The EU-South Korea Free Trade Agreement and Its Implications for the United States

William H. Cooper
Specialist in International Trade and Finance

Remy Jurenas
Specialist in Agricultural Policy

Michaela D. Platzer
Specialist in Industrial Organization and Business

Mark E. Manyin
Specialist in Asian Affairs

On October 6, 2010, the 27-member European Union (EU) and South Korea signed a bilateral free trade agreement (FTA). The South Korean National Assembly and the EU Parliament have ratified the agreement. The agreement went into effect on July 1, 2011. The South Korea-EU FTA (KOREU FTA) is the largest FTA in terms of market size that South Korea has entered into. The KOREU FTA reflects the EU and South Korean trade strategies to use FTAs to strengthen economic ties outside their home regions. It also builds upon the surge in trade and investment flows between South Korea and the EU over the past decade. On October 12, 2011, both houses of Congress passed implementing legislation for the U.S.-South Korea FTA (KORUS FTA), which the President signed into law (P.L. 112-41) on October 21. The KORUS FTA is expected to enter into force in early 2012.

The KOREU FTA is very comprehensive. It would reduce and eliminate tariffs and other trade barriers in manufactured goods, agricultural products, and services and would also cover such trade-related activities as government procurement, intellectual property rights, labor rights, and environmental issues.

Most studies done on the potential impact of the KOREU FTA estimate that the agreement will have a small but positive effect on the economies of the EU and South Korea as a whole and that the larger relative impact would be on the South Korean economy. The greatest economic impact of the KOREU FTA would be on specific sectors in each economy. EU services providers would be expected to experience gains from the agreement, especially in the areas of retail and wholesale trade, transportation services, financial services, and business services. In terms of trade in goods, EU exporters of pharmaceuticals, auto parts, industrial machinery, electronics parts, and some agricultural goods and processed foods would be expected to gain from the KOREU FTA’s implementation. At the same time, South Korean manufacturers of cars, ships, wireless telecommunications devices, chemical products, and imaging equipment would be expected to increase their exports to the EU market.

The KOREU FTA is similar to the KORUS FTA in many respects. Both agreements are comprehensive and both would eliminate tariffs on most trade in goods soon after they enter into force. However, they differ in other respects. Phase-out periods for tariffs on some manufactured goods differ. In addition, the KOREU FTA does not cover investment protection. Unlike the KORUS FTA, the KOREU FTA does not allow trade sanctions to be applied where violations of the workers’ rights and environment provisions have been deemed to occur. In addition, the KORUS FTA covers a broader range of trade in services than does the KOREU FTA. It is not clear whether these differences in the structures of the


Date of Report: December 1, 2011
Number of Pages: 28
Order Number: R41543
Price: $29.95

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The Proposed U.S.-South Korea Free Trade Agreement (KORUS FTA): Provisions and Implications

William H. Cooper, Coordinator
Specialist in International Trade and Finance

Mark E. Manyin
Specialist in Asian Affairs

Remy Jurenas
Specialist in Agricultural Policy

Michaela D. Platzer
Specialist in Industrial Organization and Business

On October 3, 2011, President Obama submitted draft legislation (H.R. 3080/S. 1642) to implement the U.S.-South Korea Free Trade Agreement (KORUS FTA) to both houses of Congress. On October 6, the House Ways and Means Committee reported out H.R. 3080 (H.Rept. 112-239). The Senate Finance Committee reported out S. 1642 (without written report). On October 12, the House passed H.R. 3080 (278-151) and sent it to the Senate which passed it (83- 15). The President signed the legislation on October 21, 2011 (P.L. 112-41). In South Korea, after a contentious battle, the Korean National Assembly passed the agreement on November 22. It is expected to enter into force in early 2012.

The KORUS FTA is the second-largest U.S. FTA (next to NAFTA). South Korea is the seventhlargest trading partner of the United States, and the United States is South Korea’s third-largest trading partner. The KORUS FTA covers a wide range of trade and investment issues and, therefore, could have substantial economic implications for both the United States and South Korea.

Congress approved the KORUS FTA implementing legislation using expedited procedures authorized by the Trade Promotion Authority (TPA). Under TPA, the President had the discretion on when to submit the implementing legislation to Congress. The KORUS FTA was negotiated and signed on June 30, 2007, by President George W. Bush. However, President Bush did not submit the legislation because of differences with the Democratic leadership over treatment of autos and beef, among other issues. On December 3, 2010, after a series of arduous negotiations, President Obama and President Lee announced that they had reached an agreement on addressing the outstanding issues related to the KORUS FTA. As a result, U.S. and South Korean negotiators agreed, in the form of an exchange of letters and agreed minutes, to modifications to the commitments made in the 2007 agreement. These modifications included changes in phase-out periods for tariffs on autos, a new safeguard provision on autos, and concessions by South Korea on allowing a larger number of U.S. cars into South Korea under U.S. safety standards than was the case under the original KORUS FTA provisions. The modifications were included in the implementing legislation. Though the issue of full U.S. beef access was not resolved because of its political sensitivity in South Korea, the Obama Administration plans to request consultations on this matter as soon as the KORUS FTA goes into effect.

A broad swath of the U.S. business community supported the KORUS FTA . With the modifications in the commitments reached in December, this group also included the three Detroit-based auto manufacturers and the United Auto Workers (UAW) union. It still faced opposition from some labor unions and other groups, including Public Citizen. Many U.S. supporters view the KORUS FTA as important to secure new opportunities in the South Korean market, while opponents claim that the KORUS FTA does not go far enough to break down South Korean trade barriers or that the agreement will encourage U.S. companies to move their production offshore at the expense of U.S. workers. Other observers suggested the KORUS FTA could have implications for the U.S.-South Korean alliance as a whole, as well as on U.S. Asia policy and U.S. trade policy.


Date of Report: November 30, 2011
Number of Pages: 58
Order Number: RL34330
Price: $29.95

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Brazil’s WTO Case Against the U.S. Cotton Program

Randy Schnepf
Specialist in Agricultural Policy

The so-called “Brazil cotton case” is a long-running World Trade Organization (WTO) dispute settlement case (DS267) initiated by Brazil—a major cotton export competitor—in 2002 against specific provisions of the U.S. cotton program. In September 2004, a WTO dispute settlement panel found that certain U.S. agricultural support payments and guarantees—including (1) payments to cotton producers under the marketing loan and counter-cyclical programs, and (2) export credit guarantees under the GSM-102 program—were inconsistent with WTO commitments. In 2005, the United States made several changes to both its cotton and GSM-102 programs in an attempt to bring them into compliance with WTO recommendations. However, Brazil argued that the U.S. response was inadequate. A WTO compliance panel ruled in favor of Brazil’s non-compliance charge against the United States in December 2007, and the ruling was upheld on appeal in June 2008.

In August 2009, a WTO arbitration panel—assigned to determine the appropriate level of retaliation—announced that Brazil’s trade countermeasures against U.S. goods and services could include two components: (1) a fixed amount of $147.3 million in response to U.S. cotton program payments, and (2) a variable amount based on U.S. GSM-102 program spending. In response to Brazil’s argument that insufficient trade in goods occurred between the two countries, the arbitrators also ruled that Brazil would be entitled to cross-retaliation if the overall retaliation amount exceeded a formula-based variable annual threshold. Cross-retaliation involves countermeasures in sectors outside of the trade in goods, most notably in the area of U.S. copyrights and patents. Based on the arbitrators’ formulas, using 2008 data, Brazil announced in December 2009 that it would impose trade retaliation starting on April 6, 2010, against up to $829.3 million in U.S. goods, including $268.3 million in eligible cross-retaliatory countermeasures.

The threat of sanctions led to intense negotiations between Brazil and the United States to find a mutual agreement and avoid the trade retaliation. In April 2010, the two parties reached a preliminary memorandum of understanding (MOU) spelling out certain actions which, if undertaken by the United States, would lead to suspension of Brazil’s threatened retaliation. Then, on June 17, 2010, U.S. and Brazilian trade negotiators concluded the Framework for a Mutually Agreed Solution to the Cotton Dispute in the WTO (WT/DS267). The framework agreement—which lays out a number of “steps and discussions”—represents a path forward toward the ultimate goal of reaching a negotiated solution to the dispute, while avoiding WTOsanctioned trade retaliation by Brazil against U.S. goods and services. As a result, Brazil has suspended trade retaliation pending U.S. compliance with the framework agreement measures. Key aspects of the framework agreement include (1) payment by the United States of a $147.3 million annual fund to a newly created “Brazilian Cotton Institute” to provide technical assistance and capacity-building for Brazil’s cotton sector, (2) quarterly discussions on potential limits of trade-distorting U.S. cotton subsidies (recognizing that actual changes will not occur prior to the 2012 farm bill), and (3) near-term modifications to the operation of the GSM-102 program coupled with a semi-annual review of whether U.S. GSM-102 program implementation satisfies certain performance benchmarks.

These U.S. commitments are intended to delay any trade retaliation until after the 2012 farm bill, when potential changes to U.S. cotton programs will be evaluated. However, in the interim, several failed legislative attempts have been made to ban U.S. payments to the Brazil Cotton Institute.


Date of Report: November 22, 2011
Number of Pages: 46
Order Number: RL32571
Price: $29.95

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Europe’s Preferential Trade Agreements: Status, Content, and Implications

Raymond J. Ahearn
Specialist in International Trade and Finance

Preferential trade agreements (PTAs) comprise a variety of arrangements that favor member parties over nonmembers by extending tariff and other nontariff preferences. PTAs, particularly free trade agreements (FTAs), have proliferated in recent years. In the post-war period, the European Union (EU), which is a PTA itself, has developed the largest network of PTAs in the world. The main findings of this report are as follows.

•          Historically, Europe’s PTAs have differed among its partners in terms of provisions and commitments and they have been characterized by relatively modest ambition in terms of market-opening. In comparison, the U.S. approach has been more standardized in terms of its provisions and more focused on achieving reciprocal market access. These differences in approaches, however, have significantly narrowed since the EU adopted its more commercially oriented Global Europe strategy in 2006. 

•          EU PTAs cover nearly twice as much trade (exports) in percentage terms (70% versus 40%) and seven times as much in value terms ($3.4 trillion versus $0.52 trillion) than U.S. PTAs. These numbers can be used to support the argument that U.S. firms may face more discrimination and possibly reduced sales than EU firms. At the same time, the data may overstate the degree of discrimination because the amount of trade covered by PTAs is not the same as the amount of trade conducted on a preferential (duty-free) basis. 

•          Concerns about trade discrimination have been a factor in U.S. and EU efforts to negotiate and implement separate but similar PTAs with five trading partners (Israel, Mexico, Morocco, Chile, and Jordan). Based on market share data analyzed, neither side appears to have gained a competitive advantage from having negotiated a PTA. This, however, does not mean that individual firms and workers have not benefitted or that exports have not risen at faster rates after the PTA became effective. 

•          In the past, Europe’s PTA program has not been a major factor affecting U.S. FTA policy, which currently is in flux. However, Europe’s recently completed FTA with South Korea raises the concern that U.S. exports will be disadvantaged due to the duty-free price advantage European-based producers will gain in the Korean market. The United States has also negotiated an FTA with Korea, which awaits approval in Korea parliament (Congress approved the agreement in 2011). 

•          Ongoing negotiations between the EU and Canada over a comprehensive FTA could also affect the U.S. FTA debate. If a robust agreement is reached, the EU and the United States would then both have FTAs with Canada and Mexico, making the absence of a FTA between the United States and EU all the more glaring after years of discussion. 

It is not clear where Europe’s PTA policy is headed. There are only a few remaining major developed countries that fall outside the EU’s network of PTAs, including the United States, China, Japan, Russia and Australia. While PTA negotiations with these countries could yield large economic benefits and provide a big impact (for good or ill) on the world trading system, some of these countries would likely demand liberalization of European agriculture and services, areas where there is widespread opposition in Europe.


Date of Report: November 15, 2011
Number of Pages: 41
Order Number: R41143
Price: $29.95

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