| bibo:abstract |
US Trade Policy under Bush Administration
and Korea-US Trade Relations
Cho, Yong Kyun
ABSTRACT
The Bush administration will take aggressive trade policy measures to open up markets of major trading partners and to make a more liberal global trade environment. With no linkage of the labor and environmental standards to a trade negotiation, and the highly probable renewal of the Fast Track Authority, negotiations for a new round and the FTAA will be reinforced.
Trade disputes between Korea and the U.S.A. are more likely to increase. To settle them, the Bush administration depends more on bilateral or unilateral instruments. The inter-Korean economic cooperation will not show a considerable progress under the new administration.
Both appropriate short-term policy measures responding to the Bush administration's new trade policy and mid- and long-term strategies to maintain the stable trade relations are necessary. South Korean firms should be more cautious in investing in the North.
I. Trade Policy Environment of the Bush Administration
The presidential election of the US in November last year, after many turns and twists, finally gave birth to the new Republican administration led by George W. Bush. The launch of the new administration is a matter of great concern to Korea because the possible changes in the US external policies may have comprehensive effects both on the security environment of the Korean peninsula and on the Korean economy.
As long as the trade policy is concerned, the basic stances are similar between the two parties in emphasizing the importance of free and fair trade. But the Bush administration would show some differences in its policy instruments and in its methodology of pursuing the policy from those of the previous Democratic administration. Those differences would bring about remarkably different results to major trading partners of the US. Moreover, a new administration tends, in general, to adopt strong policy measures in its early stage to show some visible results in the short-run. Considering these factors, we expect that the Bush administration will take very active trade policy measures to make a better global trade environment and to open up markets of major trading partners. In addition to them, following factors will affect the trade policy of the new administration.
First, the current recession of the US economy may directly affect the toughness of the trade policy. Currently the US economy is declining from the long-lasted boom of the past almost ten years. The growth rate recorded 2.4% and 1.5% during the third and fourth quarter of 2000 respectively, down from over 4% since 1997. Even if the soft-landing of the US economy is possible, the growth rate this year will clearly drop to around 2% or below, and this fall in the growth will lead to a tougher trade policy stance of the Bush administration to find a way out of the economic difficulties.
The second factor affecting the US trade policy is an increasing trade deficit. The external trade imbalances today are said to be one of the most serious problems of the US economy. Recently the trade deficit is expanding, and the volume exceeded US$400 billion in 2000. It would lead to an increasing pressure to change the trade policy of the new administration toward more active and more aggressive one.
The third factor is the weakening leadership of the US in the liberalization of global trade. Since the launch of the World Trade Organization(WTO) in 1995, the US has not played a leading role effectively to extend free trade in both regional and global contexts. For example, the US has failed to expand the North American Free Trade Agreement(NAFTA) through the participation of Chile, and also failed to conclude the Multilateral Agreement of Investment in the OECD. More importantly, the global trading system is staggering with the WTO's failure in the ministerial meeting in Seattle, December 1999, to launch a new round of negotiations to further reduce trade barriers and to write new international economic rules. It leaves a huge question mark over the US role in world trade liberalization. Since President Bush and the Republican Party prefer powerful America in their external policy, the new administration will pursue stronger trade policies to restore its leadership in the global free trade system.
II. Prospects of Trade Policy under the Bush Administration
1. General Prospects
Characteristic features of the US trade policies since late 1980s have been their active and aggressive ones by which it has pursued the opening of overseas markets and, based on that, improved the market access of the US firms. The new administration will also maintain them. The Bush administration, while it minimizes government's interventions domestically, strengthens its policy of trade liberalization externally by continuously pursuing the market opening of its major trading partners. During the election campaign last year, president Bush consistently insisted that the key to future economic growth and prosperity is the free flow of goods and services and ideas. He also said that he would be a free trading president, a president that would work tirelessly to open up markets for goods and services all over the world. With this position, the new administration will also take an active stance for various global and regional free trade agreements such as a new round, the NAFTA expansion and the Free Trade Areas of the Americas(FTAA).
When we see the Cabinet members of the Bush administration, we are more convinced of such a position. Major economic- and trade-related departments are filled mainly with two types of persons, one for high level officials of the former Bush administration and the other for persons from business sector. The Economic Advisor, Lawrence Lindsey, the Secretary of Agriculture, Ann Veneman and the USTR, Robert Zoellick belong to the first group, while the Secretary of Treasury, Paul O'Neill, and the Secretary of Commerce, Donald Evans belong to the second. Both groups tend to respect autonomy of private sector economy, as reflected in the tax cut policy. They also tend to be very aggressive in opening up foreign markets and in liberalizing global trade in both multilateral and regional contexts.
However, there exists an important constraint for the new administration to implement such trade policies. Although the Republican Party won the majority both in the Senate and in the House of Representative in the last election, its margin in the number of seats became rather thinner. Therefore, the Bush administration would not be totally free from the atmosphere of the Congress, at least in its trade policies. Compromising would be inevitable to a certain extent. Moreover, it is quite likely that, in the next Congressional election which is less than two years away, the Democrats seem to recover the majority. Under the situation, the Democrats would have less incentive to cooperate in the next two years to put through various programs in the Congress, while President Bush would make every effort to take some major policy initiative through cooperation with the Democrats. In the process, the new administration will likely meet, to a certain extent, the demand of the Congress for some protective policies such as import restrictions and anti-dumping to protect domestic industries. It would be particularly true if the declining of the US economy is accelerated, and if it results in increasing unemployment domestically.
Another feature of the trade policy of the Republican Party, which distinguishes it from that of the Democrats is higher dependence on bilateral and unilateral trade measures relative to a multilateral mechanism. President Bush and many Republicans have kept their position that multilateral trade negotiations within international organizations are nothing but an instrument to attain goals and to enhance national interests, thus if necessary, other means like regional instruments as well as bilateral and unilateral measures should be utilized. In this sense, trade policies of the new administration would be similar to those late 1980s through early 1990s, in which the US was most active in opening up overseas markets. If the WTO would not be successful in launching a new round in the near future, the US will probably take strong bilateral measures to its major trading partners. Traditionally, the Republican Party has maintained closer relations with the business society of the US, so the new administration will be more active in reflecting their opinions than the Clinton administration was. It would be all the more probable when the growth rate of the US economy declines rapidly or when the US trade deficit deteriorates further.
2. Individual Trade Issues
The general nature of the trade policy of the new administration, as stated above, will be reflected in various current trade issues which the US is now facing.
Whether the labor and environmental standards should be linked to a trade negotiation or not is one of the most remarkable differences in trade policies between the two parties. The Republicans' position is that since both labor and environmental issues are not essentially related with trade, such a link itself runs counter to the spirit of free trade, and also that if we restrict trade because of those standards, the actual trade volume of the US will shrink considerably. So they oppose the linkage. On the other hand, the Democrats argue that the labor and environmental standards are values which are prior to all others including trade, and that if we do not care for them, lower-cost products which are produced in foreign countries under the lower standards will flow into the US and would threaten the domestic production and employment opportunities. Because of such a different position, the Bush administration is expected to show remarkable differences in future trade negotiations of the US. If the US would withdraw the linkage, it will function as a positive factor which reinforces some trade negotiations such as the FTAA and the WTO new round, in which the labor and environmental issues have so far been one of the major obstacles.
Another trade issue in which we expect some changes under the new administration is the Fast Track Authority. The Fast Track Authority was terminated in 1994, when the Uruguay Round Implementation Act was passed in the Congress. It means that the US government has lacked this trade negotiating authority for almost 7 years. The Clinton administration has tried to renew the authority from the Congress several times but failed because of the conflicts of opinions between the two parties, and labor and environmental groups which strongly opposed it. The disagreement was not originated from conflicts between free trade supporters and protectionists, but essentially from the conflict in the issue of whether it includes binding provisions on labor and environmental standards in trade agreements. The new administration needs earnestly the authority because there are important negotiations ahead, which require fast-track for their effective pursuits; free trade with Chile and other steps toward the FTAA; and scheduled negotiations under WTO and a new round. The conditions are more favorable than before. Currently, a new consensus is being formed for the renewal of the authority, and the Republican is majority both in the Senate and in the House of Representatives. Moreover, the Bush administration would feel freer from the opposition of the labor union, relative to the former government. All these things are working favorably for the early renewal of the authority.
Third, a new round may have a momentum under the Bush administration. Negotiations for the launch of a new round will probably start soon. Since the suspension of the WTO Ministerial Meeting in Seattle 1999, there have been only sporadic discussions for a new round and in a very limited range among only a few major players of the WTO. One reason for this poor progress is, among others, the passive attitude of the US for its domestic politics. The Bush administration, however, will take a more active position for the launch of a new round to strengthen rules and systems of the global free trade. In addition, the administration is much less likely to link the labor and environmental standards to the trade negotiations. Furthermore, the prospect of restoring the Fast Track Authority will activate external trade negotiations of the US. They would work as positive factors for the early launch of a new round.
Lastly, the negotiations for the FTAA will be reinforced. The idea of the FTAA came originally from the EAI(Enterprise for Americas Initiative) which the former president Bush proposed in 1990. President Bush also emphasized repeatedly, in his campaign period, the importance of accelerating the negotiations to strengthen strategic relations between the US and the Latin America. In April 2001, the fourth Summit of the Americas will be held in Quebec, Canada. It will provide a momentum to the FTAA process, together with such factors as the solid recovery of the Latin American economy and the more probable renewal of the Fast Track Authority of the US.
III. Korea-US Trade Relations
The Korea-US trade relation in the near future depends on the trade policy of the Bush administration, changes in overall situation of the US economy, and macroeconomic policy changes in response to them.
First of all, the Bush administration will take an aggressive position in its trade policy, which will bring about considerable changes in trade relations between the two countries. The US business society, which is one of traditional supporting groups of the Republican Party, will increase their demand for various import restriction measures as well as the opening of overseas exporting markets. On the other hand, the new administration emphasizes the importance of a small government and also the importance of effective operation of a market mechanism. Such a position will be reflected in the trade policy. Thus, under the new administration, import restrictions are expected to be relieved to a certain extent, but active policies to open up exporting markets will be strengthened. Korea would not be an exception. Korea's current bilateral trade surplus is not as big as those of China and Japan, but it is increasing. Moreover, most of major items of Korea's export to the US market - auto vehicles, steel, telecommunication equipment, and agricultural products - are strategically very important for the US economy. For these reasons, trade disputes between the two countries are more likely to increase. Another point to keep in mind is that, under the Clinton administration, priority areas for fostering international competitiveness were information and telecommunication industries but the current Cabinet members of the Bush administration show that, together with those industries, it may make more efforts to restore the competitiveness of some traditional industries. It may lead to increased conflicts with Korea's exports to the US.
We also expect changes in ways of settling trade disputes when they occur. Many of trade disputes between Korea and the US have, so far, been brought to the Dispute Settlement Procedure of the WTO. The new administration, however, is more likely to prefer to take bilateral instruments to settle trade disputes, particularly if the procedure of the WTO would not be satisfactory for securing the national interests of the US.
The decline of the US economy which, we think, becomes worse currently may have a negative effect on the bilateral trade relations. Since the bilateral trade with the US as well as the status of the US economy itself is very important to the Korean economy, macroeconomic policies of the Bush administration in response to the current decline would have direct effects on the Korean economy. If the current recession continues or becomes worse in the near future, it would cause a considerable decrease in import demand of the US, which deteriorates the Korean export market because the US share of our export amounts to over 21%. The tax cuts policy of the Bush administration has also some implications on the Korean economy. In the short-run, the policy can expand import demand by stimulating domestic business activities in the US, but if it would aggravate the inflationary pressure on the US economy and make it inevitable to raise the interest rate, the situation could be worse. It would bring about decreasing inflow of foreign direct investment to Korea and serious deterioration of the Korean stock market.
External policy changes of the Bush administration will affect, directly or indirectly, the inter-Korean economic cooperation. The US has been employing the engagement policy with North Korea. The basic stance of the engagement policy will not change under the new administration. But president Bush and his foreign policy advisors believe that the engagement policy should be more realistic in the sense that it should be based on the imposition of a firm principle of reciprocity. If North Korea rejects this, diplomatic pressure will follow. However, it does not necessarily mean that the US will take strong coercive measures to the North since both the US and South Korea are unwilling to risk increasing tensions on the Peninsula. Anyhow, we can safely say that the inter-Korean economic cooperation would not likely to show a considerable progress at least under the early period of the Bush administration. Investments of South Korean firms to the North will increase to a certain extent as North Korea's leader Kim Jong-il visits the South in return courtesy and the inter-Korean relation improves very gradually. But the economic cooperation with the North will face a clear limitation in financing necessary capital, thus will progress only gradually. In the near future, the Korean government will inevitably play a dominant role in mobilizing investment resources. On the other hand, the role of private sector of the South would be limited not only because economic principles or profit motives cannot be directly applicable to the North Korean economy but also because South Korean firms would not have capacities large enough to meet the demand, particularly under the current receding economy of the South.
IV. Conclusion
Maintaining amicable trade relations with the US is extremely important to Korea. For this, we should take proper, short-term policy measures in response to the trade policy changes of the Bush administration, and also review mid- and long-term strategies to maintain the stable bilateral relations.
First, we should prepare ourselves for increasing disputes in trade with the US. More disputes are expected in areas such as motor vehicles, intellectual property protection, pharmaceuticals and agricultural products. It would be so not only because the Bush administration will be more active in opening up overseas markets but because such a policy is reinforced by the increasing trade deficits and the worsening US economy. More specifically, we should build up or strengthen continuous and stable consultation channels with the new administration and with the Congress. At the same time, we also need to have channels with US business persons in Korea because many of trade disputes between the two countries come from the complaints they raise.
Second, Korea should make use of the multilateral trading system centered around the WTO. For this, Korea should strengthen the cooperation with the US for the early launch of a comprehensive new round. The Bush administration is expected to take an active position in launching a new round for the moment. Thus, we have a larger room than before for the cooperation in this issue.
Third, an institutional device should be established to maintain the bilateral trade relations stable in the mid- and long-run. Above all, to maintain the rapidly increasing inflow of foreign investments and to enhance the level of international credit of the Korean economy, the early conclusion of the Bilateral Investment Treaty(BIT) is necessary. Next, we should consider seriously a bilateral free trade agreement. The bilateral FTA has both positive and negative effects. Economically, it provides a momentum for export increases and thereby another take-off to an advanced economy. At the same time, it gives additional burden of market opening to a few industries like agriculture and services. In political and security aspects, it strengthens the alliance with the US and thereby contributes to enhancing peace and stability in the Korean Peninsula. On the other hand, we should also consider the fact that a closer relation with the US may give burden to Korea in its relations with other countries like China and ASEAN countries. Therefore, a comprehensive and rigorous analysis of the Korea-US FTA is necessary to be done to evaluate its overall effects, and to set the priority among various FTAs currently under consideration.
Fourth, the inter-Korean economic cooperation will not be seriously affected by the changes of the Bush administration's external policy. The continuous and effective cooperation between the two Koreas is important not only for building a economic community but for tension reduction and peace building in the Korean peninsula. But investing in the North is still very risky. Without a mechanism through which such risks can be effectively avoided, South Korean firms should be a little more cautious in their investments to the North. At the same time we should try to build up better environments by inducing more assistances of international society.
Lastly, we should make every effort to enhance the competitiveness of the corporate sector and the international credit level of the Korean economy by reinforcing the current restructuring. The growth of the US economy is sure to decline. In this process, various uncertainties and financial instabilities would affect, in an undesirable way, the Korea's major macroeconomic variables such as stock price, interest rate, and exchange rates. Therefore, to prevent the negative effects or to minimize them, we should secure the sound basis of stable macroeconomic management.
|
