Korea-US FTA: The Logic of Two-Level Games

1. Korea-US FTA: The Logic of Two-Level Games • Beneficial for US economy? • Beneficial for Korean economy? • Why objections in the US? In South Korea? • Different political processes in the US and Korea • Why repeated concessions from Korea? • Prospects for ratification?

2. Robert D. Putnam, “Diplomacy and Domestic Politics: The Logic of Two-Level Games” (1988) • Level I: Negotiation • Level II: Ratification • Win-set: The set of all possible agreements that would win ratification for a given Level II constituency.

3. Determinants of the win-set

4. Thomas Schelling, The Strategy of Conflict (1960)

5. Korea-US FTA • For the US: Most significant FTA since NAFTA; Korea is 7th largest trading partner • Relatively small share of imports (~3 percent) and exports (~3 percent)… • For South Korea: The US is 3rd largest trading partner. • …although significance of US to Korea is declining with the rise of China • In 2000, US was 21 percent of Korean exports and 18 percent of imports • In 2005, US was 15 percent of Korean exports, 12 percent of imports

6. Comparison of Tariff Rates in Korea and U.S.A. • KORUS FTA was formally concluded on April 2, 2007 to meet the termination of U.S. TPA. It took 11 months and 18 days since the first meeting for negotiation. cf. Korea-Chile FTA took 3 years and 4 months to conclude. • Commodity tariff rates in Korea on the average are 8%, whereas 2% in U.S.A. until FTA being effective. By zero tariff, U.S. might be roughly 4 times better off than Korea.

8. Economic Cost-Benefit Analysis: The US • The USITC study (Sep. 2007) concludes that U.S. GDP would increase by $10.1 billion to $11.9 billion (approximately 0.1%): Based on the removal of tariffs and tariff-rate-quotas, that is, barriers that can be relatively easily quantified. • Merchandise exports to Korea would likely increase by $9.7–10.9 billion. • U.S. imports would increase $6.4 billion to $6.9 billion. • 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. • U.S. services exports would likely increase. • USITC update on autos (March 2011)

9. Economic Cost-Benefit Analysis: South Korea • Korea Institute for International Economic Policy (KIEP) study (Dec. 2005): KORUS FTA would eventually lead to a 0.42% to 0.59% increase in South Korea’s GDP according to a static analysis, and 1.99 to 2.27% according to a dynamic analysis. • KIEP et al. (4/30/2007) based on negotiation results announced on 4/2/2007: • GDP: +0.32% in 10 years (0.03% annual), in the short-run; +6.0% in 10 years (0.6% annual), in the long-run • Exports to the U.S.(annual): +$1.33 billion (auto +$1.09 billion) • Import from the U.S.(annual): +$0.86 billion (agriculture +$0.37 billion) • Is this analysis convincing? • No further update studies

10. Why objections? • Trade effects: More exports for the U.S., but more imports for Korea • Aggregate effects on both Korean and U.S. economies are estimated positive. -Controversial in Korea (credibility of KIEP study questioned) • Not all sectors gain. There are losers in both countries.

11. Effects of KORUS FTA on Sensitive Industries in Korea US$1.00=KW1,200 Source: 11 Governmental Research Institutions, April 30, 2007.

12. Impact of the KORUS FTA on Agriculture • Total reduction in agricultural production would be 670 billion Korean Won (US$ 560 million equivalent) for 10 years. • Most current 5-40% agricultural tariff would be repealed in order of 38% of total products abolished in 1st year; 60% in 5th year; 90% in 10th year and finally 98% in 15th year. (Korea’s grain self-sufficiency in production was 26 percent in 2009. Total annual agricultural imports from U.S.A. amounted to US$21.2 billion or 43.5 billion M/T in 2009.) • Sanitation and quarantine aspects of agricultural imports would be mitigated/abrogated. Special Safeguard Systems would become incompetent by tremendous amount of non-tariff import quota/TRQ. As a result, the small-scale, densely-populated and high land-valued Korean agriculture would be severely affected by KORUS FTA.

13. US Concerns on Auto industry • 2006 Korean export 700,000 cars, US export 4,500 cars • Is this trade imbalance unfair? • US tariff: 2.5 percent • Korean tariff: 8 percent • KORUS FTA: Korea is required to lower its barriers to trade and investment much more than the US. • USITC(2007): US exports: 45-59% ($0.3-0.4 billion) increase US imports: 9-12% ($1.3-1.7 billion) increase • USITC update(2011): US exports: +54% ($194 million) US imports: +11% ($907 million)

14. Why is South Korea enthusiastic about FTA with the US? Late President Roh’s surprising initiation of FTA with the US • Roh was elected as President by advocating anti-American sentiments. • There was no request for FTA from the US, while China was eager for FTA with Korea. • Even Japan is not planning to have FTA with the US. President Lee’s enthusiasm for FTA:

15. Why repeated concessions from Korea? • Four items of prior concessions (Roh): • To reduce the screen quota (mandatory showing days allocated to Korean films): 146 → 73 days per year • To ease automobile emission rules • To modify the livestock quarantine regulations • Privileges for US pharmaceutical and medical devices (2) Unilateral concession on US beef import (Lee): • Korea: beef, bone meat, intestines, brain, eyes, brain-bone, etc. from under 30 months-old cattle • Taiwan/Japan: beef under 30/20 months old, but not the above other parts. • Australia, China: ban U.S. beef and other parts.

16. Why repeated concessions from Korea? (3) Renegotiation on automobile • South Korea would immediately reduce its 8% tariff on U.S.-built passenger cars to 4% and would immediately reduce its 10% tariff on trucks to zero. In year five, tariffs on U.S.-made motor vehicles would be reduced to zero. • The United States would keep its car tariff of 2.5% in place for five years. In the original agreement, the tariff would have been eliminated immediately (Korean cars with small gas engines) or would be phased out over three years (large engines). • The ceiling for U.S.-exported vehicles exempted from Korean environmental standards would be raised from 6,500 (2007 agreement) to 25,000 per automaker per year..

17. Why is Korea in a weak position in FTA negotiations? Potential Answers: • Costs and benefits: Which party gains more? • Preferences & coalitions: Nationalist framing vs. farmers’ interests • Institutions • Negotiator’s strategies

18. Why is Korea in a weak position in FTA negotiations? Potential Answers: • Costs and benefits: • Preferences & coalitions: • Institutions: Limited role of the National Assembly & Political Parties (FTA with Chile) Role of the informal “Farmers’ Party”; 1.2 trillion won compensation bills, proposed by the government (FTA with the U.S.) Special Committee formed after the second round of negotiation: No significant impact on negotiations Trade Procedure bills, pending • Negotiator’s strategies: Roh MH, Lee MB vs. Bush, Obama

20. Prospects for ratification in Korea and the U.S. • U.S. Congress: TPA expired on 7/1/2007 KOREU FTA will be effective from 7/1/2011. • Korean National Assembly: DP’s dilemma: Split within the party, Anti-KORUS FTA coalition with other opposition parties GNP’s dilemma: Unilateral passage? • Re-re-negotiation?