Speeches and Transcripts
U.S.-Korea Free Trade Agreement:
Slashing the High Price of Protectionism
An Address by U.S. Ambassador Alexander R. Vershbow
to the Korea Importers Association (KOIMA)
Seoul, Korea
June 2, 2006
Chairman Kwon Soon-han, distinguished guests. Thank you for inviting me to speak at this KOIMA Forum 21 breakfast, which I know has a history of generating interesting discussions. I look forward to engaging you in a good discussion today.
What I would specifically like to discuss with you is one of the most important developments in U.S.-Korea relations in the 52 years since the signing of our Mutual Defense Treaty. I am speaking, of course, about the U.S.-Korea Free Trade Agreement. As you know, the first round of negotiations for this “KORUS” FTA – as we’ve agreed to call it for short – will be held just next week in Washington.
This agreement will be an important step on the path of modernizing the U.S.-Korea relationship and making it relevant to today’s world.
The U.S.-Korea relationship and alliance was forged in the tragedy of war, and was for many years centered on deterring external aggression. But we now need to take account of the fact that the current center of gravity of our two countries’ relationship lies elsewhere.
The Korean economy has grown and become more sophisticated, and globalization has become the defining aspect of our age. Both our societies have become more cosmopolitan. And our ties of commerce, culture and travel have become by far the most prominent form of interaction between Koreans and Americans. These are the ties that matter to the daily lives of Koreans and Americans in the 21st century.
I think this is especially true of commerce. The United States and Korea traded almost $72 billion worth of goods and services with each other last year. Korean and American businesspeople encounter each other in countless venues: buying, selling, and creating the transactions that tie our two societies more closely together.
What has been lacking until now is an up-to-date institutional framework for this fundamental pillar of our relationship. I think a Free Trade Agreement will help to fill this vacuum, by letting our two countries reach a mutual consensus regarding the mutual obligations and responsibilities in our trading relationship, just as the Mutual Defense Treaty fulfilled this role for our security alliance.
A Review of Recent History: How Did We Get Here?
Today, I would first like to discuss briefly the decision to launch the U.S.-Korea FTA talks. After that, I will spend a few minutes relating some of the basic principles guiding the American approach to trade liberalization.
Contrary to popular impressions, the decision to begin negotiating the KORUS FTA was deliberated and discussed in both capitals for some time. It was not a decision made hastily. Rather, it was a careful decision, based on cooperative discussion and considerable forethought.
I am struck that even some Korean supporters of the FTA talk about this agreement not as a proactive goal that Korea wants to achieve, but rather more like bitter medicine that one simply has to accept. That perception could not be farther from the truth. In fact, realizing the goal of the KORUS FTA talks should be considered a major economic policy achievement of your government.
The two sides first began to discuss the idea of negotiating a bilateral FTA in mid-2003, and used meetings over the rest of that year and in 2004 to sound out each other's responses to the idea. During that time, the Korean government took a very pro-active stance, arguing consistently that an FTA was both feasible and beneficial. The proposal was further advanced during subsequent high-level discussions, and our two governments agreed in late 2004 to use the first half of 2005 to study the idea in depth.
Starting in 2005 here in Seoul, you will recall that we began a series of government-to-government seminars in Seoul and Washington, where we went over the FTAs we had each concluded with other countries, educating each other about how we approach FTA negotiations, and listening to experts discuss the potential economic benefits of such an agreement. The United States also used these seminars to clarify for the Korean side the workings of our Trade Promotion Authority and what obligations that law places on U.S. negotiators.
Following that study, the question of an FTA was further discussed by our Trade Ministers, and considered by President Bush and President Roh during their summit meeting in Gyeongju last November. In short, the Korean government was steady and determined in pursuing its goal of a bilateral FTA with the United States.
During this time, the Korean government also took actions that showed it was serious about reforming its economy. Several disputes were resolved satisfactorily and to mutual benefit through our Quarterly Trade Meetings, proving that our governments could resolve issues through productive, cooperative discussion. For example, the Korean government proposed a sweeping Copyright Act amendment that would modernize Korea’s IPR regime. The United States, meanwhile, took steps to facilitate market approval and market access for Korean bell peppers (paprika) and cucurbits (squash).
These events coincided with increasing calls in the United States for concluding additional FTAs with more economically significant partners.
In the end, the announcement of the KORUS FTA talks was a major achievement for Korean diplomacy. As recently as 2003, the consensus view among American trade policymakers was that Korea was not really a viable potential FTA partner. There were still too many trade irritants, and too many people in the United States who were used to thinking of Korea as it used to be in the 1980s – a relatively closed economy where imports were not welcome.
However, a combination of three factors – Korean diplomatic persistence, Korean economic reforms, and U.S. domestic pressure for more commercially significant FTAs – worked to turn the U.S. government around, propelling Korea to the top of our FTA wish list.
A Principled Approach to Free Trade
As we embark on these FTA negotiations, then, there are two fundamental principles I think we should all remain aware of. I’m sure this audience is familiar with them.
Imports Are Good: The first principle is that trade is good. I’ll go even further: Imports are good. The pursuit of complete economic independence is a fool’s errand. It is a pursuit of poverty, not wealth. The over-enthusiastic calls for Korea to maintain economic independence that are heard coming from some quarters of South Korea sound frighteningly close to the North Korean principle of Juche – a principle that has impoverished the Korean people living north of the Demilitarized Zone.
Importing goods and services is not a sign of weakness or a loss of economic self-determination; it is simply another form of economic activity. Countries grow and prosper by increasing economic activity across the board. I think parts of Korea are still trapped in a mercantilist mentality that only counts manufacturing and exports as being beneficial to the Korean economy. This mentality overlooks the fact that imports – and the process of importing – also create a valuable chain of employment and value-added services. Imports need to shipped, distributed, marketed and advertised. They need financial services and consulting services. In short, importing creates demand for a diverse, educated, cosmopolitan and creative workforce – the kind of educated jobs that will become more and more necessary as some of Korea’s manufacturing industries lose their price competitiveness to China’s inevitable rise.
In other words, you – the members of the Korea Importers Association – are doing good, patriotic, important work, and should be respected for it.
Protectionism Costs: The second principle is that protectionism is bad. It burdens the people of the “protected” economy with high, often unseen costs. There is a lot of talk in Korea about the “costs” of free trade, or the “costs” of the KORUS FTA. But where is the talk about the heavy costs that the current situation imposes on the Korean citizen?
The American political economist Henry George – an ardent foe of big business during his time – wrote in 1886:
“Free trade consists simply in letting people buy and sell as they want to buy and sell. Protective tariffs are as much applications of force as are blockading squadrons, and their objective is the same: to prevent trade. The difference between the two is that blockading squadrons are a means whereby nations seek to prevent their enemies from trading; protective tariffs are a means whereby nations attempt to prevent their own people from trading.”
Keeping a market protected implies an act of government coercion and imposes a high cost on society, in terms of increased consumer expenses, greater tax burdens, and sapping investments away from competitive industries. The U.S. Department of Agriculture estimates that South Korean consumers pay up to 10 times as much for farm products as the average international consumer. The percentage of household income Koreans pay for food is also higher than for almost any other OECD member country. Most Korean farmers receive support from the Korean government, support that is a tremendous burden on Korean taxpayers.
The statistics I just mentioned are for agriculture alone. When one considers the costs imposed by protection of the automobile market, various service markets and other relatively protected domestic industries, the costs to the Korean consumer and taxpayer only increase.
Korea is a democratic country, and its democratically-elected representatives have made these decisions. So it is possible that these costs are being borne voluntarily by the Korean people. However, it is a heavy burden to bear, and one cannot talk about the potential costs of an FTA without also admitting that the status quo imposes a high cost – a cost that is, in fact, much higher than any transitory difficulties that may come from implementing a KORUS FTA. This is especially true when one considers the economic benefits an FTA will create for the Korean economy.
You have all heard the data before, but it bears repeating. Korean economists, attempting to quantify the impact of this FTA, have concluded that in the long term it could create as many as 249,000 new Korean jobs overall, even considering job losses in sectors that might face short-term adjustment. In terms of overall national welfare, Korean citizens will be over $7 billion richer in the long term because of the FTA.
Conclusion: The Nature of Negotiations
Ladies and Gentlemen, our two countries have agreed to conclude a comprehensive, high-quality free trade agreement. A lot of ink is being spilled in the Korean media nowadays on speculations regarding what the United States will request, or what Korea should demand. Some of that speculation will be right. But a lot of it will be wrong, so let’s not spend our precious time arguing about things now that might not even become an issue in the actual negotiations. I will not prejudge the negotiations.
After 29 years of diplomatic service, however, I do know a thing or two about negotiations, and how negotiations take on a life of their own. And I will let you in on a secret. Your negotiators will make concessions to us. And I’ll tell you another, particularly well-guarded, secret: U.S. negotiators will also accept some Korean requests that they would rather not have to accept. That is the nature of a negotiation.
Throughout this process, we must all keep in mind that the decision to conclude a free trade agreement is really the triumph of reason and rationality over blind emotion – the triumph of the general welfare over the particular interests of small groups. It represents the realization that, thanks to the modern economy, we do not have do everything by ourselves any more, that we can instead be better off by specializing in what we do best and acquiring the rest more cheaply from others. It’s the realization that we’re in this together and that we will both profit by cooperating even more closely than we do already.
Your organization has an important part to play in this process, as you are a vital stakeholder in this agreement. I hope you can make your voice heard, and that you can actively and publicly support the KORUS FTA.
Thank you for your attention, and I look forward to your comments and questions.