Not All Free Trade is Created Equal (or Evil): The US-South Korea FTA

I have been reading around the web, and there is a misconception among well-meaning groups that are opposing the new US-South Korea trade deal finalized by the Obama administration.  The misconception is that all free trade deals are created equal.  I can understand the skepticism, of course, given the history of American free trade agreements like NAFTA and the subsequent job losses.  That is not likely to be the case in case of the Korea trade agreement, however.  For a few reasons: first, South Korea is a developed country, has a fairly high standard of living, and is not bustling with cheap, slave-wage workers.  Second, the administration held out and negotiated what looks like a pretty good deal for American exports.

The Context: Standard of Living and South Korean Labor Standards

Gov. Howard Dean, lately the darling of the progressive movement, had this to say about trade and globalization when he was running for President:
Globalization is here to stay whether we like it or not, but the rules for globalization are not. Both NAFTA and the WTO help large multinational corporations but ignore the needs for the people who work for them -- not only in America but around the rest of the world. In order to make globalization work we also have to globalize worker protection, labor rights, environmental rights and human rights.
Precisely.  You see, I was a Howard Dean supporter in that primary, and I was actually paying attention to his policy positions.  I supported him because of those positions, not simply because of his anti-Iraq rhetoric.  I use these standards to figure out if a country we are trying to have a free trade pact with is playing on a level playing field.

South Korea is not China.  It is consistently ranked among "Very High Development" countries in the UN's Human Development Index.  South Korea is the world's 15th largest economy, while its population clocks in at only the 26th largest.  Its nominal per capita income is set to top US$20,000 this year, and adjusted for prices, the South Korean per capita GDP (Purchasing Power Parity basis) is nearly $28,000 a year.

In fact, according to the International Labor Organization, the South Koreans have an explicit Constitutional right to unionization and collective bargaining, which is more than can be said for the United States.  Like the United States, South Koreans have an 8-hour workday, and their workweek is no longer than 44 hours on average.  They, like us, have time-and-a-half (at least) overtime.  Unlike us, South Korean workers enjoy a legal right to one paid day off a month, and and additional 10 paid days off the first year of employment and one additional day for each additional year worked.  Maternity leave with pay is guaranteed.  The US Family Medical Leave Act, a crowning achievement of the Clinton administration (and I say it with all sincerity), only guarantees unpaid leave.

On balance, South Korea has better legal and constitutional protections for their workers than we do for ours.  As you can see, South Korea, by any measure is a relatively wealthy country.  It is right for us to be weary about unrestricted trade with countries where labor is super cheap and labor standards are far worse than in the United States, tilting the playing field away from us.  But that is far from the case with South Korea.

On the environmental side, South Korean laws are as good or better than US standards.  Like the United States, South Korean companies are required to complete an environmental impact assessment before large developments.  Not only that, they are also required to conduct advanced review before the impact study and before planning.  South Koreans have strong air and water standards, as well as tough standards on fuel and fuel additive manufacturers, enforced by the Environment Ministry's authority to stop production and a $100,000 fine for each violation.

With respect to human rights, South Korea has been cracking down on human trafficking with a new law, generally observes the citizens' rights against arbitrary arrests, and retains a democratic society.  On The Guardian's Human Rights index, South Korea ranks pretty close to the United States.

South Korea is not a country whose standards are vastly lower than ours.  If we are trying to meet Howard Dean's standard for fair and free trade practices, which I think is a fair test, South Korea meets that test.  This is a country we can be on the level playing field with.

The Trade Deal: What's In It For Us (and US)?

Not only should we not be afraid to trade with a country like South Korea on an equal footing, this specific trade deal gives the United States several advantages, especially when it comes to the US auto industry. Let's see what the US negotiators managed to extract on our side.
South Korea is agreeing to allow the U.S. to lift a 2.5 percent tariff on Korean cars in five years, instead of cutting the tariff immediately. The agreement also allows each U.S. automaker to export 25,000 cars to South Korea as long as they meet U.S. federal safety standards and allows the U.S. to continue a 25 percent tariff on trucks for eight years and then phase it out by the 10th year. South Korea would be required to eliminate its 10 percent tariff on U.S. trucks immediately.
For once, the United States has made a better deal for us. South Korea is eliminating its tariff on our trucks now, and we can actually take some time to reciprocate.  The Koreans are also agreeing to halve their tariffs on US made cars immediately, phasing it out over five years.  This is fair, given the volatile state of our auto industry, and what it just went through in the last couple of years. President Obama's leadership helped the US auto industry get back on track, and now it will help us increase our auto exports to South Korea.  The ability of each US auto maker to export 25,000 cars would result in a total of 75,000 cars exported from the US to South Korea.  That would instantly increase our auto exports to South Korea 12 fold. As the US auto industry regains footing, the ability to export to South Korea can only help us.

The export increase is not only in cars.  Opening up the Korean market to American vendors will increase American exports by up to $11 billion a year, according to the US International Trade Commission.  Their estimate is that jobs impacts will be negligible on a net basis.  The deal also opens up the lucrative $560 billion service market to American companies.  Here are the USITC estimates on the Korea trade deal, summarized:
  • U.S. GDP would likely increase by $10.1–11.9 billion as a result of tariff and
  • tariff-rate quota (TRQ) provisions related to goods market access.
  • Merchandise exports to Korea would likely increase by an estimated $9.7–10.9 billion as a result of tariff and TRQ provisions.
  • Merchandise imports from Korea would likely increase by an estimated $6.4–6.9 billion as a result of tariff and TRQ provisions.
  • U.S. services exports would likely increase as a result of the FTA, given the increase in levels of market access, national treatment, and regulatory transparency that would be afforded by the FTA in excess of the current General Agreement on Trade in Services (GATS) regime.
  • Aggregate U.S. output and employment changes would likely be negligible, primarily because of the size of the U.S. economy relative to that of the Korean economy.
The Economic Policy Institute, however, estimates 159,000 US jobs lost, and a greater trade imbalance.  Their estimate, however is based not on any actual analysis of the terms of the final trade deal, but on the basis that the USITC has been wrong on predicting the impacts of FTA's before.  However, any economist would know that merely saying "you've been wrong before" is not a reason to ignore the current economic analyses, and in addition, the examples cited by EPI conveniently ignores some key trade details.  For example, it laments the increase in trade imbalance after China's entry to the WTO and with Mexico after the passage of NAFTA, but it wholly ignores that a third country was involved in NAFTA, namely, Canada.  We have a smaller trade deficit with our neighbors to the north than with Mexico, even though our imports of Canadian goods outstrips that from Mexico.  Our trading imbalances with western European countries are also much smaller than places with cheap labor.

EPI also has a complaint that American companies might lose this race because the Koreans purchase lighter and more fuel efficient vehicles.  As an environmentalist, I cannot see a better incentive for US automakers, short of Congressional legislation - well, fat chance of that - to produce smaller, more energy efficient vehicles, which, if cheaper, have the opportunity to quickly become popular in the US as well.

The European Union (with also better labor standards than the US) and Japan have already signed free trade pacts with South Korea.  These are not places that don't care about their working people.  These are not third world countries with poor environmental standards.

As progressives, we believe in fair trade, not just free trade, and there's no reason to deviate from that standard.  Fairness in trading means a level playing field.  If the competitors are operating with roughly similar labor and environmental standards as well as a good standard of living, competition is a good thing.  And that seems to be the case here.  I am all for buying American, but increasingly the markets are lying outside of our borders.  We must innovate and find ways to increase American exports in a fair, level playing field, not retract from trade altogether.  American workers do not require trade barriers; they require a fair chance to compete in the world market to sell American product.  This is a fair deal and a fair chance for us to compete.