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KWAK Soo-Jong

Korea-U.S. FTA: A Wealth of Opportunities for Domestic Companies

KWAK Soo-Jong

May 14, 2007

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A free trade agreement between the United States and Korea was finally signed on April 2 after 14 months of tortuous negotiations. The pact has more than just commercial significance; it would compel Korean companies to change how they do business in the long run.

Given strong opposition to the deal on both sides of the Pacific, it is hard to expect the ratification will be easy. Nonetheless, uncompromising commitment on the part of both Presidents, a majority of both countries' congressmen in support of the accord, and strategic imperative to successful passage all point to a wrap-up no later than 2008.

Although many studies have shown positive effects coming from the elimination of tariff and non-tariff barriers in different sectors of the economy, there are still pockets of opponents disparaging the Korea-U.S. FTA as nothing less than a prelude to the complete subjugation of the national economy under American commercial power. Focusing too much on negative impacts of closer ties with the world's largest economy, they turn blind eye to the future challenges slowly unfolding to us.

Rather than dwelling on the pros and cons of the latest free trade deal, it is time to discuss about what Korean companies have to do to maximize benefits from it. In particular, they must come up with a more aggressive approach to capitalize on the effects of tariff removal. Considering 94 percent of tariffs would be repealed within three years, the favorable effect will last five years at most. That means Korean companies will soon be pushed to upgrade themselves to prepare for coming no-holds-barred competition.

Although free trade agreements deal with overall entry barriers, their impact is quite different depending on industrial sectors. For example, sectors such as automobiles and textiles will see a large tariff-cutting effect both immediately and for a long time. On the other hand, electronics and machinery sectors will see little benefits as tariff rates in these areas are already low.

As for media and telecommunications industries, the markets are already mature and in desperate need of making inroads into emerging markets. Korea's pharmaceutical industry has a long way to restructure themselves away from making generic drugs based on imported technologies. In this way, careful assessment on the expected impacts on different industrial sectors is in order before companies make detailed strategic plans.

I'd like to propose five strategies Korean companies can employ to respond to impending change. First has to do with human resources. To many Koreans, the U.S. market seems a natural extension of its domestic market. Korean nationals living in the country are now over 2 million, in addition to 100,000 students attending American schools and universities. In addition, the visa waiver program would not doubt allow Koreans to travel back and forth more easily. More exchanges between the two countries will necessitate more demand for such services as legal service, consulting, and banking similar in quality to U.S. standards.

The everyday use of English that has driven Hong Kong and Singapore to the status of "business hubs of Asia" is likely to be a reality earlier than expected. While China means low-cost goods to Koreans, the U.S. means much more than that. Indeed, the U.S. is the leader in scientific knowledge, as well as in creative ideas and pop cultures.

Second, Korean companies are in dire need to familiarize in areas of laws relating to trade and investment, which would a prerequisite to becoming truly global players. Third, they must be able to plan ahead for five years to prepare for mergers and alliances as part of their preemptive strategy.

Fourth, surviving and prospering in the U.S. market can be a steppingstone for many Korean businesses on route to becoming global corporations. Once a company (or a product) is successful in the U.S. market, it could do well in others without facing difficulties.

Finally, the U.S.-Korea FTA should be considered an unprecedented opportunity to foster new growth engines while making the most of resources, such as technology and human talents. Korean companies could take this opportunity to break out of the predicament between cost-competitive Chinese and high-quality Japanese producers. If the companies can seize the chance, they will be able to raise their visibility on global level.

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