The Revival of the U.S.-Korea FTA, the Global Economic Crisis and U.S. Intentions in East Asia

Pilsoo Im
Policy Director
People's Solidarity for Social Progress

June 30 marked the three-year anniversary of the signing of the U.S.-Korea FTA. The agreement was negotiated rapidly over the course of 2006-2007. It took less than a year and a half from the moment President Roh Moo-hyun (in office 2003-2008) first proclaimed his intentions to pursue an FTA during a New Year's address on June 18, 2006 to the moment the two countries sign the agreement. To this point, however, neither South Korea nor the U.S. has passed the agreement through their respective legislature. In South Korea, attempts to pass the agreement foundered on opposition from minority parties, most notably the Democratic Labor Party's use of physical force in December 2008 to stop efforts by the ruling Grand National Party to unilaterally introduce the bill on the National Assembly floor. In the United States, there has been no movement on the FTA bill other than a memorandum on the revision of domestic law necessary to put the FTA into effect sent to Congress by the Bush administration and a report submitted by the International Trade Commission (ITC) concerning the ripple effects the FTA would have on the U.S. economy.

Since June of this year, however, there has been a dramatic change in the pace of the ratification process. On June 26, U.S. President Barak Obama met with South Korean President Lee Myung-bak to discuss a delay in the transfer of wartime command of the ROK forces, while in Toronto for the G20 Summit. Immediately after his meeting, the Obama administration instructed U.S. Trade Representative Ron Kirk to begin 'new discussions' on the U.S.-Korea FTA. As soon as these instructions were reported in the media, the Korean public began to wonder what 'new discussions' actually meant. According the South Korean Trade Minister Kim Jong-hoon, "President Obama stated clearly he was not referring to a renegotiation. He gave instructions that parts [of the FTA] be adjusted at the working-level to make it possible to pass the FTA in the Congress." Still, it is rather hard to suppress suspicions that the government is simply using euphemisms to cover up what will in fact be a full renegotiation.

Questions are also being raised as to what behind-the-scenes measures led to the FTA being brought up again in this way. The South Korean government has repeatedly stated that it will not accept renegotiations aimed at revising the agreement. Thus, many people have been led to believe that South Korea agreed to reopen the FTA issue in exchange for the U.S. agreeing to delay the transfer of wartime command from April 2012 to December 2015. People are also wondering what made President Obama, who as a presidential candidate emphasized that he had voted against the Central American Free Trade Agreement (CAFTA) and never supported the North American Free Trade Agreement (NAFTA), suddenly begin to push for the U.S.-Korea FTA's passage. To answer these questions we have to look at the U.S.-Korea FTA within the context of two major problems currently facing the United States: 1) the increasing economic imbalance (principally the U.S.' current account deficit), and the threat of deflation looming over the U.S. economy, and 2) the United State's diplomatic, military and economic conflict with China. If we do this, we see that the U.S.-Korea FTA is a part of the United State's efforts to extend its influence in the East Asian region, as well as being an emergency measure for saving the faltering U.S. economy.

I. Conflict with China
First off, the Obama administration sudden emphasis on the U.S.-Korea FTA, which comes in the aftermath of the sinking of the Cheonan, can be understood as an effort to demonstrate that absolutely no fissures exist in the U.S.-ROK alliance. In this case, however, the intended is not as much North Korea as it is China.

Competition between China and the U.S. is occurring on all fronts: political, military, and economic. Conflict in the politico-military arena can be seen most clearly in the area of maritime control. On 8 March 2009, 5 Chinese Naval ships blocked the passage of and generally harassed the USNS Impeccable, an American surveillance ship, as it was travelling in open waters near the Hainan Island located in the South China Sea. The United States protested against this action strongly, seeing it as an attack on a civilian vessel. China, on the other hand, insisted that the Impeccable had been carrying out spy activities in violation of its sovereignty. In March of this year, Chinese authorities notified the U.S. government that they see, "the matter of the South China Sea as related to Chinese sovereignty and territorial integrity." While China claims the area where the Impeccable was confronted as an exclusive Chinese economic zone, the United States insists it is international waters, where any vessel should be able to travel freely.

The fact is, however, that the United States is interested in the South China Sea, both because it provides an opportunity to assert U.S. dominance in the region and because it is economically important--South Korean and Japanese oil tankers use it as a route for conveying Middle Eastern crude. This is the background behind Secretary of State Hillary Clinton statement at the ASEAN Regional Forum in July that the United States had a "national interest" in free passage in international waters in Asia. During the Forum Clinton also commented that current conflicts between China and other countries in the region over the Spratly and Paracel island chains in the South China Sea should be "settled internationally," further demonstrating U.S. interventionist intentions to China obvious displeasure.

Competition between the United States and China is being reflected as well in U.S. diplomatic efforts towards other East Asian countries. Of late, the U.S. has been rather aggressive about pursuing cooperative relationships with countries surrounding China, including Myanmar, Malaysia, Laos, Pakistan, Vietnam, and Indonesia. These moves have been threatening enough that Chinese Rear Admiral Guan Youfei accused the United States of, "plotting to encircle China with strategic alliances," during the U.S.-China Strategic and Economic Dialogue held last May.

This situation has had an impact on the aftermath of the Cheonan incident. With China showing resistance to the United State's attempts to pressure the North and impose sanctions, conservatives in the U.S. have been claiming that China's role in diplomatic efforts related to the peninsula should be reevaluated and U.S. policy towards China reformulated. These people fear that with China playing the 'good cop' next to the United State's 'bad cop', China is starting to present an alternative to the U.S.-centered world order. Therefore they wish to see a new diplomatic framework for dealing with the Korean question and East Asian relations, one that removes China's influence from the picture. For example, they are proposing that the 6-party talks be abolished and the alliance between the U.S.-South Korea and Japan made more all encompassing. To this picture they want to add a 'coalition of the willing' made up of Australia, the EU, and Russia in order to send a signal to China that it is possible to exclude it from decision-making on issue pertinent to the balance of powers in East Asia and China's national security. They suggest mediation of a peace treaty between the South and North Korea outside of the 6-Party framework, as a means for excluding China.

The United State's conflict with China has made it more urgent about strengthen its hand in East Asia in all areas. The U.S.-Korea FTA and the wider U.S.-ROK relationship that will be strengthened through its ratification are a key part of this effort. The U.S. has recently stated its intention to join the East Asia Summit (EAS), an annual meeting of the leaders of 16 countries in the East Asian region comparable to ASEAN. The U.S. hopes to see the EAS develop into a forum for consultation on regional political and security issues, through which it can increase its dominance in the region. While using the EAS to take the lead on political and security issues, it hopes to do the same on economic cooperation and free trade through APEC. In the case of the former, U.S. needs use a sturdy military alliance with South Korea and Japan as a foundation for exercise dominance as a member of the East Asian 'community'. With regards to the latter, it plans to use U.S.-Korea FTA as a foundation and a model for transforming APEC into an East Asian Free Trade Zone.

II. Increasing Economic Imbalance and the Threat of Deflation
From the first to second quarter of 2010, the U.S. GDP growth rate fell drastically from 3.7% to 2.4%. (*The GDP growth rate is the percent increase or decrease in the GDP from the previous quarter converted to reflect an annual rate.) Unemployment remains high, at nearly 10%. In addition, many economists are now saying the U.S. faces the threat of deflation for the first time since the Great Depression due to high unemployment and weak domestic consumption. Were deflation to occur, it could put further downward pressure on profits, wages and jobs. To cope with this situation, the Fed has set interests rates almost as low as is imaginable. Yet, the housing market remains in a state of paralysis. Declining income and sales tax collections are putting heavy burdens on State governments, whose fiscal woes are getting deeper and deeper. Acknowledging the precarious situation on July 21, Federal Reserve Chairman Ben Bernanke admitted to the Senate Banking Committee that the United States' economic outlook was "unusual uncertainty."
The following month he announced additional revisions to monetary policy, under which the Fed will keep its massive bond portfolio from shrinking by reinvesting money from mortgage-backed securities as they mature. This move signaled the Fed's willingness to intervene even further if necessary to prop up the shaky economy.

The United State's economic problems will not be easily solved, however, as long as global economic imbalances persist. Simply put, the U.S. economy will continue to be insecure as long as it depends on foreign financing and deficit spending, while also importing more than it exports. Unfortunately for the U.S., global imbalances are likely to go on for some time. The Peterson Institute for International Economics, a nonpartisan Think Tank in the U.S., provides analysis helpful for understanding global economic trends and their implications for the U.S. economy. The Institute notes that the sharp decline in the Euro's exchange rate is making global imbalance more severe. It points out that the OECD has estimated that the Eurozone will see annual trade surpluses of at least $3 billion in the next few years due to the Euro's rapid decline along with "tepid European growth." Moreover, strict fiscal policies now being implementing throughout Europe in response to the crisis will weaken domestic demand, and likely impel European countries to pursue easy monetary policies, which aim at further devaluation of the Euro. The Financial Times has also noted that European countries are looking to export their economic stagnation through 'beggar-thy-neighbor policies'. (*'Beggar-thy-neighbor' is an economics term for policies that are generally good for one countries national economy while hurting the economies of others such as protectionist measures and currency devaluation.) If this trend continues, the United States may see its current account deficit move past the all time high of $8 billion it reached in 2006.

The United State's biggest headache is coming from China, which refuses to revise its monetary policy to let the Yuan appreciate as much as the U.S. would like. The Chinese authorities set the stage for an upward move of the renminbi when they announced on June 19, 2010 a return to a more flexible and more market-based exchange rate regime like that they had pursued during 2005ᆜ. The results to date have been meager, however. As of September 10, 2010 the renminbi had risen by less than 1 percent. If maintained over the coming year, this pace would amount to an annual rate of only 4 percent. The Peterson Institute has steadfastly insisted on the appreciation of Yuan. It predicts that if China's real effective exchange rate were to appreciate by 10%, China's current account surplus would decrease by $170 to $250 billion annually, while the United State's current account deficit would improve by $22 to $63 each year. China, however is insisting that its currency has appreciated as much as any other currency over the last five years, that the United State's trade deficit has nothing to do with the Yuan exchange rate, and that the issue is being hyped in the U.S. for political reasons.

The Peterson Institute notes that large external deficits pose substantial risk to the U.S. economy. This is because "foreign investors might at some point refuse to finance these deficits on terms compatible with US prosperity. Any sudden stop in lending to the United States would drive the dollar down, push inflation and interest rates up, and perhaps bring on a hard landing for the United States--and the world economy at large." Continued introduction of massive amounts of foreign capital into the U.S. economy could plant the seeds for another economic crisis, they warn. The Institute adds to this the warning that, because the U.S. unemployment rate is so high, an increase in the trade deficit could lead t protectionist trade politics.

Recent fears of an increased trade deficit have made the Obama administration pay more attention to trade policy. On July 7, Obama announced the formation of a President's Export Council, made up of top business leaders, to advise efforts to double exports over the next five years, through his "National Export Initiative." The idea behind this initiative is essentially to create jobs through expansion of exports, thus tackling the problems of unemployment and low consumption levels, which its is feared will lead to deflation.

III. Cars and Meat, not the Real Issues
After the signing of the U.S.-Korea FTA the Bush government requested that the United States Trade Representative analyze the effects of the agreement. According to this analysis, if the U.S.-Korea FTA is fully implemented, U.S.' yearly exports will increase by from $10 to 11 billion a year in the areas of financial services, insurance, air transport, communications, and agriculture.

However, the U.S.-Korea FTA is predicted to have a negative effect on U.S. automobile production. This is one of the main reasons it has been delayed in Congress. Currently, one of the main issues assumed to be up for renegotiation is the plan to reduce the U.S.' 25% tariff on light trucks and SUV by 2.5% every year for the next 10 years. The tax reduction, however, is not so important as some in the U.S. think. The Peterson Institute notes that a 25% tariff in trucks and SUV, which dates back to a retaliatory measure taken against France and Germany during a trade war in 1963, is unusually high, abnormal, and therefore will be hard to maintain in the future, with or without the U.S.-Korea FTA. Moreover, the demand for these types of cars has decreased dramatically in the last few years due to the rise in the price of oil. Thus, there is little incentive for Korean car manufactures to invest in their production for export. Even if demand did increase, Korean car manufacturers would most likely employ American workers in American factories to produce their vehicles.

There are also concerns being raised about non-tariff barriers in the South Korean automobile market. The fact is, however, that with the exception of Canada and Mexico, the U.S. does not export cars produced within its territorial boundaries (in say Detroit or Ohio) to other countries. They are generally produced and sold through foreign car companies as in the case of GM Daewoo. In the area of beef, the Peterson Institute points out that the American meet exporters are feeling generally satisfied with the extent of market opening. All of this points to the fact that from perspective of the United States, renegotiations on the issues of beef and automobiles would not in fact be all that profitable. They are but secondary concerns. Thus, the U.S. believes they can be settled at the working-level, and sees the speedy ratification of the U.S.-Korea FTA as more important than harping on these issues.

IV. What are the real issues in the U.S.-Korea FTA?
South Korean capital chose to pursue the U.S.-Korea FTA as a response to the long-term economic stagnation that began after the Kim Dae-jung administration. At this time, neoliberal restructuring of the South Korean economy accelerated and a duel phenomenon occurred in which chaebols invested abroad at the same time as transnational capital's dominance in Korean chaebols and banks grew stronger. This led to an outpouring of national wealth. Long-term economic stagnation soon set in.

The Roh Moo-hyun administration had to come up with a solution to this problem. Korea's development strategy at the time was based on flexibilization of labor and increase in exports to the United States through depreciation of the won. However, many other newly emerging economies, such as China, were employing the same strategy. As such, something extra was needed. Roh saw the U.S.-Korea FTA as that 'something extra', and his administration pursued it aggressively. Roh, although with Korean capitalists seeking to transnationalize, believed the FTA would both tighten the economic relationship with the United States and force Korean industry and services to advance along neoliberal lines. Unfortunately, this strategy embodies a very significant contradiction. By accelerating transnational capital's investment in Korean stocks and bonds, the FTA will create appreciatory pressures on the won, causing the exchange rate to rise. By doing so it will bring down South Korea's current account surplus, thus creating a counter trend to the strategy of export-led growth, which is based on a weak currency.

For the U.S., facing a worsening of its current account deficit and the possibility of deflation, the U.S.-Korea FTA is a means for exporting its depression overseas. It is also part of a strategy for tying together the East Asian region as a free trade zone, and a diplomatic maneuver related to the United State's desire for political-military dominance in the East Asian region. However, unless the economic structure of the United States does not fundamentally change, it will be hard for it to achieve success through a strategy of expanding exports, at least in the short-term. For Korean capital, the U.S.-Korea FTA was a development strategy chosen in the face of crisis and in the midst of acute competition. However, because it will exacerbate contradictions within the Korean economy, it cannot be a 'crisis exist strategy' for South Korea.

The U.S.-Korea FTA is not a satisfactory solution for either country. Rather, it is being pursued as a sort of emergency plan to cope with the crisis. It is clear, however, that this plan, the choice of capital, will not be enough to overcome the structural crisis of capitalism.

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    • pssp says:

      Thanks for letting us know. We will continue to post information on this issue as it is available. Please keeping checking.

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