hankyoreh

reading "FTA for whom? Stop FTA."

Kim Youngbae, reporter for the Hankyoreh 21

It was in 1947 that the concept of a free trade agreement (FTA) first surfaced, with the goal of lowering or eliminating trade barriers between two countries or regions. It was the year that the General Agreement on Tariffs & Trade (GATT) was also launched in order to promote free trade among nations and reduce trade protectionism, which was blamed for essentially bringing about WWII.

The FTA was based on a provision in Chapter 24 of the GATT. Since it took a considerable amount of time for all member states to reach any consensus, a few like-minded countries decided to push for complete deregulation in trade among themselves, under certain conditions. The reason for having conditions in what was supposed to be a completely free FTA was that they did not want to look discriminatory against other GATT member states that were not part of this club. Doing so would also undermine the two most important pillars of the GATT philosophy: most-favored nation (MFN) treatment that should be granted to all its member states.

Professor Kim Se-gyun, a political science professor at Seoul National University, explains in his South Korea-U.S. FTA Report: "The free trade agreement under the GATT system was to keep the U.S.-led free trade at bay." His statement helps us to understand why America was less than enthusiastic about signing FTAs under the GATT system.

When the World Trade Organization (WTO) was launched in 1995, replacing the GATT, the nature of the FTA started to change. WTO negotiations started to use the concept of ’trade-related issues’ in their wording and expanded their scope in order to ease or eliminate trade barriers further than ever before. What in the past was limited only to ’goods trade’ had now changed to include investment, intellectual property rights, and agricultural products. That is, the scope of trade-related deregulation now expanded from goods to virtually every scope of economic activity. This was the result of America’s efforts, which was strong in the service sector, and successfully pushed to include the service sector in the WTO terms. Since then, the U.S. has emerged to replace the EU as the main driving force behind FTAs worldwide.

South Korea started to be keenly interested in FTAs since the Asian financial crisis. The FTA research work by the government-backed Korean Institute for International Economic Policy (KIEP) had been around, but it was in 1998 that the government itself started to promote FTAs by setting up the Office of Trade Negotiation (OTN) within The Ministry of Foreign Affairs & Trade in January of 1998.

Economics Professor Jung Yin-kyo of Inha University says, "There was a request from the IMF for the need for implementing a more open economic policy to energize the nation’s economy. And when we said we were going to push for FTAs with other countries, international institutions and credit rating agencies started to look at our policy in a positive light. The FTA was a very useful way to show to the world that we had the intention to carry out reforms and conduct an open-door policy."

Professor Jung initially became interested in FTAs when he was a doctoral student at the University of Michigan. His doctoral thesis and his previous post at the KIEP were all very closely related to FTAs, and he was even dubbed "Mr. FTA." He himself participated in several FTA negotiations, as well, including Korea’s first ever FTA pact with Chile in 2004.

"When Korea said it was interested in FTAs as early as 1998, other countries laughed about it. Very few countries showed interest. The few nations that responded positively were Turkey, New Zealand, South Africa, Israel, Chile, and Thailand. Among these, Chile was chosen as our first FTA partner and the agreement went into effect in April 2004. The six interested countries’ economies were all moderate in size, none that would create a significant economic effect on Korea. And we chose our first FTA based on which country among them would have the least impact on Korea’s economy so that we could test out an FTA first," explains Professor Jung.

After South Korea signed an FTA with Chile, it later also forged free trade pacts with Singapore, the European Free Trade Association (EFTA), and the Association of South East Asian Nations (ASEAN). It also tried making a similar deal with Japan, opened preliminary discussions with Canada, and is in the process of working toward such deals with other countries, including the United States. Therefore, the South Korea-U.S. FTA is simply one of some twenty FTA deals that Korea has already signed or is planning to do so.

Then, why is only the South Korea-U.S. FTA getting such tough domestic resistance? When Korea was negotiating with Chile on an FTA, of course it created some controversy, but it was not on the scale of dividing the entire nation on opinion faultlines. Is the controversy surrounding a free trade agreement with the U.S. based on the uncertainty of its future or a fear of the world’s number one economic power? Or is it being generated by some social and political groups that harbor anti-American sentiment?

Although agreeing and dissenting voices regarding the Korea-U.S. FTA are miles apart on most issues, the two camps also share a rare convergence. They all indicate the service sector - including finance, education, medical care, and intellectual property rights - as the key topic, more than the goods sector, which includes rice, beef, automobiles and semi-conductors.

On February 16, South Korean President Roh Moo-hyun told the members of the nation’s overseas economic committee, "We should stop worrying about how China is taking over our key industries in competitiveness. Instead, we should think about the areas where we are still behind developed countries. That is, the service sectors, such as finance and knowledge-based fields. The Seoul-Washington FTA is the result of our agonizing over this very issue to find a way to revive and upgrade the nation’s economy."

Such sentiment can also be found in the reports by the KIEP and the Korea Development Institute (KDI). In a nutshell, the message is that "if we don’t want to be caught by China’s strong economic performance, we should go along with the FTA and learn the know-how of the service industry from America."

Whereas the two opposing camps all point to the service sector as the key issue, this is also where they see things quite differently. The opposing camp says that since the American service industry is too advanced, the Korean service sector is doomed to fail even before it attempts to assume ’moderate contender’ status. Besides, they say, what is worrisome is that the service sector covers highly public sectors such as finance, education, and medical care. Professor Jang Sang-hwan of Gyeongsang University says, "The public service sector is closely intertwined with a country’s legal and institutional practices. The FTA will make this sector more inclined to seek profit."

As for the effect of the South Korea-U.S. FTA, both camps all find it difficult to accurately predict its outcome. After all, it is still uncharted territory, and its contents could also dramatically change depending on what happens during the ongoing negotiations between Seoul and Washington. What is clear, though, is that the South Korea-U.S. FTA differs from other FTAs in that it is a much more "advanced" type of FTA that allows a broad market opening and introduces a number of new rules that limit the State’s intervention into the market.

The World Bank divides FTAs into three categories: American, European, and developing nation models. The American model pursues maximum market opening, covering all service sectors. Descriptively speaking, it has a form of a "ratchet." That is, once a deal is signed, it is only possible to further open the market or to deregulate it, but changing or reversing the pact becomes very difficult. It also adopts a comprehensive National Treatment and MFN status, and all sectors are in principle open, unless specially stated otherwise. This has led to the argument that the American model reduces the role of government involvement in environmental protection and the public service sector. An example of the U.S. FTA model is the North American Free Trade Agreement (NAFTA).

The European model, which includes the European Union (EU) FTA, is different in that it only opens up areas that are specifically agreed to between two nations. As of today, the FTAs South Korea has struck with other countries, including the one with Chile, are closer to this model.

The developing nation model focuses on goods trade and normally does not include clauses on service, investment, and intellectual property rights. The Common South American Market (MERCOSUR) and the Association of South East Asian Nations (ASEAN) are considered to be examples of this model. Among all three models, the American model is looked as the most comprehensive and deeply integrated, while the developing nation model is regarded as a relatively low impact agreement.

The concern that the FTA Seoul is working on with Washington will not just limit itself to merely lowering barriers and increasing exports, but will also lead to changes in legal and institutional practices, lies in the very nature of the American FTA model. Supporters say that Korea’s economy will transform into the American model, that is, it helps Korea to join the ranks of developed nations eventually. Those who oppose it say that it spells economic integration into America for South Korea, that it would become a U.S. economic colony. The debate surrounding the South Korea-U.S. FTA is based in the fact that South Korea essentially looks to America as its model for social and economic development. It is also a debate that touches upon the role of market forces and the degree of state intervention into the economy.

One good example illustrating that the U.S. FTA model would incur changes in legal and social practices is that it provides the investor the right to directly sue the State. This was first adopted by the NAFTA and has also been included in the ongoing Seoul-Washington negotiations, becoming one of the biggest sticking points between the two sides. According to this clause, American investors, not the U.S. government, can directly file suit against the Korean government for violations of the FTA. This is the only case that grants such right to an individual, except for the U.N. Universal Declaration of Human Rights. In addition, the legal bodies that handle this kind of litigation will not be a South Korean court but rather a variety of international tribunals, including the International Centre for Settlement of Investment Dispute (ICSID) of the World Bank or the United Nations Commission on International Trade (UN-CITRAL). That is why some see it as a violation of the a state’s legal sovereignty.

A case in point is the Metalclad Co. vs. Mexico case. It started when a local government in Mexico rejected plans by an American company, Metalclad Co., to build a hazardous waste disposal facility. The local government designated the field surrounding the factory site as an environment protection area. Metalclad Co. brought the case to an international court by suing the local government for violating the NAFTA. The court ruled the local government’s act a violation of the FTA, and said that the governemnt had to pay Metalclad Co. 16 million USD.

Song Gi-ho, a legal expert on international trade, sees the FTA’s inclusion of the investor’s right to sue the State as a "heresy of international law." And, seeing this kind of danger, Australia had the clause excluded when it signed an FTA with the U.S.

The Korean government looks at it differently. It explains that the goal of giving the investor the right to sue the State is to protect the interests of foreign investors against discrimination. It also points out that South Korean investors can also sue the American government, if necessary. Since both sides all have the same right, says the Korean government, it is fair. Yet, this fairness only applies as a textbook example, not in reality. As of November 2004, most of the 85 pending cases at the ICSID were brought by American companies, with one exception. So, it is reasonable to question the validity of the essentially unilateral use of this legal tool by dressing it up as a "fair" avenue that everyone has equal access to.

Then, what would an investor’s right to sue the State mean to South Koreans? More than half of the nation’s service trade is done in the form of foreign direct investment (FDA), so investment is directly linked to the service sector trade. This can be better appreciated if we imagine that foreign capital enters Korea and sets up schools and hospitals, threatening its domestic counterparts. That is why some people point out that the most important sector in the South Korea-U.S. FTA is investment. They argue that if the service and investment sectors are completely open, then few domestic sectors will remain untouched by the effects of the FTA.

Considering that the America-favored FTA model is comprehensive, locks the deal once struck, and includes the investor’s right to sue the State, it is very likely that the South Korea-U.S. FTA will lead to the deterioration of the public service sector and create social divide as the Korean government moves to protect the interests of foreign investors, including in areas of medical care, education, and the environment. From a neo-liberalist or market fundamentalist perspective, it gives the market, not the state, more power to facilitate economic liberalization. But then, the South Korea-U.S. FTA reflects the different interests of different social classes. In order to head off the wasteful division of public opinion and create consensus, both pro and con camps should stop tossing around the vaguely phrased "national interest" slogan and start honestly voicing where their "personal interest" lies in this debate so that everyone can hold more constructive dialogue on the matter.