Key Facts and Provisions of U.S.-South Korea Trade Deal

November 11, 2010

The United States and South Korea are working to resolve beef and auto trade issues blocking U.S. congressional approval of a free trade agreement while President Barack Obama is in Seoul for the Group of 20 summit.

An announcement is expected by early Thursday evening in Seoul, which is early morning Washington time.

Here is some background on the Korea-U.S. Free Trade Agreement (KORUS) and its expected economic impact:

The pact, which the two countries signed on June 30, 2007, would be the biggest U.S. free trade agreement in 17 years and the second largest after the North American Free Trade Agreement with Canada and Mexico.

South Korea is the United States’ seventh-largest trading partner and eighth-largest export market. Last year, the United States exported $28.6 billion worth of goods to South Korea and imported $39.2 billion of products from that country.

U.S. companies had about $27.7 billion in investments in South Korea in 2008, with the most in the manufacturing, finance, insurance and wholesale trade sectors.

South Korea companies invested about $13 billion in the United States in 2007 through 2009, while U.S. companies invested about $5.1 billion in South Korea in the same period, according to South Korea’s embassy in Washington.

The agreement is expected to increase bilateral investment flows by extending certain protections for corporate investors and creating a binding arbitration mechanism.

South Korea would immediately grant duty-free access to almost two-thirds of current U.S. agricultural exports, with tariffs and import quotas on most other farm goods phased out within 10 years.

Exports of seven U.S. products (skim and whole milk powders, evaporated milk, in-season oranges, potatoes for table use, honey, and identity-preserved soybeans for food use) would be subject to South Korea import quotas that slowly expand.

The pact does not provide U.S. rice producers any preferential access to South Korea’s protected market.

South Korea also was allowed to keep a 50 percent tariff on in-season navel oranges, but granted the United States a small duty-free quota that will grow over time. For out-of-season oranges, the 50 percent tariff is phased out over seven years.

Most U.S.-South Korean trade in consumer and industrial products would become duty-free within three years after the agreement enters into force, and virtually all remaining tariffs would be lifted within 10 years.

The two countries agreed to liberalize trade in services by opening up their markets beyond what they have committed to do in the World Trade Organization.

About 60 percent of U.S.-South Korea trade in textiles and apparel would become duty-free immediately, and KORUS would provide a special safeguard mechanism to reduce the impact of textile and apparel import surges.

The agreement would allow the United States to exempt South Korean exports from any global restrictions that it imposes on trade, such as a steel tariff that former President George W. Bush imposed in 2002.

The pact would establish an independent body to review recommendations and determinations regarding South Korean pricing and government reimbursement for pharmaceuticals and medical devices and to improve transparency in the process for making those determinations.

One year after the pact enters into force, a bi-national committee would be formed to study including products from “Outward Processing Zones” that use North Korean labor, such as the Kaesong Industrial Complex, within the scope of the pact.

The U.S. International Trade Commission has estimated the agreement would boost U.S. gross domestic product by about $10.1 billion to $11.9 billion, or approximately 0.1 percent, once fully implemented.

It expected the pact to increase annual U.S. goods exports by about $9.7 billion to $10.9 billion, primarily in agricultural products, machinery, electronics, transportation equipment, including passenger vehicles and parts.

U.S. imports from South Korea were projected to increase $6.4 billion to $6.9 billion, primarily in textiles, apparel, leather products, footwear, machinery, electronics, and passenger vehicles and parts.

The ITC study also said it expected U.S. services exports to rise and for investment flows to increase between the two countries, but did not make a precise estimate.

It estimated any that changes in aggregate U.S. employment would be negligible given the much larger size of the U.S. economy compared to the South Korean economy.

Some U.S. sectors, such as livestock producers, would experience increases in employment, but others such as textile, wearing apparel, and electronic equipment manufacturers would be expected to experience declines in employment.

(Reporting by Doug Palmer; editing by Eric Beech)

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