In his State of the Union address in January 2010, President Obama set out the broad outlines of a national initiative to double exports by 2015 and in the process create jobs. Expanding trade is part of the administration’s larger economic recovery program that also includes infrastructure, clean energy, education, and innovation. The president plans to provide more detail on these efforts in a major speech next month.
As a highly trade-dependent state, Washington has a keen interest in the debate over pending free trade agreements (FTAs) with South Korea, Columbia, and Panama. The South Korean trade agreement, KORUS, is the most significant of the three given South Korea’s $1 trillion economy and 50 million people. Several current and one former Washington elected representatives have been active in pushing for its ratification.
The U.S. currently has 11 FTAs with 17 countries, the most recent being the US-Jordan agreement that was fully implemented in January 2010. In 2010, 41 percent of U.S. goods exported went to FTA partner countries, and those exports were growing at a slightly faster rate than exports to the rest of the world.
Currently U.S. trade with South Korea is substantial but in deficit. South Korea is our seventh-largest trading partner, and we are South Korea’s third-largest trading partner. In 2010, we exported goods valued at $38 billion compared to imports of $48 billion. This imbalance has been in the range of $10-15 billion for the last decade but is a small part of the total U.S. trade deficit which was $500 billion in 2010.
In contrast, Washington state’s trade with South Korea is in surplus. South Korea was fourth on the list of destination countries for exports from Washington in 2010 after China, Japan, and Canada. Commodities with a value of $2.7 billion went to South Korea via Washington. South Korea was the fifth largest source of commodities imported into the state with a value of $1.6 billion. Larger sources of imports were Canada, China, Japan, and Taiwan.
Not surprisingly, a large export category is civilian aircraft, engines and parts. South Korea has long been a major Boeing customer. Korean Air, a privately held airline, operates predominately Boeing planes, as does Asiana, another Korean airline. Korean Air has recently purchased both passenger and freighter model 747-8’s, Boeing’s largest plane. Boeing also sells military aircraft to South Korea.
These numbers come with a caveat since the actual origins of exports and imports by state are often hard to identify. The accounting is especially a problem when a coastal state is the entry and exit point for goods that are destined or originate in other states. Washington state is a significant gateway for bi-lateral trade; one estimate is that three-fourths of the state’s trade is produced and consumed elsewhere. But goods that pass through our ports from and to other states obviously contribute to Washington’s economy.
An example is the movement of Kia vehicles through the Port of Tacoma. In July of this year the one millionth Kia made in South Korea, a hybrid, was off-loaded at the port. Most of these vehicles are destined for dealers across the country.
Similarly, some agricultural commodities produced in other states are included in export data. Wheat is a good example, since wheat and other grains from as far away as Iowa pass through our ports. And some products made in Washington contain components that have been imported. For example, Korean Air manufactures parts for the 747-8 and other Boeing commercial planes.
Trade in services is even harder to assign to states by origin and destination. But we do know that the export of services is a growing proportion of all national exports and enjoys a positive trade balance — $145 billion in 2010. Washington state, with its concentration of software, telecommunications, transportation, and tourism companies clearly contributes to this favorable balance.
Former Gov. Gary Locke is a valuable asset in state trade. In June, when he was still U.S. Commerce Secretary, Locke (now U.S. Ambassador to China) announced the National Export Strategy. At Commerce, Secretary Locke has been actively engaged in promoting KORUS. In April he made the case in an op-ed following a fact-finding trip to South Korea.
KORUS would impact a broad range of trade items including manufactured goods, services, and agricultural products. It would eliminate tariffs on over 95 percent of industrial and consumer goods within five years. It is expected to open Korea’s $560 billion services market to American companies providing education, health care, and telecommunications services. And it would immediately eliminate or phase out tariffs and quotas on a broad range of agricultural products, with almost two-thirds (by value) of Korea's agriculture imports from the U.S. becoming duty free. KORUS also provides protection for intellectual property, workers health and safety, and the environment.
KORUS, which has been in the works since the Bush II administration, was signed by both nations in 2007 but not ratified by Congress. It has been contentious, dividing traditional Democratic allies in and outside Congress — one reason Obama has delayed submitting it to Congress for debate and action.
Congressional Republicans have objected to the coupling of the FTAs to legislation that would protect displaced workers. The Trade Adjustment Assistance (TAA) program, which has been on the books since 1962, is caught in the debate over deficit reduction. Democrats argue that it’s a necessary insurance policy for trade pacts.
But there are indications that the treaty is now ready for approval by Congress. After the president’s trip to South Korea last November did not result in a final agreement, Obama administration and Korean trade officials met for several days to settle several sticking points including autos and beef. And the president announced in December that a final agreement had been reached. Informal mark-up of implementing legislation has recently begun in committees in both the House and Senate.
As KORUS has been stalled, other nations have moved ahead on trade pacts with South Korea. The European Union (EU) officially signed an agreement in October 2010 at the EU-South Korea Summit in Brussels. The pact has provisionally applied since July of this year and EU exports to South Korea are growing rapidly. South Korea currently has a favorable trade balance with the EU. In 2010 EU goods exports to South Korea totaled €28 billion, while imports from South Korea totaled €38.7 billion. South Korea has a similar trade advantage in the exchange of services which are about 15 percent of goods traded.
Bilateral trade negotiations are always difficult since they involve a thicket of thorny issues — tariffs on a large number of goods and services, import quotas, non-tariff barriers such as taxes, labor and environmental standards, and assistance to workers who are displaced when imports substitute for domestically produced goods and services. And the timing of changes becomes crucial to allow for a more careful adjustment. There are individual constituencies for every traded good and service in both countries that need to sign off.
For some the overall economic impacts on jobs are crucial. Unfortunately it’s often hard to find where the truth lays in the debate on trade issues when numbers are problematic. The KORUS trade issues are especially complex, given the size and diversity of the South Korean economy and the country’s dependence on protectionist policies for its rapid growth from a poor state to a highly industrialized and technology-based “economic tiger.”
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