Compromise delivers 11th-hour deal

For South Korea, a free trade agreement with the US was never just about market access to its second-largest trading partner.

Seoul had much grander ambitions than that. It hoped for a deal that would bring increased investment from the world’s largest economy; technology transfer from a global leader; and knock-on improvements across the under-developed service sector.

These gains were meant to upgrade the Korean economy across the board and help it avoid being sandwiched between low-cost China and high-quality Japan, and act as a trigger for a second series of reforms needed 10 years after the Asian financial crisis.

Given the difficulties in securing the agreement – talks continued until minutes before Monday's 1pm final deadline – and the noisy protests on the streets of Seoul, many analysts were relieved that there was a deal at all.

“This falls short of the initial expectations of both countries so both could be criticised,” said Lee Kyung-tae, president of the influential Korea Institute for International Economic Policy. “But considering the political reality in both countries, I think the outcome of these negotiations is quite well balanced.”

The two sides had clearly both made concessions in sensitive areas such as beef, textiles and cars, analysts said, and the negotiators pointed out they compromised to seal the pact.

While the deal is important to the US, becoming its largest trade accord in more than a decade and giving it an important bridgehead in Asia, it is crucial for Korea, which the central bank last week warned was starting to lose its “economic vitality”.

Mr Lee’s institute estimates that annual exports to the US will rise immediately by 12 per cent, or $5.4bn, and will expand by 15 per cent, or $7.1bn, during the mid-to long-term.

At the same time, analysts said the successful conclusion of the deal will give Korea increased leverage when they start negotiating with other big major economies such as the European Union and China, analysts said. Seoul is due to start FTA talks with Brussels next month.

“It’s a substantial agreement,” Young Soo-gil, an economist and president of the National Strategy Institute, who had feared the pact would be a low level “vanilla” deal.

“It will see a considerable opening in the agriculture market and there will be enormous benefits to Korean consumers because tariffs will be eliminated across a large range of sectors,” Mr Young said.

Certainly, the liberalisation of some agricultural products will bring about significant restructuring in the heavily subsidised agriculture sector, which comprises about 4 per cent of national output.

Korea has the highest level of farm protection of any member of the Organisation of Economic Co-operation and Development, with almost two-thirds of Korean farmers’ income derived from subsidies or trade protection, more than twice the OECD average.

The finance ministry on Monday outlined a $1.27bn plan to compensate farmers and help them find new livelihoods.

But there was disappointment that the deal did not contain adequate provisions to kick-start the service sector and help Korea lessen its reliance on products such as Samsung phones and Hyundai cars, instead becoming a knowledge-based service-oriented economy.

“At the beginning of this FTA the government said that one of the main focuses should be on services so we could upgrade our service sector and create half a million new jobs over the longer term,” Bark Tae-ho, a trade expert at Seoul National University.

“But if you look at the services part of this agreement, it’s not very impressive so I don’t know how this is supposed to upgrade the services sector. It should have been much more aggressive,” he said.

Education and medical services were excluded from the agreement, and although Korea said it would move towards opening accounting and law, this was already underway. Labour productivity in the service sector is just about 56 per cent of that in manufacturing, well below the OECD average of 93 per cent.

However, KIEP says that the arrival of US service providers would have increased productivity and employment, but that restructuring will occur in the service sector simply because of demand from the manufacturing sector.

But, as presidential and parliamentary elections loom, Mr Young of National Strategy Institute says securing the agreement was the easy part. The deal still has to pass through Korea’s riotous National Assembly.

“All the political players will be trying to champion the cause of opposition,” he said. “I think there is going to be a major debate here – and much more serious than we have seen up until now.”

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