Progress on Korea-US Trade Offers Contrast with Talk of Protectionism

This week's finalization of the long-delayed Korea-US Free Trade Agreement (KORUS FTA) offers a welcome contrast with all the gloomy talk of a protectionist response to the ongoing global crisis. The Bush administration first negotiated the deal, which would be the biggest since NAFTA, in 2006,  under the since-expired system for "fast track" approval by Congress. Due mainly to opposition from auto and beef interests, it was never ratified.

The Obama administration made revival of the stalled agreement a centerpiece of its National Export Initiative. Final renegotiation of KORUS FTA was supposed to be a big take-home from the otherwise lackluster G-20 summit in Seoul last month, but last-minute snags ruined the timing. Finally this week the two countries were able to announce agreement on the difficult issue of automobile trade. Korea will admit 25,000 cars each year from each U.S. automaker, and the United States will eventually, but not immediately, lower tariffs. The beef issue remains unresolved.

What has changed to offer hope that Congress may ratify KORUS FTA now, when the parties seem deadlocked on nearly all other issues? Nothing much has changed in the economic case for KORUS FTA. In terms of the usual models, which attempt to balance the interests of consumers, firms, and workers against one another in an unbiased manner, it is hard to see the agreement as anything but a win-win deal. Instead, the important changes have all been political.

In two ways, the political trade game is played by different rules than the economic game. First, whereas economists tend to focus on net gains, politics is very sensitive to the fact that any change in trade policy produces some losers along with the winners. Second, the political influence of winners and losers is not necessarily proportional to the magnitude of their economic gains or losses. Instead, well-organized groups, like corporations, farm groups, and unionized workers, have disproportionate political power compared to poorly organized groups like consumers and non-unionized workers.

KORUS FTA provides a perfect illustration of the political economy of free trade. The strongest opposition to the original treaty came from the Big Three automakers and their unions, which controlled enough Democratic votes in Congress to block ratification. Opponents claimed that US-Korean automobile trade is inherently unfair because Korea exports 700,000 cars a year to the United States while importing 100 times fewer US cars. Little attention was paid to the fact that KORUS FTA would lower Korean auto tariffs by more than US tariffs would be lowered, or that Korean and US automakers each produce many cars in the others' country, which do not show up in import figures, or that trade in auto parts is closer to balance than trade in finished cars.

Additional opposition came from US beef producers. Korea has blocked US beef imports, alleging risks of mad cow disease. This has infuriated Senator Max Baucus (D-Mont.), Chairman of the Senate Finance Committee, which is a key gateway for ratification. Many observers think Korean health concerns are bogus, but whatever the science behind them, they are political reality. An earlier attempt to lift the beef ban led to riots in the streets of the Korean capital, and the government now views beef in third-rail terms.

The political balance of forces has now changed greatly. US auto companies and their unions have lost leverage due to bankruptcies and bailouts. Max Baucus will still chair the Finance Committee, but Democratic leverage will be notably weaker. A long list of big corporations--FedEx, Microsoft, General Electric, Wal-Mart, GE and others--have favored KORUS FTA from the beginning, not least because it will significantly weaken non-tariff barriers to trade in services. Unless Senate Republicans decide to vote against KORUS FTA solely because the Obama administration backs it, we can expect ratification in the spring.

The bottom line: There is often a big gap between the economics and the politics of trade liberalization. Economics tells us that when the interests of all groups are taken into account, trade liberalization leads to net gains for both importing and exporting countries. However, in Washington,  politics is played as a zero-sum game where the interests of consumers and non-unionized workers often count for little. It is only at certain moments that the economics and politics of trade liberalization line up favorably. Let us hope this is such a moment.

Follow this link to download a short slide show on  trade liberalization and KORUS.