The Korea–US Free Trade Agreement (KORUS) has languished for more than three years, but recent events suggest a revival of fortunes and the possibility of KORUS actually becoming a reality within the next year. Originally signed in 2007 during the Bush administration, it had been stuck in Congress because automotive and agricultural interests were not satisfied with concessions by the Koreans. Finally, in December of last year the United States and Korea initialed revisions to the agreement to resolve many of the stumbling blocks. Passage of this agreement will be one of the major trade initiatives for the Obama administration this year and should be monitored if you have business with Korea.
The final text of the agreement is not yet available but according to the Obama administration the primary changes involve acceleration of the tariff reduction for cars exported to Korea. The administration’s goal is to send the agreement to Congress before the first of July.
The United States currently has 11 free trade agreements in place and three pending congressional approval. However, KORUS is unique in a number of respects. This agreement includes provisions not found in any other agreement and improvements to other areas. For example:
Pharmaceuticals and Medical Devices: The KORUS FTA includes provisions requiring that rules for pricing and reimbursement be fair, reasonable and nondiscriminatory. Industry participants will also have the opportunity to participate in the development of rules governing the pharmaceuticals sector. It also includes commitments from both countries to implement a patent linkage system.
Automotive: Under the agreement Korea will immediately eliminate its 8 percent tariff on all passenger cars and the United States will immediately eliminate its 2.5 percent tariff on passenger cars with engines up to 3,000 cc and phase out its 2.5 percent tariff on larger vehicles over three years. A unique aspect of the KORUS FTA is its regulatory provisions. For example, the agreement establishes an Auto Working Group that will address future regulatory issues.
Services: Under the agreement, each country’s broadcast and audiovisual service providers will have increased access to the other market. Korea will open its market to US legal and accounting service providers and express delivery companies (UPS and FedEx) will have increased market access.
In the short term the United States will benefit more from the agreement simply because the average Korean tariff is currently 11.2 percent and the average US tariff is 3.7 percent. Both countries will benefit from areas such as liberalization in the financial services sector and opening of legal and accounting services. Moreover, Korea has agreed to reduce the time for customs clearance of express delivery items.
Korea and the European Union have a signed FTA that will enter into force as of July 1, 2011. With passage of KORUS, Korean manufacturers will have enhanced access to the world’s two largest markets. This will cause difficulties for supply chain managers. Each agreement has its own set of rules of origin and companies will have to ascertain whether the preferences under each agreement apply. Potentially, compliance will be more difficult for US companies operating under NAFTA. Currently parts from the United States, Canada and Mexico can be combined and the finished product will receive NAFTA preference when the good is exported to either of the other two countries. However, the same good may or may not be eligible for preferential treatment under KORUS depending on the amount of US content.
Stay tuned for future reports on specific aspects of KORUS as information becomes available. The agreement contains numerous innovations that make it unique and will provide some interesting opportunities for US companies.