Monday, April 02, 2007

A US-Korea Free Trade Agreement

Reported in today's Washington Post:
SEOUL, April 2 -- The United States and South Korea successfully concluded a free trade agreement after almost 10 months of contentious negotiations, a U.S. official said Monday.

The deal, which requires legislative approval in both countries, is the biggest for the United States since the North American Free Trade Agreement signed in 1992 and ratified in 1993. It is the biggest ever for South Korea.

...The two countries began negotiations in June. Both sides strongly advocated a deal, saying it would boost trade and growth in the two economies, which do more than $75 billion in trade a year.
We don't know much about this agreement yet, but mostly likely it follows NAFTA in structure: the least controversial items have tariffs reduced to zero immediately, and then over the next five or ten or fifteen years zero tariffs and quotas will be phased in for the more controversial types of traded goods and services.

There will probably be a fair amount of resistance in Washington (from some Republicans as well as Democrats), but not nearly as much as there would be if the deal was with a low-wage country such as Mexico. After all, according to the BLS average hourly labor costs in manufacturing in Korea were fully 57% of US labor costs in 2005, which is about the same as in Israel and New Zealand. By comparison, Mexico's labor costs are about 11 percent of the US's, Brazil comes in at 17 percent, Hungary and the Czech Republic are at 26 percent, and Portugal is at 31 percent of US labor costs.

As usual, however, any controversy over this agreement will probably be blown considerably out of proportion. On the one hand, passage of the agreeement would probably have no real measurable impact on the US labor market, since tariff rates are already low, wage differentials are relatively small, and Korea is so small (relative to the US economy). But on the other hand, passage of the agreement would probably also have almost no measurable benefit for consumers in the US, for exactly the same reasons.

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