U.S.-Korea Free Trade Agreement: A Path to Sustainable Growth
Alexander Vershbow, U.S. Ambassador to the Republic of Korea
Address to the Institute for Global Economics
Seoul, Korea
February 14, 2006
It's a real pleasure for me to be able to meet with the Institute for Global Economics this morning. I heard great
things about this organization even before I left Washington to move to Seoul. So my thanks go to Dr. Sakong Il for
offering me this opportunity to speak with you today.
As you all know, less than two weeks ago U.S. Trade Representative Rob Portman and Korean Trade Minister Kim Hyun-chong
announced the launch of Free Trade Agreement negotiations between the United States and Korea. That event marked a major
milestone in the history of bilateral relations between our two countries. It also represented a milestone in the
development of deeper economic links across the Pacific Ocean between North America and Northeast Asia.
Today I would like to focus primarily on the relationship between trade liberalization and economic growth. More
specifically, the relationship between the U.S.-Korea FTA and responses to some of the key economic development
challenges facing Korea at this important juncture in its economic history.
Today is also Valentine's Day. That means I need to remember to get flowers for my wife Lisa. It also means it's a good
day to talk about deepening relationships, whether those are trade and investment relationships, or romantic
relationships.
I was surprised to learn that Valentine's Day actually dates back to pre-Christian Rome and the annual feast of
Lubercus. Every February during that feast, the names of young maidens were put in a box. Boys would draw out names to
decide who would be their girlfriend for the next year, which began in March. The couple would then stay together for a
year, until the following March.
It's not an exact parallel, obviously. If we agree on the terms of a Free Trade Agreement, the new economic relationship
between Korea and the United States will last much longer than March 2007. But March 2007 is our rough deadline for the
negotiations. And our Chief Negotiators -- one a boy and the other a girl, by the way -- will be "dating" frequently
over the coming twelve months.
Trust me, however, that the selection process for choosing partner nations for the U.S.-Korea FTA negotiation was more
scientific than drawing names out of a box.
Attractions for the United States
So, why is Korea an attractive FTA partner for the United States? Let me cite four of the most important reasons.
First of all, Korea has a large and advanced economy. In fact, Korea is the United States' seventh-largest trading
partner, with two-way goods trade in 2005 valued at $72 billion. This makes the U.S.-Korea FTA our most ambitious FTA
undertaking since we began negotiations with Canada and Mexico 15 years ago. So just from a commercial perspective, this
is a very big opportunity for both sides.
The overwhelming benefits of a U.S.-Korea FTA justify the effort. The latest Korean government research predicts that a
U.S.-Korea FTA would increase Korea's real GDP by as much as 2%, boost exports to the United States by 15%, and raise
manufacturing employment by 6.5%. For the United States, the economic impact is also expected to be significant, around
0.2% of GDP, which is a lot for our $11 trillion economy.
Beyond economics, the second reason why these FTA talks are such a good idea is because Korea is an important ally of
the United States, and a key geo-strategic partner in the Northeast Asian region. Let me read to you from a statement by
President Bush issued on February 2. The President said:
"The United States and the Republic of Korea have a strong alliance and are bound together by common values and a deep
desire to expand freedom, peace, and prosperity throughout Asia and the world... A Free Trade Agreement with the
Republic of Korea will provide important economic, political, and strategic benefits to both countries and build on
America's engagement in Asia."
Completing a Free Trade Agreement can only make the bilateral U.S.-Korea relationship even stronger.
Third, there is an important regional dynamic to a U.S.-Korea FTA. This FTA will help cement trans-Pacific economic
ties, and underscores U.S. commitment and engagement in Northeast Asia. More than some other Asian nations, perhaps,
Korea seems to have a clear understanding of the importance of Asian nations reaching across the Pacific to forge strong
economic ties with North America.
>From the American perspective, we hope that the U.S.-Korea FTA will further strengthen Korea's leadership role in
Northeast Asia. We hope that the increased trade and investment between Korea and the United States resulting from this
FTA will help inspire Japan, China and others to accelerate their own market opening and economic reform.
Fourth, and finally, looking at Korea's internal economic structure, we hope that a U.S.-Korea FTA will help Korea's
reform-minded economic leaders to continue to strengthen the Korean economy, through further market opening and economic
policy reform. Since the 1997 Asian financial crisis, under strong leadership, Korea has taken a series of important
steps to open and reform its economy, which have continued to this day. We hope that the FTA talks will provide an
important opportunity to lock in and build on these reforms.
Attractions for Korea
I would like to spend some more time today discussing this final point -- the benefits of the U.S.-Korea FTA in helping
to promote economic reform and economic growth in the Republic of Korea. As indicated by the title of my address today,
I believe that the U.S.-Korea Free Trade Agreement will help significantly in promoting sustainable economic growth here
in South Korea, and therefore is a "win-win" proposition.
During his New Year's address on January 18, President Roh first spoke about the U.S.-Korea FTA, saying: "We should
conclude a Free Trade Agreement with the United States for the future of our economy." This strikes me as a profoundly
wise statement. Notice the reason the President cites. It's not a short-term vision. President Roh was talking about
making the Korean economy stronger in a lasting way.
Amplifying President Roh's view, Trade Minister Kim Hyun-chong has frequently referred to Korea's FTA with the United
States as an "invisible infrastructure." His point is that Korea invests heavily, and intelligently, in physical
infrastructure. Similarly, Korea can and should invest in intangible infrastructure, such as by linking the Korean
economy more closely to the largest and most advanced economy on the planet, the United States. As Minister Kim has
said, Korea "will learn from the United States, compete with it in some areas, and have the opportunity to grow into a
developed economy."
Challenges to Long-Term Sustainable Growth
Let's explore for a moment what are the biggest long-term growth challenges for the Korean economy. One is clearly the
problem of Korea's rapidly aging labor force, and its growing retirement-age population.
Aging Population: Now, I am not a professional economist by training. And I expect that most of you in this room could
explain this problem more fully than I can. But it is clear even to a layman that Korea faces a major dilemma.
According to some calculations, Korea is experiencing the most rapid fertility rate decline in any major country in
human history. This will, of course, have a huge impact on social expenditure, the nation's long-term fiscal position,
and the composition of the labor force and Korea's general industrial capability. It could even have some impact on
Korean culture and society.
Basic economic growth theory says that sustained growth will be harder to achieve when the labor force is not growing --
following the simple equation of labor growth, plus capital, plus productivity growth, equals total growth. At the same
time, social costs could become prohibitively expensive without growth.
What to do about this situation? It's not an original argument, but given the finite availability of domestic capital,
the key solution must be productivity growth. The goal is to produce more, especially in services, using fewer people.
At the same time, the economy should endeavor to attract as much foreign capital as possible. Foreign capital is among
the best capital available because, along with cash, it tends to bring and introduce new technologies, both "hard
technologies" and "soft technologies" such as new business management practices.
This is where the U.S.-Korea FTA comes in. We expect that with a U.S.-Korea FTA, we will see an acceleration of Korean
investment in the United States to take advantage of improved business opportunities. But an FTA between our two
countries will also have a profoundly positive impact on foreign investment in Korea. All previous American FTA partners
have seen a sharp increase in U.S. direct investment. For example, U.S. investment in Mexico jumped from $4.4 billion
pre-NAFTA to $13.2 billion after NAFTA. Our only other Asia-Pacific FTA partners, Singapore and Australia, also
experienced increased inward foreign investment.
Polarized Economy: A second key challenge to the Korean economy in the medium and long term is the problem that is
commonly referred to as the polarization of the economy.
President Roh has made this a major theme of his presidency. As he explained in his New Year's speech: "The divide
between conglomerates and small and medium enterprises, and between regular and irregular employees is growing wider."
Again, I think President Roh's analysis is right on the mark.
It's quite apparent to most observers that a bifurcation -- or splitting in two -- of the Korean economy is becoming
increasingly clear. Significantly, as President Roh said, this is happening on both the business front and the labor
front.
In business terms, a relatively small group of technologically advanced manufacturing firms -- those with the capability
of reaching world markets -- has enjoyed an immense export boom. That group is investing more overseas, financed by
vibrant but narrow corporate bond and stock markets. Meanwhile, a second group of less technologically advanced, more
domestically oriented smaller firms is struggling to stay alive, while finding it increasingly difficult to attract bank
financing.
In labor terms, Korea also has an unusual situation -- where a relatively small group of workers enjoy both high wages
and high job security, while others experience both lower wages and lower job security. Some unionized workers take
advantage of their employment at profitable firms to demand wages, rights, benefits and job security that arguably
exceed the increases in their productivity, making it hard for those firms to hire more regular employees. Meanwhile,
non-union workers at smaller firms, and irregular and temporary workers at large firms, are seeing only slow
improvement, or even declines, in their real incomes.
What to do in such a situation? It appears to me that the key is to create new growth opportunities in new economic
areas -- not necessarily manufacturing -- where better investment and employment opportunities can be generated to try
to bridge the gap.
Here, again, I believe there is an important role for the U.S.-Korea FTA to play in helping build Korea's "invisible
infrastructure." Increased foreign investment can play an important role in helping fill gaps in the Korean economy. But
the FTA will also help by promoting service sector deregulation, particularly in financial services, but also in other
key service sectors. More sophisticated financial services methodologies introduced as the result of deregulation will
inevitably help spur the development of venture capital and start-ups, creating new growth opportunities. In addition,
the regulatory transparency provisions of the FTA should help accelerate deregulation of the real (non-financial)
economy as well, creating even more avenues for investment and job creation.
To some extent, the "polarization" disparities now evident in the Korean economy are the inevitable result of the rapid
growth and structural reforms that have already taken place. Some parts of an economy always grow faster than others,
and some workers and businesses adjust more quickly than others to changing circumstances. But polarization remains a
problem to be addressed, and it's a similar problem, frankly, to what we face in the United States. Rather than trying
to force high-performing capital into new segments of the economy, it needs to be lured into those segments. Investment
in the gaps of the economy must be attracted -- it cannot be dictated. Certainly, no measures should be taken to
restrict investment in some areas in order to try to force investment into others. It is also not wise for the
government to act as a major financial intermediary.
Fortunately, it is clear that the Roh Administration understands that reform and growth are the ways to deal with the
polarization and aging society dilemmas. The United States is highly pleased and excited that we have been invited to
participate in this vision, through the pursuit of a U.S.-Korea Free Trade Agreement.
The Strategic Context: "Completing U.S.-Korea Relations"
Finally, let me discuss just a bit more the strategic context of the U.S.-Korea FTA talks.
Last week, Vice Foreign Minister Yu Myung-hwan called the FTA talks "a bold move to complete Korea's strategic alliance
with the United States." I couldn't agree with him more.
Sometimes when things happen gradually, they don't get noticed. But what has gradually happened in the history of
U.S.-Korea relations is that a plain military alliance that was established to protect South Korea from North Korea's
declared aim of reunifying the peninsula under communist rule by force, has step-by-step expanded and graduated, and
emerged into an important global partnership.
During their Gyeongju summit meeting in November, President Bush and President Roh agreed to launch a high-level
strategic dialogue called the Strategic Consultation for Allied Partnership, reflecting Korea's increasing international
standing and its growing role on the world stage. In January I attended the first of these consultations in Washington
and I am happy to report that we had an excellent discussion on bilateral, regional, multilateral and global issues.
Our alliance really has taken on a global dimension. The United States and the Republic of Korea are working
side-by-side to rebuild Iraq and Afghanistan as part of the international effort to bring freedom, peace and democracy
to those nations. We appreciate that Korea recently extended the mission of its troops in Iraq for an additional year.
Alongside countries from across the globe, the Republic of Korea has also sent humanitarian assistance to regions hit
hard by natural disasters, such as the tsunami in Southeast Asia, the earthquake in South Asia, and the hurricanes in
the United States. It is a measure of Korea's stature in the world today that the R.O.K. contributed $30 million to aid
the victims of Hurricane Katrina. That assistance will help Americans who suffered from one of the worst natural
disasters in our history, and we are grateful.
Here in Northeast Asia, our bilateral efforts to increase international cooperation and ensure stability are evident in
our work together in the Six Party Talks. As President Bush and President Roh said at Gyeongju, we are committed to the
peaceful resolution of the North Korean nuclear issue through diplomatic methods, but we will not tolerate a
nuclear-armed North Korea. I hope that talks will resume soon. It is in the interests of all countries and peoples, but
most especially it is in the interests of the North Koreans themselves that the D.P.R.K. shed the albatross of its
nuclear programs and join the international community.
Collective prosperity also depends on the health of each nation's people. One issue that urgently requires international
attention is the threat that avian influenza could lead to a human pandemic. When the weather turns cold, we are all to
some extent thinking about catching colds and "flu," but the dangers posed by an influenza pandemic are quantitatively
different, as the 1918 case graphically shows. Preventing a pandemic and minimizing the damage if one emerges will
uniquely require international cooperation. Washington and Seoul are working together on this important issue. Both our
countries are founding members of the International Partnership on Avian and Pandemic Influenza launched by President
Bush at the United Nations this fall.
Another measure of the strength of our alliance is the numbers of people-to-people exchanges. The U.S. Embassy processed
over 400,000 visas in our fiscal year that ended in September 2005, and we hope to process as many as 500,000 in this
2006 fiscal year. The U.S. Embassy issues more than 65,000 student visas, making Korea the third largest source of
foreign students. Since the terror attacks on September 11, we have been required to institute additional security
procedures, but wherever we can we have worked to streamline the process. In the Gyeongju summit, President Bush said
that the United States will work with the R.O.K. to "develop a Visa Waiver Program roadmap to assist Korea in meeting
the requirements for membership in the program." I personally am committed to this issue, because as you know our
alliance is not just between governments but between our two peoples, and I want to ensure that as many Koreans as
possible have the opportunity to visit the United States.
As I mentioned earlier, we are working closely with the Korean government to modernize our defense alliance to better
meet our shared goals and better serve our peoples. We plan to consolidate and relocate several bases away from
population centers, return some bases such as Yongsan Garrison to the Korean people, and transfer more missions and
authority to Korea's armed forces. Over the next few years, we plan to spend $11 billion to upgrade U.S. forces in the
region to improve our ability deal with any contingency on the Peninsula or beyond. By moving our troops out of places
like the heart of Seoul, we will lay the groundwork for keeping our alliance strong for decades to come; and by
improving the quality of our forces, we will ensure the effectiveness of our deterrent for decades to come.
In short, U.S.-Korea relations are advancing well on several fronts. Today, on Valentine's Day, we are lucky enough to
be able to meet and discuss how conclusion of a U.S.-Korea Free Trade Agreement will help complete our alliance, and
raise U.S-Korea relations to next level.
I have enjoyed this opportunity to address the potentially immense benefits of the U.S.-Korea Free Trade Agreement, and
look forward to your questions and comments.
Released on February 14, 2006
ENDS