The Korea-U.S. free trade agreement went into effect as of midnight last Thursday. The bilateral free trade pact, known as the KORUS FTA, came five years and nine months after the talks first began in June 2006. The effectuation of the trade pact has already lowered the prices of some American agricultural products and wine in Korea, as well as those of Korean-made automobiles in the U.S. However, conflicts surrounding the investor-state dispute settlement provision in the FTA continue to mount, hinting at the tension and rancor to come. Today, we have invited Dr. Kim Hyung-joo김형주 of the LG Economic Research Institute to tell us about the changes in Korea triggered by the free trade deal with the largest economy in the world. First, he tells us about what lowered tariffs means for the Korean economy.

I expect to see many positive results. For instance, Korea imports from the U.S. quite a lot of intermediate goods, such as materials needed for semiconductor production, or capital goods required for the products made in Korea. In the wake of the effectuation of the Korea-U.S. FTA, we expect to see the prices of these imported goods fall, which means Korean manufacturers would have better price competitiveness not only in the American market but also in other markets around the globe. In the competition for more export markets, a price difference of two or three percent makes a lot of difference. Given the rivalry between the Korean and Japanese industries, and the growth surge of the Chinese economy, Korea would gain an edge and benefit considerably from the fallen costs of intermediate and capital goods in the long run.

On the first day following the effectuation, Korea immediately removed tariffs on 9,061 items and the U.S. on 8,628 items. In fact, no tariffs were imposed on the 80 tons of imported goods from the U.S., saving Korean importers about seven thousand dollars in import duty. When a few cents can make a huge difference in costs, importers welcome the tariff removal. The automobile, petrochemical, electronics, and semiconductor industries will now benefit from the lifting of an average 3.5% tariff with their trade with the U.S., an economy accounting for nearly a quarter of the total global GDP. However, due to the patent-linkage system in which a drug developer grants marketing licenses to a generic medicine company only if their products do not possibly infringe existing patent rights, the Korean pharmaceutical companies foresee a fall in production amounting to roughly 90 million dollars per year for the next decade. In addition, the Korean agricultural, forestry, and fisheries industries, which face stiff competition with 600 imported items that are rendered tariff-free, brace for a huge blow despite a government plan to provide a 22 trillion-won subsidy.

Korea’s agricultural, forestry, and fisheries industries are at a disadvantage compared to the U.S., because Korea is smaller in land size and its climate is not appropriate for growing feed crops. Most of Korean government subsidies for the agricultural and fisheries sector would be the measures to preserve the incomes of farmers and fishermen who suffered losses following the effectuation of the KORUS FTA. There is also a lending program for farmers who make facility investments to upgrade their global competitiveness. The problem with the money-lending program is that no matter how well the loan is invested, the money is essentially a debt that the borrower must pay back. So, rather than providing financial assistance to hardware or facilities, post-FTA subsidies for the agricultural and fisheries sectors should focus on human investments, such as boosting the skills and competitiveness of farmers, and finding new export markets in China or Japan.

Some drastic and fundamental measures are needed if a Korean farmer with an average cultivated land of one hectare is to compete with an American farmer who owns, on average, more than 200 hectares of land. The Korean government, therefore, has launched an FTA support center within the Ministry of Food, Agriculture, Forestry and Fisheries and is designing measures to boost the competitiveness of Korean farmers and fishermen. There are also measures in the pipeline to protect small businessmen. But the area of most concern for the Korean government is how to prepare for the renegotiation of the investor-state dispute, or ISD settlement provision.

The ISD system is a very thorny issue, because the settlement court judges may favor investors from their own country. In that case, the case would be handed over to the judges in the third-party country. The ISD provision could become a serious problem if the involved parties do not trust the court systems of either country. On the other hand, if the parties do trust the court systems, the provision would just remain a toothless clause. Korea and the U.S. have agreed to hold additional negotiations on this matter within the next 90 days, giving both parties time to fine tune the provision. If the ISD clause was dropped from the KORUS FTA, there would be no grounds for Korea to include this clause in Korea’s FTA negotiations with other countries such as China. Instead of removing the ISD provision altogether, it would be better for all involved parties to define the terms conditions more precisely so that the provision would not infringe on Korea’s legal sovereignty or undermine Korea’s policies.

Last Friday, the Korean government launched a joint taskforce to prepare for the ISD renegotiation. The taskforce will look over the proposed solutions and start talks with the U.S. in the Service and Investment Committee, slated to kick off within 90 days after the FTA effectuation. Since the way Korea handles the ISD issue can now extensively affect the nation’s future FTAs, Korea plans to address all the issues and capitalize fully on the system. As with all negotiations, the upcoming talks will attempt to reach a point where both parties can balance out their losses and gains. For the first time in Asia, Korea has brought into effect free trade pacts with both the European Union, the world’s largest economic block, and the United States, the world’s biggest economy. How should Korea make the best of its partnerships with the two hugely lucrative markets?

The Korean economy is described as a small open economy. That means the Korean economy cannot survive without importing materials and does not determine the prices or market conditions. The Korean economy is in a position where it is greatly influenced by the conditions and environment of the global economy. If Korea avoids competition in the global stage, its economy is bound to shrink more and more, which would be extremely dangerous for the nation’s survival. Koreans should look far into the future and make the best out of the KORUS FTA.

Market liberalization and competition is a double-edged sword, with potentials for both great benefits and crippling downfalls. This is why Korea should take a careful look at all the possible problems and design thorough countermeasures. The KORUS FTA is a chance for the Korean economy to take advantage of broader economic ties and bring about sustainable growth.