KORUS FTA – Congressional Passage & Ratification: Some Thoughts by Dom LaVigne

My fellow administrator over at Korea Business Central, Dom LaVigne listened to the Korea Business Central interview with Dr. Victor Cha (available here) and shared the following very thorough and pertinent insights about KORUS FTA. He gave me permission to post his comments here in their entirety:

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 I thought the interview with Dr. Cha was very interesting, and certainly a coup for KBC in being able to get someone so prominent (i.e., NSC background) for an interview on the KORUS FTA.

My comments on the interview and on the KORUS FTA topic in general are from my perspectives in having led US business lobbying efforts for the US-Singapore FTA (it become effective on January 1, 2004) and the US-Malaysia FTA (started in June 2006 but remains incomplete due to several sensitive Malaysian political and sectoral issues).

1.                  US Commitment to Asia

As Dr. Cha rightly pointed out, many government officials in Asia – particularly in ASEAN (Association of Southeast Asian Nations = Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam) have been questioning the perceived US commitment to Asia in the last 5-6 years.

Since September 2001, the predominant feeling among many in Southeast Asia has been that the US is only interested in a military, security, and/or anti-terrorism relationship with the region, and less so in business or trade.  These officials cite the ever-growing “soft power” diplomacy of China, which has made significant inroads throughout the region and in Africa in recent years.  Some have questioned whether China had displaced the United States in terms of influence in the region.

While I am not on-the-ground in Korea, I would suspect the situation there is very much as it is in Singapore and Malaysia.  In the last couple years of the Bush (’43) Administration, and certainly in just the first six months of the Obama Administration, the US sent significant numbers of senior-level officials to Southeast Asia to discuss everything from FTAs and economic cooperation, to trade and investment.  I was involved in hosting many meetings when these officials visited AmCham, and I can attest to the level of sincerity and interest by the USG in Asia.

However, what we often told officials is that the USG and its respective embassies in the region need to do a much better job of PR and marketing their commitment and involvement in Asia.  While the US government is doing a lot, very people on the street (and unfortunately even many of our close supporters in Asian governments) are not clearly getting the message.

2.                  TPP (Trans-Pacific Partnership - http://www.ustr.gov/tpp)

The TPP was started around 2006 by Brunei, New Zealand, and Singapore, who were looking to establish a very large Asia Pacific FTA that would involve partners in North and South America, including the United States.

The US recently agreed to participate in this, and it is expected that they will participate in the first rounds of the TPP this month (Mar 2010).  While this will require a huge amount of work, the US will push to have the TPP be part of its standard “Gold Standard” for FTA agreements – i.e., FTAs which are comprehensive and address all sectors, thus resulting in the highest possible trade liberalization by the relevant parties.

The US’ involvement in the TPP is certainly significant, and sends the right signals of its long-term commitment to Asia.  If Korea were also able to join the TPP, that would be quite important, given its growing global economic and political influence.

Note:  The TPP would not negate specific “bilaterals” (two-country agreements) which the US and Korea are undertaking with each other and/or other partners.  Rather, the TPP will seek to be a standard that is compatible with the various bilaterals, but also provide a platform upon which TPP members can build gold-standard bilaterals among each other.

Lessons Learned:

From my involvement in the USSFTA (US-Singapore) and USMFTA (US-Malaysia), and also my having kept pace with the KORUS FTA as we were negotiating the USMFTA, several key points and lessons learned that are important for the KORUS situation:

1. US Public Sentiment:  Most of us who are doing international business know the value of an FTA, and (inspite of what people would think) many Congresspeople and Senators and their staffs will admit privately that they see and understand the value of having and FTA.  However, what ultimately pushes them to approve or not approve it will be their constituents.

The US economy and job market are frankly still in a shambles.  It is quite scary to see (on-the-ground) how hard it has been hit everywhere, and the big gap between how Asia continues to chug along, while in the States, it feels as though the wind has been taken out of the US’ sails.

CAFTA (Central American FTA) barely squeaked by in 2004 when the US economy was much more robust, and President Bush had to expend significant political capital to get it through.  The main obstacles to such FTAs passing will inevitable be feelings of potential job loss, questions about other countries not having labor unions (or how they treat their workers), and environmental implications.

Given the current public sentiment in the US – and with the mid-term Congressional elections happening in Nov 2010 – there is no way KORUS would pass Congress at this stage.

2. Congress:

Note:  KORUS was signed by USTR and the Korean Minister for Trade & Economy on June 30, 2007.  I don’t know whether the agreement has been ratified by the Korean Parliament, but Congress must ratify it or it will be back to the drawing board. 

Congress takes a summer recess from June-Sept each year.  Given the amount of discussions and lobbying required to get this legislation through Congress, it will likely not be possible to do before June.  Also with midterm elections in Nov, most people who are running for office again will be busy with campaigning during the August-Nov period.  

Quite frankly, US public sentiment is such that I believe any US government official voting for an FTA prior to the Nov elections would most likely not regain his/her seat.

The only plausible option would be to introduce KORUS in late Jan 2011, after Congress reconvenes from the midterm elections and winter recess.

3. TPA (Trade Promotional Authority)

When the US was getting more involved in FTAs in the late 1990s and early 2000s, President Clinton or President Bush signed the Trade Promotional Authority, which would enable the President to present future FTAs to Congress for ratification, but Congress could only do an “up-or-down” vote – i.e., they could only vote YES or NO on the entire agreement.  Normally for legislation going through Congress, members have the ability to request changes on a line-by-line basis, attach their own riders, etc.

TPA was enacted specifically to prevent this, because if Congress could make changes to the Agreement, it would need to go back to the other country’s legislative branch, who would either need to re-approve it, or if they did not, then the trade negotiators from both sides would have to work out a deal.

Unfortunately TPA expired on July 1, 2007.  At that time, it was felt that Congress would not renew it, and people were anticipating at least four years before Congress would approve it again.  Given the current economic situation in the US, it’s very unlikely TPA would have much of a chance unless the economy picks up significantly by 2011.  Still, it would likely take at least 8-10 months for TPA to be re-approved, given how slowly legislation can move through the US Congress.

Korea and Malaysia were racing to get their FTAs with the US negotiated and signed prior to July 1, 2006.  I think Korea just made it (June 30), while as I said, the Malaysia FTA is still under discussion.  So far as I am aware, no US FTAs have been presented to Congress since TPA expired. 

There is a real, significant risk the KORUS FTA could get bogged down in Congress as people pick it apart line-by-line.  Particularly given the very pugilistic bi-partisan bickering that has been taking place between Congress and the Administration in recent months, if the White House is putting forward KORUS, the Democrats would need to ensure party discipline to avoid their members voting with the Republicans (who might put up a fight due to partisan politics, even though most Republicans you talk to have favored and would favor this FTA). 

What will be critical is for US industry and business to put together a very comprehensive strategy for educating Congress and the American public on the benefits of KORUS.  We did this in Singapore after the FTA was signed, and while we were pressing Congress for ratification.  It took around six months of extremely intense work, including having AmCham members and their corporate HQs in the US send faxes by the thousands.  We even hired “runners” – professionals in Washington, DC who are hired to stand in lines outside of Congressional hearing rooms to pick up copies of the meeting transcripts – to hand-deliver letters to all Congressional and Senate offices stating the importance of the FTA and what needed to be done.

I know that Tami Overby (AMCHAM’s past President who is now heading up the US Chamber’s Asia Pacific operations) spent much time in Washington, DC lobbying Congress on the FTA. Once it is announced that KORUS will be submitted to Congress for consideration, a huge amount of educational work (particularly on correcting misperceptions) will be required by the US and Korean business communities.

4. What the US Stands to Gain?

Potential gains for US industry would be tremendous, if forces in the States realized how much this would open the Korean market, expand export opps for US companies, create more and higher-paying jobs, etc.

a. Services: Allow US law firms to establish offices and practice in Korea (I do not know whether this is part of the KORUS FTA, but this is certainly a barrier currently in Korea).

As with the USSFTA and USMFTA, a KORUS FTA would allow express delivery services (e.g., FedEx, UPS) to operate more easily and effectively in Korea, and not be subject to restrictions which are common in many countries (e.g., de minimus limits, requirements on delivering their products in-country through local partners, etc.

If it is difficult for US professionals to work in Korea because of their qualifications not being recognized (e.g., US engineers, architects, doctors), the KORUS FTA might be addressing these areas (this was an issue in the USSFTA).

b.  Autos: As controversial as this issue is, an FTA should open the Korea market more to US automobiles.  Now the question arises whether Koreans would actually want American cars, given the very strong nationalism on Korean brands (even in cases where American products are cheaper).  I’ve seen Nokia dominate much of the world mobile phone market outside Korea, yet fail twice when they tried to sell their products in Korea.  I would guess there are very few examples of foreign brands doing well in Korea (exceptions being Starbucks, Nike, Dunkin’ Doughnuts, etc.)

c. Beef: Again, another very controversial issue.  Assuming the health questions/considerations are addressed properly, increases in US beef exports to Korea will not only benefit US beef producers, but also Korean consumers.  While I must admit that I prefer Korean beef to US beef, it is ridiculous to have to pay KRW 55,000 or more for deung shim in many Seoul BBQ restaurants, versus a top-quality US beef which might run KRW 15,000 cheaper.

What the Korea Stands to Gain?

a. Branding: Ask many people in the States where is Korea, and you’ll likely get the answer that it’s a city close to Tokyo or Beijing.  Malaysia and Singapore suffer the same problem.  The other opinion (which I’ve seen very much since I have been back from people in the Midwest) is that Korea is still as poor as it was in the “MASH” tv series portraying the Korean war.  I have even had top academics in US business schools disagree very strongly with me when I told them that five-star hotels in Seoul hardly run under USD 300.00 per night and that the cost of living in Korea was so high (i.e., they thought Korea was still a third-world country).

When we were going through the USSFTA and USMFTAs, these same questions arose.  One significant benefit of the FTA would be to put Korea “on the radar screen” among most Americans who have no idea that it is the US’ 10th (?) largest trading partner.

b. Korean companies: After we completed the USSFTA, I received many (many) calls from Singaporean companies who had heard so much about the States via the FTA, and now wanted to see how they could take advantage of the FTA to do business in the US, export more to there.   Quite a few even wanted to setup offices and investments in the US. Not only is this good for Korean companies and will increase Korean jobs at home, but it will also bring in badly-needed tax revenues and trickle-down spending to many US states and cities.