A Big Bet on Free Trade

By Cho Jae-hyon

Finance Editor

Just several weeks ago, the whole country was in a foul mood under the weight of growing concerns that the economy was stuck sandwiched in between Japan and China. Business leaders and research institutes were projecting bleak scenarios for the economy.

The luck changed abruptly, A free trade agreement with South Korea and the United States, struck on April 2 after 10-months of rigorous negotiations, lifted the depressed mood, with the trade pact seen as breathing new life into the stagnant economy.

Korean trade negotiators drew praise. Even chief U.S. negotiator Wendy Cutler called Korean negotiation team ``the strongest’’ she has ever faced.

Finance and Economy Minister Kwon O-kyu also said in a meeting with senior journalists that negotiators for the agriculture, financial and broadcasting industries did excellent jobs. But he admitted that it is regrettable that key services areas are excluded from the deal, rating the degree of overall openness of the market in the trade talks ``above average.’’

The trade deal, if ratified both at the U.S. Congress and South Korean National Assembly, will give the U.S. new business opportunities. For South Korea, it means opportunities to break away from its outdated frames and accelerate reforms in many areas.

The pursuit of a trade pact with the U.S. reflects Korea’s commitment to exposing itself to a greater competition. It also shows its anxiety over stalled growth and urgency to find new growth engines. A wider market opening unleashes fiercer competition. And competition hurts weak and inefficient industries most.

Korea has been slow in opening its markets. But with its economic clout ever growing, it can ill-afford to continue to turn deaf ears to knocks on its doors.

The impact of the trade deal on individual sectors will be uneven. A lot of jobs will disappear, some incompetent businesses will have to fold and some companies will thrive. Understandably, trade unions and vested interest groups are rallying against the accord. They fear large-scale restructuring and entailing job losses.

A number of polls show that the majority of the people favor the trade deal. The sale toward the passage of the deal looks rough though.

In the eyes of free trade proponents, the deal is unsatisfactory. The Roh Moo-hyun administration scored a political victory with the exclusion of the ultra-sensitive rice in the accord. We Koreans have been taught that farming is the core of everything. It is a divine job that should be protected at whatever costs.

The Korean agriculture industry has received enormous amount of government subsidies for decades. This support, financed by taxpayers’ money, has done little to strengthen the farming industry.

The trade accord makes the overdue farming industry reform less likely than before, leaving Korean consumers to pay high prices for the rice. Korea has been criticized by foreign countries for protecting its business turfs, while it grows on sales of its goods to foreign markets. We can keep doors closed to protect certain industries.

It’s true that South Korea has gotten the better of the deal in terms of defensive point of views. It succeeded in protecting its rice bowls. But free trade talks are all about opening markets wider to a greater competition.

The trade says little about the services industry. Trade barriers stand tall for healthcare and education industries, the two areas that need reforms and market opening most for the benefit of consumers.

Hundreds of thousands of Korean students are studying in the U.S., spending billions of dollars there. It’s regrettable that Korea lost an opportunity to revamp the inefficient and heavily-regulated education system with the exclusion of the education industry from the talks. Korea needs to lock in additional reforms in the services industry across the board, regardless of the trade deal.

The two sides appear to have intentionally and artfully left sticky issues unelaborated in the agreement. They have yet to agree on as to how to deal with goods produced in Kaesong’s industrial zone in North Korea. The imports of U.S. beef are also open to further debate. In the process of a review of the KORUS FTA, debate will be raucous.

The stock market is cheering the trade deal, with the benchmark stock index setting new records. The trade pact is already helping attract foreign investors to the local bourse.

It’s anybody’s guess how the trade deal will affect South Korea going forward. Even so, it looks certain that it is awakening long-dormant optimism in consumers, businesses and bureaucrats.

Just a decade after it was hit by the currency crisis, Korea made a huge bet on a free trade deal with the world’s largest economy. To emerge as a winner from the gamble, Korea should make the most of the deal. Let it phase in much-needed reforms and phase out old, outdated frames and regulations.