Aggressive Regionalism In Korea-U.S. FTA: The Present And F

An Expert's View about Trade Agreements in South Korea

Posted on: 24 Feb 2010

The Korea-U.S. FTA is a result of a paradigm shift from traditional regionalism, which deals mostly with customs-border issues, to ‘aggressive regionalism’ that codifies a whole-scale problem-solving process.

Aggressive Regionalism1 in Korea-U.S. FTA: The Present and Future of Korea?s FTA Policy Won-Mog Choi* < Abstract > The Korea-U.S. FTA is a result of a paradigm shift from traditional regionalism, which deals mostly with customs-border issues, to ?aggressive regionalism? that codifies a whole-scale problem-solving process. A series of age-old bilateral trade disputes, such as the automobile trade imbalance, unethical business practices in pharmaceuticals and medical devices, and effective protection of copyrights, were actively addressed between Korea and the United States, and permanent solutions to the problems were sought in the form of stable and binding FTA rules. New global or regional issues, such as the non-implementation of WTO panel decisions and South and North Korea?s economic cooperation, were also dealt with. When negotiating future FTAs, Korea will continue to take the problem-solving approach based on this aggressive regionalism. Particular focus will be given to such sensitive issues regarding the trade remedy system, unfair business practices, sanitary and food safety, and economic engagement policies towards North Korea. As Korea becomes part of more FTAs, transaction costs caused by fragmented FTAs will become an economic issue. In order to reduce the costs of the aggressive regionalism policy, Korea must adopt the advanced level of accumulation system for the rules of origin and it should endeavor to ultimately harmonize varying rules among FTAs. This strategy may start by linking to other FTAs. It is suggested that achieving such ?multilateral regionalism? should be a long-term task for Korea. I. Free Trade Agreements (FTAs) as a Problem-Solving Process Several authors use the term aggressive legalism to describe a WTO country?s use of WTO?s substantive rules to counter what it considers the unreasonable acts, requests, and practices of a major trading pa 2rtner. In the 1980s and 1990s, Korea and Japan shifted their WTO policy 3 and jumped ?on the aggressive legalism bandwagon?. This use of WTO?s substantive rules to settle disputes between trading partners is considered an appropriate way to settle trade disputes between WTO countries, and Gao (2005) suggests that China should use these rules 4 to protect its legitimate trade interests. 1The word ?regionalism? (as opposed to ?multilateralism?) in this paper is used to indicate a policy orientation of pursuing active FTA negotiations. * Professor at Ewha Law School, Ewha Womans University, Seoul, Korea (wmchoi91@hanmail.net). 2See Saadia M. Pekkanen, ?Aggressive Legalism: The Rules of the WTO and Japan?s Emerging Trade Strategy?, The World Economy 24(2001), at 707?737. See also Henry S. Gao, ?Aggressive Legalism: The East Asian Experience and Lessons for China, in Henry Gao and Donald Lewis (eds), China?s Participation in the WTO (Cameron May Publishers, November 2005); and Ichiro Araki, ?Beyond Aggressive Legalism: Japan and the GATT?, in Mitsuo Matsushita et. al. (eds), WTO and East Asia: New Perspectives (Cameron May, 2004), at 149?175. 3See Gao, above n 2. 4 Ibid. 1 This policy of aggressive legalism, based on ?a conscious strategy where a substantive set of international legal rules can be made to serve as both ?shield? and ?sword? in trade disputes among sover 5eign states?, is reflected in the growth of regionalism in this era of proliferating FTAs. Countries negotiating an FTA plan to use treaty rules as a whole-scale problem-solving process. That is, they intend to use regional trade agreements to counter any unreasonable acts, requests, and practices of their trading partners. As a result, they want to include internal measures in FTAs that are not usually covered in international treaties. This new trend may be called aggressive regionalism, and the Korea-U.S. FTA (K-US FTA)6 offers a good example of this aggressive use of problem solving mechanisms. Chapter II identifies major problems that occurred during the K-US FTA negotiations, and it shows how Korea and the United States resolved these problems by codifying legally binding provisions. Aggressive regionalism and implications for Korea?s future FTA policy are examined in Chapter III. As Korea is conducting, or will actively pursue, FTA negotiations with many countries (including the EU, Canada, Japan, Peru, GCC7, Australia, New Zealand, China), this analysis may help these countries and their trade negotiators understand aggressive regionalism, in general, and Korea?s FTA policy, in particular. II. Major Problems in Korea-U.S. Trade and Their Resolution in the K-US FTA Bilateral trade between Korea and the United States has posed many problems. Both countries, two long-time allies, dealt with most of those issues when they negotiated their FTA, which comprises 24 chapter 8s, 3 annexes, and 5 letters. Major challenges they faced included how to deal with automobile trade imbalance, problems of trade in pharmaceutical and medical device, protection of copyrights, implementation of dispute settlement panel decisions, and outward processing exception for Kaesung Industrial Complex Problem. A. Dealing with the Automobile Trade Imbalance The largest problem involved an imbalance in automobile trade. Before the FTA negotiations, Korea exported approximately 700,000 automobiles to the United States, and the United States exported approximately 5,000 automobiles to Kore 9a. 5See Pekkanen, above n 2. 6Free Trade Agreement between the Republic of Korea and the United States of America, signed on June 30, 2007. Due to the dramatic change of economic environment (global economic crisis and collapse of automobile industry in the United States) after signing, it is uncertain if the agreement can be approved by U.S. Congress. As of May 2009, Korean Congress is waiting for positive signal from the U.S. side before completing its own approval procedure. 7Gulf Cooperation Council. Its members include Qatar, Bahrain, Oman, Kuwait, U.A.E., and Saudi Arabia). 8These include chapters on trade in goods/ services/ IPRs, agriculture, textiles, pharmaceutical products, rules of origin, customs administration, SPS, TBT, trade remedies, investment, electronic commerce, competition, government procurement, labour, environment, and transparency. 9 In 2006, Korea exported 695,134 vehicles to the United States, and approximately 554,000 of these vehicles were made by Korean companies. The export volume of the United States to Korea was only 5,732 vehicles, and approximately 4,000 of these automobiles were made by GM, Ford, and DCX (UAW, ?Korea Free Trade Agreement Continues Unfair Auto Trade Imbalance?, http://www.uaw.com/dclink/factautotrade.pdf, visited 17 May 2009). 2 According to prevailing American views, Korean trade barriers that included high tariffs on U.S. automobiles created this trade imbalance. During FTA negotiations, Korea agreed to immediately eliminate the 8% tariff on U.S. passenger vehicles, 10% tariff on U.S. trucks, and 3 to 10% tariff on almost all U.S. auto parts. These cuts, if implemented, will give U.S. automobile and auto parts manufacturers a price advantage in the Korean market. Non-tariff barriers were also addressed. During FTA negotiations, Korea agreed to amend its Special Consumption Tax and Annual Vehicle Tax and reduce existing maximum tax rates based on engine size. This cascading set of taxes disproportionately affected U.S. automakers because U.S. vehicles tend to have relatively larger-sized engines than Korean vehicles. Korea agreed to reduce the Special Consumption Tax from 3 to 2 stages and the Annual Vehicle 10 Tax from 5 to 3 stages. The Korean government also agreed not to adopt any new taxes based on vehicle engine displacement or modify an existing tax to increase the disparity in tax rates between categories of vehicle 11s, and it stated that it would provide an 80% refund on its Subway Bond Tax for purchasers of new automobiles, which was another tax considered to be a barrier to U.S. automobile imports.12 In order to implement these reforms, Korea will have to amend several of its key tax laws. During the FTA negotiations, Korea made several commitments in the area of technical regulations for vehicles. In particular, the Korean government agreed not to apply emission standards that were higher than the standards used by California and agreed to use lower standards than the California standards for small-volume manufacturers. Manufacturers who sell fewer than 4,500 vehicles a year in Korea will be exempt from any of these emission standards.13 K-US FTA exempts imported motor vehicles from any new or amended Korean regulations related to self-certification for safety standards for at least 2 years after the regulations or amendments come into effect, and these standards would only apply under certain conditions.14 These exemptions were designed to benefit U.S. auto manufacturers who are expected to sell fewer automobiles in the Korean market than Japanese or European manufacturers. In addition, Korea and the United States negotiated an innovative and unique mechanism for resolving bilateral trade disputes related to automobiles. If the agreement?s expedited dispute settlement pane 15l finds that a party has not complied with its obligations in the agreement?s auto provisions, it can authorize the other party to reimpose import duties on the defaulting party?s automobiles. This is the so-called snap-back mechanism. Reimposed duties may be levied until the party at fault complies with all the auto provisions 16. Another 10 Article 2.12.1 and 2.12.2 of K-US FTA. The signed text of K-US FTA is available at http://www.fta.go.kr/pdf/20081104/eng_list.htm (visited 17 May 2009). 11Article 2.12.3. 12Article 2.12.4. 13Confirming Letter of Specific Autos Regulatory Issues, K-US FTA. 14 Ibid. 15This process will reduce the amount of time used to make decisions using most dispute settlement mechanisms by 50%. See Annex 22-A (Alternative Procedures for Disputes Concerning Motor Vehicles), K-US FTA. 16 Ibid. 3 panel decides if the party at fault has met its FTA obligations and rescinds the duti 17es. This mechanism will be removed from the agreement 10 years after the FTA comes into effect if it is not used to settle a trade dispute involving automobi 18les. K-US FTA also established an autos working group to address regulatory issues that may arise and review potential new regulations affecting auto manufacturers in each country. In this provision, both countries must be involved in developing new regulations related to automobile imports.19 In addition to its autos-specific provisions, K-US FTA also addresses standards and technical barriers to trade (TBTs) and many other regulatory practices. On top of national treatment and the principle of necessity stated in WTO Agreements, this FTA includes provisions to ensure transparency in the development and implementation of technical regulations and related conformity assessment procedures. In these provisions, Korea and the United States agreed to publish the criteria used to recognize conformity assessment bodies and explain the objectives of new automobile regulations and how they will achieve these objective 20s. Korea and the United States also agreed to 1. notify the other country about new regulations, even if they are based on international standards; 2. allow at least 60 days for written comments on proposals; 3. make all comments about new regulations public; and 4. publish a notice about proposed and final regulations in a single official journal, and include responses to significant comments and explanations about any revisions made to the regulations 21. In short, K-US FTA has stronger, more comprehensive provisions related to the automotive sector in the areas of taxes, tariffs, standards, and technical barriers than any other trade agreement. Compliance with these FTA provisions is guaranteed by the powerful dispute settlement mechanism that ensures U.S. automakers and auto parts manufactures can fairly compete in the Korean market and restores balance to the automobile trade between the two countries. B. Problems of Trade in Pharmaceutical/Medical Device The K-US FTA negotiations about pharmaceutical issues are another example of these two countries attempting to solve mutual problems that may touch on even deeper sovereign issues. According to the outcome of a series of tough negotiations, both states agreed to take measures to prohibit unethical business practices in the trade of pharmaceuticals and medical devices. U.S. multinational pharmaceutical companies were allegedly troubled by the close business relationship between Korean pharmaceutical companies and medical facilities/people, such as hospitals and doctors. On the other hand, Korean drug companies 17 Ibid. 18 Ibid. The mechanism terminates ten years after the entry into force provided that no panel established under it has determined violation or non-violation. 19Annex 9-B (Automotive Working Group), K-US FTA. 20Article 9.5, K-US FTA. 21Article 9.6, K-US FTA. 4 claimed that U.S. multinational manufacturers were lobbying Korean medical people in countries such as China, where U.S. anti-trust laws are not effective. Both sides complained about kickbacks, bribery, and improper inducements for purchasing and prescribing local or U.S. drugs or medical devices in Korea. As a result of a successful compromise, Korea and the United States agreed to prohibit unethical business practices nationally and globally22: 1. Each Party shall adopt or maintain appropriate measures to prohibit pharmaceutical product or medical device manufacturers and suppliers from providing improper inducements to health care professionals or institutions for the listing, purchasing, or prescribing of pharmaceutical or medical device products eligible for reimbursement under health care programs operated by its central level of government. 2. Each Party shall adopt or maintain appropriate penalties and procedures to enforce the measures that it adopts or maintains in conformity with paragraph 1.23 C. Protection of Copyrights The protection of intellectual property rights (IPRs) was another challenge faced during the K-US FTA negotiations. Traditionally, IPRs protection is a national responsibility governed by an obligation to protect IPRs. K-US FTA, however, explicitly and specifically explains how to do it. In a side letter attached to the agreement, Korea agreed to prevent illegal copying and distribution of copyrighted works on university campuses and precise enforcement methods are prescribed: Korea agrees to take the following actions as soon as possible, but no later than six months after the date this Agreement enters into force: 1. continue to implement policies that work to promote the use of legitimate materials by students, lecturers, bookstores, and photocopy shops on university campuses, and develop and implement further such policies, if necessary. Within this framework, seek cooperation and information from all universities, and consider the need for follow-up action; 2. enhance training activities in the territory of Korea on book-piracy enforcement, thereby raising awareness among enforcement personnel of illegal book printing activities as well as commercial scale operations of illegal reproductions of copyrighted works; 3. enhance enforcement activities with respect to underground book piracy operations; and 4. develop and pursue public education campaigns to raise general awareness in the public sector of illegal book printing activities as well as commercial scale operations of illegal reproductions of copyrighted works.24 D. Implementation of Dispute Settlement Panel Decisions 22See Article 5.1 (?the Parties affirm the importance of?ethical practices by pharmaceutical and medical device manufacturers and suppliers and by health care providers on a global basis in order to achieve open, transparent, accountable, and reasonable health care decisionmaking?). 23Article 5.5 (Ethical Business Practices), K-US FTA. 24Side Letter on Copyright Protection, Korea-US FTA. 5 It is fair to say that WTO?s dispute settlement procedure (DSP) has been quite successful; however, this nascent success is tainted because countries do not always implement panel decisions. A study25 that examines 333 total consultation requests made from January 1995 (the establishment of WTO) until October 2005 shows that the genuine success rate is 67%.26 Although the success rate in the first half period of the WTO system is 72%, it drops to 63% in the 7second ha 2lf. More troublesome is the fact that the United States, the founder and largest supporter of the DSP system, has become the most frequent default 28er. Taken captive by special-interest politics in Congress, the U.S. Government has found it difficult to implement all panel decisions (see, for example, US-FSC 29, US-1916 30 Act, US-Byrd Amendment 31, US 32-Copyright Act, US-Section 211 33 34, and US-Japan Hot-Rolled Steel). Facing this serious challenge, some commentators suggest using monetary fines or damages to settle trade dispu 35tes. According to this view, instead of amending domestic 25Won-Mog Choi, ?To Comply or Not to Comply? Non-implementation Problems in the WTO Dispute Settlement System?, 41 (5) Journal of World Trade (2007). 26 Ibid, at 1047. 27 Ibid. 28 Ibid, at 1047?70. 29United States-Tax Treatment for Foreign Sales Corporations, WT/DS108. A U.S. foreign sales corporations (FSC) tax measure was found to be an export subsidy by a WTO panel. Initial revision of the FSC law was found to be incompatible with panel rulings. With the DSB authorization of EC?s retaliation against U.S. exports, the U.S. Congress enacted another FSC law in October 2004, but it was also found inconsistent by another WTO panel in September 2005. 30United States-Anti-dumping Act of 1916, WT/DS136, 162. The U.S. 1916 Anti-dumping Act essentially provides a private right of action for a criminal offence and a treble-damage provision to counteract intentional dumping on the U.S. market, which elements were found inconsistent in the case. After several of failed attempts to repeal the Act and with arbitral panel?s award for retaliation, the United States repealed the 1916 Act in December 2004. 31United States-Continued Dumping and Subsidy Offset Act of 2000, WT/DS217, 234. Under the Byrd Amendment Act, anti-dumping/countervailing duties collected by U.S. Customs were distributed to the companies that asked for anti-dumping/countervailing investigations. This was found to be inconsistent with WTO rules. After a series of retaliation actions by the EC, Canada and Japan in 2005, the U.S. Congress repealed the amendment on February 1, 2006. 32United States-Section 110(5) of US Copyright Act, WT/DS160. A U.S. statutory provision that allowed certain retail establishments to avoid payment of royalties otherwise due to copyright holders was ruled inconsistent with the TRIPS Agreement. Although a new temporary compensation method was invented, the United States and the EC were unable to reach a permanent solution. 33United States-Section 211 Omnibus Appropriations Act of 1998, WT/DS176. This act was the result of legislation designed to punish certain Cuban interests by denying trademark protection. The United States and the EC agreed to extend the deadline of the implementation period from December 2002 until June 2005. After the deadline ended without results, the EC reserved the right to request an authorization of retaliation in the future. 34 United States-Anti-Dumping Measures on Certain Hot-Rolled Steel Products from Japan, WT/DS184. This case occurred as a result of the U.S. DOC?s exclusion of certain home-market sales to affiliated parties when calculating dumping margins. The United States and Japan agreed to extend the deadline of the implementation period from November 2002 to July 31, 2005. In July 2005, Japan reserved the right to request an authorization of retaliation in the future. 35Marco Bronckers, ?More Power to the WTO??, Journal of International Economic Law 41 (2001), at 62; William Davey, ?Implementation Problems in the WTO Dispute Settlement System: The US Experience?, paper presented at the US and WTO Dispute Settlement: Crisis in Implementation? 6 laws that violate WTO rules, countries at fault would pay a certain amount of money to the injured country. Indeed, monetary fines have already been introduced into several FTAs recently concluded with the United States. For example, the U.S.-Chile FTA, U.S.-Singapore FTA, and U.S.-Australia FTA permit a non-complying party, when faced with retaliation, to pay an annual monetary assessment to the complaining country. K-US FTA includes this type of dispute settlement device: The complaining Party may not suspend benefits if, within 30 days after it provides written notice of intent to suspend benefits or, if the panel is reconvened under paragraph 3, within 20 days after the panel provides its determination, the Party complained against provides written notice to the other Party that it will pay an annual monetary assessment.36 This use of fines is an attempt to meet new challenges by cooperating at a regional level, and it is another aspect of aggressive regionalism. The global marketplace is carefully wa 7tching this experimen 3t. E. Outward Processing Exception for Kaesung Industrial Complex Problem In general, FTAs require agreeing countries to produce the goods they trade with their partners inside their own territory. Notwithstanding this principle of territoriality, countries can agree to allow production outside of a country if the material is exported from that country and the finished product is re-imported into the country. These provisions are called the outward processing exception. The Korea-Singapore FTA38 includes this exception. In this provision, this type of production is permitted if the total value of non-originating inputs does not exceed 40% of the value of the goods and the value of originating materials is not less than 45% of the value of 39 the final goods. In the Korea-EFTA FTA40, added value caused by outside production must not exceed 40% of the final product?s value, and the value of originating materials must be more than 60% of the total value of materials used in the production.41 Seminar hosted by the Korea International Trade Association at Seoul, June 1, 2004 (on file with the author), ch. IV. 36Paragraph 5, Article 22.13, K-US FTA. 37There are some criticisms about this monetary fine idea: ?If monetary fines become normal practice to deal with non-implementation situations, big economies might regularly purchase their breach of international obligations with a certain amount of money. This may create a new phenomenon of a sort of ?international mercantilism,? which will open the door through which powerful U.S. senators and politicians will be able to use its financial power to cater to specific needs of their specific constituency. In certain circumstances, the U.S. might not actually pay any amount of fine out of pocket: Granting already an enormous amount of international aid, the U.S. could simply substitute existing and continual aid for a new payment of fine that is due. As a consequence, developing countries receiving U.S. aid would find it more difficult to obtain full implementation of DSP decisions by the United States. All of these possibilities may well engender a ?culture of illegality? or ?culture of monetary payment? in a large scale that would make future compliance more difficult? (see Choi, above n 25). 38Signed in August 2005, entered into force in March 2006. 39Paragraph 1, Article 4.4, Korea-Singapore FTA. 40Signed in December 2005, entered into force in September 2006. 7 The approach taken in K-US FTA is more cautious and even hortatory. As a result of recommendations by the Committee on Outward Processing Zones on the Korean Peninsula, geographical areas will be identified as outward processing zones, and specific criteria for the eligibility and maximum threshold for value addition will be established.42 This provision depends on several conditions that include but are not limited to the following: 1. Progress toward the denuclearization of the Korean Peninsula. 2. The impact of the outward processing zone on intra-Korean relations. 3. The status of environmental standards, labor standards and practices, wage practices, and business and management practices in the outward processing zone compared to the situation in the rest of the local economy and international marke 3tpl 4ace. Although K-US FTA does not contain any concrete outward processing exception rules (unlike previous FTAs), it does establish a legal basis for further discussions if and when there are changes in the relationship between North and South Korea. III. Analysis and Implications A. The Case of Aggressive Regionalism It is clear that the global community needs to move from the outdated concept of preserving sovereignty and decide how to allocate power in the international marketplace. Many international efforts have been made to find an optimal way to allocate power among sovereign economi 44es. In this light, K-US FTA bases the allocation of power or authority on efficiency and mutual understanding among partner economies rather than insisting on the outdated doctrine of non-intervention in domestic affairs. Korea has embarked on aggressive regionalism because it wants to upgrade its internal economic environment. If Korea simply wanted to reduce the cost of trade with a big economy, it would have been better off negotiating a FTA with China rather than with the United States because Chinese tariffs are much higher than U.S. tariffs. Although Korean export industries have been doing well, the Korean economy has stagnated at a 4% growth rate, and the unemployment rate has increased to 3.7% 45. This situation shows that Korea?s economic problems have an internal, not an external, source. Korea understood that its economic problems were internal, and it decided to eliminate domestic inefficiencies by forcing its system to compete with the U.S. economy, the most efficient economy in the world. Although the Korean government claims, for political reasons, that the largest benefit of K-US FTA comes from increased market access 41Article 13 and Appendix 4, Annex I, Korea-EFTA FTA. 42Annex 22-B, Korea-US FTA. 43 Ibid. 44For the new understanding of sovereignty as an issue of allocating authority, see John Jackson, ?The Challenging Fundamentals of International Law and Ten Years of the WTO?, Journal of International Economic Law 8 (1), at 11-13; John Jackson, ?The WTO ?Constitution? and Proposed Reforms?, Journal of International Economic Law (2001) at 68-70. 45Growth rates of Korean economy were 4.6% (2004), 4.0% (2005), 5.2% (2006), 5.1% (2007) and 2.2% (2008) compared to 7.2% (2002), 8.5% (2000), and 9.5% (1999). Unemployment rates were 3.7% (2004, 2005), 3.5% (2006) and 3.2% (2007, 2008). Source: Bank of Korea, ?Economic Statistics System?, http://ecos.bok.or.kr/ (visited 17 May 2009). 8 for its automobile and textile exports, it is counting on FTAs, including K-US FTA, to increase the efficiency of its economy in the future. In retrospect, some of Korea?s FTAs had serious problems in terms of their level of liberalization and consistency with WTO rules. For example, in the Korea-Singapore FTA, 91.6% of products were subject to a tariff elimination schedule within 10 years, and most major agricultural products (including rice, apple, pear, onion, garlic, and beef) and fishery products were excluded from the schedule. In the FTA with EFTA, only 86 to 88% of industrial and fishery products were subject to a tariff elimination schedule. Tariffs on agricultural products were only eliminated for products currently traded between the two sides. This back-down trend in terms of trade liberalization is highlighted in the Korea- ASEAN FTA.46 Most sensitive agricultural products were excluded from the schedule. As quid pro quo, ASEAN states excluded Korean cars, car components, electronic machines, metals, and cigarettes, which are major Korean export items, from the FTA. As a result of these exceptions, Thailand refused to sign the FTA as a protest.47 In K-US FTA, Korea and the United States agreed to eliminate tariffs on all industrial products and quickly remove 94% of them (within a 3 year period). Only some agricultural products, such as rice, oranges (produced during harvesting season), soybean/potatoes (for human consumption), milk powder, and honey, were subject to tariffs. Therefore, Korea?s original aim, which was to achieve high-level liberalization and improve the efficiency of its economy, was accomplished by K-US FTA. In the past, the only objections to trade liberalization came from import substitution- oriented interest groups, such as farmer?s association, poultry producers groups, and labour unions. These groups systematically organized supporting groups and efficiently conducted a campaign of public propaganda. On the other hand, export-oriented groups, including associations of large export companies, remained silent and became free riders on the government?s trade liberalization policies. As a result, consumer associations and many NGOs sided with the import substitution-oriented interest groups and forced the Korean government to compromise on its trade liberalization plans in order to produce policy results. Once K-US FTA negotiations were officially launched, however, export-oriented groups in Korea started to support high-level FTAs. As a result, the government was able to pursue a liberalization of trade and solve the trade problems between Korea and the United States. B. Implications for Korea?s Future FTA Policy and for the World a. Further Problem-Solving Approaches It appears that this aggressive regionalism approach will continue to be Korea?s FTA policy. Now that Korea has established high-level trade liberalization with the most efficient 46The Framework Agreement was signed in December 2005, the Agreements on Trade in Goods and Services were signed respectively in August 2006 and November 2007 (and entered into force, respectively, in June 2007 and May 2009), and the negotiation for the Agreement on Investment was concluded in April 2009. 47Thailand eventually joined the FTA in February 2009. 9 economy in the world, it will not hesitate to use this FTA to solve domestic or foreign problems. Although K-US FTA is a mechanism for solving many of its trade problems, its future FTA negotiations will need to deal with the increasing number of trade remedy measures taken against its exports. As the volume of trade between Korea and the world grows, dumping or export subsidy practices may occur more frequently, and as a result, there will be an increasing number of trade remedy measures. Korea will also have to find a way to avoid anti-dumping or anti-subsidy measures used for protectionist purposes. If it is unable to solve these types of problems, any gains from trade liberalization would substantially disappear. The upgrade of the current trade remedy system was a high-priority issue to Korea during FTA negotiations with the United States, and it will be an important issue in negotiations with other countries, including China. China and New Zealand dealt with this issue when they negotiated their FTA. In this agreement, both countries agreed not to take any action pursuant to the WTO Anti-dumping Agreement ?in an arbitrary or protectionist manne 48r?. They also agreed to notify the other country when initiating an investigation ?as soon as possible following the acceptance of a properly documented appli 49cation from an industry?. It is widely known that anti-dumping measures have often been used for protectionist purposes: 1. Frivolous petitions from domestic industries have been easily accepted by investigating agencies and investigated. 2. Producers or exporters subject to investigations were unaware of the petition before investigation started. 3. Investigations and outcomes were often tainted by an arbitrary application of standards and criteria by the investigation authority. In these circumstances, China and New Zealand?s announcement not to take anti-dumping measures in an arbitrary or protectionist manner and provide early notification is an ambitious and challenging policy for solving chronic problems in the trade remedy system. The China-New Zealand FTA prescribes that ?neither party shall introduce or maintain any form of export subsidy on any goods destined for the territory of the other P 50arty?. This agreement makes changes to the WTO subsidy and countervailing system (where certain export subsidies on agricultural products are not prohibited, but they are subject to a reduction commitment) as applied between the two countries and establishes a clearer framework for solving the problem of subsidies. This FTA allows a party to exclude the other party?s products from the safeguard action if these imports do not injure the country?s economy, and a party must immediately notify the other party when starting an investigation.51 The New Zealand-Singapore FTA, on the other hand, tightened up the rules about dumping: 1. The de minimis dumping margin is raised from 2 to 5% and applies to new cases, refunds, and review cases. 48Article 62, China-New Zealand FTA. 49 Ibid. 50Article 63, China-New Zealand FTA. 51Article 64, China-New Zealand FTA. 10 2. The margin of dumped imports normally regarded as negligible is increased from 3 to 5%. 3. The timeframe to be used for determining the volume of dumped imports shall normally be at least 12 months. 4. The period for review and/or termination of anti-dumping duties is reduced from 5 to 3 y 52ears. Unethical business practices in the pharmaceutical goods sector and other sectors also pose great challenges. Many commentators are concerned about non-transparent and unfair business practices in many Asian countries, including China and Japan, that often create non- tariff barriers. The protection of IPRs will also be a challenging issue in any Korea-China trade negotiations. In this regard, China and Korea can learn from K-US FTA?s active, cooperative use of FTA rules to solve these trade issues. Food safety will be another critical issue for Korea when it negotiates an FTA. Recently, Korea had difficultly establishing sanitary standards for American be 53ef, and this struggle shows the political difficulties of combining the market liberalization of agricultural products with food sanitary issues in Korea. Setting out details for sanitary and phytosanitary rules and implementing arrangements under a FTA might provide a good solution. The China-New Zealand FTA is an excellent example for resolving this issue because it orders the two countries to conclude implementing arrangements and establish SPS rule 54s. Indeed, the food sanitary and safety issue will be a challenging issue in any negotiations between Korea, an OECD country, and China, the largest agricultural producer in the world. The outward processing exception clause under K-US FTA is directly related to the rules about the origin of products produced in the Kaesung Industrial Complex located in North Korea, a symbol of Korea?s engagement policy towards the North. This issue will be a high priority in Korea?s future trade negotiations with other countries. Given the close ties between North Korea and China, it may be possible to negotiate a specific exception clause similar to provisions in the Korea-Singapore or Korea-EFTA FTAs, which include a 40 to 45% or 55 40 to 60% formula. Going further, China and Korea may follow the whole-scale exemption clause in the China-New Zealand FTA that follows the Treaty of Waitang 56i. In 52Article 9, Singapore-New Zealand FTA. 53Massive public demonstrations were held in Seoul after Korea and the United States signed a treaty on Import Health Requirements for U.S. Beef and Beef Products on April 18, 2008. Although the principle intention of the government in signing the treaty was to form an amicable environment within the United States for the early ratification of K-US FTA, many Koreans felt their government compromised public health by allowing the importation of age-old American beef that has the potential for BSE (Mad-cow disease). As a consequence, two rounds of additional negotiations were held between the two countries, and exporters and importers in both countries agreed voluntarily not to export and import certain age-old beef with governmental guarantees. For details, see Won-Mog Choi, Legal Analysis of Agreed Documents in Korea-U.S. Beef Negotiations and Policy Directions for Korea, International Trade Law No.82 (Ministry of Justice of Korea, August 2008). 54See Article 77, China-New Zealand FTA. (More than 10 implementing arrangements are agreed to be concluded.) 55Above n 39 and 41. 56New Zealand gives the Maori, a minority tribe living in New Zealand, differential and favourable treatment pursuant to the provisions of the Treaty of Waitangi. How to make the international community acknowledge this special arrangement is a politically sensitive issue. In the China-New 11 this clause, China and New Zealand would recognize various economic cooperation activities between South and North Korea. In particular, China may agree to accept the provisions stated in the Agreement on Basic Relationship between South and North Kor 57ea, which establishes differential and favourable treatment for intra-Korea trade. b. Benefit and Cost Approach of Multiple FTAs It is true that an FTA provides countries with many benefits. In particular, to an export- oriented economy like Korea, increased market access to foreign export markets is crucial. Although Korea also has to open its market to FTA partners, increased competition with more efficient foreign companies will increase efficiency in the goods, services, and investment sectors. Cheaper-priced imports will also benefit consumers. The cost of FTAs, however, can be very high for Korea. In many cases, the cost is high because Korea must make industrial adjustments that include a transfer of labour from one sector to another in a traditionally inflexible economy. In addition, a complicated web of multiple FTAs may create a so-called spaghetti bowl cost58 and have a trade diversion effect on Kor 59ea. The inconsistencies between various elements of these agreements, such as different schedules for phasing out tariffs, different rules of origin, conflicting standards, exclusions, and differences in rules dealing with trade remedy, and other regulations and policies, can increase the cost of doing business for Korean firms and trade diversion effects. If an exporting company has many FTAs, it may be able to claim FTA duty exemption wherever its goods are exported within 0 this network 6. In spite of this benefit, different rules of origin must be satisfied for each export destination, which creates spaghetti bowl costs. Companies located in a spoke, on the other hand, must not only bear the spaghetti bowl costs, but also a spoke cost.61 It is known that a regional FTA hub country and its companies receive many benefits. Increased competitiveness by importing the most suitable Zealand FTA, a special provision exempts the arrangement from various duties, and disputes will be handled by a special arbitral tribunal. See Article 205, China-New Zealand FTA. 57Agreed between the two governments in December 1991, and entered into force in 1992. 58 In general, a proliferation of overlapping preferential trade agreements can create a spaghetti bowl effect. See generally Jagdish Bhagwati, ?Regionalism and Multilateralism: An Overview?, in Jaime de Melo and Arvind Panagariya (eds), New Dimensions in Regional Integration (Cambridge University Press, 1993); Jagdish Bhagwati and Arvind Panagariya (eds), The Economics of Preferential Trade Agreements (Washington: AEI Press, 1996). 59 In general, regional trade agreements can cause welfare losses for countries that are both members and nonmembers of the pact by diverting imports from low-cost nonmember sources to higher-cost member suppliers. In such cases, the cost difference borne by importing members is commonly known as a trade diversion effect. Jacob Viner, The Customs Union Issues (Carnegie Endowment for International Peace, 1950). 60For empirical analysis of positive trade effect for FTA-hub countries, see Joseph D. Alba, Jung Hur, and Donghyun Park, ?Effects of Hub-and-Spoke Free Trade Agreements on Trade: Panel Data Analysis (ADB Economics Working Paper Series No. 127, Asian Development Bank, October 2008). 61Through one of the earliest studies on the effect of a hub-and-spoke trade system, Kowalczyk and Wonnacott show how spokes will gain or lose from a FTA with the hub in the context of NAFTA. Kowalczyk C., Wonnacott R.J., ?Hubs and Spokes, and Free Trade in the Americas?, (NBER Working Papers No.4198, 1992). Puga and Venables show how the hub-and-spoke structure of a FTA can influence the incentives for firms to locate in a country or another. Puga D., Venables A., ?Trading Arrangements and Industrial Development?, World Bank Economic Review 12 (1998), at 221-49. 12 raw materials from multiple spokes customs-free and expanding foreign direct investment 62 inflow are some of the advantages. Also the hub country has many advantages when negotiating new FTAs and is in a better position to persuade its prospective partners to accept the conditions of its existing FTAs or other 63 conditions favorable to itself. In a specific region, a hub country could also display its political and economic leadership.64 However, a hub-and-spoke structure is relatively inefficient compared to an integrated regional FTA because there is an increase in trade-related costs 65. A hub constructs a complex trade ne 66twork with multiple spokes, and as a result, traders? compliance costs increase. Also businesses at the hub will pursue rent-seeking behavior: That is, firms in a hub try to maintain monopolistic positions in the hub-and-spoke structure, hindering a competitor from one spoke from branching out to another spoke 67. There are also strong incentives for economies to try to become the hub in an attempt to dominate economies in their region, which can lead to discrimination and conflic 68ts. The problem is that spoke countries must bear the costs associated with these advantages in the form of a spoke cost. The Korean economy relies heavily on foreign source materials, and it exports its final products all over the world. As a result, the spaghetti bowl and spoke costs will become more damaging and unbearable as the Asian region negotiates more FTAs. Since the 1990s, spaghetti bowls have occurred in major regions around the world. In Asia, China?s approach to ASEAN for a FTA in 2001 triggered a domino 69effect and created so-called noodle bowl 0 costs 7. In this situation, former beneficiaries of complexity tend to downsize and go offshore. 62 Inkyo Cheong, East Asian Economic Integration: Recent Development of FTAs and Policy Implications (Seoul: Korea Institute for International Economic Policy, 2002), at 86. 63 Ibid. 64 Ibid. 65For the general discussion about inefficiency of hub-and-spoke structure, see George Deltas, Klaus Desmet, and Giovanni Facchini, ?Hub-and-Spoke Free Trade Areas? (CEPR Discussion Paper No. 5960, London: Centre for Economic Policy Research, November 2006). 66Above n 62. 67 Ibid, at 87. 68 Ibid. For more general discussions about the hub-and-spoke type of RTAs, see Peter Lloyd, ?New Bilateralism in the Asia-Pacific?, the World Economy 25 (2002), at 1279-96; Richard Bladwin, ?The Spoke Trap: hub and spoke bilateralism in East Asia? (KIEP CNAEC Research Series 04-02, Korea Institute for International Economic Policy, 2004); Peter Lloyd and Donald Maclaren, ?Gains and Losses from Regional Trading Agreements: A Survey?, The Economic Record 80 (2004) at 445-467; Zhai Fan, ?Preferential Trade Agreements in Asia: Alternative Scenarios of Hub-and-Spoke? (ADB, 2005); De Benedictis, Roberta De Santis, and Caludio Vicarelli, ?Hub-and-Spoke or Else? Free Trade Agreements in the Enlarged EU: A Gravity Model Estimate? (Working Paper 37, European Network of Economic Policy Research Institute, 2005). 69See Richard Baldwin, ?The domino theory of regionalism? in Baldwin, Haaparanta and Kiander (eds), Expanding membership of the European Union (Cambridge: Cambridge University Press, 1995). Republished as Chapter 23 (pp. 479?502) in J. Bhagwati, P. Krishna and A. Panagariya, Trading blocs: Alternative approaches to analyzing preferential trade agreements (Cambridge: MIT Press, 1999). 70ADB president Haruhiko Kuroda (in a speech delivered to the Jeju Summer Forum in Korea in July 2006) referred to the phenomenon of spaghetti bowls in Asia as the Asian noodle bowl effect of FTAs and warned that it could present future challenges for broader regional and global integration. See Masahiro Kawai, Ganeshan Wignaraja, ?The Asian ?Noodle Bowl?: Is It Serious for Business?? (ADBI Working Paper No. 136, Asian Development Bank Institute, April 2009). 13 Many firms in spokes harmed by this complexity tend to push governments to untangle FTAs. Naturally, regional policies aim to simplify the rules of origin and link FTAs to one another. How to multilateralize FTAs will soon become a major concern for Korea and the world.71 c. Accumulation, Harmonization, and Linkage among FTAs To achieve this policy, accumulation, which allows inputs from preferential trading partners to be used in the production of a final good without undermining the origin of the product, must be part of the rules about origin. There are three types of accumulation: (1) bilateral, (2) diagonal, and (3) full accumulation. Most recent FTAs include a provision allowing bilateral accumulation. This allows goods from participating countries to be processed in a partner or beneficiary country as if the goods originated in that partner or beneficiary country on the condition that the processing goes beyond a minimal level. The accumulation provisions in a FTA involving Korea, therefore, would encourage the use of materials and parts originating in the countries involved in the FTA. The second type of accumulation is known as diagonal accumulation. Diagonal accumulation operates in a preference group proposed by FTA parties. In this situation, materials or parts originating in one or more countries within the group may be further processed (provided it is more than minimal) in another country within the group, and these materials or parts are seen to originate in the country where they are processed. For example, shoes assembled in Korea from components originating in China and India may qualify as a good originating in Korea if China and India are designated a diagonal accumulation group. In particular, the commercial benefits of using this type of accumulation may be clearly demonstrated in case of the textile industry. Full accumulation enables the work or production carried out in one country to be carried forward to another country and be counted as if it were carried out in the country that produces the final product: It allows a product produced in one country to be sent to another country for further processing and recognizes the final country as the point of origin. Under this system, fabric produced in Korea can use non-originating yarn, and the fabric created from the yarn (not in itself a process conferring origin) will be considered a product that originated in Korea. Full accumulation would allow more fragmentation of production processes among FTA members and could stimulate increased economic linkages. The Pan-Euro-Med Accumulation Area allows for diagonal and full accumulation among many economies in the European and Mediterranean region. Countries in this region have already concluded a protocol to harmonize varying rules of origin (see Diagram 1 and Table 1). 71See Richard E. Baldwin, ?Multilateralising Regionalism: Spaghetti Bowls as Building Blocs on the Path to Global Free Trade? (The World Economy, Blackwell Publishing, 29(11), 2006). 14 < Diagram 1: EU Project of Harmonizing ROO-PECS > Change of Tariff Value Added Specific Accumulation Classification (Domestic or Import Content) Manufacturing Process A. Agreements involving the EU EU - PanEuro Yes (4, 2) Yes-Import (50-30%) Yes Bilateral Diagonal EU - GSP Yes (4, 2) Yes-Import (50-30%) Yes Bilateral Diagonal EU - Contonou Yes (4, 2) Yes-Import (50-30%) Yes Full EU-Chile Yes (4, 2) Yes-Import (50-30%) Yes Bilateral EU-Mexico Yes (4, 2) Yes-Import (50-30%) Yes Bilateral EU-South Africa Yes (4, 2) Yes-Import (50-30%) Yes Bilateral Diagonal (ACP) Full (SACU) B. Others NAFTA Yes (6, 4, 2) Yes-Domestic (60-50%) Yes Bilateral AFTA Yes-Import (60%) Full ANZERTA Yes-Domestic(50%) Full Singapore-Japan Yes (4) Yes-Domestic (60%) Yes Bilateral Singapore-US Yes (6, 4, 1) Yes-Domestic (55-35%) Yes Bilateral K-US Yes (6, 4, 1) Yes-Domestic(generally 35%) Yes Bilateral / Import(generally 45%) 15 < Table 1: Rules of Origin in Existing Free Trade and Preferential Trade Agreements of EU in comparison with Those of Major Countries >72 It is important for Korea to include this approach in a FTA because its economy heavily depends on outsourcing materials and intermediate goods. The burden of production costs incurred by each restrictive rule of origin can be somewhat reduced by allowing less restrictive accumulation rules, such as diagonal or full accumulation. It is high time for Korea to consider these rules when negotiating FTAs or amending existing ones. More fundamentally, Korea should gradually replace complicated requirements for changes in tariff classification and specific process criteria under FTA rules of origin with a single standard, such as a regional value content criterion. All the protectionist value of these requirements can be transformed into a certain degree of regional value by proper calculations, and having a single criterion in FTA rules of origin will greatly reduce transaction costs. Therefore, Asian countries, including Korea, need to decide how to achieve common regional values and transform source-of-origin criteria. Simplification of FTA rules of origin involving Korea need to be combined with efforts to link to other FTAs. This linkage may occur if all the countries involved in an FTA agree to adopt a diagonal or full accumulation system and amend their respective FTAs. Harmonization of rules of origin can only occur if these countries unify their various rules about origin. This process takes a large amount of time and effort, and therefore, it must be designed on a long-term basis. This low-level linkage (i.e., linking multiple FTAs using accumulation and harmonizing the rules of origin) will enable countries to tackle higher-level linkage over the longer term. These higher-level linkages must deal with harmonizing the institutional or systematic provisions of FTAs that cover customs administration and trade facilitation, transparency, institutional provisions and dispute settlement, exceptions, trade remedies, technical barriers to trade, sanitary and phytosanitary measures, intellectual property rights, competition-related matters, electronic commerce, investment, and labor and the environment. Ultimately, this endeavor may lead to the harmonization of market access provisions among FTAs involving Korea and solve the problems associated with government procurement, financial services, cross-border trade in services, textiles, and apparel, agriculture, and industrial goods (see Diagram 2). As more and more FTAs are harmonized and interlinked by higher-level linkages and accumulation in Asia, a pan-Asia FTA idea could eventually materialize. That is, a trilateral FTA comprising China, Korea and Japan may be formed and by linking other existing bilateral FTAs to this, the linkage and harmonization task of FTAs in Asia may be gradually pursued. Eventual accession of other Asian countries to the China-Korea-Japan FTA would complete the pan-Asia economic integration project (see Diagrams 3 and 4). In this course, a step-by-step approach from low to high level linkages and harmonization can make the idealistic agenda more feasible. This ambitious goal will require Korea to use forward-looking approaches and have courage when negotiating future FTAs. 72 Summarized by the author by examining individual agreements. 16 < FTA 1 > < FTA 2 > HIGH MID LOW MID HIGH NT & MA NT Electronic for Goods & MA Commerce for Goods Electronic Commerce Ag Investment Agriculture riculture Investment Labor & Textiles & Textile & A Environment Apparel pparel Labor & Rules of Environment Competition Cross-border Cross-Border Origin Trade in Services Trade in Services Competition IPRs & Origin Financial Financial IPRs SPS/ TBT Services Services Procedures SPS/ TBT Trade Remedies Telecommunications Telecommunications Trade Remedies Exceptions Government Government Procurement Procurement Exceptions Institutional Provisions & Institutional Dispute Provisions & Settlement Dispute Settlement Transparency Transparency Customs Admin & Trade Facilitation Customs Admin & Trade Facilitation Linkage between FTAs 1 and 2 < Diagram 2: Level of Linkage among FTAs and their Sectors > 17 < Diagram 3: Linkage among FTAs in Asia > < Diagram 4: Pan-Asia Integration among FTAs > IV. Conclusion 18 K-US FTA is a result of a paradigm shift from traditional regionalism, which deals mostly with customs-border issues, to aggressive regionalism that codifies a whole-scale problem- solving process. By addressing a series of age-old bilateral trade disputes, such as the automobile trade imbalance, unethical business practices in pharmaceuticals and medical devices, and effective protection of copyrights, and new global or regional issues, such as the non-implementation of WTO panel decisions and South and North Korea?s economic cooperation, K-US FTA establishes stable, permanent principles and binding rules for trade between Korea and the United States. It appears that the aggressive regionalism approach reflected in K-US FTA will continue to play an important role in Korea?s future FTA policy. When negotiating FTAs, Korea will take a problem-solving approach to trade remedy issues, unfair business practices, sanitary and food safety issues, and economic engagement policies towards North Korea. As Korea becomes part of more FTAs, transaction costs caused by fragmented FTAs will become an economic issue. By actively adopting the accumulation system for the rules of origin and harmonizing varying rules among and linking to other FTAs, Korea must reduce the costs of the aggressive regionalism approach. It is suggested that achieving such ?multilateral regionalism? should be a long-term task for Korea. 19
Posted: 24 February 2010

See more from Trade Agreements in South Korea

Expert Views    
Aggressive Regionalism In Korea-U.S. FTA: The Present And F   By Won-Mog Choi, Ewha Law School
Country Profile South-Korea   By GlobalTrade.net
Hot Tips    
South Korea: Trade Agreements   By U.S. Commercial Service South Korea