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17 Apr 2007

International Economy

KORUS FTA: Catalyst for Other FTAs To Boost Competitiveness(Current Issue No.1965)

Finally, the US and South Korea clinched a deal on a bilateral Free Trade Area (FTA) agreement on April 1, 2007. The move has prompted trade partners of the US and South Korea to press ahead with their FTA negotiations to maintain and boost their export competitiveness in goods and services with the US and South Korea, too, as the latest deal will lead to a mutually freer market for goods and services between those countries. The US-South Korean FTA pact is expected to contribute to much higher bilateral trade turnover between the US and South Korea, likely breaching USD100-billion threshold against the current value of USD78 billion.
In the US-South Korean (KORUS) FTA pact, reductions of tariffs on industrial goods will result in almost all product categories between them (representing some 94 percent of the trade between the two countries) seeing their import duties cut to 0 percent within three years, while tariffs imposed on the remainder will be totally eliminated within 10 years. Remarkably, most of the products in the textile and garment category will become duty-free immediately after the FTA deal takes effect. For automobiles, the US and South Korea have agreed to cut import duties on small passenger cars immediately after the pact comes into force, whereas those on large passenger cars will be reduced within 3-10 years. On the farm sector front, South Korea has lifted its ban on the import of the US beef, which had been rejected since late 2003 due to the spread of mad cow disease in the US, while in exchange the US agreed to exclude rice from the list of products to be liberalized in the deal.
This freer US and South Korea trade per their bilateral FTA is expected to come to be approved by the parliamentary bodies of both countries. Undoubtedly, the move will deal a blow to the US' and South Korea's trade partners whose exports are identical to those on the KORUS list of the liberalized products, including automobiles, textiles/garments and beef, as their competitiveness may be eroded. Under these circumstances, these trade partners may not be able sit idle, and will have to expeditiously enter into agreements on their own FTAs with the US and South Korea, or establish regional FTA agreements such as possible FTA between Japan, China and South Korea.
Product Category Economies Likely to be Impacted by the FTA Deal:
Automobiles - Japan, China and Taiwan
Textiles and garments - China, India, Indonesia, Vietnam, Hong Kong,
Bangladesh, the Philippines, Cambodia, Thailand and
Taiwan
Beef - Australia and New Zealand
For Thailand, it is expected that the FTA framework between the US and South Korea will affect Thailand slightly. However, Thailand may be affected by the tariff reductions on garments and textile products sent to the US from South Korea, because the price competitiveness of South Korean products will be better in the US market. At present, although Thailand has a market share of textiles and garments in the US larger than South Korea's, the US tariff reduction for South Korean garments and textiles will cause Thai-made products to face tougher competition in the US market. At this time, garment and textile products are the second-ranked export category of Thailand shipped to the USA, next to computers, accessories and parts. Moreover, Thailand exports more than USD1.5 billion in ready-made garments to the US annually. As a result, Thai garment and textile manufacturers here will have to prepare for competition in the US, which seems will get tougher, aside from the competition in low-priced textiles and garments from China, India and other developing countries in Asia.
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