Shadow Government

Everything you wanted to know about last week’s Korea trade agreement, but were afraid to ask

Congratulations to President Obama and his team for successfully concluding negotiations on the U.S.-South Korea free trade agreement (KORUS) on Friday. Republicans should applaud and support the president when he pursues such a market-friendly policy. So should Democrats, of course, but the early indications are that the agreement will face critics on the left. More ...

Chung Sung-Jun/Getty Images
Chung Sung-Jun/Getty Images

Congratulations to President Obama and his team for successfully concluding negotiations on the U.S.-South Korea free trade agreement (KORUS) on Friday. Republicans should applaud and support the president when he pursues such a market-friendly policy. So should Democrats, of course, but the early indications are that the agreement will face critics on the left. More on that anon. Herewith eight questions and answers about what just happened.

1) What changed in the agreement?
The original KORUS was signed in the summer of 2007, more than three years ago. Up until late last week, Obama and other critics had derided that accord as unsatisfactory. So what changed?

The headline revisions were in the auto sector. Ford, in particular, was upset about the obstacles it faced trying to sell into the Korean market while Korean producers like Hyundai enjoyed lucrative access to the U.S. market. In the revised agreement, Korea promises changes to emissions and safety restrictions that Ford argued were discriminatory. Tariff schedules were also reworked to slow market access for car producers on each side (i.e., less rapid liberalization).

Korea, in turn, will phase out its tariffs on U.S. pork exports more slowly than previously planned, will get more favorable visa treatment for workers coming to the United States, and will slow down changes to its patent system that U.S. pharmaceutical makers wanted.

2) Is it better than the first version of KORUS in 2007?
One agreement is indisputably better than another if it makes some groups better off and leaves no one worse off (that’s "Pareto efficiency" for those who enjoy slinging econ jargon). This revision is not that. Ford is happier while pickup buyers and pork exporters are not. Weighing one group’s interests against another’s is a political calculation. The answer depends on who your friends are.

3) Was it worth the wait?
No. The bulk of the benefits of this agreement could have been had years ago and U.S. trade policy has been held hostage ever since.

4) Was it handled well?
. The Obama administration has adopted the role of the tough negotiators who will not be rushed into a suboptimal deal. Yet this was not a matter of time running out. There were no negotiating sessions between the administration’s June announcement that it would conclude FTA talks and the end of September. The embarrassing scene in Seoul in which Obama had to stand up and admit failure was due to inadequate U.S. preparation leading up to the summit. There was nothing new about Korean recalcitrance over revisions and good staff work means resolving such impasses before the president’s credibility is put on the line.

5) Is it a good agreement?
Yes. It will have substantial economic benefits for the United States, mends the damage in relations with a close ally, will help bolster U.S. standing in Asia, and will restore U.S. credibility in its global economic diplomacy.

Interestingly, there is a formal assessment that is required by law for every U.S. free trade agreement to assess what it will do. The U.S. International Trade Commission conducted such an analysis in 2007, weighing in at just under 400 pages. It predicted an increase in U.S. GDP from $10.1 to $11.9 billion as a result of the agreement, and a substantial increase in exports that would exceed the increase in U.S. imports.

So where’s the interesting part? you ask. Here: Will the Obama administration use this same analysis or request a new one? If it uses the old analysis, it’s hard to argue that all the haggling achieved much. It would be tempting to request a new one, if only to try to validate the delay. But there are two big problems with this. First, a new USITC analysis might come out transparently similar to the old one. Second, the exercise would make it appear, legally, like a new agreement. That can have serious implications for its prospects in Congress.

6) Will it pass the U.S. Congress?
The new agreement drew plaudits from all over. Some of the most notable huzzahs: Dave Camp (R-MI), the presumptive next chair of the House Ways and Means Committee; Sandy Levin (D-MI), the outgoing chair of Ways and Means; House Majority Leader Steny Hoyer (D-MD) — and the United Auto Workers! It has been a while since a major American union supported a trade agreement. Politically, this is a coup for the administration, as it is directly attributable to the auto revisions they negotiated.

Yet there is opposition as well. Sen. Max Baucus (D-MT), chair of the Senate Finance committee, said, "I am deeply disappointed that today’s deal fails to address Korea’s significant barriers to American beef exports." He reserved judgment on the deal. Other critics did not.

Lori Wallach, Director of Public Citizen’s Global Trade Watch, wrote:

Choosing to advance Bush’s NAFTA-style Korea free trade agreement rather than the new trade policy President Obama promised during his campaign will mean more American job loss and puts the White House at odds with the majority of Americans…"

Katrina vanden Heuvel, editor of the Nation, wrote Dec. 7 in the Washington Post:

The president is touting a NAFTA-like corporate trade deal with South Korea … This is political self-immolation. Blue-collar workers abandoned Democrats in large numbers in the fall; wait until they learn what the trade deal means for them."

This opposition will likely be caught up in the reaction to the president’s decision to compromise on tax cuts. Critics on the left will add this to the list of perceived betrayals, as vanden Heuvel does. The repeated references to NAFTA serve as a reminder that the president publicly promised as a candidate to withdraw from that agreement if it were not revised (it hasn’t been).

There is relatively little minority opponents in Congress can do to block an agreement, though, so long as it is protected by the provisions of the legislation granting trade negotiating authority (TPA). So it’s safe, right?

Not necessarily. Now we return to the question of whether this is a new agreement or the old agreement, slightly modified. Scott Lincicome, a trade lawyer at White and Case, explains that if it’s a brand new agreement, it’s not covered under TPA, which expired some time back and which the president never sought to renew. The White House is thus left in the position of arguing that it’s really the same old agreement, with minor tweaks. Congress has yet to render its verdict.

7) When will this be done?
The administration has not set a date. Nor is it clear whether KORUS will be advanced by itself or in conjunction with the pending Columbia and Panama FTAs. The smart money, though, is on passage by mid-summer, 2011.

8) Does this clear the way for the other pending FTAs and a revived U.S. trade policy?
Maybe. This can be argued two ways.

The uplifting version: a resounding win for KORUS can show that trade agreements are politically feasible under the current political alignment. Trade could be one of several issues on which President Obama and Republicans could find common ground and demonstrate that they can make government work.

The downcast version: Critical union support from the UAW will not easily be replicated, so the new political alignment may be difficult to extend. Obama was driven to this by foreign policy imperatives unique to the Korean peninsula. He will pay a heavy price with his core supporters for this and other compromises and will not be eager to alienate them further.

That hardly exhausts the supply of questions. For the time being, though, suffice it to say that the Obama administration has managed to revive prospects for a constructive U.S. trade policy and deserves support in the fight that surely lies ahead.

Phil Levy is Senior Fellow on the Global Economy, The Chicago Council on Global Affairs, and teaches strategy at Northwestern University’s Kellogg Schoool of Management.

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