Let’s Work Together

Exporting Blog Series: KORUS FTA

Dec 2nd, 2011

Andy Reinke – Following several years of negotiation spanning two U.S. Administrations, President Obama signed the U.S.-South Korea Free Trade Agreement last month, along with free trade agreements with Colombia and Panama. These free trade agreements (FTA’s) are the largest most extensive since NAFTA was passed in the mid-90’s, and is in line with the President’s objective to double U.S. exports within 5 years. As I write this, the President is hosting APEC in Honolulu, HI, at which the U.S. is furthering its efforts to reach a multilateral trade agreement with 8 other Pacific Rim nations, again aimed at propelling America’s export engine. While the agreements with Panama and Colombia are in themselves beneficial to the U.S., the focus of this blog installment will address our recent free trade agreement with South Korea (KORUS FTA).

Whenever the topic of free trade agreements arises, detractors for trade suggest FTA’s fuel the exportation of American jobs to those nations with which we enter into such agreements.  The facts point to a much different outcome.  As Former U.S. Trade Representative Susan Schwab said at a National District Export Council Meeting in November 2008, the U.S. has a trade SURPLUS with every nation with which we’ve entered into a Free Trade Agreement if we deduct oil imports from the equation. A Wall Street Journal article also acknowledges that the U.S., on aggregate, must lower its tariff and non-tariff barriers far less than other nations when entering into bilateral trade agreements because the U.S. already has relatively one of lowest tariff levels and least cumbersome set of import regulations of any nation. What does this all mean? It means historically, FTA’s are good for American exports, good for creating and sustaining U.S. jobs and this translates similarly to our own Indiana economy.

Let’s lay out some trade facts first:  The US exported $1.28 trillion to the rest of the world in ’10, and Indiana’s share of that was $29 billion, making the Hoosier state the 14th largest in the union. South Korea has 49 million consumers with a per capita GDP of $20,491, and is the world’s 12th largest economy ($1.5 trilliion in GDP), all in a land mass slightly larger than Indiana. South Korea is our country’s 7th largest trading partner for manufactured goods and services, and 5th largest for US agricultural exports.

Impact on Indiana

The following information contains data that comes from the U.S. Department of Commerce, the International Trade Administration, U.S. and Indiana Agricultural Departments, the World Economic Forum, the American Farm Bureau Federation and from a presentation to the Indiana District Export Council on October 2011 by Michael Choi, International Trade Specialist,  U.S. Department of Commerce.

The US exported $55 Billion to South Korea in 2010 and Indiana’s share was $551 million. Although not enough to place the Asian nation among the top 10 export destinations for our state’s exports, South Korea’s imports of Indiana goods are definitely on the rise, and are expected to surge with the new trade agreement.

Auto Sector:  Indiana’s manufacturing ties to the auto and transportation sectors are well known, and our state transportation-related exports typically rank among the top three of Indiana’s exported products, being first in 2010. 9% of our exports to Korea are in the auto and transportation sector. Current South Korean tariffs on these goods average 8.3% but are expected to eventually drop to 0%. Regulatory transparencies coupled with ease in standards are expected to help Indiana’s transportation sector gain a larger presence in South Korea.

Medical Equipment:  Indiana’s 4th largest export industry, medical instruments, may also expect to fare better in free trade with the South Korean market. Top U.S. medical equipment exports to South Korea include surgical instruments, diagnostic equipment, artificial joints and medical appliances. Current South Korean tariffs average 5.4%, but can range up to 50% depending on a product’s Harmonized Tariff schedule. Other current impediments to trade include inadequate regulatory transparency and difficulty in satisfying testing and certification requirements, which are to be significantly lessened under the trade deal.

Machinery:  Indiana’s portion of the U.S.’ $5 billion in exports to South Korea in Machinery (Indiana’s 3rd largest export industry), was $50 million in 2010. Current tariffs levied against U.S. Machinery by the South Koreans range from 0% to 13%, averaging 7.5%. Again, difficulty in satisfying testing and certification requirements and inadequate regulatory transparency are to be streamlined and made easier for U.S. exporters of industrial machinery.

Services:   The United States typically enjoys a trade SURPLUS with the rest of the world in the increasingly vital service sector (services ranging from architecture, medical imaging and assessment, financial and service sectors, tourism, legal, insurance, technology, distribution, express delivery and education). The U.S. exports $12 billion on average to South Korea in services with nearly a two to one edge over imports by U.S. firms from South Korea.

Agriculture:  U.S. food and agricultural exports to Korea are also expected to surge due to the FTA. Indiana’s agricultural exports totaled $3.4 billion of the total $9.6 billion of Indiana’s 2010 agricultural receipts.

The American Farm Bureau Federation estimates that Indiana’s agricultural exports to Korea will increase by $39 million. Among the top winners in this new agreement which call for the elimination of nearly 2/3 of all duties for U.S. agricultural exports, are feed grains, soybeans and related products, and pork and dairy products. Food exports to Korea need to be registered with the Korea Food and Drug Administration (KFDA), and must comply with the Korean Food Code, the Korean Food Safety Code and the Korean Food Additives Code. These codes do not align with international standards to which most food products need to meet, and is one cause of difficulty for U.S. agricultural exports to Korea addressed by the FTA.

Although much of the architecture for implementing the KORUS FTA needs drafting, for more information on how the FTA with South Korea will impact your products, contact your local Indiana Small Business Development Center and let us help you assess current U.S. exports to South Korea within your product range, and how quickly the Korean duty on your products will decrease.

Recently, the KORUS-FTA was approved by Korea’s National Assembly, the last hurdle to making the agreement law in both nations. The net effect is that this agreement is a good deal for Indiana’s economy.

As the current U.S. Trade Representative Ron Kirk indicated in an article appearing in the Ft. Wayne Journal Gazatte late last month following passage of the KORUS FTA, “’Made in America’ are still three of the most treasured words in the world. It is the most powerful brand”.

Andy Reinke is the President of Foreign Targets, Inc. (FTI)  an export management company creating and managing proactive export programs for small and medium sized manufacturing firms.  This is achieved by utilizing a proven methodology:  FTI’s Core-8 Steps to Export Management. Read more about export in the ISBDC’s Exporting Your Products and Services FAQ Page.