When President Obama in March announced the National Export Initiative, skeptics scoffed at his goal of doubling U.S. exports as unrealistic. When exports jumped 22 percent in the first nine months of the year, critics noted the figures looked good only in comparison to a dreadful 2009. And when the U.S. and South Korea in November failed to reach a compromise deal on their 3-year-old free trade agreement, optimism waned further.
But the export outlook took a dramatic turn for the better this month when the U.S. and South Korea reached agreement on a revised text of the FTA. The compromise could mark the beginning of a long-term acceleration in U.S. exports — and improve U.S. exporters’ prospects for competing in the rapidly growing Asia-Pacific region.
Assuming Congress approves the South Korea deal, it will be by far the largest U.S. trade pact since the North American Free Trade Agreement in 1994. No ordinary “emerging market,” Korea already imports $250 billion in manufactured goods worldwide. South Korea’s industrial market is much larger and more sophisticated than that of other partners in recent U.S. free trade pacts, including Australia, Singapore, Chile, Morocco, Oman and the Central American nations in CAFTA.
Ratification of the South Korea treaty also could open the door to two other languishing U.S. free trade deals — with Colombia and Panama. And it could fuel support for other free trade initiatives, including the Trans-Pacific Partnership, which would add New Zealand, Vietnam and Malaysia to a Pacific Rim free trade area of U.S. partners that already encompasses Australia and Chile.
Shorter term, “The outlook for U.S. exports in 2011 is pretty good,” said Frank Vargo, vice president for international economic affairs at the National Association of Manufacturers. “Doubling exports from 2009 over a five-year period (2010-2014), we’d need to average annual growth of 15 percent. I don’t see why we can’t hit the 15 percent growth rate.”
In fact, U.S. manufactured exports jumped 21 percent in the first nine months of this year, year-over-year, and 26 percent with its free trade agreement partners, he said.
New trade pacts will only help increase that growth by opening markets further to U.S. manufactured and other goods. “We’ve got to get trade barriers down in Asia,” Vargo said.
South Korea is a prime example because only 11 percent of the country’s manufactured imports come from the U.S., Vargo said. “We face tariffs that average about 8 percent (on those goods), but our tariffs on imports from South Korea are only 2 percent on average,” he said.
The pact will lower U.S. tariffs a little, but South Korean tariffs on U.S. exports to that country will fall even more. The agreement will eliminate tariffs on 95 percent of consumer and industrial products between the two countries within three years. The U.S. International Trade Commission expects U.S. merchandise exports to Korea to increase $9.7 billion to $10.9 billion a year, and merchandise imports from Korea to increase $6.4 billion to $6.9 billion.
NAM expects about 70 percent of those new exports to be manufactured goods. But Peter Friedmann, executive director of the Agriculture Transportation Coalition, expects more new U.S. exports of agricultural goods and forest products. U.S. manufactured goods exporters, Friedmann said, aren’t as competitive with their Asian counterparts as U.S. exporters of agricultural and forest products.
U.S. agricultural exports likely to increase include grains, oilseeds, animal feeds, fruits, vegetables, nuts, dairy products, meat products, seafood and various processed foods and nonalcoholic beverages, the ITC said.
U.S. service providers, including those in the logistics and transportation sector, also should benefit. Laura Baughman, president of Washington consulting firm Trade Partnership Worldwide, said the deal also would spark significant demand for all sorts of U.S. services “because U.S. companies are so competitive” in services. Overall, “in economic terms, this is by far the most important (U.S.) free trade agreement” to date, she said.
Congressional rejection of the Korea deal could undermine prospects for long-term U.S. export growth, and deal a major blow to Obama, trade analysts agree. “Trade is never popular, even in the best of times,” said Brian Pomper, a Democratic Party trade expert who is a partner at the Akin Gump law firm in Washington. “There is a fear that it could be a negative for the U.S. economy, and some members (of Congress) are avowedly anti-trade.”
Other trade interests — and major congressional lobbyists — are split on the pact. The UAW supports the revised pact, largely because it allows the 2.5 percent U.S. tariff on Korean car imports to remain in effect for four years, along with a 25 percent duty on Korean SUVs.
But Richard Trumka, president of the AFL-CIO, was quick to oppose the deal because of broader concerns beyond automobiles. A U.S.-Korea trade deal should “go beyond the auto assembly sector to a more fundamental question about what a fairer and more balanced trade policy should look like,” he said in a statement.
The investment and government procurement provisions in the deal, he argued, “will encourage off-shoring” by multinationals. Even if the deal becomes law, U.S. and South Korean workers will “continue to face repeated challenges to their exercise of fundamental human rights on the job — especially freedom of association and the right to organize and bargain collectively, he said.
Trumka added the deal fails to address the potential problem of currency manipulation and contains lax rule-of-origin provisions.
“There will be significant resistance; this will not be a slam dunk,” said Charles Dittrich, vice president for regional trade initiatives at the National Foreign Trade Council. “With every free trade agreement, it takes a lot of work to overcome the misconception that trade doesn’t have a net positive effect.”
Dittrich is optimistic the deal will be approved, although there will be a vocal minority that “twists the facts” in its opposition.
To sell the agreement, Obama, along with NAM, the NFTC and other pro-trade groups must “explain how this agreement will benefit U.S. jobs,” Vargo said. A key argument: Manufactured goods account for 80 percent of U.S. merchandise exports to South Korea, according to NAM, and those manufacturing exports to Korea supported 230,000 American jobs in 2008, the most recent year for which data is available.
Beyond that, Vargo said, the deficiencies in the Bush-era version of the pact — which Obama didn’t dare bring to the Congress for approval — “have been rectified” in the revised text. For example, new provisions in the deal give U.S. automakers the opportunity to increase their sales to Korea before U.S. tariffs on Korean vehicles come down. South Korea also would eliminate non-tariff barriers that restrict U.S. automakers’ access to the Korean market, such as permitting imports of U.S. vehicles that meet different safety standards than those in Korea.
Supporters argue the deal has an extra payoff for U.S. national security. “The shelling of South Korea (by North Korea in November) brought to the forefront the fact that we have a strategic alliance with South Korea,” Vargo said.
Added Pomper, “There is a very strong national security argument to be made” about the importance of the agreement. With a nuclear-armed North Korea just across the divided peninsula, “how do we give South Korea a stiff arm” on this deal? Although the timing may just be coincidental, the compromise came only weeks after the military provocation by North Korea against the South in the Yellow Sea.
If the deal fails to go through by next July, when the free trade pact between South Korea and the European Union takes effect, U.S. exports will suffer a significant blow. William Reinsch, president of the National Foreign Trade Council, said the EU deal ultimately moved the Obama administration to bring these negotiations to a conclusion after so many months of delay. If the EU-South Korea pact takes effect before the U.S.-South Korea agreement, “all of a sudden, we would have a major competitive disadvantage versus our major competition,” Reinsch said.
But even its staunchest supporters acknowledge a revised U.S.-South Korea trade deal isn’t perfect. Its big weakness may be its failure to meet the demands of U.S. beef exporters.
Reinsch said the implicit quid pro quo with the Koreans worked this way: The U.S. said, “We can’t do this without something on cars, but we, in turn, won’t press you on the beef issue.”
Pomper, a former trade counsel to Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee, said he worries the South Koreans may not realize their inability to make concessions on the beef issue could doom the pact’s chances for approval by that committee. “I hope the Koreans understand the importance of beef,” he said, noting a compromise on that issue would help its chances of approval in Congress.
For all its importance, the U.S.-Korea pact — and additional free trade deals down the road — probably won’t be enough to sustain a high rate of U.S. export growth over the long haul. “We also need more export promotion; more export financing” and a better way of managing our export controls, Vargo said.
Strengthening the U.S. Export-Import Bank could help. The Ex-Im Bank last year extended only $20 billion in funding, while its equivalent bank in Canada extended $80 billion in export financing, Vargo said. That’s four times as much funding from a bank in a country that has only about one-tenth the population of the United States.
John Hardy, president of the nonprofit Coalition for Employment Through Exports, wants the U.S. government to take a more strategic and assertive approach to using the U.S. Export-Import Bank. The premise of the Obama administration has been that by doing a higher volume of the same type of business, the U.S. has a chance to reach the goals in the NEI, Hardy said.
“But we have to rethink how we approach it. Other countries are being more strategic about their approach; more aggressive,” he said. While free trade agreements are “a significant step,” the Obama administration has relied too much on old-fashioned initiatives such as trade promotion visits, he said.
He wants the Ex-Im Bank to become more competitive, and relax some restrictions that make it difficult for some exporters to gain access to its funding, such as high content requirements on Ex-Im Bank loans.
Contact Alan M. Field at email@example.com.