Japan Economic Foundation

Chairman's Article
(excerpts from JEF's Magazine "Japan Spotlight")

59 . Implications of Korea-US FTA

Implications of Korea-US FTA
July/August 2007
Noboru Hatakeyama
Chairman and CEO,
Japan Economic Foundation


I would like to express my heartfelt congratulations on the South Korea-US
(KORUS) FTA which was agreed on April 2, 2007. This FTA has a lot of
implications upon WTO negotiations and Asian regional economies, including
those between Japan and South Korea and between the United States and East
Asia.

In the WTO talks known as the Doha Round, Japan, South Korea, Switzerland,
Norway and six other countries formulated the so-called G-10 to represent
voices of countries whose agricultural goods imports exceed exports thereof
by a big margin. However, since Korea accepted "a comprehensive FTA,"
which means for Korea to address full liberalization of agricultural trade
in the FTA negotiations with the United States, I think the G-10 has
collapsed already at least on a de facto basis. Other things being equal,
the collapse of the G-10 will put much stronger pressure on Japan's
policymakers to open the agricultural market further in the WTO
negotiations.

The pressure on Japan's agricultural policies will be strengthened also in
FTA negotiations. When the KORUS FTA is completed, companies located in
South Korea will be able to enjoy zero tariffs in their exports to the
United States whereas companies in Japan will continue to have to pay
around 4% US tariffs on average. In order to avoid this disadvantage, some
Japanese companies may invest in South Korea or directly in the United
States. Some of them may invest in Mexico to enjoy the benefits of the
Japan-Mexico FTA and NAFTA.

Of course, a more fundamental solution is to have a Japan-US FTA. The
stance of the US government on this issue is to require Japan to agree on
"a comprehensive" FTA, which means for Japan to address full liberalization
of agricultural trade in the negotiations on an FTA with the United States.
The ratio of agricultural output in South Korea to its GDP is 4%, much
higher than that of Japan whose agriculture ratio is just 1% of GDP.
Nevertheless, South Korea determined to accept a "comprehensive" FTA with
the United States. Therefore voices are coming out in Japan as to why
Japan cannot do what South Korea could in opening agricultural markets.
The government of Japan should seriously consider this point and decide to
enter FTA negotiations with the United States as soon as possible. The US
presidential Trade Promotion Authority (TPA) expired at the end of June
2007, but negotiations per se are possible even without TPA, which may have
been reinstated by the time the outcome of the negotiations is submitted to
Congress.

The KORUS FTA will also accelerate FTA negotiations further between Asian
countries and non-Asian economies including the EU. In fact, South Korea
has already started negotiations with the EU which, in turn, has entered
FTA negotiations with ASEAN as a whole and India since May.

Companies located in the ASEAN area except for Singapore, which has an FTA
with the United States already, will have the same disadvantage as
companies in Japan. Therefore, most ASEAN countries, including the
Philippines, will try to have FTAs with the United States.

If some of these efforts are realized, they, along with the KORUS FTA, will
contribute to responding to the US request to join Asian legal trade
frameworks. The US government has been informally expressing its
displeasure against East Asian FTA proposals that do not include the United
States as a member. Although it is impossible for the United States, not
located in East Asia, to be a member of an East Asian FTA, there are at
least two ways for the country to engage in this area institutionally. The
first one is to establish an APEC FTA. APEC includes the United States and
most East Asian countries. This idea was discussed at the Hanoi APEC
leaders' meeting in November 2006 and will be elaborated further at the
next APEC summit set for September 2007 in Sydney.

The second one is for the United States to have an FTA with each individual
East Asian country. In this respect, the KORUS FTA as well as possible
FTAs between the United States and individual ASEAN countries will
facilitate the US-Asia relationship.

Last but not the least, what kind of impact will the KORUS FTA have on
Japan-Korea FTA negotiations that have been stalled since November 2004?
Will the momentum of concluding the KORUS FTA revive Japan-Korea FTA
negotiations as well? I hope so, but the situation is not that easy. In
fact, in most bilateral FTA negotiations, a smaller country took the
initiative to start. Through an FTA, the smaller country can enjoy a
bigger liberalized market of the partner country whereas some industries of
the smaller country may be overwhelmed by their counterparts in the bigger
country. Therefore, a smaller country has the right to decide whether to
enter negotiations on an FTA with a bigger country, comparing merits with
demerits. In the same vein, it is entirely up to South Korea whether to
resume FTA negotiations with Japan.