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
< 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
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
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 (email@example.com).
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.
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
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
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.
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).
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
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).
13Confirming Letter of Specific Autos Regulatory Issues, K-US FTA.
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.
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
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
Korea and the United States also agreed to
1. notify the other country about new regulations, even if they are based on
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
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
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.
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
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.
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).
Ibid, at 1047.
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?
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
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.
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.
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).
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
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.
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
The New Zealand-Singapore FTA, on the other hand, tightened up the rules about
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.
50Article 63, China-New Zealand FTA.
51Article 64, China-New Zealand FTA.
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
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
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.
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).
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.
raw materials from multiple spokes customs-free and expanding foreign direct investment
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
costs 7. In this situation, former beneficiaries of complexity tend to downsize and go offshore.
Inkyo Cheong, East Asian Economic Integration: Recent Development of FTAs and Policy
Implications (Seoul: Korea Institute for International Economic Policy, 2002), at 86.
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.
Ibid, at 87.
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
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).
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
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).
< Diagram 1: EU Project of Harmonizing ROO-PECS >
Change of Tariff Value Added Specific Accumulation
Classification (Domestic or Import Content) Manufacturing
A. Agreements involving the EU
EU - PanEuro Yes (4, 2) Yes-Import (50-30%) Yes Bilateral
EU - GSP Yes (4, 2) Yes-Import (50-30%) Yes Bilateral
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
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%)
< 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.
Summarized by the author by examining individual agreements.
< FTA 1 > < FTA 2 >
HIGH MID LOW MID HIGH
NT & MA
NT Electronic for Goods & MA Commerce
for Goods Electronic
Ag Investment Agriculture riculture
Investment Labor & Textiles &
A Environment Apparel pparel Labor &
Environment Competition Cross-border
Cross-Border Origin Trade in Services
Trade in Services Competition IPRs
& Origin Financial
Financial IPRs SPS/ TBT Services
SPS/ TBT Trade Remedies Telecommunications
Trade Remedies Exceptions Government
Procurement Exceptions Institutional
Provisions & Settlement
Transparency Customs Admin
& Trade Facilitation
& Trade Facilitation
Linkage between FTAs 1 and 2
< Diagram 2: Level of Linkage among FTAs and their Sectors >
< Diagram 3: Linkage among FTAs in Asia >
< Diagram 4: Pan-Asia Integration among FTAs >
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.