A Proposed Korea-U.S. Free Trade Agreement and Kaesong Industrial Complex

Abstract

IntroductionA free agreement is one form of a trading block, a preferential economic arrangement amongst a group of countries that reduces barriers to trade. Trading blocs have emerged as the most debated topic in world trade. While countries around the world are making efforts to suppress national interests in favor of trading blocs, these groupings are also seen as evidence of difficulties in preserving the current global trading system under the World Trade Organization (WTO).The WTO has five major functions: (1) administering its agreements; (2) acting as a forum for negotiations; (3) monitoring national policies; (4) offering technical assistance and training for developing countries; and (5) cooperating with other international organizations (Kim and Kim, 2006, p. 38).As a multi-party negotiation promoted by the WTO travels along a bumpy road, making little progress, trading blocs-particularly FTAs-have seen accelerated expansion. For example, a total of 43 agreements were reported to the WTO during a roughly one-year period from January 2004 to February 2005 (Lee, 2006, p. 122).South Korea and the U.S. agreed to start serious negotiations for a free agreement between the two countries on February 2, 2006. During the first preliminary session held in Seoul on March 6, they agreed to begin the formal negotiations on June 5. Because the U.S. president's authority to negotiate agreements, called the trade promotion authority, expires on June 30, 2007, and includes the 90-day congressional review period on the final negotiation results, the deal must be concluded by late March. One of the major sticking points for a successful conclusion has to do with disagreement between the two countries over the inclusion of products made by the Kaesong Industrial Complex (KIC), the first large-scale economic project jointly undertaken by both Korean governments.This article is organized as follows. The first section discusses types of trading blocs. The second section analyzes reasons for trading blocs. The third section describes U.S. objectives in an FTA. The fourth section considers Korean objectives in this FTA. The fifth section covers the Korean request for duty-free treatment for goods produced by the KIC. The last section describes the impact of the U.S. elections on the KORUS FTA.Trading Blocs: Types of Economic CooperationA trading bloc is a preferential economic arrangement amongst a group of countries that reduces interregional barriers to in goods, services, investment, and capital. Historically, trading blocs have consisted of member countries with similar levels of per capita income, geographic proximity, comparable trading regimes, and political commitment to regional organization (Ronkainen, 1993, pp. 1-18). While the European Community displayed all of these characteristics in its early stages with six members, recent developments have shown that political will to cooperate does overcome consequences of dissimilarity in the first three characteristics. The admission of Greece and Poland into the European Union and the bilateral agreement between Chile and Korea indicate that a united political will can overcome the consequences of most dissimilarity. Thus, five forms of economic integration have developed among countries: the free area, the customs union, the common market, economic union, and political union (Kim and Kim, 2006, pp. 39-43).The free area type of cooperation requires member countries to remove all tariffs amongst themselves. However, the member nations are allowed to have their own tariff arrangements with nonmember countries. The North American Free Trade Agreement (NAFTA) involving the U.S., Canada, and Mexico illustrates this free area type of agreement.Under the customs union arrangement, member nations not only abolish internal tariffs amongst themselves but also establish common external tariffs. …