Monday, November 8, 2010

Korea-US FTA: Why Hasn't This Passed Yet? Both Sides Are Being Equally Ridiculous

The leaders of the largest 20 economies in the world are going to gather in Seoul this week.  Presidents Lee (South Korea) and Obama (United States) have been trying, at various speeds over the past 3 years, to ratify the the Korea-U.S. (KORUS) Free Trade Agreement.  Apparently, according to Reuters, there are two areas where disagreements still exist: autos and beef. 

It's hard to decide whether South Korea or the U.S. is being more ridiculous in this 3-year delay:  let's just call it a draw.

Ford took out a full page advertisement against the KORUS FTA late last week, with claims that Korean manufacturers would be allowed to ship 52 cars to Korea for every American manufacturer.  This advertisement has received a fair amount of publicity in the United States' press, including from think tanks, and via newspaper coverage.
Most people in the United States are well-aware of Ford Motor Company's dramatic strides.  It declined government aid during the financial crisis and bankrupcies of both General Motors and Chysler; now Ford is generally-considered to be the best managed U.S. auto manufacturer.  Equity investors have been handsomely rewarded as well:  Ford stock has risen by 62.1% in the past 52 weeks alone.  Senator Carl Levin, Michigan Senator, has also voiced concerns to support his contituency.  American complaints against the  KORUS FTA concern tariffs, and adherence to emissions standards.  Not only are both areas without merit, but neither addresses the fundamental problem:  Korean consumers won't buy a Ford passenger car in large numbers anytime soon.

This is a quote from the Reuters' article,
"Levin and others had advocated the United States phase out the 2.5 percent U.S. auto tariff over at least 15 years, but allow for a quicker elimination if sales of American cars to South Korea hit certain levels." 
Linking the elimination of U.S. tariffs to the level of American car sales to Korean consumers?  Let's be frank and honest here:  the U.S. auto manufacturers are worried about the increasing market share of Hyundai and Kia in the U.S.  That's it.  GM is silent, which is being interpreted as neutral.  Do you know why?  In Korea, GM owns Daewoo Motor, which failed as a result of the Daewoo Group's enormous debt, coupled with the Asian currency crisis.  So GM, if it complained a la Ford, GM would be criticizing itself. 
For its part, Korea should also drop any price barriers, and let Korean consumers decide.  Ford would have a long, long way to go:  it has no dealer network, no maintenance facilities, and most importantly:  what Koreans would buy a Ford Focus instead of Hyundai Elantra for essentially the same price?  There will be some, of course, that want to buy as a result of being different.  That would be the extent of it. Until a foreign-made product is unquestionably superior, everyday Koreans won't buy it.  One day, take a Korean Air flight from Seoul to the U.S.  Do you see all the Koreans onboard?  They pay, easily 10% higher prices for a ticket on Korean Air than on United Airlines or Delta Airlines.  Nevertheless, those seats do not go unfilled.  Long gone are the days when Korean-made products are objectively inferior to American counterparts.  When you add this simple fact to everyday Koreans' affinity for domestically-made products, Ford has a long uphill battle.  It knows this and that is why it wants to tie the phasing out of the 2.5% U.S. auto tariff to the level of American car sales. 
On emissions standards, the complaints of American manufacturers are easily answered by one simple statement.  Lexus, Honda, BMW, Audi, and Mercedes-Benz all comply with Korean emissions standards.  We can have all sorts of other discussions about the inequity of Korean emissions standards, etc.  None of them matter in the least.  Other, foreign-based automanufacturers know the laws, and comply. 
In short, the U.S. objections do not make a lot of sense.  They reveal two worries: the loss of domestic market share, and the inevitable failure to gain a foothold in Korea.

Koreans love the idea of conspiracy, and do not quite understand the power of the fear of litigation.   There is good reason for this.  The large conglomerates (chaebol) have dominated almst every facet of Korean life for as long as anyone can remember.  When there is a production problem in some area which causes illness, there is little recourse for a consumer to complain, or sue.  A couple of years ago, it was found that some lunches prepared for schools was defective.  There was little press coverage, and no report of compensation to the students. 

The nature of the complaints against U.S. beef, in The Lost Seoul's view, are tied to this lack of belief in consumers' rights.  There would not nearly be the "fear" of BSE (mad cow disease) if Korean citizens fundamentally believed in the concept of consumers' rights.   Think about U.S. corporations' actions.  If you think about the recent over-the-counter drug epidsode, the manufacturers pull everything off their shelves immediately.  Why?  The public good?  Yes, you can make that claim, and the companies certainly state that.  However, it is a fact that there are HUGE legal liabilities that need to be avoided.  To everyday Koreans, this is not a part of the psyche. 

The fact is that Americans eat beef of all ages, without knowing the age, and without asking any questions.  If there was a problem that was known by the company responsible, the legal consequences would be severe to the point of potential extinction of the company. Have any Americans asked at a restaurant, "How old is the beef that is being served in this dish?"  Nope. 
There is the issue of wagyu, which is similar to Japanese kobe beef.  It is indeed tender, and expensive (although not as pricey as kobe).  Korean objections to American imports as a result of potential are also pointless:  the number of Koreans that insist on buying, or choosing restaurants because wagyu is being served are relatively few, and they won't change their consumption of wagyu because of the fact that there is filet mignon available. The downside of the tariffs on U.S. beef?  Inflation on existing products.  Food inflation is a major problem in Korea.  Any Korean complaints against the import of U.S. beef are outweighed easily by the benefits that everyday Koreans will enjoy due to greater supply, and lower price inflation.  Even if this benefit were small, the average Korean household would benefit. 

Not suprisingly, special interest groups are blocking the passage of the KORUS FTA.  They do so without merit, and at the cost to both American and Korean consumers. 


Anonymous said...

US objections to the KORUS FTA have nothing to do with tariffs. No one is asking for a 15-year phase-out of the 2.5% US tariff on auto imports. It goes away immediately upon ratification and the Americans are not threatening to change that.

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