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Thursday, September 9, 2010

Pending U.S. and EU Free Trade Agreements with South Korea: Possible Implications for Automobile and Other Manufacturing Industries

Michaela D. Platzer
Specialist in Industrial Organization and Business

South Korea has negotiated free trade agreements (FTAs) with the United States and the European Union (EU), but neither agreement has yet been approved. The U.S. Congress must approve the United States and South Korea free trade agreement (KORUS FTA) and the European Parliament must vote on the European Union and South Korea free trade agreement (KOREU FTA) before the FTAs can take effect. If the FTAs are ratified, it is possible there could be a "first mover" advantage for either the United States or the European Union, depending on which FTA is approved first. Some argue that both agreements have shortcomings and should not be approved. 

This report provides U.S. lawmakers with a comparison of the manufacturing components in the KORUS and KOREU FTAs. Congressional interest in an FTA between the European Union and South Korea mostly centers on those U.S. industries competing with European industrial sectors, especially motor vehicles. The two pending FTAs raise questions about what it could mean for U.S. manufacturers if the United States takes longer, or fails altogether, to implement the KORUS FTA, while the European Union and South Korea possibly move ahead to approve and implement their outstanding FTA. In such a case, the possibility exists that the removal of tariff and nontariff barriers between the European Union and South Korean markets could result in U.S. manufacturers losing South Korean market share to European competitors. On balance, most U.S. and European manufacturing sectors, with some auto manufacturers in particular among notable dissenters, argue that the pending FTAs will be beneficial and are largely supportive. On the other side, labor unions in the United States and the European Union are considerably more skeptical, claiming that South Korean companies could be the biggest beneficiaries, since they could gain even greater access to the significantly larger U.S. and EU markets. Labor union leaders say the FTA will result in further job losses as their respective manufacturing workforces compete for market share with competitive South Korean manufacturers in their own domestic markets. 

Various forces will affect how and when each side might move forward on its respective FTA. Congress has a direct role in the approval of the KORUS FTA, but until recently legislative consideration of the agreement had been at a standstill. In June 2010, President Obama directed the United States Trade Representative to initiate new discussions with the South Korean government to resolve outstanding issues in time for the G-20 Summit in Seoul in November 2010, such as autos and beef. Some lawmakers argue that the KORUS FTA provides a greater advantage to South Korean manufacturers than to U.S. manufacturers. Others have expressed their support for economic and national security reasons. 

No specific date has been announced by the European Union on when it expects to approve its FTA with South Korea, but the European Commission (the EU's executive charged with negotiating agreements with other countries, among its areas of responsibility) has indicated that it would like to move forward in 2010 or 2011. 

Automotive trade is the primary focus of this report because it is one of the most contentious and high-profile manufacturing issues in the KORUS and KOREU FTA deliberations. Additionally, brief overviews are included of other selected U.S. manufacturing sectors that could be affected by these FTAs, such as home appliances, consumer electronics, and pharmaceuticals and medical devices. Trade in agricultural products and services are not covered by this report.

Date of Report: September 1, 2010
Number of Pages: 35
Order Number: R41389
Price: $29.95

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