Friday, November 19, 2010

The Real Victims of KORUS FTA Failure? Korean Citizens

The G20 Seoul Summit Was Anti-Climatic in Many Ways....

Before the G20 Seoul Summit, there was great preparation, great anxiety, and not-so-great anticipation of a final agreement to ratify the KORUS (Korea-U.S.) Free Trade Agreement.  At best, the G20 delivered on one out of the three.  Perhaps the only certain outcome?  Continuing inflation in South Korea to the detriment of Korean citizens.

War of Words Among the Largest
In a strange twist, Ben Bernanke was the target of most of the verbal attacks by foreign leaders around the world.  As a result of QE2 (Quantitative Easing 2), which is a program where the US Federal Reserve Bank will purchase between USD $500-750 Billion in U.S. government bonds, foreign central bankers roundly criticized "Helicopter Ben."  Of course, this is somewhat ironic, given that governments around the world have also propped up their domestic economies in various ways.  The EU, Japan, China, and yes, South Korea have embarked on massive government spending programs in order to prevent deflation and the resulting loss of consumer confidence.  That, in turn, would start a spiral in which consumers don't spend, which creates another round of economic duress.  In South Korea, the Bak administration has spent a great amount of money in buying vacant apartments outside of Seoul (신도시) to avoid further losses by Korean construction companies.  In Europe, the ECB has purchased government bonds of Greece and now, Ireland is next in line to received direct financial aid.  Countries are trying to preserve their domestic economies but the result is artificial currency depreciation.  For global leaders to point at Helicopter Ben is irony at its height.

No KORUS FTA = Increasing Inflation for Koreans
The bottom line is that both the U.S. and Korean governments are being foolish by not reaching final agreement on the Korea-U.S. (KORUS) Free Trade Agreement.  Beef and autos continue to the main points of contention.  However, the fact that many other common goods would be imported into Korea at much lower prices would have created downward pressure on inflation.  That is very important to the average working Korean, where food inflation is rampant to the point where even cabbage used in making kimchi has become unaffordable to many.  Now, The Lost Seoul isn't stating that final ratification of the KORUS FTA would result in instaneous downward pressure on all prices, but the fact is that greater competition due to lower tariffs on many goods can do nothing other than help mitigate the increasing pressure on the cost of living in Korea.  So while special interest groups are delaying ratification of the KORUS FTA, the victims are Korean citizens who are struggling to make ends meet.  The Bak administration would do well to attempt to break the impasse, or pressure will increase on the Bank of Korea to increase interest rates to strengthen the Won.  Doing so would jeopardize the competitiveness of Korean products on the international marketplace.  That is a vicious cycle that may be difficult to stop, at precisely the wrong time if the global economic recovvery continues to be painfully slow.  Korea has difficult choices in its immediate future:  pressing the U.S. to finally ratify the KORUS FTA should be a top priority.


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