A Korea-U.S. Agreement: What is at Stake?

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Dean Baker
The Hankyoreh, July 25, 2006

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There has been considerable opposition within South Korea to the proposed trade agreement with the United States. The opponents of this deal have a good case.

The basic story in any bilateral trade pact is that both countries reduce their trade barriers, thereby allowing consumers in both countries to benefit from lower prices and producers to benefit from an increased export market. There are also losers - the domestic producers who are unable to compete without protection from foreign competition. But, proponents of these trade pacts will contend that the gains to the winners exceed the losses to the losers, so the country as a whole benefits from trade.

That’s the simple story. The reality is more complicated. First, the fact that the benefits to the winners exceed the losses to the people who are harmed by increased trade provides little consolation to those who lose out from a trade agreement. In the United States, most of the workforce has seen almost no increase in real wages over the last quarter century. Trade has been one of the main factors behind this wage stagnation. The benefits to those who gained from trade - business owners and professionals - may have been larger than the losses suffered by the bulk of the workforce, but this doesn’t make workers feel any better about a quarter century of wage stagnation. Those who stand to lose from a new trade agreement with the United States (farmers top this list) are certainly right to be concerned about their livelihoods.

But, this is only part of the story. While the United States likes to call its trade deals "free trade agreements," this is inaccurate. An important part of the proposed pact with South Korea would actually involve increasing protectionist restrictions in the form of tighter patents and copyright rules. The United States trade negotiators make tighter intellectual property rules a central plank in their agenda in response to demands from the U.S. software, entertainment, and pharmaceutical industries. They hope that with stronger intellectual property rules, they will be able to charge more for their products in South Korea, thereby increasing profits.

It is also important to realize that the United States takes these rules very seriously, especially when it comes to pharmaceuticals, where the most money is at stake. The United States has a standard pattern in these negotiations. It insists on new intellectual property rules with whom it is negotiating. Then, as soon as the deal takes effect, the United States immediately presses to get the strongest possible interpretation of every clause, even when it means far higher drug prices for its new trading partner. The situation of Australia, which just signed a new trade pact with the United States last year, provides a good example of this pattern of behavior.

From an economic standpoint, imposing more stringent intellectual property rules in South Korea is largely just a transfer from firms and consumers in South Korea to the U.S. corporations that hold the patents and copyrights. It is very generous of the South Korean people to be willing to pay more money, but it’s not clear why they should.

The key argument usually put forward by proponents of a new trade agreement is that United States is the world’s largest import market. According to this argument, it might be worth paying more money for movies, software and drugs, if South Korea can have better access to the huge U.S. market.

On this point, it is worth taking a more careful look at the numbers. Currently, the United States is by far the world’s largest importer; its market has grown by more than 1.1 trillion USD over the last decade. While this may look like an inviting market, it’s important to realize that the United States also has an enormous current account deficit. Virtually all economists agree that it will not be able to sustain this current account deficit for much longer. In the not too distant future, the current account deficit must fall to a more sustainable level. When it does, the U.S. import market will shrink.

At the Center for Economic and Policy Research, we did a short study that projected that the U.S. import market would shrink by more than 300 billion USD over the next decade, as the U.S. current account deficit adjusts to a sustainable level. This means that, rather than competing away market shares from domestic U.S. producers, South Korea’s exporters will have to compete with exporters from China, India, and elsewhere for a share of a rapidly shrinking market. This does not look like such a great prize.

In short, in this new trade agreement, South Korea is being asked to make concessions on intellectual property and elsewhere that will impose substantial costs on its economy. The benefit that it gets in return is increased access to the U.S. market. If the U.S. import market shrinks as we have projected, then South Korea may find that it has made costly concessions for nothing.