Thomas White Global Investing
South Korea
South Korea Stamp
November 19, 2010
A Postcard from the Asia Pacific
South Korea: Setback as Trade Deal with U.S. Falters

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The U.S. is hoping that the South Korean free trade agreement can be finalized in a ‘matter of weeks.’

It was meant to set the tone for the Group of 20 summit, a gathering of the world’s most powerful and biggest economies in Seoul. Instead, U.S. President Barack Obama and South Korean President Lee Myung-bak had to face waiting media with the news that yet again the two countries had failed to reach a conclusive agreement on a new trade deal. It was a deal that the White House believes could have created up to 70,000 American jobs. An agreement that could have added another $10 billion in U.S. exports. Somehow, despite the best efforts of both countries, the negotiations appeared to be stuck in first gear.

What went wrong this time around? The deal was one that was originally agreed upon in 2007, but Congress never ratified it. This time both parties failed to reach consensus on issues relating to car and beef exports. While South Korea wanted an immediate end to a 2.5% import tariff that the U.S. imposes on South-Korean made cars, the U.S. wanted South Korea to gradually lift restrictions on U.S. beef imports. Further, the struggling U.S. automotive industry, plagued by an anemic market and enhanced competition from Asian manufacturers, was hoping to break into what is a tough closed market in South Korea, dominated by the likes of Hyundai and Kia. American vehicle manufacturers like Ford have bitterly complained about the lack of access to the car market in South Korea. Ford contends that the U.S. exports only one car to South Korea for every 52 vehicles that the Asian giant sends to the U.S. Meanwhile, the steady appreciation of the won against the U.S. dollar this year added to Korean apprehensions about the trade deal, as the stronger currency has made imports cheaper and exports less competitive

Also clamoring for greater access to the South Korean market are American beef producers. Fears of the mad cow disease reached their peak in 2008, and forced President Lee Myung-bak to apologize to the people for allowing U.S. beef imports. Since then, U.S. beef has been less tainted by disease than by politics in South Korea. Currently, U.S beef producers limit beef exports to South Korea to cows that are younger than 30 years, as it is believed that the age of the animal may play a role in disease. Despite that restriction, the U.S. still accounts for 37% of South Korea’s beef imports in the first nine months of this year. From all this, it seems there are more than minor ‘technical issues’ that Lee said would need to be ironed out in the next few weeks. Obama himself is weakened politically, and the agreement as it stands would face sterner tests if put before a new Congress in January.

Meanwhile, South Korea is not counting on its losses. The country signed a free trade agreement with Peru, which is its second trade agreement in Latin America after Chile. It has also forged deals with India, Singapore and most crucially, a recent agreement with the European Union (EU) awaits ratification. Easier and more liberal trade with the EU means that South Korea will be less inclined to bargain hard with the U.S., whose economic clout has waned over the past recession. The EU pact alone is expected to create 250,000 jobs in South Korea, which has waged a resilient and often successful battle against its own forces of recession. It remains to be seen if the U.S. can catch up in the next few weeks.

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