This report evaluates the implications of the potential U.S. agreement with South Korea for American manufacturers and compares it with a similar pending free trade agreement between South Korea and the European Union (EU). On December 3, 2010, President Obama announced that cabinet-level negotiations and his discussions with South Korean President Lee Myung-bak produced modifications in the KORUS FTA that he believes addresses his concerns and those of Congress. In a nutshell, the pending KORUS FTA would eliminate tariff and non-tariff barriers for U.S. and South Korean manufacturers in a range of industrial sectors, including automobiles, consumer and industrial products, textiles and apparel, and pharmaceuticals and medical devices. The main section of this report compares the manufacturing components of the two agreements. In particular, it reviews automotive trade, the most politically and economically sensitive manufacturing sector in both agreements. Agricultural and services trade are not covered. As Congress considers what action it might take on the KORUS FTA, the European Union and South Korea have completed their own negotiations of a comprehensive free trade agreement (KOREU FTA). If approved, it means the FTA is provisionally ratified in the European Union and can enter into force. The possible competitive impact on U.S. manufacturers of a KOREU FTA will likely be debated by Congress when it considers whether or not to ratify the KORUS FTA, which could be in 2011. Some observers speculate that the auto sections of the FTAs may require some form of side agreement or other arrangement, which have yet to be worked out, before either agreement can be passed by the U.S. Congress or the European Parliament. The steel sectors in the United States and the European Union are also notable dissenters. If the KOREU FTA takes effect first, business groups such as NAM claim U.S. manufacturers could find themselves locked out of the South Korean market. Notwithstanding a possible first mover advantage, it seems U.S. and EU manufacturers are likely to benefit less from their respective FTAs with South Korea when compared with the possible gains for South Korean manufacturers in the larger U.S. and EU markets. Another estimate produced by the Ways & Means Committee Republican Staff found that the United States could lose $1.1 billion in exports to South Korea if the pending KOREU FTA is fully implemented and the United States fails to implement the KORUS FTA. The European Union's 22% truck tariff will be removed over three or five years, depending on the type of vehicle. Some in the United States and the European Union auto sectors remain skeptical South Korea will faithfully implement its NTB obligations in autos, even if the two pending FTAs are ultimately approved and implemented, given its past haphazard enforcement record. For U.S. manufacturers, South Korea is an important market. This should provide U.S., EU, and South Korean textile and apparel manufacturers greater access to each others markets, with South Korean textile manufacturers likely to increase their exports to the United States and European Union markets. On the other side, the American Apparel & Footwear Association has expressed its general support for the KORUS FTA, with the footwear industry strongly supportive of the KORUS FTA. Comparison of Automobile Tariff Reductions
Appendix C. Agreements between South Korea and Various Partner Countries
Beyond their commercial engagement with the United States, the European Union and South Korea are also exploring free trade agreements with other trading partners.
South Korea has negotiated free trade agreements (FTAs) with the United States and the European Union (EU), but neither agreement has yet been approved. The U.S. Congress must approve the United States and South Korea free trade agreement (KORUS FTA) and the European Parliament must vote on the European Union and South Korea free trade agreement (KOREU FTA) before the FTAs can take effect. If the FTAs are ratified, it is possible there could be a "first mover" advantage for either the United States or the European Union, depending on which FTA is approved first. Some argue that both agreements have shortcomings and should not be approved.
This report provides U.S. lawmakers with a comparison of the manufacturing components in the KORUS and KOREU FTAs. Congressional interest in an FTA between the European Union and South Korea mostly centers on those U.S. industries competing with European industrial sectors, especially motor vehicles. The two pending FTAs raise questions about what it could mean for U.S. manufacturers if the United States takes longer, or fails altogether, to implement the KORUS FTA, while the European Union and South Korea possibly move ahead to approve and implement their outstanding FTA. In such a case, the possibility exists that the removal of tariff and non-tariff barriers between the European Union and South Korean markets could result in U.S. manufacturers losing South Korean market share to European competitors. On balance, most U.S. and European manufacturing sectors, with some auto manufacturers in particular among notable dissenters, argue that the pending FTAs will be beneficial and are largely supportive. On the other side, labor unions in the United States and the European Union are considerably more skeptical, claiming that South Korean companies could be the biggest beneficiaries, since they could gain even greater access to the significantly larger U.S. and EU markets. Labor union leaders say the FTA will result in further job losses as their respective manufacturing workforces compete for market share with competitive South Korean manufacturers in their own domestic markets.
Various forces will affect how and when each side might move forward on its respective FTA. Congress has a direct role in the approval of the KORUS FTA, but until recently legislative consideration of the agreement had been at a standstill. On December 3, 2010, President Obama announced that cabinet-level negotiations and his discussions with South Korean President Lee Myung-bak produced modifications in the KORUS FTA that he believes addresses his concerns and those of Congress. Some lawmakers argue that the KORUS FTA provides a greater advantage to South Korean manufacturers than to U.S. manufacturers. Others have expressed their support for economic and national security reasons.
No specific date has been announced by the European Union on when it expects to approve its FTA with South Korea, but the European Commission (the EU's executive charged with negotiating agreements with other countries, among its areas of responsibility) has indicated that it would like to move forward in 2011.
Automotive trade is the primary focus of this report because it is one of the most contentious and high-profile manufacturing issues in the KORUS and KOREU FTA deliberations. Additionally, brief overviews are included of other selected U.S. manufacturing sectors that could be affected by these FTAs, such as home appliances, consumer electronics, and pharmaceuticals and medical devices. Trade in agricultural products and services are not covered by this report.