U.S.-South Korea Trade Pact: A Turning Point for American Exports?Published: January 12, 2011 in Knowledge@Wharton
Last March, when President Obama announced his National Export Initiative, aimed at doubling U.S. exports by 2014, critics argued that this ambitious goal was unrealistic. The President wasn't really serious about trade, they said; he was just trying to appease the business community. After all, since taking office the previous year, he had turned his back, the critics maintained, on opportunities to push through Congress the Bush-era trade pacts that the United States had earlier signed with Colombia, Panama and South Korea.
Those deals were simply too unpopular with Congressional Democrats, according to the naysayers, and Obama wasn't going to risk his political capital pursuing an agenda fostered by his predecessor. The critics remained unimpressed after the United States posted a 22% growth rate for exports for January through September 2010. Sure, those numbers looked good, they said, but only in comparison with the dismal results of 2009. In November, the criticism seemed to be confirmed at the G20 Summit in Seoul, when the United States and South Korea failed to announce a revised, politically acceptable version of their 2007 pact.
Now it seems as if the pessimists may have been wrong all along. Much to the surprise of many who had given up on the issue, the U.S. and South Korea finally reached agreement on a revised pact early in December. If, as many anticipate, the deal is approved by the new Congress next spring, it will be by far the largest U.S. trade pact since NAFTA went into effect in 1994. No longer a small, struggling market, South Korea imports $250 billion in manufactured goods from the rest of the world each year. Its industrial market is much larger and more sophisticated than that of other partners in recent U.S. free-trade pacts.
For U.S. exporters, the deal is "huge news," says Charles Dittrich, vice president for regional trade initiatives at the Washington-based National Foreign Trade Council (NFTC). "We have turned a corner -- it means another $11 billion in U.S. exports annually," he notes, citing an analysis by the U.S. International Trade Commission. "The Obama administration has seized the moment and the opportunity."
Calling the deal "a win-win for both sides," Laura Baughman, president of Trade Partnership Worldwide, a Washington consultancy, notes that the pact will go beyond merchandise exports and spark demand for a significant volume of U.S. services in such areas as banking, software and tourism. "In economic terms, this is by far the most important [bilateral] free-trade agreement" to date, she says.
A great deal is at stake beyond Korea. Approval of the pact could open the door wide to approval of the two other long-delayed U.S. bilateral free-trade deals -- with Colombia (signed by both governments in 2006) and Panama (2007). It could also fuel support for even more ambitious U.S. trade initiatives, such as the Trans-Pacific Partnership, which would add Malaysia, New Zealand and Vietnam to an Asian Rim free-trade area of U.S. partners that already encompasses Australia and Chile.
While the Obama administration failed to act on the three pending agreements from the Bush years, some of the country's largest trading partners were aggressively moving forward with their own pacts, threatening the long-term competitiveness of U.S. exporters in many key markets. For example, the European Union signed its own pact with South Korea, and the EU is currently negotiating deals with Argentina, Brazil, Canada and India, among others. Meanwhile, China is negotiating or planning to negotiate bilateral agreements with the Association of Southeast Asian Nations (ASEAN), Australia, Costa Rica and India -- but not with the United States. And Japan is negotiating with Australia, the Gulf Cooperation Council, India and New Zealand. The list goes on.
The potential reverberations of those free-trade agreements could be very harmful for U.S. exporters if the U.S.-Korea deal doesn't go through, says Rob Mulligan, who heads the Washington office of the U.S. Council for International Business (USCIB), which represents U.S. companies at the International Chamber of Commerce.
Even the timing for approval is of the essence, says William Reinsch, president of the NFTC. The pact needs to go into effect before July 1, when the EU-South Korea deal becomes effective, or the latter pact will set key technical standards for trade between the United States and South Korea.
What's more, the fate of the pact has national security implications, says Brian Pomper, a partner at the Akin Gump law firm in Washington, D.C. and a former trade counsel for Sen. Max Baucus, a Montana Democrat who heads the Senate Finance Committee. With a nuclear-armed North Korea once more threatening military conflict, "some may wonder how can the United States give South Korea a stiff arm" by rejecting the deal? South Korean President Lee Myung-Bak has been widely criticized at home for his weak and indecisive response to a recent artillery attack by North Korea. If Congress rejects the deal, it will be a slap in Lee's face. So beyond economic considerations, Pomper says, "this [deal] is the sort of symbol of U.S. leadership in Asia that many other countries -- who are looking at China with a nervous eye -- have been [seeking]. It is reasserting American interests in Asia. The President has put his reputation on the line."
What People Tell the Pollsters
But is there, in fact, sufficient political support for such a pact in the United States? Will Democrats, independents and Tea Party followers suspicious of globalization oppose the pact because of their ideological objections, or fears that their constituents will hold it against them in the 2012 elections? Although the new text of the Korea pact won quick approval from the United Auto Workers union -- because it eliminates tariff and non-tariff barriers to U.S. auto exports to South Korea -- it was quickly rejected by Richard Trumka, president of the AFL-CIO. Trumka argues that the agreement's provisions for investment and government procurement "will encourage off-shoring" by multinationals rather than maximize opportunities for U.S. job growth. Even under the revised treaty, both U.S. and South Korean workers would "continue to face repeated challenges to their exercise of fundamental human rights on the job -- especially freedom of association and the right to organize and bargain collectively," he adds.
Pomper says many Americans tell pollsters they support stronger exports, but they don't necessarily link such a desire to bilateral or multilateral agreements that improve access to foreign markets. In other words, exports are not automatically linked with job growth in the U.S. mindset. Lately, the tide of public opinion has been turning even further against free-trade pacts among many independents and conservatives who traditionally back other kinds of initiatives -- such as lower corporate and individual tax rates -- that expand opportunities for businesses. Free traders have reportedly done a poor job of explaining how these pacts can promote U.S. jobs by opening up markets. That's the key connection that supporters are promising to make this time around. One such supporter is Frank Vargo, vice president for international economic affairs at the National Association of Manufacturers (NAM), who notes that manufacturing exports to South Korea supported 230,000 American jobs in 2008, the last year for which statistics are available. And that's, of course, before the new pact adds to the export flow.
Vargo and other supporters have a lot of work to do. For one thing, not everyone believes in such numbers. In a recent Pew Research Center poll, "two-thirds of Tea Party people say that free-trade agreements lead to job losses, and this belief is starting to affect the Republican Party," says Pomper. "The Tea Party is a form of populism, and I am nervous that this view will start to filter up."
More broadly, most Americans tell pollsters that trade is fine when it is with countries that are widely viewed as friendly, but not necessarily with others. In the Pew poll, 76% of the respondents said they favored trade with Canada and rated that country highest as a trading partner. More than 50% of respondents were also positive about the benefits of trading with Brazil, the European Union and Japan. But fewer than half of the respondents -- only 45% -- had a positive view of trade with China and South Korea. Why were so few Americans positive about South Korea, a longtime military ally of the United States? Pomper says pollsters believe the explanation is that "many Americans are geographically challenged," confusing South Korea with North Korea, which attracts a lot more attention in the mainstream media.
Overall, only 33% of the respondents said that trade agreements have been "good for the U.S." Some 44% were opposed to them, and 46% said that they had been hurt personally by the agreements. In the October Wall Street Journal/NBC News Poll, 53% of respondents said that free-trade agreements have hurt the country, up from 46% in 2007 and only 32% in 1999. Even very-well-educated, upper-income people are now more likely to oppose free trade, according to the poll. Among those earning $75,000 or more, 50% said that free-trade pacts have hurt the United States, up from 24% in 1999.
The Tea Party Factor
During the fall election season, some Democratic and Republican candidates sought to leverage widespread xenophobia and fear of globalization by suggesting that their opponents had supported free-trade measures that wound up "exporting jobs" to China. David Spooner, a former U.S. trade negotiator who is now an attorney at Squire, Sanders & Dempsey in Washington, D.C., believes, however, that both parties had only limited success with such appeals. Spooner, a Republican, notes that Republican Rob Portman, the U.S. Trade Representative under President Bush, won his race for an Ohio Senate seat by a wide margin despite the fact that his opponent hammered away that Portman, during his tenure as Trade Representative, had supposedly sold out U.S. manufacturing jobs to China.
With Portman now in the Senate and other pro-trade Republicans in key positions -- such as new Speaker John Boehner of Ohio and Majority Whip Eric Cantor of Virginia -- it is tempting to believe that both the House and the Senate will quickly push through the Korea agreement and then move on to Colombia, Panama and other trade pacts. But everything hinges on the ability of the President to assert his leadership on the Korea deal. "The President has demonstrated leadership," says Dittrich, "and we have no reason to think that he won't continue to do so." The battle over the Korea agreement seems likely to pit Obama on one side -- along with pro-trade Republicans. On the other side will be anti-trade Democrats and Tea Party Republicans.
Many leaders of the business community fear that the Tea Party will undermine their efforts to promote pro-trade initiatives by shooting down this deal and others. "You can't assume, as in the past, that a Republican Congress is entirely pro-trade," says USCIB's Mulligan. "The Republicans have developed this populist tinge, and they are focusing on the China trade" as a key target.
Although they are Republicans, Tea Party supporters voiced views in that recent Pew poll about trade that were "by a wide margin" more hostile than that of the average American, notes Pomper. Only 24% of Tea Party supporters said trade agreements were good, and 63% said they were bad, reflecting their widespread fears that the United States signs away its sovereignty whenever it joins such pacts. And, as noted earlier, two-thirds blame the pacts for job losses. If that poll is accurate, the Tea Party faithful could wind up being less supportive of free trade than the general public. Spooner, the Republican trade negotiator, is somewhat optimistic that the Tea Party people will ultimately bend in support of pro-trade initiatives, provided that more pro-trade Republican leaders like Boehner and Cantor pressure them firmly.
"The Tea Party is a bit all over the place," notes Gerald McDermott, a professor of international business at the University of South Carolina's Darla Moore School of Business and a former Wharton professor. "On the one hand, it has a very libertarian feel to it," supporting free markets and small government, and arguing for an investigation into the powers of the Federal Reserve Bank. On the other hand, "they have an 'us-them' mentality that doesn't fit well with trying to do trade." The key question, notes McDermott, is "at what point does their populism run up against their libertarianism? Their reaction to government has been induced by the domestic economic crisis. The notion that elites and the federal government have signed free-trade agreements with other elites [from other countries] could run up against the ideology of free trade" that has been a foundation of Republican economic and foreign policy for decades.
For his part, NAM's Vargo is optimistic about the Korea trade pact, but reluctant to view it as a panacea. "To double exports from 2009 over a five-year period, we would need average annual growth of 15%. I don't see why we can't hit the 15% growth rate." Free-trade deals like the new one with Korea --- and others to follow -- will help, he notes, but trade pacts alone won't be enough to achieve more ambitious long-term goals for U.S. exports, such as narrowing the trade deficit with China and restoring U.S. competitiveness in many high-value manufacturing sectors. Says Vargo: "We also need more export promotion, more export financing and a better way of managing our export controls."