Time for FDI through KORUS FTA
Rather than taking to the streets to diffuse groundless rumors about the harmful impacts of the KORUS FTA, opposition party lawmakers need to spend much more time at the National Assembly for a budget deliberation to support sectors likely injured due to the KORUS FTA. Empirically and theoretically, an FTA between two significant countries proves to bring more trade and higher growth effects.
Accordingly, the KORUS FTA, which was finally ratified by the Korean National Assembly a few weeks ago, is likely to generate a higher growth impact than any of Korea’s other FTAs with a single nation because the U.S. and Korea are the largest and a near top ten economy in the world, respectively. Given the uncertain and bleak world economic outlook, especially in the eurozone economies, and Korea’s own downside forecast for economic growth for 2012, effectuation of the KORUS FTA early next year would be very timely and beneficial for Korea to overcome a globally looming recession.
In the past five years, Korea’s inbound foreign direct investment (FDI) has been far lower than its outbound FDI. For example, inbound FDI on the arrived basis in 2010 was a mere $5.3 billion, whereas outbound FDI was $23.3 billion, 4.4 times higher than the inbound figure. If Korea had been able to strike a balance between outbound and inbound FDI figures by raising the latter, it could have caught several birds with one stone: the achievement of economic growth, job creation, new managerial and technology transfer.
Korea’s economy next year is forecast to grow even less than 4 percent, with youth unemployment higher than 10 percent. Against this backdrop, it is critical to more aggressively induce FDI as an effective means of revitalizing the Korean economy. On the eve of KORUS FTA effectuation, national priority must be renewed to turn to this immediate and effective tool for FDI implementation to revive a risk-prone Korean economy.
There is another reason we must make special efforts to increase Korea’s inbound FDI. An econometric study on the KORUS FTA showed key positive effects on the Korean economy, such as 5.9 percent growth, the creation of 350,000 jobs over 10 years, an increase in consumer welfare through cheaper foreign products due to tariff-free importation. Due to how the KORUS FTA will improve Korea’s economic system toward global best practices for doing business in Korea, U.S.-based multinational companies are likely to invest more to take full advantage of new market openings, especially in the service sectors, and better business environment. As for non-U.S. companies already in Korea or potential investors, they may feel at a disadvantage vis a vis U.S. firms in maintaining their market shares in Korea.
To overcome these adverse conditions, the existing non-U.S. firms in Korea might increase their FDI into Korea not only to maintain their market shares here, but also to export to the U.S., where a tariff is reduced or free for made-in-Korea products. We could also see new inbound FDI from non-U.S. potential investors seeking to manufacture their products in Korea for similar purposes.
For these reasons, the KORUS FTA study assumed the trade pact would result in additional FDI of about $3 billion, on top of pre-FTA-effectuation trends. However, this additional investment would not come along automatically. We have to do our homework by improving existing labor relations, deregulating some impediments and executing a transparent and coherent FDI administration. Also it is important to strengthen aftercare services for existing foreign investors. The investor-state dispute (ISD) issue has been a focal point for opposition lawmakers, who considered it a poisonous clause in the KORUS FTA.
Although this clause is a universal system in most bilateral investment protection treaties, thorough pre-emptive aftercare services can prevent any ISDs from occurring. In this regard, the function of the foreign investment ombudsman must be augmented with a more professional staff that is equipped with legal expertise and a deep understanding of cross-border investment behavior.
The writer is also a Distinguished Professor at Chung-Ang University and Chair of the Presidential Regulatory Reform Committee.