All about the KOR-US FTA
So one of my readers asked me what the KOR-US FTA was after I mentioned it in the last article about COSTCO and their delicious pizza. I think this shows how long I’ve been in Korea, because I naturally assumed that everyone would know what the KOR-US FTA is, as it’s such a big deal in Korea.
I am smacked back to reality to realize that in the grand scheme of things, in other parts of the world, there isn’t quite any reason for anyone to care about it, as it either doesn’t affect them, or it affects them so little that they don’t really notice it. In Korea, naturally it’s really important, and it’s also quite a politically charged topic.
It means the Korea – United States Free Trade Agreement. Ideally, under free trade agreements, all tariff and taxes on goods are lifted between participating countries. Did you ever wonder why Japanese cars are expensive in the U.S. despite being relatively cheap in Japan? It’s because of the import taxes. The U.S. government basically is taking their cut of your auto purchase.
WHAT? That’s not fair!
Well, there are actually two schools of thought here.
Some would say that the domestic industry needs to be protected against foreign competitors who have a superior product at a cheaper price. They usually cite labor costs in the U.S. for the reason that the American product is so expensive. If people can buy a Honda Accord for less than the price of a Ford Taurus, then nobody would buy a Taurus. The Ford factory would lose massive amounts of business, and thousands of American workers would lose their jobs as a result.
Others would say, yes, that’s not fair and they would want the government to step out and let the market decide. So then if we take our Honda Accord vs. Ford Taurus example, Accords would naturally sell better, but this would force Ford to change their company or product somehow in order to stay competitive.
Okay so what’s this got to do with Korea?
Well in the KOR-US FTA as I understand it, Korea will no longer have tariffs on American products. The U.S. in return will no longer have tariffs on Korean products. (There are certain technicalities and exemptions in all FTA’s, so my explanation is a bit simplified.) This kind of thing would have been unheard of in Korea’s developing stage (from 1950’s to 1980’s). Developing countries need to protect their industries against foreign competition specifically because nobody would ever buy the domestic product otherwise. Now that Korea is a modern robust economy, discussions about FTAs are happening. Naturally there are pros and cons to the FTA, and there are political parties for the FTA, as well as those against it.
What are the Pros?
For Korea, Korean products like cars, TV’s, cell phones, electronics, and high tech equipment can become more competitive in the U.S. market. Hyundai, for example, which is already known for being an inexpensive choice for American car buyers could actually become less expensive. I would assume that sales would skyrocket after such a development.
For the U.S., American agricultural products would become more competitive in Korea. At the moment, there are taxes and tariffs set up specifically to protect Korean farmers. U.S. food products in Korea are marked up considerably and I’ve “heard” there’s actually a thriving black market that gets these products from
American army bases undisclosed sources.
Under the FTA, all these agricultural products would become cheaper. Since we originally started talking about the FTA in relation to COSTCO in Korea, with American agricultural products being cheaper, almost everything in COSTCO would become inexpensive because there would be no import tax. I’d probably shop there all the time instead of once in a while.
In short, the pros are that it is better from the point of view of American and Korean consumers.
What are the cons?
Well, take the pros for America. Those are the cons for Korea. Take the pros for Korea. Those are the cons for America.
Let me explain.
With really inexpensive and high quality Hyundai, Kia, Samsung, and LG products, fewer Americans would buy Ford, GM, or American electronics products. (Wow, I can’t even think of ONE American electronics company off the top of my head. That’s sad.) Anyway, the residual effects of the cheaper Korean products would make it more difficult for those American companies to compete, forcing them to make changes, which could result in American workers for those companies losing their jobs. The U.S. would take a huge hit in the auto and electronics industry.
In Korea’s case, dirt cheap American agricultural products, most importantly California rice, would flood the Korean market, thereby putting the nail in the coffin for the Korean agricultural sector. There would be a huge decrease in demand for Korean rice, Korean beef, Korean soybeans, Korean vegetables and fruits and even Korean canned products. Agriculture as a living would then be impossible in Korea. Agricultural land in the countryside would become virtually worthless, and cities would have an influx of migrants from the countryside in search of work.
(Edit:I found out later that rice is not included in the FTA, thereby allowing some protection to Korean rice farmers.)
In both cases these cons can be seen as short term problems, as after one or two generations, fewer people will be tied up in those sectors, or the sectors themselves would have somehow improved to stay alive. Some would argue that the pros are also short term, but in the long run, the consumer ultimately wins with an FTA. (Unless, of course, he can’t afford to buy anything because there are no jobs available because of the FTA.)
In short, the cons are for the owners of companies in protected industries and their employees.
What is YOUR opinion of the FTA?
That’s a good question. I can see both sides of the debate. On the one hand, I think that a company shouldn’t be penalized just because they are foreign, if they have a superior product that they can sell inexpensively. On the other hand, dropping the FTA on Korean farmers and American auto workers would be disastrous to those people.
Regardless of how I feel about it, the more important thing is how the U.S. Congress feels about it, because once they pass the KOR-US FTA, it’s going to be put into effect.