SOUTH KOREA: Free Trade With US May Trip Over Cars, Drugs

By IPS Correspondents Reprint | | Print |

Ahn Mi-Young

SEOUL, Aug 28 2006 (IPS) - A free trade agreement (FTA) that South Korea hopes to close with the United States, this year, is stumbling over import tariffs that this country maintains on automobiles and restrictions on pharmaceutical drugs.

South Korea, which has a two-way trade with the U.S. estimated to be worth 72 billion dollars in 2005, hopes to make headway at a crucial third round of talks in Seattle, early next month.

But U.S. negotiators have demanded that South Korea substantially increase the number of cars imported into the country from the present 2.7 percent of all cars actually sold annually. They have called ‘discriminatory’ the eight per cent average tariff now being levied on U.S. makes.

On its side, the U.S. maintains a 2.5 percent import duty on South Korean automobiles which it may leave intact, unless they get a positive response from Seoul, although this goes against the principle of free and open trade. But in 2005, South Korea posted a 10.8 billion dollar trade surplus with the U.S.

The case of pharmaceutical drugs is more complicated, although both sides have reported progress after U.S. negotiators walked out in protest on Jul 14 against a new medical reimbursement policy adopted by the South Korean government.

According to the new policy, the government will only reimburse patients for medicines that are on a pre-approved or on a “positive” list adopted by South Korean health authorities and this, according to Washington, excludes new and ‘innovative’ drugs not on the list.

While the U.S. has shown flexibility on pharmaceuticals, this may have been driven by a self-imposed deadline. U.S. negotiators want to use a ‘fast-track’ negotiating authority (granted by Congress which holds a final authority for signing FTAs) before it expires in July 2007.

But there are other issues as well. South Korea’s concern is not only market access but also stronger protection of the IPR (intellectual property rights) for U.S. interests doing business with South Korean counterparts.

In particular, South Korean generic medicine producers could end up facing IPR claims not only for the ‘same product’ but also ‘similar products’ from U.S. pharma majors.

Cheon Man-Bok, a health and welfare ministry official who leads the medicine panel of the proposed FTA, admitted at a national assembly forum on Aug. 10 that “U.S. negotiators asked us for stronger IPR protection that would require South Korean generic manufacturers to pay the exclusive IPR for their ‘similar products’ to the American medicines.”

Commenting on the demand, Lee Sang-Ee, professor at Jeju Medicine University said: “If this is accommodated, it would be hard for Korean pharmaceutical companies to remain viable. Some Korean companies would even have to stop production.”

For South Korean negotiators, the challenge is not so much about talking with their U.S. counterparts as with addressing the demands of ‘loser groups’ at home in the farm, pharmaceutical and service sectors, which are clearly vulnerable. On Jul.12 about 26,500 people took to the streets urging a halt to the second round of FTA talks.

Also, there is strong suspicion as to why President Roh Moo-Hyun, who has been trying to wean his country’s military away from U.S. operational control, is pushing a deal that may end up with South Korean commercial interests being dominated by Washington..

To calm down opposition to his commitment to the FTA, Roh appointed on Aug. 11 a former senior economic minister Han Duk-Soo to head taskforce whose mission is to calm down people’s FTA-phobia.”

“Our FTA with the U.S. is basically intended to be a business win-win deal that has nothing to do with politics,” said Han. “Despite its economic bottomline, there is a false assertation that FTA is aimed at benefiting bigger business at the expense of farmers and low-income earners. It is by no means true that FTA with U.S. would result in a new society where public companies are privatized and consumers would pay higher fees for utilities, health care and education.” Trade experts point to how ‘gainer groups’, in South Korea’s case, big industrial sectors like automobiles and electronics, remain mostly silent. Trade experts indicate that because big business would usually want to be free-riders on the FTA without offending loser groups.

“Such an imbalance between the losers and the winners could be one of the hurdles that could lead the commercial deals like FTA to be embroiled into a political games, where labour and politicians are trying to make a political issue out of the commercial free trade deal,” said a professor at the Graduate School of International Studies at Sogang University.

A glance at the farm numbers appear to show that the impact of the FTA on South Korea’s farm sector is marginal. The country’s farm population reduced from 5.4 million in 1995 to 3.5 million in 2003 in the 47 million population. The share of the farm sector in the country’s total GDP reduced from 6.2 percent to 3.8 percent during this period.

Opponents indicate that South Korea trade surplus with the U.S. would shrink if it signs the FTA with the U.S. South Korea’s average tariff on American imports is 11.2 percent and compares well with the U.S. average tariff on Korean-made products, which is 4.9 percent.

The state-run think-tank Korean Institue of Economic Policy expects that the South Korea’s FTA deal with U.S. would result in a 15.1 percent increase in South Korea’s shipment towards U.S. (or by 7.1 billion US dollars) and also result in a 39.4 percent increase in U.S. shipment towards South Korea (by 12.2 billion dollars).

North Korea has joined those opposing the deal and its ‘Nodong’ newspaper commented in an editorial: “South Korea’s free trade deal, if signed, is going to place South Korea’s economies under the U.S. sovereignty as it is a pack that would only benefit U.S. companies’ desire to maximize profit. The trade deal would be a diplomatically humiliating pact that would lead to a stronger alliance with U.S. and thereby destroy the two Korea’s drive towards the reunification.”

Opponents of the FTA point to the cases of Canada and Mexico and depict them as victims of FTAs with U.S. Highlighted is the case of a private U.S. postal company bringing up a lawsuit against Canada’s state-run post office system on charges of unfair subsidies. As a result, Canadians are now denied public post offices which cover remote rural areas at cheap rates.