South Korea Trade Deal A Bad Deal

In pledging to push for congressional passage of a U.S.-Korea Free Trade Agreement, President Obama is showing his inexperience as well as the "no change we can believe in" attitudes of his economic advisers.

Like China, Korea has an export-led, neo-mercantilist economic growth strategy. Each time the United States has negotiated trade agreements with these kinds of economies, it has wound up with dramatically higher imports and only small, if any, gains in exports. This is because the U.S. and the export-led economic systems are asymmetrical and largely incompatible.

Export-led economies don't want imports except of the raw material and components necessary to produce their exports. There are many ways to impede imports other than tariffs and quotas. In Korea, for example, antitrust enforcement is very weak. Large chaebols [1] like Samsung and Hyundai control much of the distribution chain. So even if tariffs are zero, foreign exporters may not be able to find distributors to carry their products. Or take intellectual property: The best treaty language in the world for protection of intellectual property won't protect it if the nationalistic court system doesn't enforce the law.

A high-ranking Korean official recently admitted to me that the conclusion of the free trade deal between the U.S. and Korea would not result in any significant increase in U.S. exports to Korea.

Some are warning that the recent conclusion of a free-trade deal between the European Union and Korea will put the U.S. at a disadvantage in the Korean market. I'm not very worried about this. The Europeans are unlikely to gain much benefit from the deal and I'd be willing to bet that Korean exports to the EU will climb much more rapidly than EU exports to Korea.

If the president really wants to do a deal with Korea, then let us do a really meaningful deal which would include antitrust enforcement, currency manipulation, truly equal treatment in terms of distribution availability, buy-national policies, and investment incentives. Indeed, let's be bold and propose not a free-trade agreement, but an economic union under which conditions for all market participants would be exactly the same.