The second round in the U.S. Korea FTA negotiations took place in the Shilla Hotel in Seoul the week of July 10.
The American delegation was led by Wendy Cutler from the USTR's office, the Korean delegation was led by Kim Jong-hoon of the Korean Ministry of Foreign Affairs and Trade (MOFAT). (This image is from a story on the Korean Embassy web site.) Everyone looks pretty happy here, but disagreements over the treatment of pharmaceuticals in the Korean national health care system caused problems.
This Korean Ministry of Foreign Affairs and Trade press release describes the Korean delegation, and Korean preparations for the sessions: Launching of the Second Round of Korea-U.S. (KORUS) FTA Negotiations (July 7).
So. Korea's case for treating Kaesong manufactures as originating in So. Korea itself wasn't helped by North Korean missile tests the week before the second round of negotiations: Kim Jong Il goes ballistic (Economist, July 6). One Korean politician argued the U.S. owed Korea acceptance of the Kaesong goods to help pay a debt owned for the U.S. role in the division of Korea (Uri Bigwig Asks U.S. to Atone for Korean Division in FTA (The Chosun Ilbo, July 11). In the U.S. Dean Kleckner was sympathetic to the Korean position, in a July 14 column: Korean Opportunity, (Truth about Trade and Technology). International diplomatic maneuvering over potential responses to the tests, and a long scheduled North-South Korean meeting provided some background for the week's negotiations.
The meetings were punctuated by anti-FTA demonstrations. The largest came on Wednesday: Massive Anti-FTA Protests Paralyze Seoul (The Chosun Ilbo, July 12). This blog post has a number of well-done photos of these demonstrations (it also includes a photo of the demonstrations in Washington during the first negotiating session: Photos of FTA demonstrators (Nemodream, 2006).
In early May, the Korean Ministry of Health and Welfare said that, as a cost-control measure, and possibly as early as September 2006, it would change its approach to reimbursing expenditures on drugs. It would:
...institute a so-called positive list approach that will allow it to exclude new pharmaceuticals from the list of products approved for reimbursement under the national health insurance program. Among other criteria, cost effectiveness will figure prominently in HIRA's decision to approve new drugs. (Schott et al.)
Contrast this with a "negative list" approach that includes all drugs unless a deliberate decision has been made to exclude them. Going into the Seoul meetings, this was a concern for U.S. negotiators.
The U.S. and So. Korea set up a public/private Pharmaceuticals Working Group in 2002 to work on this and other issues. Cutler notes in her post-meeting statement that the U.S. was surprised to find, when it arrived in Korea, that key decisions had been made to move ahead with implementation in September. This caused problems.
"Negotiations on drugs hit a stumbling block early in the week (Trade Talks between Korea and US End with Partial Progress (Korean Embassy website, Hoon Joo, July 14):
Negotiations on the trade talks hit a stumbling block after Seoul’s new prescription drug system was revealed to the pharmaceutical working group, prompting the US negotiating team to walk out.
Korea’s effort to reform its drug pricing policy of the national healthcare system, which includes the new “positive list,” spurred the drastic reaction from the U.S. The new drug pricing policy employs reasonable measures to list reimbursable prescription drugs rather than the current “negative list,” which only lists the exclusions.
“In short, Korea’s decision precluded meaningful negotiations at this time,” Assistant US Trade Representative Wendy Cutler told the press on Friday.
The US negotiators assert that such measure would discriminate against new innovative drugs, which most US pharmaceutical companies specialize.
Wendy Cutler, the lead U.S. negotiator, explained in a post-meeting statement (Statement of Assistant USTR Wendy Culter on the Conclusion of the Second Round of Negotiations of the KORUS FTA, July 14):
"On pharmaceuticals, I’m sure you’re aware that thing did not go as planned. First, let me make clear, the United States position is not to challenge the basic premise of Korea’s national healthcare system nor are we trying to block reform. That is not our objective. We recognize Korea faces an aging population and rising health care costs – the United States and other countries around the world faces similar challenges. What we are saying is any reform should be transparent and fair, and not disproportionately target foreign pharmaceutical products.
"Going into these negotiations, we had agreed to establish a dedicated working group to discuss pharmaceutical trade issues. To our surprise, upon our arrival in Seoul, we were informed that Korea was going to switch to a positive list system for the reimbursement of pharmaceutical products before we had the opportunity to have meaningful negotiations on these issues.
"In our view, the decision to proceed with this plan is inconsistent with both the mandate of the Pharmaceutical Working Group and the market-opening spirit of the FTA. In short, Korea’s decision precluded meaningful negotiations at this time. Therefore, in order to ensure continued balance in the overall negotiations, we felt that it was appropriate to suspend work in two additional groups: trade remedies and services.
"We believe that this was a balanced and measured response that appropriately reflected our level of concern.
"Clearly, our preference would have been for all the groups to have met this week as scheduled. But, under the circumstances, we were left with no choice.
"That said, while our differences in views in the pharmaceutical sector are challenging and difficult, they are not insurmountable. Ambassador Kim and I have agreed to continue to work together to get things back on track with respect to pharmaceuticals so as to allow for a productive third round during the week of September 4th.
In fact, because of these problems, the ended earlier a earlier than scheduled, without dealing with several scheduled topics (Korea, U.S. fail to complete second FTA talks, Yoo Soh-jung, The Korea Herald, July 14):
The second round of formal free trade talks between Korea and the United States ended earlier than scheduled today, suggesting that the talks may have reached an impasse.
Seoul’s Ministry of Foreign Affairs and Trade said in a statement that the parties did not meet to cover four of the categories originally planned for negotiations today.
It said the four categories were trade remedies, services, goods trade and the environment.
The halt to the talks come after Seoul and Washington failed to make any progress in the area of pharmaceuticals and medical equipment on Tuesday, resulting in a full suspension of talks in the area...
It [The Korean Foreign Ministry - Ben] said that U.S. negotiators did not participate in the sessions for trade remedies and services scheduled for Thursday, while Korean negotiators canceled the goods trade and environment sessions planned for today, the final day of talks.
Things were accomplished. Wendy Cutler, who lead the U.S. team, described the week's accomplishments in a statement after the negotiations had closed: Statement of Assistant USTR Wendy Culter on the Conclusion of the Second Round of Negotiations of the KORUS FTA (July 14). The list included:
"We agreed on the timeframes for tariff phase-outs for industrial goods, which is a very significant step and we are nearing agreement on the timeframes for tariff phase-outs for agricultural and textiles goods, setting the stage for the exchange of tariff offers by mid-August.
"We also exchanged initial offers in services and investment...
On Thursday, The U.S. and Korea exchanged "reserve lists" of services sectors they expect to exclude from an agreement. Korea submitted a list of 100 services it wanted excluded from the FTA: Korea Tries to Keep 100 Services Out of FTA With U.S. (The Chosun Ilbo, July 13). There was progress on cars and financial services: Korea, U.S. Agree to Keep Japanese Cars Out of FTA (The Chosun Ilbo, July 12) and Korea, US Eye to Eye on Financial Products (Kim Yon-se, The Korea Times, July 11).
The Korean Ministry of Foreign Affairs and Trade web site (Outcomes of the Second Round of Korea-U.S. FTA Negotiations) amplified on the discussions on tariff phase-out schedules:
The two parties reached an agreement on the framework for tariff concession schedules in the sector of goods and agreed to exchange tariff offers for goods, textiles, and agricultural products in mid-August. As the parties were unable to reach an agreement on a framework for tariff concession schedules in the sectors of textiles and agricultural products, they decided to draft their tariff offers according to their own respective methods.
- Timetable for lifting tariff barriers on goods (categories): Immediate, 3 years, 5 years, 10 years, undefined
In agriculture, the Korean lead negotiator announced that rice was off the negotiating table (U.S. boycotts discussions on medicines in FTA talks with S. Korea, The Hankyoreh, July 14):
...Seoul's chief negotiator Kim also reiterated his government's pledge to exclude rice from the free trade talks with the U.S.
"I don't think rice is subject to bargaining in terms of tariffs and (import) volumes," Kim said. It is the first time that Kim publicly commented about rice, one of the most sensitive items in the talks.
Excluding rice, both nations agreed to exchange tariff concessions on agriculture and textiles in the middle of next month ahead of a planned third round of talks in September, Kim said.
However, Kim's stance on rice was contradictory to a remark by his U.S. counterpart Cutler. On Monday, Cutler said, "We are fully aware that this is very sensitive issue for Korea, nevertheless, it's no secret that we will seek rice market access under this negotiations."...
The two sides reached some agreement on sanitary and phytosanitary measures (Agreement scarce, dispute persists in S.K.-U.S. free trade talks, The Hankyoreh, July 13):
South Korea and the U.S. have agreed to establish a standing committee to set sanitary standards for agricultural and food products, representing a compromise on one of the more contentious points in the negotiations on a proposed free trade agreement (FTA) between the two nations. Seoul had maintained that it would be enough to set up a "non-standing" committee, while the U.S. had demanded a standing one that could deal with the quarantine issue consistently throughout the talks.
Specifically, the standing committee would look at sanitary and phytosanitary measures (SPS), covering both food products and plant matter that would fall under the terms of an FTA.
"We have reached an agreement, and currently both sides are having committee chair-level talks" to solidify the terms, a South Korean official close to the matter said.
Some saw the compromise as a blow to South Korean interests. Through the standing committee, some experts said, the U.S. may find it easier to ask for expanded trade of food and meat products, including genetically modified crops.
The agreement came on the third day of the second round of FTA talks...
I'll reorganize and revise this post as I get more information.
Updated on August 9.
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