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NAFTA and Its Implications for the Korean Economy
Yong-Kyun Cho
1995.06
Research Professor, Institute of Foreign Affairs and National Security.
Introduction
NAFTA has come into force since the beginning of 1994. It is the biggest free trade
area in the world that has a population of 379 million and a GNP of US $6.5 trillion.
NAFTA draws the special attention of many countries especially because it was
launched at a time when regionalism was proliferating over most of the world, and the
World Trade Organization(WTO) was about to commence as a result of the conclusion
of the UR. Under these circumstances, it is expected to exert considerable effect on the
current world economic order. Since NAFTA is an unprecedented economic integration
between advanced countries and a developing country, many Asian countries which
depend heavily on the U.S. market for their exports, are fearful of its negative effects.
The Korean economy also responded very sensitively to NAFTA. North America has
been the biggest export market for Korea, so that having stable access to this market is
very important to the persistent growth of the Korean economy, even though the share
of the market continuously goes down. During the past 30 years, the Korean economy
has pursued as export-led development strategy, thus the expansion of regionalism
such as NAFTA would directly affect our economy. Therefore it is indispensable to
analyze what NAFTA really is and how it affects the Korean economy.
Recently, the expansion of NAFTA has been discussed very frequently and, at the
Miami Summit last year, it was agreed that the negotiation of the "Free Trade Area of
the Americas(FTAA)" would be concluded no later than 2005. On the other hand, the
APEC leaders' meeting that was held at Bogor last year agreed to complete the
achievement of APEC's goal of free and open trade and investment in Asia and the
Pacific no later than 2020. In this context, it would be very interesting to see how these
two different regional groups will interact with each other and how they will affect the
formation of a new world economic order. For the Asian countries, the trade
liberalization of APEC can mitigate to a certain extent the disadvantage of the countries
outside NAFTA. Therefore the relationship between the two regional groups and the
direction of their development would be very meaningful to these countries.
In considering this situation, this paper tries to analyze the relationship of NAFTA with
the main factors of the world economic order such as the launching of WTO, APEC
trade liberalization, and the deepening of EU integration, in order to derive a plausible
direction of NAFTA development and its economic implications. It focuses on the
possible expansion of NAFTA that would directly affect East Asian economies, including
Korea. Finally, the paper suggests a proper policy response of Korea based on the
analysis of the effects of NAFTA on the Korean economy.
Consistency of NAFTA with GATT
Economic Effects of NAFTA on Korean Exports
Expansion of NAFTA, and Its Direction
Conclusion
Now the concern of Korea and other East Asian economies with the possible adverse
effects of NAFTA has been reduced considerably. This is the case not only because
NAFTA itself is not so exclusive as was expected, but also because the multilateral free
trade system of the WTO is established in the world economy. We hardly expect that
NAFTA and even FTAA will develop into exclusive trading blocs. Such an optimistic
views is based on the following factors in addition to the successful beginning of the
WTO system.
First, although regionalism is popularized widely, most are directed toward an open
regionalism. Open regionalism means opening its membership to third countries.
Actually, open regionalism accelerates the widening of regional cooperation or the
integration of them. Such a widening of regionalism tend to expand the boundaries of
free trade, and contributes to establishing multilateral trade rules.
Second, as Latin American countries take an open economic policy, the interdependence
between them and Asian economies is increasing. With this current situation, even
through the FTAA is created, it would not be exclusive. More than half of the total trade
of the U.S. is with other APEC countries. Enlarging the trade volume with Asian
countries would be very important for successful implementation of the development
strategy of Latin American countries. Moreover, the three North American countries
and Chile belong to both APEC and the FTAA. In the long-run, this may contribute to
the economic integration between the two regions.
Under these circumstances, Korea and other East Asian countries may have several
policy options: access to NAFTA membership, trade and investment liberalization within
the APEC, and active participation in multilateral free trade under WTO. For the reasons
discussed above, access to NAFTA of East Asian countries is not realistic at present
and in the near future as well. The liberalization of the Korean economy has improved
significantly with its participation in UR negotiations and market opening for joining
OECD. Nevertheless, the Korean public is highly skeptical of joining NAFTA. Aside
from the usual dependency rhetoric, Korea will find it difficult to accommodate NAFTA
requirements on agriculture and financial services.
Trade liberalization within the APEC and WTO is a common subject to which most East
Asian countries should give priority. As long as APEC takes open regionalism, the two
liberalization policies can be complementary to each other. The strengthened systems
of APEC and WTO can mitigate to a certain extent the discriminatory effects of NAFTA
in the short-run, and affect the mature of NAFTA itself in the long-run.
Last November, the APEC countries agreed in the Bogor Declaration that trade
liberalization within APEC would be completed no later than 2020. A detailed schedule
for this will be discussed in Osaka this year, but there will be many impediments to
overcome in this process. A few countries are skeptical about the institutionalization of
APEC. So for smooth proceedings, it is necessary that a country or countries should
take an active role to mediate and coordinate the conflicts among various countries.
The U.S. seems to focus on a smooth implementation of NAFTA, including the
negotiations with Chile. Japan clearly is not in a position of mediator, neither are
ASEAN countries. Korea, on the other hand, is in the middle economically,
geographically, and politically. So, Korea's initiative in trade and investment
liberalization is both necessary and desirable.
Source Materials
AFTA, APEC, and the WTO: How Do They Fit Together?
Summit of the Americas Declaration of Principles (Re.*)
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