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However, the WTO's negotiations reached a stalemate in 2003 due to continuous discord between its rich and poor member countries. Since then it has been overwhelmed by a wave of regionalism driven by free trade agreements. Many have viewed these FTAs with skepticism because they are seen as undermining the WTO's multilateralism.
South Korea and the United States, though members of the WTO, have advocated FTAs and even collaborated to create a new one, known as the "KORUS FTA," in 2007. With the widespread admission that the WTO is dysfunctional, many countries are eager to join the FTA trend. This has made the South Korea-U.S. deal look like a natural progression -- all the more so because the two countries traditionally have been allies in terms of economics and politics.
According to the U.S. Congressional Report Service's January report, the KORUS FTA was seen as an example for other potential U.S. trade partners, advancing the Bush administration's policy of "competitive liberalization" that, through free trade agreements, induces trading partners to remove trade and investment barriers. KORUS is the United States' largest FTA in terms of mutual trade and investment since the North American Free Trade Agreement, or NAFTA, came into force in 1994.
The U.S. also has viewed its free trade deal with South Korea as a means to check China's increasing economic influence. And it has been seen as devised to reinforce the traditional U.S.-South Korean alliance, perceived as weakened in recent years due to conflicts over North Korean policy.
It seems there is consensus regarding the KORUS FTA's political effects, though the economic perspectives of the FTA partners may still diverge somewhat, influenced by diverse interest groups. Opposition has arisen from such U.S. groups as auto and steel workers, manufacturers and labor unions. On the other hand, Korea faces challenges mainly from agricultural and medical groups.
South Korea has sought to negotiate FTAs with several longtime trading partners such as Chile, Singapore, China, the European Union, the United States, the Association of Southeast Asian Nations, Japan, Hong Kong, Taiwan, Mexico, Russia and India. A South Korea-Chile FTA came into force in 2004 and a South Korea-Singapore trade deal was formed in 2006. After South Korea concluded FTA negotiations with the United States in 2007, it immediately began to launch negotiations with the European Union.
South Korea's government has two main policy goals in seeking these trade agreements. Firstly, according to the Korea Institute for Industrial Economics and Trade, South Korea's initial goal of launching these negotiations was to keep pace with the FTA-driven regionalism wave. South Korea's new government is shifting its focus to reforming its economy through the U.S. and EU trade deals. In addition to these policy goals, the KORUS FTA can be reviewed through a cost/benefit analysis.
The FTA's primary benefit is to grant South Korea preferential access to the U.S. market through reduced trade barriers. Although it was considered that the United States could gain more than South Korea from this agreement because South Korea's tariffs have been higher, such an exclusive privilege available only to an FTA partner is not to be passed up.
Furthermore, the United States is special in that it has been South Korea's third-largest trading partner. So, even any minimal additional preferential access to the U.S. market represents a new, incomparable trading opportunity.
Another expected economic benefit is an increased inflow of foreign direct investment. FDI-related business activities have been, in fact, regulated by WTO rules. However, the WTO's failure to provide properly elaborated regulations and protections has given almost complete permission for bilateral investment treaties and FTAs to take the place of the WTO. When it comes to FDI, most FTAs are absorbing bilateral investment treaties' standardized rules.
The U.N. Conference on Trade and Development has long studied the positive effects of FDI on economic growth. Basically, FDI contributes to economic growth by injecting capital into a host country. FDI's most precious benefits, however, are transfers of skills and technologies and structural market reforms.
FDI-related business activities channel foreign skills and technologies into a local economy: this is called the "spill-over effect." The increased competition for FDI among domestic and local enterprises drives structural reforms. The UNCTAD advises that these benefits of FDI cannot lead to economic growth in a host country whose economy is not mature enough to absorb them. However, this is not the case in South Korea.
On the other hand, FDI is deemed in general to bring economic costs by creating a "trade-diversion effect" and, furthermore, unsettling domestic economic policies because it falls under the protection of the "investor-state dispute settlement mechanism," which allows a private investor to legally challenge a host government's public policy.
These concerns may sound reasonable at first. But a closer look shows whether they are true in the case of the KORUS FTA. South Korea, with this FTA, does not intend to choose just one among equally important trading partners. It is wise to deal selectively with counterparts who hold different values. South Korea rather attempts to reinforce its focus on a major trading partner, the United States, and to discriminate against other minor partners. This is likely to create more gains than having no FTA with the United States.
In this respect, the FTA would not simply create a "trade-diversion effect." It would rather enhance trade through a trade discrimination process. In addition, South Korea has pursued its FTA projects with many countries equipped with significant export markets. This may efficaciously offset such a diversion effect.
It looks as if the "investor-state dispute settlement mechanism" poses grave challenges to a host country's domestic policy. However, it turns out that this mechanism has not worked that way. The UNCTAD's Jan. 8 report, "Investor-State Dispute Settlement and Impact on Investment Rulemaking," reveals that many countries -- mostly in the Asia-Pacific region -- have accumulated experience with the mechanism, which has helped host countries to elaborate their investment-related policies for better interpretation and application.
The UNCTAD reaches the conclusion that thanks to the accumulated experience with the mechanism, host countries can liberalize and protect FDI and avoid hurting their key public policy objectives.
Both governments embarked on this project with the idea that this FTA would mutually benefit their alliance, whether the benefits are political or economic. This FTA would upgrade their alliance to a higher level in terms of economic and political cooperation and mutual prosperity. Their traditional alliance yields compellingly persuasive evidence to justify the FTA, and its long-term benefits confirm their need for it.
The KORUS FTA is still pending, awaiting approval from the countries' congresses. It is unclear now whether it will overcome the opposition groups in both countries. However, it is clear that the KORUS FTA's failure would be a great loss to the two countries' alliance.
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(Lee Jae Young is a freelance writer and citizen reporter for Ohmynews International. He has a master's degree from Cornell University Law School in Ithaca, New York. ©Copyright Lee Jae Young.)
