s share of U.S. imports of textiles has held relatively steady. In 1991, South Korea was the rdth
Korea—$56.1 million of apparel and $231.4 million of textiles in 2006.
KORUS FTA would eliminate U.S. tariffs immediately on 52% (in terms of value) U.S. imports
of South Korean textiles and apparel, and would phase out U.S. tariffs on 21% over five years and 70
on the remaining 27% over 10 years. Currently, the average U.S. MFN tariff on textiles is 7.9%
with a maximum applied tariff of 34.0% and with 16.1% of textiles categories already entering
the United States duty free. The average applied U.S. MFN tariff on apparel imports is 11.5% 71
with a maximum tariff of 32%, and 3.3% of the tariff lines entering duty free.
The average South Korean applied tariff on textiles is 9.2% with a maximum of 13% and 0.3% of
tariff lines entering duty free. The average South Korean tariff on apparel is 12.6% with none 72
entering duty free and with a maximum tariff of 13%. The KORUS FTA, would eliminate South
Korean tariffs immediately on 77% (by value) of U.S. exports of textiles and apparel and would 73
phase out tariffs on 13% over three years and the remaining 10% over five years.
67 See especially Schott, pp. 5-6.
68 Calculations by Global Trade Information Systems, Inc. based on U.S. Department of Commerce data.
70 United States International Trade Commission. U.S.-Korea Free Trade Agreement: Potential Economy-Wide and
Selected Sectoral Effects. USITC Publication 3949. September 2007. p. 3-52.
71 World Trade Organization. Tariff Profiles 2006. Located at http://www.wto.org.
73 USITC. p. 3-52.
The KORUS FTA, with some exceptions, would use the yarn-forward rule of origin for apparel
imports; that is, apparel made from yarn or fabric originating in either the United States or South
Korea would be eligible for duty-free treatment under the FTA. The FTA also includes a special
safeguard provision whereby, if imports of textiles or wearing apparel to one KORUS FTA
partner country from the other increases at such a rate as to cause or threaten to cause serious
injury to the domestic industry of the importing country, the importing country can suspend
further reduction of tariffs, or it can increase the duty on the imported product to (the lesser of)
the MFN rate applicable at the time the action was taken or the MFN duty that was in force when
the FTA went into effect. The safeguard action can be in place for two years with a possible
extension of two years but no more than a total of four years. However, the importing country
will have to compensate the exporting country by making additional trade liberalizing
concessions equivalent in value to the additional duties expected to result from the safeguard
action. The concessions would be limited to textiles and apparel unless the two countries agree
The USITC has estimated that, if implemented, the KORUS FTA would over time lead to an
increase in U.S. imports of South Korean textiles of $1.7 billion to$1.8 billion and of apparel of
$1.0 billion to $1.2 billion, with the major portion of the increase being diverted from other
countries. The USITC also has estimated that KORUS FTA would lead to an increase in U.S.
exports of textiles of $130 million to $140 million and of apparel of $39 million to $45 million to 74
The KORUS FTA would allow some fibers, yarns, and fabrics originating out side of the United
States and South Korea to become eligible for preferential treatment if the product is not available
domestically in commercial quantities in either country. The agreement also provides for the
establishment of a Committee on Textile and Apparel Trade Matters to raise concerns under the
FTA regarding mutual trade in these products.
The textile and apparel industry appears split on their views of the KORUS FTA according to the 75
Industry Trade Advisory Committee on Textiles and Clothing (ITAC-13). Some representatives
of the textile producers support the yarn-forward rule as benefitting their industry and also
conforming to provisions in other U.S. FTAs but also argue that it should be broader by including
sewing thread, narrow fabrics and pocketing fabrics, which are excluded from the rule. Others,
including some textile representatives and representatives from the apparel industry with supply
chains in other countries, have criticized the yarn-forward rule as being restrictive and limiting
Members of the industry are also divided on the lack of cumulation provisions in the FTA, that is
provisions which allow preferential treatment for limited amounts of apparel woven from
components outside the FTA area. Textile producers supported the lack of cumulation provisions
while apparel producers would have wanted them included. They also split on the phase-out
periods for tariffs with textile producers arguing that some sensitive products were given
immediate duty-free treatment. Apparel producers argued that all apparel and textiles should have
been given immediate duty-free treatment. Footwear and travel goods are also covered under the
74 Ibid. p. 3-53.
75 Report of the Industry Trade Advisory Committee on Textiles and Clothing (ITAC-13) on the South Korea/U.S.
(KORUS) Free Trade Agreement. April 27, 2007.
FTA. Producers of both categories strongly support the FTA and how their products would be 76
The provisions of KORUS FTA affect a wide range of other industries beyond the automotive
sector and textiles and apparel. Cross-sectoral trade associations that represent broad ranges of
U.S. manufacturers have indicated their support for the agreement, not only because of the
general elimination of South Korean tariffs on U.S. exports, but also because of such provisions
as those promising to increase cooperation in the reduction of technical barriers to trade and the 77
improvement in South Korea of the protection of U.S. companies’ intellectual property rights.
Similarly, most sectoral trade associations expressed support, although some noted reservations 78
with specific provisions. The steel industry in particular was a notable dissenter.
U.S. machinery exports could be the largest single sectoral gainer from the FTA with South
Korea. According to the US ITC’s simulation analysis, the sector stands to gain nearly $3 billion 79
in exports if the agreement is approved. The tariffs on U.S. machinery and equipment imported
into South Korea range from 3% to 13%, but U.S. products are already competitive in many
cases, and already account for 15-20% of total South Korean imports. (A specific example is
U.S.-made computer-numerically controlled machine tools.) Most machinery tariffs would be 80
immediately eliminated; others would be phased out over three to ten years. As noted in the
previous section on autos, the capital goods machinery industry representatives in ITAC 2 split
with the motor vehicle industry representatives and supported the agreement. The ITAC report
specifically cited, “U.S. manufacturers of electrical equipment [who] will benefit substantially by
South Korean tariff reductions and eliminations, where the sector has already returned to running 81
a trade surplus with South Korea.” The USITC report further noted the export potential of
electrical-power generating equipment, for which South Korean duties range up to 8% currently.
U.S. exporters are nonetheless already leading suppliers of turbines, generators and nuclear 82
reactors to South Korea. The National Electrical Manufacturers Association (NEA) stated that
U.S. exports to South Korea had risen steadily, by a total of 62%, since 2002, and that there was a
U.S. surplus in bilateral trade. It calls for:
77 National Association of Manufacturers (NAM). “Support the U.S.-Korea Free Trade Agreement,”
ManuFacts(September 2007); U.S. Chamber of Commerce, “Chamber Welcomes Announcement of U.S.-Korea Free
Trade Agreement” news release 07-57 (April 2, 2007), and “U.S. Chamber Welcomes Signing of U.S.-Korea Free
Trade Agreement” news release 07-126 (June 30, 2007); Business Roundtable, “Business Roundtable Applauds Deal
on U.S.-Korea Trade” (April 2, 2007).
78 Thus, in its submission to the ITC, the NAM indicated, “the FTA is not perfect and noted concerns expressed by U.S.
automakers about the FTA’s tariff and nontariff provisions and the questions raised by the U.S. steel industry about
trade rules and other barriers.” USITC. U.S.-Korea FTA, p. 3-73.
79 Ibid., Table 2.2.
80 Ibid., pp. 3-68 and 3-71.
81 ITAC 2, p. 1.
82 USITC. U.S.-Korea FTA, p. 3-71.
legislators in both countries to ratify the Agreement as soon as possible. While the U.S.
electrical equipment industry still has concerns relating to non-tariff barriers and intellectual
property protection in South Korea, the overall FTA package would improve conditions for
selling there by featuring the elimination—most of it immediate—of remaining tariffs on 83
goods in NEA’s product scope.
Another major capital goods item in which the United States has a strong bilateral trade position
is aircraft. Total 2006 aircraft and parts exports to South Korea were $2.4 billion. However, 84
civilian aircraft imports are already duty-free in South Korea.
Both South Korean and U.S. tariffs on most electronics products, such as semiconductors,
telecommunications equipment, and computers, are already zero, as they are included in the
multilateral Information Technology Agreement eliminating tariffs among more than 50
countries. The United States already has a substantial surplus with South Korea in
semiconductors: $4.3 billion in 2006 exports, versus $2.9 billion in imports. The United States
has a small deficit in computer equipment, plus large imports of computer and office equipment 85
parts and accessories ($2.1 billion) and communications equipment ($5.6 billion).
Sectoral organizations representing these industries supported KORUS FTA. It was argued the
FTA would extend tariff-free treatment to consumer electronics products and could guarantee
improvements for U.S. products in South Korea with respect to intellectual property protection, 86
technical barriers, government procurement and competition policy.
One information technology organization supportive of KORUS FTA, the Semiconductor
Industry Association, did caution that the trade remedies chapter of KORUS FTA could
undermine U.S. industry’s use of antidumping and countervailing duty (AD-CVD.) laws (see
below). In 2003, the USITC found that Micron Corporation, the last remaining U.S.-based
producer of dynamic random access mode semiconductors (DRAMs, widely used as memory
chips in computers) was materially injured by government-subsidized DRAM semiconductors
produced by Hynix Corporation of Korea. The Commerce Department subsequently established a 87
The American steel industry registered a strongly negative position on KORUS FTA through its
industry advisory body to USTR, ITAC 12 (Steel). Its report noted that the agreement “does not
provide for changes in U.S. AD-CVD statutes” and that each party retains its full rights under
World Trade Organization rules. However, ITAC 12 objected to “changes to the related legal
processes” in the KORUS FTA chapter on trade remedies with respect to three “key areas:”
83 NEMA. “U.S.-South Korea Free Trade Agreement,” NEMA Issue Brief (April 2007).
84 USITC. U.S.-Korea FTA, p. 3-68 and Table 3.13.
85 Ibid., Table 3.13.
86 Ibid., pp. 3-68 through 3-73.
87 USITC Investigation no. 701-TA-431. Federal Register, XVIII: 154 (August 11, 2003), pp. 47546-7, 47607.
• By Article 10.7.3, parties are required to notify each other whenever an AD-CVD
application is filed, and prior to initiation of a formal investigation. They must afford the
other government an opportunity to consult on the application. The steel industry objects
to “improperly politicizing] the consideration of a trade remedy provision filed by a U.S.
industry, in a process that is already transparent and open,” particularly in antidumping
• In Article 10.4, either party must afford to the other an adequate opportunity for, and
due consideration of price undertakings by respondent companies, “which, if accepted
may result in suspension of an investigation” without imposition of penalty duties. The
steel industry is concerned that the provision “would encourage the use of suspension
agreements and the injection of foreign governments into the trade law process.”
• The steel industry opposes the provision to establish a bilateral Commission on Trade
Remedies (Article 10.8) as “unprecedented, unnecessary and would provide yet more 88
opportunities for South Korea to weaken U.S. trade law enforcement.”
The specific details of the trade remedies chapter are discussed elsewhere in this report. Beyond
these specific issues ITAC 12 also made a number of other critical points. It argued that the rules
of origin provisions did not follow earlier precedents and there were concerns with products
eventually being produced in the Kaesong Industrial Complex of North Korea. (See the section
on the Kaesong Industrial Complex.) It objected to the proposed KORUS FTA’s ignoring
currency manipulation issues. They also supported their U.S. automotive customers’ view that the
FTA failed to insure adequately access to the South Korean market for U.S.-made motor vehicles.
On these grounds, “especially with regard to the proposed AD-CVD provisions, ITAC 12 cannot
conclude at this time that the KORUS FTA promotes the economic interests of the United States 89
and provides for equity and reciprocity within the steel sector.”
While pharmaceuticals and medical devices (P&M) are a relatively small part of U.S.-South
Korean trade, they are products in which U.S. producers compete well in the South Korean
market and ones in which manufacturers see increasing export opportunities as the South Korean
economy matures. For years, the U.S. industry and government have complained about a number
of South Korea’s pharmaceutical policies that allegedly are designed to protect South Korean
industry, which predominately produces generic drugs.
South Korea is among the world’s top 12 largest markets for pharmaceuticals, accounting for 90
about $8 billion in sales annually. The South Korean market for medical devices accounts for
roughly $2.5 billion in sales annually and is expected to grow 10-15 % each year in the next 91
several years, in part due to the rapid aging of the population. While potentially lucrative, South
Korea is a market in which U.S. P&M manufactures claim government regulations have limited
their ability to penetrate that market.
88 Office of the USTR. Industry Trade Advisory Committee on Steel (ITAC 12). The U.S.-Korea Free Trade
Agreement (April 27, 2007). Main views are summarized in pp. 1-2.
89 Ibid., p. 2.
90 USITC. p. 3-64.
91 Ibid. p. 3-91.
In 2006, the United States exported $493 million in medical devices to South Korea, accounting
for 2.1% of total U.S. exports of those products and 1.5% of total U.S. exports to South Korea. In
2006, the United States exported $325 million in pharmaceuticals to South Korea accounting for
1.0% of total U.S. exports of pharmaceuticals and 1.0% of total U.S. exports to South Korea. In
the same year South Korea exported $214 million in medical devices and $61 million in
pharmaceuticals to the United States.
Of major concern was the South Korean government’s May 2006 change in how it determined
reimbursement amounts. Prior to the change, it maintained a “negative list” system, under which
products would be eligible for reimbursement unless they appeared on the list. With the change,
the South Korean government has switched to a “positive list” requiring a product to be listed
before it would be eligible making it potentially more difficult for a product to become eligible.
Announcement of the policy came without prior notification to U.S. officials or affected U.S.
manufacturers and occurred at an early point in the negotiations placing a cloud over them.
Despite complaints from the United States, South Korea went ahead with implementing its
positive list system.
P&M manufacturers also have cited the South Korean government’s policies on reimbursements
for pharmaceuticals and medical devices under its single-payer health insurance program. U.S.
manufacturers have argued that the policies discriminate against innovative pharmaceuticals
because they establish relatively low reimbursement amounts for medicines thus not taking into
account the costs that producers of leading-edge pharmaceuticals incur and that are reflected in
higher prices. The manufacturers wanted the KORUS FTA to establish transparency as an
important principal in South Korea’s development and implementation of reimbursement policies,
including an appeal process for decisions going against U.S. manufacturers.
In response, South Korea agreed in the KORUS FTA to allow U.S. pharmaceutical makers to
apply for increased reimbursement levels based on safety and efficacy. South Korea also agreed
to publish proposed laws, regulations, and procedures that apply to the pricing, reimbursement,
and regulation of pharmaceuticals and medical devices in a nationally available publication and to
allow time for comment. In addition, South Korea agreed to establish a process for U.S.
manufacturers to comment on proposed changes in laws and regulations and for them to obtain a
review of administrative determinations that adversely affect them.
Intellectual property rights protection in South Korea has been a critical issue for U.S.
pharmaceutical manufacturers. Specifically, the failure of the South Korean government to
protect from competitors proprietary data that manufacturers must submit for market approval. In
addition, the South Korean government has, in some cases, approved marketing of some
pharmaceuticals before it has determined that the applicant is the rightful owner of the patent and 92
trademark. In part for these reasons, the USTR has continued to place South Korea on the 93
special 301 “Watch List.”
92 Primosch, William. Testimony of Senior Director, International Business Policy, National Association of
Manufacturers on the Proposed United States-Korea Free Trade Agreement for the Trade Policy Staff Committee,
Office of the U.S. Trade Representative. March 14, 2006. p. 6.
93 Office of the USTR. Special 301 Report. April 2007. “Special 301” refers to Section 182 of the Trade Act of 1974.
Since the start of the Special 301 provision in 1989, the USTR has issued annually a three-tier list of countries judged
to have inadequate regimes for IPR protection, or to deny access: (1) priority foreign countries are deemed to be the
worst violators, and are subject to special investigations and possible trade sanctions; (2) priority watch list countries
are considered to have major deficiencies in their IPR regime, but do not currently warrant a Section 301 investigation;
In response, under the KORUS FTA’s data exclusivity provisions, South Korea would not allow a
third company, such as a generic drug manufacturer, from marketing a new pharmaceutical using
the safety and efficacy data, supplied by an original U.S. manufacturer as part of the market
approval process, without the permission of the original U.S. maker for five years from the date
of marketing approval for the original product. In addition, if a third party submits safety or
efficacy information for a product that an FTA partner government had already approved, the
government is to notify the original patent holder of the identity of the third party and is to
prevent the marketing of the third party’s product on its territory if permission had not been
granted by the original patent holder. In a side letter, the United States and South Korea agreed to
not invoke the data exclusivity provision until the FTA has been in effect 18 months.
Furthermore, South Korea agreed of a patent-linkage system; that is, neither government is to
approve the marketing to a generic drug while the original patent is still in effect. Another
provision, known as patent-term extension, would require each FTA government to adjust the
length of the effective period for patents on pharmaceuticals to take into account delays incurred
in receiving patent approval and marketing approval. The KORUS FTA states that no provision
would prevent either government from taking measures to protect the public health of its residents
from HIV/AID, tuberculosis, malaria, and other epidemics, by ensuring access to medicines. The
FTA would reaffirm each country’s commitment to the WTO TRIPS/heath Declaration.
Reactions within the pharmaceutical and medical devices industries were somewhat split on the
KORUS FTA. Makers of innovative products supported the provisions that are designed to
preserve the rights of patent holders and provisions that are designed to make the South Korean
regulatory, pricing, and reimbursement process more transparent and open to comments and
procedural reviews. At the same time, industry representatives remain critical of South Korea’s
new reimbursement procedures and argue that the new system does not take into account the
benefits of innovative drugs that cause drug prices to be higher. Generic drug manufacturers
argue that the KORUS FTA does not contain provisions guaranteeing the availability of 94
South Korea was the seventh largest U.S. market for cross-border trade in services in 2006.95 U.S.
service providers exported $12.4 billion in services to South Korea. Among them were South
Korea travel to the United States ($2.8 billion) other transportation, such as freight services ($2.8
billion); royalties and license fees ($2.1 billion); and other private services, such as professional 96
services, business services, banking, insurance, and other financial services ($3.8 billion).
However, this amount probably undervalues the total volume of U.S. sales of services to South
Korea as services are also sold through three other modes of delivery: by U.S. companies with a
long-term presence in South Korea, by U.S. providers to South Korean residents located
temporarily in the United States; and by U.S. providers temporarily located in South Korea.
and (3) watch list countries, which maintain IPR practices that are of particular concern, but do not yet warrant higher-
level designations. See CRS Report RL34292, Intellectual Property Rights and International Trade, by Shayerah Ilias
and Ian F. Fergusson.
94 Report of the United States Industry Trade Advisory Committee for Chemicals, Pharmaceuticals, Health/Science
Products, and Service (ITAC-3) on The United States-South Korea Trade Promotion Agreement. April 24, 2007.
95 Ibid., 4-1.
96 Data obtained from U.S. Department of Commerce. Bureau of Economic Analysis.
In 2006, the United States imported $8.2 billion in services, including other transportation ($3.2
billion), U.S. travel to South Korea ($1.4 billion), expenditures by U.S. military ($1.7 billion), 97
and other travel ($1.0 billion). This figure does not include services sold to U.S. residents by
South Korean firms through the other modes of delivery.
U.S.-South Korean trade in services cuts across several chapters of the KORUS FTA—Chapter
12 (cross-border trade in services); chapter 13 (financial services); and Chapter 15
(telecommunications); chapter 11 (foreign investment); among others. A major U.S. objective in
the KORUS FTA negotiations was to obtain South Korean commitments to reduce barriers to
trade and investment in its services sector, especially in professional, financial, and
In general the two countries would commit to:
• provide national treatment and most-favored-nation treatment to the services imports
from each other;
• promote transparency in the development and implementation of regulations in
services providing timely notice of decisions on government permission to sell services;
• prohibit limits on market access, such as a caps on the number of service providers,
on the total value of services provided, on the total quantity of services provided, and on
the total number of persons that can be employed by services providers;
• prohibit foreign direct investment requirements, such as export and local content
requirements and employment mandates; and
• prohibit restrictions on the type of business entity through which a service provider
could provide a service.
U.S. and South Korean negotiators agreed to several concepts under the KORUS FTA that could
apply the agreements provisions to a broad scope of services. The two countries agreed to the
“negative list” approach in making commitments in services. That is, the KORUS FTA is to apply
to all types of services unless identified as an exception in the relevant annexes. In addition, the
commitments are racheted—when new services emerge in the U.S. or South Korean economies,
those services are automatically covered by the FTA unless identified as an exception; if either
country unilaterally liberalizes a measure that it had listed as an exemption, it is automatically
covered under the FTA. Furthermore, if one KORUS FTA partner extends preferential treatment
to service providers from a third country under another FTA, it is to extend the preferential
treatment to its KORUS FTA partner.
The United States sought greater reciprocity in the treatment of professional services and thereby
gain increased access to the South Korean market for U.S. providers. The United States and South
Korea agreed to form a professional services working group to develop methods to recognize
mutual standards and criteria for the licensing of professional service providers. Under the
KORUS FTA, South Korea would allow U.S. law firms to establish representative offices in
South Korea no later than two years after the KORUS FTA entered into force. South Korea would
also permit U.S. legal representative offices to establish cooperative operations with a South
Korean firm to handle matters pertaining to domestic and foreign legal matters, and, no later than
five years after the agreement’s entry into force, would allow U.S. law firms to establish joint
ventures with South Korean firms. However, South Korea would still reserve the right to restrict
the activities of foreign lawyers.
Regarding financial services, under the KORUS FTA, if a domestic provider in one partner
country develops and sells a new financial service in its home market, providers from the FTA
partner country would be able to sell a like service in that market. The agreement would allow an
FTA partner government to impose restrictions on the sale of financial services by providers from
the other partner country for prudential reasons, for example, to protect investors, depositors,
policy holders, or persons to whom a fiduciary duty is owed. The FTA would also permit either
partner government to restrict monetary transfers in order to ensure the soundness of financial
The South Korean insurance market is the seventh largest in the world. The USITC estimates,
therefore, that U.S. insurers would be poised to obtain sizeable gains in a liberalized South 98
Korean services market. U.S. insurance companies have been concerned that the state-owned
Korea Post and the cooperative insurance providers—the National Agricultural Cooperative
Federation and the National Federation of Fisheries Cooperative—are not regulated by the
Korean Financial Supervisory Commission or by the Financial Supervisory Service, while both 99
private-sector foreign and domestic providers are so regulated. Under the KORUS FTA, South
Korea agreed that those entities would be subject to an independent state regulator as opposed to 100
being self-regulated. In addition, Korea Post would not be allowed to offer new insurance
products. The two countries would allow a partner country financial services provider to transfer 101
electronically information from its territory as necessary in the course of doing business.
This is a provision that the U.S. industry highlighted as being particularly important.
In telecommunications services, South Korea would reduce government restrictions on foreign
ownership of South Korean telecommunications companies. Two years after the KORUS FTA
enters into force, U.S. companies would be able to own up to 100% of voting shares in domestic
South Korean telecommunications companies, and those companies would be able to own up to 102
100% of a facilities-based licensee. These provisions do not apply to KT Corporation nor to SL
Telecom Co for which a 49% foreign ownership limit would remain. In addition, each KORUS
FTA partner would ensure that telecommunications providers from the other would have access to
and use of its public telecommunications network for purposes of interconnection under non-103
discriminatory conditions and would guarantee dialing portability among other conditions.
98 USITC. p. 4-8.
99 Office of the United States Trade Representative. 2007 National Trade Estimates Report—Foreign Trade Barriers.
100 The United States-Korea Free Trade Agreement (KORUS FTA). Report of the Industry Trade Advisory Committee
on Services and Finance Industries (ITAC 10) April 2007.
101 The Free Trade Agreement Between South Korea and the United States (KORUS FTA). Chapter 13 (Financial
102 Annex -I (Korea).
103 KORUS FTA Chapter 14 Telecommunications.
Those who represent U.S. services providers have been enthusiastic about the KORUS FTA and
have urged its approval. In a statement, Robert Vastine, President of the Coalition of Services
We commend Ambassador Schwab and the team of negotiators who secured significant
benefits for U.S. services providers in this agreement.... Korea is a key market for U.S.
service companies, and this is a very high-quality agreement that merits swift passage by the 104
Congress because it creates new commercial opportunities that will support new jobs.
For years, a priority for South Korea has been to convince the United States to ease restrictions on
the issuance of visas for South Korean business representatives. The visa issue—along with South
Korea’s request to be added to the Visa Waiver program (VWP), which allows visa free travel for
short-term visitors—was addressed in discussions outside of the KORUS FTA negotiations. On
October 17, 2008, President Bush announced that South Korea was one of seven countries that 105
would be admitted into the program in 4-6 weeks. With this step, the VWP is likely to no
longer be an issue in bilateral relations. South Korea is one of the United States’ largest sources of
foreign visitors. In FY2007 there were 811,251 short term visitors for business or pleasure from 106
The KORUS FTA text contains a number of provisions that cut across in many sectors in bilateral
trade. Many of these provisions have become standard fare and have become part of the template
for FTAs in which the United States participates.
Trade remedies, laws and actions designed to provide relief to domestic industries that have been
injured or threatened with injury by imports, are regarded by many in Congress as an important
trade policy tool to mitigate the adverse effects of lower priced imports on U.S. industries and
The three most commonly used trade remedies are antidumping (AD), countervailing duty
(CVD), and safeguard actions. Antidumping (19 U.S.C. § 1673 et seq.) actions provide relief
from the adverse impact of imports sold at prices shown to be less than fair market value, and
countervailing duty (19 U.S.C. § 1671 et seq.) actions provide similar relief from goods that have
been subsidized by a foreign government or other public entity. Safeguard actions (19 U.S.C. §
104 Coalition of Service Industries. Coalition of Service Industries Expresses Strong Support for U.S.-Korea FTA;
Urges Swift Congressional Passage. Press release. June 30, 2007.
105 White House Office of the Press Secretary, “President Bush Discusses the Visa Waiver Program,” October 17,
2008. South Korea’s path to entry into the VWP was made possible
by reforms of the VWP that were embodied in H.R. 1 (P.L. 110-53), the Implementing the 9/11 Commission
Recommendations Act of 2007. For more on the U.S. Visa Waiver Program, see CRS Report RL32221, Visa Waiver
Program, by Alison Siskin.
106 Department of Homeland Security, Temporary Admissions in Yearbook of Immigration Statistics: 2007 Table 28.
2251 et seq.) are designed to give domestic industries an opportunity to adjust to new competition
and are triggered by import surges of fairly traded goods. The relief provided in a safeguard case
is a temporary import duty, temporary import quota, or a combination of both, while the relief in
an antidumping or countervailing duty action is an additional duty placed on the dumped or
subsidized imports. These actions are authorized by the WTO as long as they are consistent with
the rights and obligations of Article XIX of the General Agreement on Tariffs and Trade (GATT)
and the WTO Agreement on Implementation of Article VI of the GATT 1994 (Antidumping 107
Many Members of Congress have expressed support for maintaining and strengthening U.S. trade
remedy laws in the face of growing import competition. As a result, the preservation of U.S.
authority to “enforce rigorously its trade laws” was a principal negotiating objective included in th108
presidential Trade Promotion Authority (TPA) in the 107 Congress.
According to news reports, the “single most important South Korean demand” in the bilateral 109
talks was changes to U.S. antidumping rules. This may be due, in part, to the significant
number of U.S. trade remedy cases brought by U.S. industries on South Korean goods. As of July
15, 2007, antidumping duties were being collected on 15 South Korean imports (mostly on
stainless steel specialty products such wire rod and pipe fittings), and countervailing duties were
being assessed on 5 South Korean products, while South Korea had 2 antidumping measures in 110
place against U.S. products. The U.S. global safeguard cases imposed on steel in February
steel imports to the United States. Of the 13 WTO dispute resolution complainant cases South 112
Korea has brought to date, seven have been disputes against U.S. trade remedy actions. South
Korea is also a member “Friends of Antidumping” group in the WTO Doha Round that insists on
implementing changes to the Antidumping and Subsidies Agreements in any new multilateral
In the bilateral negotiations between the United States and South Korea, talks broke down in early
December 2006 when South Korea presented the United States with a list of specific changes to 113
U.S. antidumping laws on a “basically” take-it-or-leave-it basis, but in mid-January 2007,
107 For more information, see CRS Report RL32371, Trade Remedies: A Primer, by Vivian C. Jones.
108 P.L. 107-210, Trade Act of 2002, Section 2102(b)(14).
109 “South Korea Retracts Key Demand in Anti-Dumping Rules: Leaked Government Report,” Yonhap (South Korea),
January 19, 2007.
110 USITC. “Antidumping and Countervailing Duty Orders In Place As of July 20, 2007, by Country.” Available at
http://www.usitc.gov. Korea Trade Commission, TR Measures, available at http://www.ktc.go.kr/en/kboard_child/
111 Schott, Jeffrey J., Bradford, Scott C., and Moll, Thomas. Negotiating the Korea - United States Free Trade
Agreement, Institute for International Economics, June 2006.
112 World Trade Organization dispute settlement statistics, http://www.wto.org/english/tratop_e/dispu_e/
dispu_by_country_e.htm. South Korea was one of the complainants in the WTO dispute brought against the U.S.
safeguard measures on steel, as well as that against the Continued Dumping and Subsidy Offset Act (“Byrd
113 “Cutler says U.S.-Korea Talks Hit Snag in Three Negotiating Groups, FDA Week, December 8, 2006. Although the
particulars of South Korean demands were not made public, according to news reports, one of Korea’s demands was to
be excluded from the cumulation of imports used to determine injury in a safeguards case, if its share of imports into
the U.S. are below a certain threshold.
South Korean officials softened their stance after accepting the assurances of U.S. negotiators that
Trade Promotion Authority had granted the Bush Administration only limited flexibility to make 114
concessions on trade remedy issues.
The KORUS FTA, just as in earlier FTAs the United States has entered into, proposes that each
party to the agreement would retain all rights and obligations under the WTO agreements—
meaning that the trading partners would be permitted to include each other in global safeguard
actions (although, as in other FTAs, it does extend a possible exemption from global safeguard
measures to either party if its imports are not a substantial cause of serious injury) and to
implement AD and CVD actions against each other. Additionally, as in earlier FTAs, the trade
remedies article would also authorize either party to the agreement to apply a transitional
safeguard measure against imports of the other party if, as the result of the reduction or
elimination of a duty mandated by the agreement, a product is being imported in increased
quantities as to be a substantial cause of serious injury to a domestic industry that produces a like 115
or directly competitive good.
In the case of a safeguard, the party imposing it must provide a mutually agreed-upon amount of
compensation. If the parties do not agree, the other party may suspend concessions on imports of
the other party in an amount that has trade effects substantially equivalent to the safeguard 116
As such, the agreement does not seem to require any changes to U.S. AD, CVD, or global
safeguard laws, or substantially change administrative procedures required to implement these 117
actions. However, in an apparent departure from previous FTAs, the KORUS FTA seems to
require a few additional administrative steps prior to initiation of a trade remedy investigation
involving goods from the other party. First, each party would have to notify the other if an
antidumping petition is received regarding the other party’s imports, as well as provide an 118
opportunity for a meeting between the parties before an investigation is initiated. Additionally,
the party initiating an AD or CVD investigation would be required to provide written information
regarding its procedures for negotiating a price or quantity undertaking (known in U.S. law as a 119
suspension agreement), and, after a preliminary affirmative determination is reached, “provide
due consideration and adequate opportunity for consultations regarding proposed price
undertakings” which could result in suspension of the investigation without imposition of duties 120
provided a mutually agreeable undertaking is reached.
The KORUS FTA would also establish a Committee on Trade Remedies (which would meet at
least once a year) made up of representatives from each party who have responsibility for trade
114 “South Korea Retracts Key Demand on Anti-dumping Rules: Leaked Government Report.” Yonhap, January 19,
115 See Chapter 10, Section A, Article 10.1 Application of a Safeguard Measure and Article 10.5 Global Safeguard
116 Article 10.4, Compensation.
117 USITC. U.S. Korea Free Trade Agreement: Potential Economy-wide and Selected Sectoral Effects. Publication
3949, September 2007, p. 6-1.
118 Chapter 10, Section B. Antidumping and Countervailing.
119 CVD: 19 U.S.C. 1671c; AD: 19 U.S.C. 1673c. Under these statutes, a quantitative restriction or price offset
suspension agreement must completely eliminate the injurious effect of the dumping or subsidy, must be in the public
interest and must be able to be effectively monitored by U.S. authorities.
120 Chapter 10, Section B. Antidumping and Countervailing Duties, Article 10.7, paragraphs 3 and 4.
remedies matters. Committee functions would include enhancing knowledge of the parties’ trade
remedy laws and practices, overseeing the implementation of the trade remedies chapter of the
agreement, improving cooperation between the parties, developing educational programs on trade
remedy laws, and providing a forum for exchange of information on trade remedies and other 121
topics of mutual interest.
As discussed earlier, the Industry Trade Advisory Committee on Steel (ITAC 12), believes that
the procedural concessions made on trade remedies could politicize trade remedy actions, thus
possibly weakening U.S. trade laws. In particular, the ITAC 12 stated that the U.S. AD-CVD
investigative process is already transparent and that the pre-initiation notification and consultation 122
requirements would delay and politicize the process. It also objected to the “undertakings”
provisions, saying that these provisions would encourage the use of suspension agreements and 123
introduce actions of foreign governments into trade remedy procedures. (For more information
on the steel industry’s reaction, see discussion in section on “Other Manufactured Goods.”)
The ITAC 12 also opposes the establishment of a Committee on Trade Remedies, saying that it
such a forum would give South Korea an opportunity to attempt to further try to weaken U.S. 124
trade remedy laws. Speaking in April 2007, Assistant U.S. Trade Representative for Korea,
Japan, and APEC Wendy Cutler, the chief U.S. negotiator, implied that the consultative
committee would focus on information sharing and “will not provide a forum to discuss specific 125
cases.” She also mentioned that the committee could be a benefit to the United States by
providing a platform for discussing certain industrial subsidies that the South Korean government
may be supplying to manufacturing firms, and that negotiators worked out an “accommodation” 126
that was beneficial to both sides’ needs on a very contentious part of the negotiations.
A consistent and significant goal for South Korea in the FTA talks was securing preferential
treatment for products made in the Kaesong Industrial Complex (KIC) in North Korea, a position
the United States adamantly throughout most of the negotiations. Located near the North Korean
city of Kaesong (also spelled “Gaesong”), 40 miles north of Seoul, the KIC is designed for South
Korean companies to employ North Korean workers. The factories of 15 South Korean
manufacturing firms began operating when the site opened in 2004. As of November 2007, this
number had increased to 52 firms, which employed about 20,000 North Korean workers. There
are plans to expand the zone dramatically. The South Korean Unification Ministry expects that by
the end of 2010, about 450 South Korean manufacturers and 100,000 North Korean workers will 128
be in the KIC. The KIC arguably has become the centerpiece for South Korea’s “sunshine
policy” of engaging North Korea.
121 Chapter 10, Section C. Committee on Trade Remedies, Article 10.8, paragraph 2.
122 ITAC (12) on Steel, Advisory Committee Report, April 27, 2007, p. 7.
123 Ibid, p. 4
125 “Trade Remedy Piece of Korea FTA Ignores Korean AD Demands,” Inside U.S. Trade, April 13, 2007.
127 For more, see CRS Report RL34093, The Kaesong North-South Korean Industrial Complex, by Dick K. Nanto and
Mark E. Manyin.
128 Ministry of Unification, “Current Status of Operation in the Gaeseong Industrial Complex,” November 23, 2007.
In the final KORUS FTA agreement, the two sides reached a compromise on the KIC. One year
after the KORUS FTA enters into force, a binational committee will be formed to study the
possibility of eventually including products from “Outward Processing Zones” (OPZs) using 129
North Korean labor sometime in the future. The agreement identifies three general categories
for which the committee is to develop more detailed criteria: progress in the denuclearization of
North Korea, developments in intra-Korean relations; and wages, the environment, and labor
standards. For the third category of issues, the committee is to consider relevant international
norms as well as the “situation prevailing elsewhere on the Peninsula.” After the committee has
developed criteria, the OPZ provisions in the FTA lay out a three step process by which products
made in the KIC could be incorporated into the FTA. First, the committee must deem that an
outward processing zone meets the criteria it has established. Second, the two governments must
agree that the FTA should be amended accordingly. Third, each government must seek
“legislative approval for any amendments to the Agreement with respect to outward processing
zones.” The agreement does not lay out the size or composition of the committee, or how
committee members will be chosen, or the procedures by which the committee is to arrive at 130
In the KORUS FTA negotiations, the United States backed away from the principle of its initial
position of not ever expanding the KORUS FTA to North Korea-made products, a significant
achievement for South Korea. At the same time, the United States appeared to give up little in
substance in the near-to-middle term. The United States apparently would be able to control the
decision to and pace of any move to grant preferential treatment to North Korea-made products.
Any perceptions of foot-dragging by the United States, however, may come at a diplomatic price
if future South Korean governments push for more rapid integration of North Korean industrial
zones into the FTA.
Two important issues for the United States in considering South Korea’s demand were the
conditions for North Korean workers and the income the KIC provides for the North Korean
government. Some U.S. labor and human rights advocates have argued that North Korean
workers in Kaesong are being exploited. South Korean officials, as well as other analysts, counter
by saying that conditions at Kaesong are far better than those in the rest of North Korea.
Additionally, the North Korean government derives hard currency from several sources in the
KIC project, including leasing fees and surcharges levied on North Korean workers’ wages,
which are paid to an arm of the North Korean government agency before being passed on to
employees (in the form of North Korean won). To date, these revenue streams are likely to be
relatively small, though not insignificant, given the small size of the North Korean economy and
its shortage of hard currency. If the most ambitious goals for the Kaesong project are realized, by
the middle of the next decade the North Korean government would likely derive tens if not
hundreds of millions of dollars annually from tax revenues and its slice of North Korean workers’ 131
wages, assuming the KIC’s current tax and wage structures remain in place. Some South
Koreans caution that the uncertainties over the future course of the KIC project make such
projections highly speculative.
129 Chapter 22, Annex B, Committee on Outward Processing Zones on the Korean Peninsula.
130 April 2007 interviews with U.S. and Korean officials; remarks by Assistant U.S. Trade Representative for Japan,
Korea and APEC Affairs Wendy Cutler at an April 5, 2007 Korea Economic Institute forum; “Behind the Korea FTA
Negotiations,” Washington Trade Daily, April 12, 2007.
131 Moon Ihlwan, “Bridging the Korean Economic Divide,” Business Week, March 8, 2006.
Foreign investment is becoming an increasingly significant element in the U.S.-South Korean
bilateral economic relationship. Over the past 10 years, the stock of U.S.-South Korean foreign
direct investment (FDI), valued on an historical cost basis, has increased substantially, due in no
small part to the market-oriented reforms South Korea undertook after its 1997 financial crisis. In
1997, the value of stock of U.S. FDI in South Korea was $6.5 billion and had increased to $22.3
billion by the end of 2006. In 2006, 43% of U.S. FDI in South Korea was in manufacturing,
especially in computers and electronic products, chemicals, and other manufacturing facilities.
The remainder of the FDI was in services, with U.S. FDI in banking and other financial services
accounting for much of this investment. South Korean FDI in the United States has also increased
substantially in the last 10 years, albeit from a much lower base. In 1997, the stock of South
Korean FDI in the United States was valued at $0.6 billion and had increased to $8.6 billion by
the end of 2006. $7.2 billion, or 84% of this investment was in wholesale trade, perhaps reflecting 132
the sharp retail facilities to sell South Korean-made vehicles in the United States.
Foreign investment has been a sensitive issue in U.S.-South Korean relations for many years as
U.S. investors have tried to make inroads into the South Korean economy. U.S. investors’
criticisms have included restrictions on foreign investment in key sectors, such as
communications and lack of adequate protection for intellectual property. (See section on IPR
provisions of the KORUS FTA.) Efforts to establish bilateral rules have failed in the past. In the
1990s, the two countries tried to negotiate a bilateral investment treaty (BIT), that would commit
each party to provide national treatment to the investments from the other party and abstain from
performance requirements for foreign investments from the other party. But the negotiations
collapsed largely over U.S. opposition to South Korea’s so-called screen quota on domestic films
and the latter’s resistence to lifting or reducing it. (The South Korean government reduced the
screen quotas by half just before the KORUS FTA negotiations were launched in February 2006.)
The KORUS FTA chapter on investment essentially contains the commitments that would
otherwise have been in a BIT.
The FTA sets down general principals for the treatment by South Korea and the United States of 133
investors and investments from one partner in the territory of the other. The principle of
national treatment—that one party to the agreement will treat covered investments and investors
from the other party no-less favorably than it treats domestic investors and investments—is
paramount. The FTA allows each party to make exceptions to the national treatment principle, but 134
those exceptions must be specified in the relevant annexes to the agreement. A second
fundamental principal is most-favored-nation treatment (MFN)—the two parties agree to treat
investors and investments from the other no less favorably than it treats investors and investments
from third, non-party countries. A third principle is minimum standard of treatment, that is, each
132 CRS calculations based on data from U.S. Department of Commerce. Bureau of Economic Analysis.
133 A range of factors determine the climate for foreign investment—government regulations, skills of local labor,
general economic conditions, intellectual property rights protection, among others. Therefore, U.S.-South Korean
investment ties could be affected by not only the provisions of the investment chapter of the agreement, but other
chapters as well.
134 The USITC report on the KORUS FTA points out that South Korea’s list these “nonconforming measures” in the
KORUS FTA is longer than in previous FTAs that the United States has signed; however, industry representatives
generally believe that the KORUS FTA would still render significant opportunities for U.S. investors. USITC. p. 6-5.
party shall accord to all covered investments treatment in accordance with customary
international law, including fair and equitable treatment and full protection and security.
The KORUS FTA would set limits on government expropriation of covered investments—that
they be only for public purpose and carried out in a non-discriminatory manner, and affected
investors would be provided with prompt and adequate compensation (fair market value). It also
would require each KORUS FTA partner-country government allow for the free transfer of
financial capital pertaining to covered investments both into and out of the country with
exceptions, such as cases related to criminal offenses. The KORUS FTA would prohibit the U.S.
and South Korean governments from imposing performance requirements (domestic content
requirements, export-ratios, import limits, etc.) on the investments from the other. It would allow
exceptions for measures intended to accomplish social objectives, such as to increase
employment in certain regions of the country, promote training of workforce, and protect the
environment. The agreement would also prohibit a requirement that senior managers be of a
particular nationality but would allow a requirement that the majority of board of directors be of a
Similar to other U.S. FTAs, the KORUS FTA would establish procedures for the settlement of
investor-state disputes involving investments covered under the agreement where the investor
from one partner-country alleges that the government of the other partner-country is violating his
rights under the FTA. The FTA stipulates that the two parties should try to first resolve the dispute
through consultations and negotiations. But, if that does not work, the agreement would provide
for arbitration procedures and the establishment of tribunals as provided under the “Convention
on the Settlement of Investment Disputes Between States and Nationals of Other States.”
The USITC concluded that U.S. investors, especially investors in financial services, would likely 135
gain from the KORUS FTA. (See section on financial and other services.) The United States
has been the predominate partner in terms of foreign investment and stands to gain the most from
the protections provided by the KORUS FTA. However, South Korean investments in the United
States are increasing, and therefore, South Korea could benefit as well.
In addition to those sections addressing pharmaceutical manufacturing (see discussion above), the
KORUS FTA contains other provisions on intellectual property rights (IPR) protection in U.S.-
South Korean trade. Under the FTA the United States and South Korea would reaffirm their
commitments under the WTO Trade-Related Aspects of Intellectual Property Rights (TRIPS)
agreement and other international agreements and conventions on intellectual property. But the
two countries would make IPR commitments beyond those agreements with provisions that
• require each government to extend national treatment to IPR holders from the other 136
135 USITC. p. 6-5.
136 A national treatment exception is made with respect to the secondary uses of recordings by means of analog
communications, including over-the-air broadcasts, whereby a Party can limit the rights of performers and producers of
sound recordings from the other Party on its own territory. This exception was a disappointment to U.S. industry, which
otherwise praise the agreement. Korea-U.S. Free Trade Agreement: Benefits to America’s Entertainment Industries.
• require transparency through the publication of regulations and laws regarding
intellectual property rights;
• facilitate the registration of and protection of trademarks and established limitations
on the use of geographical indications;
• ensure the right of authors, performers, producers of recordings to determine use of
• require copyright protection for no less than 70 years; thus, South Korea agrees to
extend its copyright protection term, an objective of U.S. copyright holders;
• protect copyrighted material against piracy and provide penalties for those who abet
piracy including the seizure and destruction of pirated and counterfeit products;
• protect copyrighted performances on the internet; and
• protect encrypted programming over satellites and cable signals.
On May 10, 2007, a bipartisan group of congressional leaders and the Bush Administration
released a statement that provided language to be included in pending and future FTAs, including
KORUS FTA. Among other things, the statement, or framework, called “The New Trade Policy
for America,” requires U.S. FTA partners to commit to enforcing the five basic international labor 137
standards and would require that the commitment be enforceable under the FTA. Neither
country is to waive or otherwise derogate from its labor statutes that reflect the five labor rights in
a manner that affects trade or investment between the two FTA countries. Each country is to
ensure that those affected by their respective labor laws have access to tribunals that enforce their
rights under those laws.
Under the KORUS FTA the two countries are to form a Labor Council made up of officials
responsible for labor matters in each country, that will meet within the first year after the
agreement enters into force. At least one session of the Council will be devoted to meeting with
the public in each country to discuss matters related to the enforcement of the labor provisions of
the FTA. Disputes regarding labor matters under the FTA are to be resolved first by consultations,
but if those fail, the parties in dispute may take the matter to the Labor Council and eventually to
a dispute settlement panel if these mechanisms fail to resolve the dispute. The KORUS FTA also
Testimony Before the U.S. International Trade Commission by Greg Frazier, Executive Vice-President Worldwide
Government Policy Motion Picture Association of America. June 6, 2007. p.7.
137 The FTA would require each Party to adopt and maintain five internationally-accepted labor rights that are
contained in the ILO Declaration on Fundamental Principles and Rights at Work and Its Follow-Up (1998) (ILO
Declaration) Article 19:2 specifies these rights as the freedom of association, the effective recognition of the right to
collective bargaining, the elimination of all forms of compulsory or forced labor, the effective abolition of child labor
and the elimination of discrimination in respect of employment and occupation. The framework also requires FTAs to
adhere to seven major multilateral environmental agreements and for this commitment to be enforceable under the
FTA. “The Trade Policy for America” was completed after President Bush notified the Congress on April 1, 2007 of
his intention to sign the KORUS FTA but prior to the signing on June 30. At first, South Korean officials balked at
opening negotiations to add the language but eventually agreed to do so. After, the two sides held negotiations, they
included the language in the final text that was signed on June 30, 2007.
calls for the establishment of a Labor Cooperation Mechanism whereby the two countries would
develop and work in areas pertaining to labor rights in each country.
To many outside observers, South Korea’s labor rights regime is generally considered to be strong
for regular workers. South Korea ranks in the top third of the OECD’s thirty members in terms of 138
employment protection for regular workers. Indeed, for years, a major complaint of U.S.
multinationals is that restrictions in the South Korean labor market, such as mandatory severance
pay, significantly raise the cost of investing and doing business in Korea. In contrast, U.S. union
representatives argue that recent changes to make South Korean labor markets more flexible are 139
reducing the rights of South Korean workers. Korea’s unions have earned a reputation for
activism; the number of working days lost to strikes is regularly among the highest in the OECD.
Hyundai Motors, for instance, has experienced a strike every year since 1994. Moreover, strikes
in South Korea are notable in that they are sometimes accompanied by violence and the
occupation of workplaces and public spaces (such as highways), to which the government often
responds with police action. In its comments on the KORUS FTA, the Labor Advisory Committee
for Trade Negotiations and Trade Policy (LAC), criticized South Korea for the imprisonment of
around 200 unionists who were “exercising basic labor rights” and for mobilizing riot police 140
against union activity.
Korea’s labor pool is divided into two segments: 1) South Korean “salarymen” (salaried workers,
overwhelmingly men, in large corporations) who comprise less than one-third of the workforce.
Over half of this segment of the workforce is represented by powerful unions. 2) The remainder
of the workforce, comprised of employees in small-scale firms plus the country’s temporary and
day laborers. Few of these workers are unionized. The proportion of temporary workers has
grown markedly, to nearly one-third of the workforce, one of the highest rates in the 141
industrialized world. These workers tend to receive low wages and receive limited coverage by
the social safety net, points highlighted by the LAC. Labor markets are notoriously rigid.
A great deal of business is conducted by governments through the purchase of goods and services
for their own use. Most governments, including the United States have laws (The Buy American
Act) which require such goods and services to be of domestic origin. However, the General
Agreement on Tariffs and Trade (GATT) and now the WTO have some provisions, the WTO
Government Procurement Agreement (GPA), under which the countries agree to open up some of
their government procurement business, to foreign companies as a way to promote trade. This
agreement is plurilateral, that is it only applies to those WTO members that have signed it. The
United States and South Korea are among the 39 signatories to the GPA. The GPA established
rules for governments to publish information about contract tenders, including technical
specification, about qualification for suppliers, the awarding of contracts, with a specific
emphasis on nondiscrimination and transparency in the conduct of government procurement.
138 OECD, Economic Survey—Korea 2007, p. 138.
139 Report of the Labor Advisory Committee for Trade Negotiations and Trade Policy (LAC) on the KORUS FTA,
April 27, 2007, p. 9.
141 OECD, Economic Survey—Korea 2007, p. 128-40.
The KORUS FTA reaffirms the GPA as a baseline for government procurement but would expand
the criteria to include more contracts. The GPA applies to contracts valued at around $193,000
and above. The KORUS FTA would apply agreement to contracts valued at $100,000 and above,
potentially increasing the value of bilateral government-procurement trade. The GPA applies only
to contracts tendered by 79 U.S. Federal government agencies and by 42 South Korean central
and subcentral agencies listed in the annex. Under the KORUS FTA, South Korea would add nine
more agencies to be covered.
In keeping with the May 2007 agreement on labor and the environment between the Bush
Administration and congressional leaders, under the KORUS FTA, the United States and South
Korea would commit to enforce a list of seven multilateral environmental agreements to which
both are parties and to add to the list when other agreements enter into force. (See the Labor 142
Rights and Conditions section above.) In addition, the FTA would prevent the two countries
from easing environmental standards in order to allow firms on their territory from gaining a
competitive trade advantage. Furthermore, violations of the environmental provisions are to
handled in the same manner as commercial provisions through the dispute settlement mechanism
of the KORUS FTA and subject to trade sanctions, unprecedented for U.S. FTAs.
Making information publically available is a fundamental principle imbedded in international
trade rules and in each of the FTAs that the United States has entered into. For years U.S.
exporters and trade negotiators identified the lack of transparency of South Korea’s trading and
regulatory systems as one of the most significant barriers to trade with South Korea, in almost
every major product sector. Under KORUS FTA, the United States and South Korea would
commit to publish relevant regulations and administrative decisions as well as proposed
regulations; to allow persons from the other party to make comments and to ask questions
regarding proposed regulations; to notify such persons of administrative proceedings and to allow
them make presentations before final administrative action is taken; and to allow such persons to
request review and appeal of administrative decisions.
The KORUS FTA would provide several options for the United States and South Korea to resolve
disputes arising under the agreement, in addition to the special dispute settlement provisions
under the foreign investment chapter and other chapters. KORUS FTA would require the two
countries to establish a joint committee chaired by the USTR and the Minister of Foreign Trade or
their designees to supervise the implementation of the agreement. The committee would establish
a panel to adjudicate disputes between the two countries under the agreement, if consultations do
not lead to a resolution of the dispute. Annex 22A of the KORUS FTA contains provisions for the
settlement of disputes regarding motor vehicles, specifically the snap-back provision. (See
142 The seven agreements are: the Convention on International Trade in Endangered Species; the Montreal Protocol on
Ozone Depleting Substances; the Convention on Marine Pollution; the Inter-American Tropical Tuna Convention; the
Ramsar Convention on the Wetlands; the International Convention for the Regulation of Whaling; and the Convention
on Conservation of Antarctic Marine Living Resources.
discussion in section on auto trade.) Annex 22-B provides for eventual discussion of the inclusion
of products made in outward processing zones in North Korea. (For more information, see
discussion in Kaesong Industrial Park section.)
The KORUS FTA includes other sets of provisions intended to facilitate market access. Technical
barriers to trade are standards and regulations that are intended ostensibly to protect the health
and safety of consumers and for other legitimate non-trade purposes but may through design and
implementation discriminate against imports. The KORUS FTA would commit both countries to
uphold their obligations under the WTO Agreement on Technical Barriers to Trade (TBT). In
addition, South Korea and the United States would promote transparency, by allowing persons
from the other party to participate in the development of standards, technical regulations, and
conformity assessment procedures.
Regarding customs administration and trade facilitation, the KORUS FTA would promote
joint cooperation to ensure compliance with each other’s customs laws and regulations. For
example, it would require the two countries to adopt procedures and regulations to facilitate
express delivery shipments.
Rules of origin define what are goods that originate in the FTA region and therefore are eligible
for preferential treatment. (Textiles and apparel have separate rules of origin). The KORUS FTA
would require that goods must be wholly obtained or produced in the territory of both countries or
country. The FTA would set a regional value threshold to be met to be considered originating in
the FTA territory and provides formulas for determining the regional values.
National competition laws and regulations are intended to ensure that one firm does not so
dominate a sector of the economy as to inhibit market entry and stifle competition. Among other
things, the KORUS FTA would require that the United States and South Korea inform persons,
who are subject to administrative actions, of hearings and provide them the opportunity to make
their case. The two countries would cooperate in enforcing competition laws through the
exchange of information and consultation. In addition, designated monopolies and state-
enterprises would have to operate in conformance with the agreement and in accordance with
The KORUS FTA includes provisions to facilitate trade via electronic commerce (e-commerce).
They would prohibit discrimination against digital products and imposing customs duties on these
products. They would also require the recognition of electronic authentication and electronic
signatures and would promote consumer access to the Internet.
The United States concluded and entered into (signed) the KORUS FTA within the parameters of
the Trade Promotion Authority (TPA) under the Bipartisan Trade Promotion Act of 2002. (P.L.
that is mandatory congressional consideration, limited debate, no amendments, and an up-or-
down vote. TPA does not impose a deadline on the President to submit the draft implementing
bill. It is generally assumed that the President would do so only when he expects to have
sufficient support in Congress to pass it, although he could submit the bill without that assurance
and risk the bill’s failure. The April 2008 bilateral beef agreement allowing for the resumption of
U.S. beef sales to South Korea, subsequently revised to address Korean public concerns and the
Korean government’s efforts to address them, removes the last impediment to sending the
KORUS FTA to Congress, according to Administration officials. Some Members of Congress
have signaled they will now watch to see how Korea moves to implement this commitment.
However, differences over the implications of the KORUS FTA between the White House and the
Democratic leadership in the Congress have made the timing and even the likelihood of the
President’s submission and the Congress’s subsequent consideration of implementing legislation 143
In South Korea, the KORUS FTA must be approved by a majority vote in the unicameral
National Assembly to take effect. Unlike in the United States, trade agreements are not subject to
any fast-track time lines. President Lee Myung Bak, who was elected in December 2007, has
made passage of the KORUS FTA a priority for his government. Most opinion polls show a
majority of South Koreans in favor of the agreement, though opposition has been intense from
rural interests, among others. Furthermore, most polls of South Korean legislators show a broad
support for the agreement within the National Assembly, which is controlled by President Lee’s
Grand National Party. The KORUS FTA was not a significant issue in either the 2007 presidential
election campaign, despite the fact that one of the major candidates opposed the agreement, or the
April 2008 parliamentary elections.
For South Korea, entering an FTA with the United States meshes with a number of Lee’s
economic and strategic goals. Ongoing competitive pressure from Japanese firms, increased
competition from Chinese enterprises, and the rapid aging of the South Korean workforce has
heightened the sense of urgency to boost national long-term competitiveness, particularly in the
services industries, where South Korean productivity typically lags compared to other
industrialized countries. Indeed, former President Roh and other South Korean officials have 144
argued that the KORUS FTA is essential for South Korea’s economic survival. Similarly, if less
grandiosely, President Lee has argued that passage of the KORUS FTA will help revitalize South
Korea’s economy. To accelerate Korea’s reform efforts—and also to avoid being left out from
other FTAs being created globally and in Asia—Presidents Roh and Lee have pursued an
aggressive effort to negotiate FTAs. South Korea has entered into FTAs with Chile, Singapore,
the European Free Trade Association (EFTA), the Association of Southeast Asian Nations 145
(ASEAN), and is negotiating with other countries, including the European Union and India.
The United States and South Korea negotiated the KORUS FTA in part as a means to restore the 146
health of a critical foreign policy and national security alliance. While the talks were ongoing,
143 It is also possible that the next President could submit the implementing legislation, if President Bush has not done
so by the end of his term.
144 Korea Broadcast System, March 31, 2006 Broadcast in Korean, summarized by the Open Source Center, “ROK TV
Carries Economic Minister’s Comments on ROK-US FTA,” April 10, 2006, FEA20060410021900. (Han was Finance
Minister when he made these remarks.) South Korean Blue House, “Address to the Nation,” April 2, 2007.
145 EFTA is comprised of Iceland, Norway, Switzerland, and Liechtenstein. ASEAN consists of Brunei, Cambodia,
Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.
146 For more, see CRS Report RL33567, Korea-U.S. Relations: Issues for Congress, by Larry A. Niksch.
the KORUS FTA sometimes was discussed as a possible counterweight to the bilateral friction
that was occurring over issues such as how to manage relations with North Korea and the re-
positioning of U.S. troops in South Korea. These tensions decreased markedly in 2007, following
the Bush Administration’s decision to place greater emphasis on engagement and negotiations
with North Korea. The election of Lee, who has stressed the importance of rebuilding U.S.-South
Korean ties, is expected to further improve relations. Thus, with the alliance apparently on firmer
ground, the KORUS FTA no longer appears as an exceptional area of bilateral cooperation.
Although the FTA’s utility as an acute salve for the alliance has been reduced, over the medium
and longer term, some argue it could help to boost the alliance by deepening bilateral economic
and political ties. The tensions over North Korea policy, which may resurface, have revealed the
extent to which the two countries view North Korea differently. Most South Koreans’ sense of
threat from North Korea has declined over the past decade, even as Americans’ threat perceptions
have risen. With the central rationale for the alliance—deterring a North Korean attack—now
open to question in South Korea, and with many South Koreans opposed to allowing U.S. troops
in South Korea to deploy to other parts of Asia (such as the Taiwan Strait) in the event of a crisis,
the future utility and form of the alliance is being debated. Entering into an FTA, some argue, is a
way to help reorient the alliance to adapt to the changes on the Korean Peninsula and in East
Asia. However, in concrete terms, it is difficult to see how the KORUS FTA would make a
significant difference in the strategic relationship, as it is unlikely to alter either country’s
fundamental interests on the Peninsula or in Northeast Asia.
In contrast, while the passage of the KORUS FTA is unlikely to have a major substantive impact
on the strategic relationship, a collapse of the KORUS FTA would probably have a profound
symbolic effect, particularly upon the way South Koreans view the alliance. If the KORUS FTA
is rejected or subjected to a prolonged delay by the United States, it would be a psychological
blow to many South Korean policymakers, many of whom would likely see it as a betrayal. This
would be particularly true since, in their eyes, they made politically costly concessions on autos,
beef, labor, and the environment to help ensure the agreement would be more favorably received
in the U.S. Congress. The KORUS FTA’s failure in the United States, according to some Korean
politicians and policymakers, would lend credence to arguments in South Korea that the U.S.
commitment to Korea and Northeast Asia is declining. If these perceptions take hold, it would
increase the political costs of South Korean leaders’ taking unpopular decisions on behalf of the
alliance, such as increasing South Korean payments for relocating U.S. troops on the Peninsula. If
the KORUS FTA is rejected or delayed in the United States, U.S. policymakers could attempt to
somewhat ameliorate the negative symbolic effects in South Korea by taking high profile steps to
expand U.S.-ROK strategic, rather than economic, relations.
The fate of the KORUS FTA could affect U.S. efforts to institutionalize its economic presence in
East Asia, a goal the Bush Administration has been pursuing in part through FTAs. In addition to
the KORUS FTA, the United States has an FTA with Singapore. It has been negotiating with
Malaysia and Thailand, but these negotiations have been slow or dormant. In September 2008,
the United States announced it would launch negotiations to join the Trans-Pacific Strategic
Economic Partnership Agreement (also called the “P-4” agreement), a trade liberalization
arrangement among Brunei, Chile, New Zealand, and Singapore. The U.S. use of FTAs in Asia
also has been a response to the plethora of bilateral and multilateral FTAs that are being
negotiated in the region. None of the actual or proposed multilateral agreements include the
United States. Failure of the KORUS FTA could be viewed as a serious blow to the U.S.
“competitive liberalization” strategy. With FTAs throughout East Asia proliferating, a failure of
the KORUS FTA to be implemented would also likely mean that the United States would be shut
out of regional economic groupings in East Asia. In contrast, the implementation of the KORUS
FTA could spark interest of other East Asian countries, such as Japan, to negotiate FTAs with the
United States in order not to lose their share of the huge U.S. market to South Korea. Thus, if the
proponents of the “competitive liberalization” argument are correct, the fate of the KORUS FTA
could play an important role in accelerating or decelerating the move to open market regionalism
in East Asia.
Similarly, the fate of the KORUS FTA is likely to be seen as a bellwether for broader U.S. trade
policy, which is now in a period of re-evaluation. In addition to the KORUS FTA, U.S. FTAs with
Colombia and Panama are pending but not likely to receive consideration before the conclusion th
of the 110 Congress, leaving it to a new Congress and Administration to decide their fates. The
Doha Development Agenda round in the WTO is, for all intent and purposes, on life support, if
not dead. This raises questions in the minds of U.S. policymakers and other experts, regarding the
future role of the WTO and multilateral negotiations in shaping the international trading
framework. The KORUS FTA will likely play a role in this reassessment. For better or worse, its
rejection or indefinite delay might call into question the viability of FTAs as a serious U.S. tool to
strengthen economic ties with major trading partners.
On April 18, 2008, U.S. and South Korean negotiators reached agreement on the sanitary rules
that Korea will apply to beef imports from the United States. It allows for imports of all cuts of
U.S. boneless and bone-in beef and other beef products from cattle, irrespective of age, as long as
specified risk materials known to transmit mad cow disease are removed and other conditions are
met. However, to address subsequent Korean concerns, both sides revised this deal in June to
limit sales of U.S. beef from cattle less than 30 months old.
South Korea published rules to put this agreement into effect on June 26, and quickly began to
inspect U.S. beef shipments. The U.S. Department of Agriculture similarly has begun to
implement a new program to verify that the beef sold is processed from cattle under 30 months
old. U.S. beef exporters are now working to recapture a key overseas market. In 2003, South
Korea was the third-largest market for U.S. beef exports, prior to the ban imposed after the first
U.S. cow infected with mad cow disease, or BSE (bovine spongiform encephalopathy), was
discovered. Korea’s commercial significance is reflected in the position taken by several
Members of Congress, who state that congressional consideration of, and support for, the Korea-
U.S. Free Trade Agreement (KORUS FTA), depends upon South Korea fully opening its market
to U.S. beef.
While the U.S. beef industry and U.S. policymakers welcomed the April deal, Korean TV
coverage of the issue and Internet-spread rumors that questioned the safety of U.S. beef resulted
in escalating protests and calls for the beef agreement to be renegotiated or scrapped. U.S.
officials countered that measures already in place to prevent the introduction of BSE in U.S.
cattle herds meet international scientific standards. To address mounting public pressure, the
Korean government twice pursued talks with the United States to find ways to defuse public
concerns without “renegotiating” the beef agreement. On June 21, both governments confirmed a
“voluntary private sector” arrangement that will allow Korean firms to import U.S. beef produced
only from cattle less than 30 months old. Both view this as a transitional step until Korean
consumers regain confidence in the safety of U.S. beef.
Since mid-July 2008, exports of U.S. beef have accelerated and are gaining market share against
other competitors. To date, Korean importers are selling U.S. beef primarily to regional markets
and neighborhood butcher shops. However, U.S. exporters are watching for changes in consumer
sentiment that might encourage Korean department store, supermarket, and restaurant chains to
resume large-scale purchases of U.S. beef.
The anti-beef agreement protests in South Korea have since subsided. However, they could have
lingering effects on U.S.-South Korean relations, because of the erosion of the Korean President’s
political standing, and the possible impact on his government’s ability to secure ratification of the
For more information, see CRS Report RL34528, U.S.-South Korea Beef Dispute: Agreement and
Status, by Remy Jurenas and Mark E. Manyin.
South Korea came late to the table of major motor vehicle manufacturing nations. The 1980
edition of the Automotive News Market Data Book, an authoritative industry source, listed no
South Korean production in its world table covering the period 1946-78, and no South Korean
company among the top 50 global producers. By 1988, according to the same publication’s 1990
edition, total South Korean car and truck production exceeded one million units. In the 2007
edition, total South Korean production of cars and trucks in 2006 is given as more than 3.8
million units, which ranks South Korea as the global number five national producer, behind, in
order, Japan, the United States, China and Germany. Yet South Korea remains only a mid-level
consumer of motor vehicles. Its national sales of 1.2 million ranked its market not only well
behind the top three leading producers, but also behind each of the five largest western European
nations, plus Russia, Brazil, India, and Canada, and just ahead of Mexico. Exports account for
about 70% of Korea’s motor vehicle production volume, a figure that is matched by no other
major motor vehicle producing country.
South Korea has aggressively developed and protected a nationally owned automotive
manufacturing base. Motor vehicle imports were prohibited in South Korea until 1987, and 147
imports from Japan were banned until 1999. Originally the South Korean government
promoted the development of a fleet of domestically owned producers, but this strategy failed. In
the shakeout after Korea’s economic crisis of 1997-98, only one major South Korean-owned
company was left, Hyundai, which also took control of the number-two producer by volume, Kia.
Others were marginalized, out of the business altogether, or controlled by foreign companies.
Korea’s third producer, and their only other major manufacturer left in the business, Daewoo, is 148
now controlled by General Motors. The lone major South Korean-owned producer, the
Hyundai-Kia combination, in 2006 produced 3.8 million vehicles worldwide, ranking it number
six globally. Of this output, 2.7 million vehicles were manufactured in South Korea, 72% of the
country’s total output of cars and light trucks, and more than double the total sales of all vehicles 149
in South Korea.
While Hyundai is a world-class global competitor, with current and planned assembly operations
in the United States and other countries, it is questionable whether Hyundai, or any other South
Korean-owned firm, could maintain an independently operated market base in South Korea
without continued formal and informal protection from the national government. Comparative
analysis of motor vehicle import and sales data by CRS from the Automotive News Global Market
Data Book and Ward’s Motor Vehicle Facts & Figures indicates that import penetration in the
South Korean market in 2005 was equal to 3% of sales, even lower than the 5% level in Japan.
By comparison, the U.S. level was 39% (20% if imports from Canada and Mexico are excluded),
and in major European producer countries, Canada, and Mexico, the shares of imports were 50%
or higher. The British authors Maxton and Wormald believe that the South Korean industry may
147 USITC. Industry and Trade Summary: Motor Vehicles (USITC Publication 3545, September 2002), p. 60.
148 Ibid., pp. 60-61; Graeme P. Maxton and John Wormald, Time for a Model Change: Re-Engineering the Global
Automotive Industry. Cambridge, U.K.: Cambridge University Press, 2004. p. 101-2; CRS Report RL32883, U.S.
Automotive Industry: Recent History and Issues, p. 75-76.
149 Automotive News 2007 Global Market Data Book, p. 29.
be fated to become a “networked” producer in the long run, i.e., surviving only by linkages to 150
other major market producers.
Jeffery Schott of the Peterson Institute for International Economics has presented an analysis of
South Korean automotive production and shipments in 2005, based on Korean official statistics,
which illustrates that large shares of South Korean vehicles of all types are exported. Among
passenger cars, however, the significance of exports tends to decline with the size of the vehicle.
The export share of South Korean-produced vehicles officially described as “light” was 69%, and
of “small” vehicles was 82%. For “medium” cars, the export share dropped to 62%, and for
“large” cars, the share was 53%. Schott noted that Ford and Chrysler representatives “argue that
South Korean tariff and nontariff barriers have restricted the supply of imported large vehicles—
which traditionally have higher profit margins—to reserve a large share of the market for
domestic producers ... a surprisingly high percentage of South Korean production of larger cars is
sold in the domestic market rather than exported, and these are cars that most directly compete 151
William H. Cooper, Coordinator Stephen Cooney
Specialist in International Trade and Finance Specialist in Industrial Organization and Business
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Mark E. Manyin Remy Jurenas
Specialist in Asian Affairs Specialist in Agricultural Policy
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Vivian C. Jones Alison Siskin
Specialist in International Trade and Finance Specialist in Immigration Policy
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150 Maxton and Wormald, pp. 101-2.
151 Schott (August 2007), table 2 and p. 4. It may be argued that Hyundai’s U.S. sales of its Sonata sedan, which may
be considered a “medium” or “large” vehicle in Korea, were sourced out of its Alabama assembly plant starting in
2005, thus reducing the export share of that product. However, according to Ward’s Automotive Yearbook, only 91,000
Hyundai vehicles were produced in the U.S. in the startup year of 2005.