The title is a nod to Jonathan Dingel's excellent trade blog.
A U.S. - Korea trade agreement is going to impact third parties. These impacts create incentives for these countries themselves to seek FTAs with the U.S. and Korea. A variety of news stories have been addressing this.
This is not an attractive alternative to a multilateral approach through the World Trade Organization, as this Financial Times editorial points out: One trade deal done, thousands to go (Apr 3). Martin Wolf also weighs in: A Korean-American strand enters trade’s spaghetti bowl (Financial Times, Apr 3):
This month marks the 60th anniversary of the General Agreement on Tariffs and Trade, of which Cordell Hull was a founding father. It also sees the announcement of a “free trade agreement” between his country and South Korea. The core of the Gatt was non-discrimination. The core of the new agreement is its opposite. Thus has the US taken the betrayal of its erstwhile principles even closer to its logical conclusion....
In this case, the US and South Korea agree to discriminate in favour of exporters or investors based in each other’s territory. The obvious potential economic cost of such an agreement is what Jacob Viner, the great inter-war trade economist, called “trade diversion”. In other words, the partners might shift from more competitive to less competitive suppliers. In this case, however, trade diversion may be modest, since these two countries are among the world’s most competitive suppliers of a wide range of goods and services.
A more significant economic cost, however, is systemic. The number of preferential trade agreements has exploded upwards in recent years (see chart). An agreement between the US and South Korea is itself a quantum leap in this progression... Other countries will be desperate to avoid the adverse effects upon them. This makes probable yet another jump in the prevalence of such agreements.
Several of the stories in the survey of press clippings below discuss the way the U.S.-Korea agreement encourages further bilateral agreements. He goes on:
That will have at least two further economic consequences. First, an increasing proportion of the world’s trade is sure to be governed by the diverse rules of origins and special procedures of a host of discriminatory bilateral and plurilateral agreements. That guarantees an explosion in administrative complexity. Second, every further bilateral agreement will alter the degree of preference enjoyed by existing suppliers. That guarantees an explosion of business uncertainty. These are indeed inevitable results of what Prof Bhagwati has called the “spaghetti bowl” of preferences....
Steve Suranovic explains how trade diversion could hurt third party producers, and reduce the benefits of an FTA, evaluated from a world accounting stance: Trade Diversion and Trade Creation .
Choi and Schott looked at the potential for trade diversion losses and losers from a U.S.-Korea FTA: External Implications of a Korea-U.S. FTA (Chapter 5 in Free Trade between Korea and the United States? Institute for International Economics, April 2001). In a subsequent CGE study, Schott, Bradford and Moll also found large trade diversion losses from a U.S.-Korea FTA, although smaller relative to the gains to the U.S. and Korea. See Table 10 in Negotiating the Korea–United States Free Trade Agreement (IIE, 2006).
Turning to press coverage since the agreement was reached -
Kazumasa Higashi writes about the impact on Japan: U.S.-ROK pact may prompt govt to rethink FTA stance (Yomiuri Shimbun, April 4 in Japan):
The government is likely to reconsider its stance on free trade agreements in light of a pact concluded Monday between South Korea and the United States.
Until recently, Tokyo had yet to even schedule negotiations with Washington. However, if Seoul uses its new FTA as a means to rapid expansion into the U.S. market, Japan will be forced into its own quick response....
When the FTA comes into effect, tariffs on South Korean industrial, forestry and marine products will be removed, giving that country's firms a decisive advantage over their Japanese counterparts.
Joseph Coleman also reports on Japan's reaction: Buzz: Is Japan-US Trade Deal Possible? (International Business Times, Apr3). Nice bit:
Japanese Trade Minister Akira Amari compared it to the U.S. naval flotilla that forced feudal Japan to open up to the outside world in the 1850s.
"It is like a 'black-ship' effect," Amari said Tuesday. "But I think it will be a stimulus to gather everyone's wisdom so that we will not be left behind as other countries pursue more and more" free trade pacts.
Hwang Young-jin writes that "Japan is eager to revive failed trade negotiations with Korea" (JoongAng Daily, Apr 4).
His article points out that Korea is currently involved in a number of negotiations:
More FTAs are in the works for Korea. The first round of negotiations with the European Union is scheduled to begin next month. A trade pact with the world’s largest economic region would be a big boost for Korea, experts say. Korea’s $43.7 billion in exports to the EU last year topped the $41.3 billion in exports to the U.S.
A trade pact between Korea and China is also in the early stages of discussion. The governments of both countries are carefully studying the possibility of a trade pact through a joint research committee established last month in Beijing. Two more meetings of the committee are scheduled this year, and, if all goes well, official talks will begin later.
Formal negotiations on a trade accord are underway with Canada. The ninth round was held in Vancouver, from January 29 to February 2 this year. Mexico is also in talks with Korea, and several rounds of negotiations have been held since last year.
Kim Yon-se expects the agreement to
...embolden China and Japan to sign the deal with the United States, not to fall behind Korea. Korea has long been regarded as a nutcracker in Northeast Asia, sandwiched between rising China and the world's second largest economy Japan. The deal would serve to pull Korea out of the sandwiched situation. (FTA to Implant Anglo-Saxon Economic Model on Korea, Korea Times, Apr 2)
Kim's article is accompanied by a nice figure, summarizing Korea's FTA activity:
The Taiwanese Minister of Economic Affairs expects the deal to hurt Taiwan: U.S.-Korea FTA to hurt Taiwan: MOEA (China Post, April 2 in Taiwan)
Fred Bergsten of the Peterson Institute points out that the odds are against U.S. trade promotion authority extension. That will make it difficult for the U.S. to negotiate PTAs with countries like Japan. Korea may have a leg up in the U.S. market for some time:Korea’s Unique Historic Opportunity (Op-ed in the Chosun Ilbo, February 10, 2007 ).
Australian beef prices were dropping on the prospect that U.S. and Korean negotiators might deal with the bone issue and reduce beef tariffs: Aust beef prices plummet in Korea before FTA (ABC News Online, March 30). "Australia has dominated the Korean market since a ban on US beef products in 2004, due to concerns over mad cow disease." With an agreement, the Australian National Farmers' Federation urges action: NFF urges action here as US-Korea conclude FTA (Philip Hopkins, The Age, April 4 in Australia):
THE National Farmers Federation has called on the Federal Government to match the US free trade agreement with South Korea as soon as possible.
The trade policy manager for the NFF, Scott Mitchell, said multilateral trade negotiations through the World Trade Organisation remained the NFF's priority.
But third parties such as Australia ran the risk of being disadvantaged by bilateral FTAs, so Australia also had to do them....
Rowan Callick, The Australian's China correspondent, says the, "US-Korea agreement shows Australia is losing out in bilateral deals" (Apr 9). One of Callick's concerns is that the U.S.-Korea deal did not involve any Korean concessions on rice. "Dirty" FTA deals like these, that leave out key industries and sectors, create precedents that make it easier for protectionist interests to carve out exceptions with other countries:
But our north Asian negotiating partners are likely to become less susceptible to listening to the case for openness, each time a "dirty" deal is cut, like the new one that enables Seoul to lock out efficient American rice growers.
The Chosun Ilbo reports that the Chinese see no serious long-run disadvantages - and also that the agreement may spur a Chinese-Korean agreement (Korea's Neighbors See FTA as a Smart Move , April 3):
Chinese trade experts believe that China may see its exports to the U.S. decline in the short term but foresee no inevitable disadvantages in the long term. Wang Yong, the director of the Peking University Center for International Political Economy Research, said, "With the conclusion of the South Korean-U.S. FTA, China may see exports of machinery to the U.S. or exports of agricultural produce to South Korea decline. But from the Chinese standpoint, this will offer Chinese enterprises an opportunity to make efforts to enhance their corporate competitiveness." Economist Su Dongpo said, "It seems the U.S. made many concessions to Korea in the negotiations in an effort to curb China's rapid growth by using South Korea." Chinese experts predict the deal will also spur Korea-China FTA talks, which are in their initial stage.
In this story, a writer for The Hankyoreh sees the agreement with the U.S. encouraging both Japan and China to seek agreements with Korea. The writer sees geopolitical incentives for the Chinese: With S.K.-U.S. FTA handshake, China, Japan weigh options (Apr 4)
This Hankyoreh analysis looks beyond economic issues to impacts of the agreement on the balance between Northeast Asian nations: S.K.-U.S. trade deal set to effect regional diplomatic, security issues (Apr 3): "Experts say FTA may also be serving to check China’s rise, U.S.-Japan alliance."
Revised April 8.
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