Potential Losses an Argument FOR US-Korea FTA

June 5, 2006
by Steve Suranovic

This week, South Korea and the US will begin formal discussions to create a free trade area (FTA) between the two nations. Since the announcement to begin negotiations was made last February, a series of demonstrations and protests have erupted among Korean groups who see the FTA as a source of future economic losses. These protests build upon similar protests by Korean nationals in Hong Kong in December 2005 against the free trade agenda of the World Trade Organization. Protests against the US-Korea FTA were also staged by Korean film artists at the Cannes film festival in May. Next week, as the FTA discussions begin, Korean labor and agricultural groups are planning similar demonstrations in Washington.

The likelihood of economic losses is the prime argument against trade liberalization. Supporters of free trade typically counter these arguments by claiming that any losses will be relatively minor, will be temporary, and will be offset by even larger gains to other sectors within the economy. In the case of a US-Korea FTA, the Korean textile, electronics and automobile industries are sectors likely to benefit from improved access to the US market. Nonetheless, these benefits will not directly affect the workers in the agricultural or service sectors who stand to lose from increased competition with US firms. Thus, even if the sum total benefits that arise from freer trade exceed the sum total losses, this fact will do little to appease the people who will surely suffer.

However, an even stronger argument for trade liberalization does exist, but it is rarely emphasized. It is an argument that does not depend on the measurement of gains and losses. Instead the argument focuses on the competitive process itself that is stimulated from the opening of international markets. It is an argument that some of the benefits will arise entirely because of the economic losses. In other words, the losses that are expected to occur because of free trade are themselves the source of many of the long term benefits.

As an example consider the South Korean film industry. Workers in the film industry argue that a further reduction in the number of mandatory screening days for Korean films (a likely change requested in an US-Korea FTA) will allow more US films to be shown in Korea. Korean filmmakers will surely emphasize the cultural dangers of allowing more exposure to Western films filled with Western ideals. However, these filmmakers are perhaps even more aware of how a change in the quotas for Korean films, will affect the profitability of the Korean film industry. If US films are more strongly desired than Korean films by Korean audiences, domestic film industry profits will fall and fewer home-grown films will be produced.

Maintaining the quotas provides a certain security to Korean filmmakers and maintains a cultural presence. However, removing the quotas, and freeing trade, could have an even better effect, despite the obvious losses. The positive effects will arise because of competition. Without the assurance of a high number of screening days, Korean filmmakers will be forced to innovate and change to remain competitive with American films. While some fear that Korean films will have to become more "American" to compete, this assumes that what all Koreans filmgoers want is to be more American. Surely this is not the case. Korean filmmakers have a distinct advantage over American filmmakers because they understand the cultural values of the Korean people. Thus, to compete they will need to tap deeper into that knowledge to create new works that appeal to the unique cultural norms of the Korean people. Competition will inspire this process. Sure, some Korean films will not achieve this result. These films will be pushed out of the market or will not be created. The Korean film industry might even contract. Nonetheless, the films that continue to serve the market are more likely to be of even higher quality and depth than the average Korean film was before.

Another sector where losses are expected is in agriculture. Currently there are limitations on US beef imports due to the 2003 episode of mad cow disease. Since that scare has abated the US will certainly demand further opening of the market for beef under a free trade area. In the important rice market, Korea has participated in the WTO Agreement on Agriculture which includes requirements to import certain minimal amounts of rice. However, the US will likely demand accelerated access under a free trade agreement. Whether Korean negotiators agree to these changes remain to be seen.

In any case, the reduction of trade barriers on many agricultural products will increase competition within a highly protected sector of the Korean economy. This competition will spur similar types of innovation and creativity. Agriculture producers will need to search for ways to lower costs and improve efficiency. Marketing campaigns might be used to emphasize the quality of Korean sourced farm products to maintain domestic demand. However, despite these changes, many farmers will be unable to compete. Those that remain in business will be the ones that are the most innovative, the ones who have cut costs and improved quality to the greatest extent. Those that are unsuccessful will be forced out of business. For these businesses and their workers the transition will be difficult. However, in a dynamic and flexible competitive economy these workers will eventually move to other occupations where their productivity can be even higher.

It is important to remember that the competitive process, a process stimulated with free trade agreements, is difficult and even painful for some at times. Governments can best attend to these adjustment costs by removing the barriers to trade gradually. This provides time for businesses that will face the most pressure to begin planning for adjustment long before the pressure appears. For example, the North American Free Trade Area (NAFTA) between the US, Canada and Mexico had a 15 year implementation period. However, these economic costs and burdens are not something to be prevented since they are an absolutely necessary part of the process. If businesses do not fear that foreign competition will erode profits and potentially lead to failure, they will have little incentive to reduce costs, improve quality and innovate for the future.

The role of government is to provide the conditions needed for its people to realize their greatest potential. Free trade agreements encourage a nation's firms to compete with all others in the world. In contrast, protected markets, although providing security to workers, also promote economic stagnation. When firms need not compete, they don't compete, they don't innovate, they don't improve. Successful firms, and successful countries, are those that continually innovate, change and adapt. If the South Korean government has confidence in the creativity, perseverance and wisdom of its people, then it should provide opportunities for them to realize their greatest potential. The US-Korea FTA is an important step in that direction.

Last Updated on 1/18/07