Getting the Korea free trade agreement out of park

DESPITE the clear benefits for the United States and Korea, a proposed free-trade agreement has been stalled for nearly 18 months due to disputes over U.S. beef and the sale of U.S. autos in Korea. While the difficulties over beef have largely been resolved, the current global economic crisis has only further clouded the agreement's prospects.

Before the current crisis, the difficulties with the auto provisions of the Korea-U.S. Free Trade Agreement were more about the declining position of the U.S. auto industry in the United States than any specific provisions in the agreement itself. With the U.S. auto industry's future still in doubt after the Bush administration's recent initial bailout measures, the aspects of the agreement need to be considered in the current political and economic context.

With the onset of the global economic crisis, the U.S. auto market is poised to contract from 16.5 million vehicle sales last year to 13.6 million this year. The decline in sales is forecast to continue into 2009. Under the current economic climate, maintaining market share in the United States, which is the world's largest market for autos, is significantly more important for the immediate concerns of the Big Three than gaining any additional import market share in Korea, where total sales last year accounted for around only 1 million vehicles.

Consider the prospect that the Big Three may not begin to break even until 2012, and that even with a government-backed restructuring the U.S. industry could still face a future where only two the Big Three survive. Maintaining flexibility on the issue of autos and considering measures that could mitigate the free-trade agreement's impact on the U.S. auto sector may be the only means of seeing the agreement move forward in the near future.

This would have the benefit of allowing both countries to begin experiencing the benefits of the agreement in other sectors. One option would be to temporarily suspend the provisions relating to trade in autos. While the FTA currently calls for a three-year phaseout of U.S. tariffs and an immediate lifting of Korean tariffs on autos, a temporary suspension would offer two benefits.

First, the U.S. industry would not face increased competition from Korea while it undertakes a significant restructuring in its home market and, should that restructuring be successful, it would be in a better position to utilize the provisions in the FTA to expand its share in the Korean market.

However, any suspension of the FTA's auto provisions would not be permanent, and would need to be structured with clear guidelines on what signs of health in the U.S. industry would trigger resumption of the provisions. These could include a period of consecutive quarters of health by the U.S. industry as a whole, or the completion of the conversion of factories to produce more fuel-efficient cars.

Whatever the metric, any agreement would also need to cap the suspended period for the possibility that the U.S. auto industry is unable to meet those metrics in a reasonable period of time. These are unique economic times for both the U.S. economy and the U.S. auto industry. The current recession could extend through much of 2009, with the fortunes of the U.S. auto industry not improving until later.

Suspending the auto provisions of the FTA could provide the flexibility both sides need to move the agreement forward. This past spring, as daily protests over U.S. beef filled the streets of Seoul, the United States worked with Korea to find a politically acceptable way to relieve the crisis. Now the United States is facing a potentially much more critical crisis, and Korea could act to strengthen the friendship between both nations by showing similar flexibility during this difficult economic period.