5. International Legal Aspects: Conditions for the formation of an FTA under GATT/WTO

Since South Korea and Chile are WTO members, a prospective South Korea-Chile FTA is bound to meet FTA requirements set forth by the GATT/WTO. The GATT adheres to the basic principle of nondiscriminatory treatment between its contracting parties (Article 1, GATT) and has worked to eliminate trade barriers to all member nations. It does, however, in Article 24, approve of Free Trade Agreements (FTAs) and other regional agreements as intermediate solutions. Though such agreements, strictly speaking, violate the nondiscriminatory principle, it is likely they will in the long run lead to global liberalization.

Article 24 of the GATT/WTO and Article 5 of GATS define certain exceptions to the principle of MFN and set forth the following five basic FTA requirements:

First, even if an FTA is formulated, trade barriers with other contracting parties should not be raised (Article 24, Clauses 4 and 5?b?). If an intermediate treaty is concluded, it should include plans and schedules to establish a FTA within a reasonable period (Article 24, Clauses 5?c?). According to the interpretation of Article 24 agreed during the Uruguay round, a “reasonable period” is ten years. Countries participating in the FTA should immediately notify GATT/WTO members (Article 24, Clauses 7). Under the FTA, customs tariffs and other restrictive trade rules and regulations should be abolished for substantially all sectors (Article 24, Clauses 8?b?).

Yet, as the FTA between the US and Israel excluded the agricultural sector, the phrase “substantially all trade” has been interpreted to allow some latitude in the structure of trade agreements. Numerous free trade pacts have been negotiated without comprehensive coverage of agricultural trade. The Canada-US FTA exempts important farm products from its liberalization commitments, and these exemptions were carried over into NAFTA. NAFTA eliminates all farm trade barriers between the US and Mexico, albeit over a lengthy transition period, but allows the industrial countries to avoid free trade in agriculture. The European Union limits the scope of its farm trade reforms in all its preferential trade pacts, including its most recent FTA with Mexico. In each case, the partner countries justify their actions by arguing that agriculture is a small share of bilateral trade and that the pact covers “substantially all” trade.

In the case of the South Korea-Chile FTA, exempting such a politically sensitive sector as agriculture from the FTA liberalization schedule would be possible under the Article 24, even though such an exception is highly unlikely. The FTA including services trade should satisfy requirements similar to those stated above pertaining to the commodity trade (GATS Article 5, Clauses 1, 4 and 5–7)

South Korea and Chile have traditionally favored a multilateral approach to trade and investment liberalization. Both countries committed themselves to the rule-based requirements of GATT/WTO for forming a FTA in order not to undermine the basic principle of nondiscrimination and bring harm to third countries. This position is reflected in the three basic principles of the South Korea-Chile Framework Agreement: a comprehensive FTA, liberalization in all areas, and transparency in implementation. The international response to South Korea-Chile FTA is likely to be muted due to the non-threatening size of the agreements.

RECOMMENDATION

The South Korean government should conclude the FTA negotiation as planned. A South Korea-Chile FTA will not only bring economic benefits for South Korea, but will also help South Korea pursue further FTAs with larger economies in the long run. If negotiations fail, it may tarnish South Korea’s national image and credibility in the international trade community, making it difficult for the government to pursue FTAs with other countries. Given the suspicion in international society that South Korea’s push for economic reform began after the economic crisis had declined, the successful conclusion of the South Korea-Chile FTA will end doubts of South Korea’s commitment to economic reform and building an open trading nation.

Considering the political sensitivity of the agricultural sector and its poor competitiveness against Chilean agricultural imports, MOFAT should come up with a two-pronged strategy. The domestic strategy should build consensus on the sensitive agricultural issues, and the negotiation strategy should resolve differences with Chile over the agricultural concession schedule. It is critical that the government create a pro-FTA environment among the general public to prevent the politicization of the South Korea-Chile FTA during the presidential campaign period this November–December.

To achieve the goal, it is recommended that MOFAT implement the following measures:

• MOFAT should form alliances with proponent groups to shift the public discussion from ‘whether to conclude the FTA’ to ‘how to compensate potential losers’.
• Domestic consensus among stakeholders on agricultural market opening should be established, and measures on restructuring the agricultural sector and compensating farmers from damages should be formed.
• With domestic consensus, MOFAT should exert more flexibility in its concession schedule on less sensitive agricultural products and compromise with Chile to conclude the South Korea-Chile FTA.

DOMESTIC STRATEGY

The overall objective of the domestic strategy is the following:

• Educate the South Korean people about potential benefits and costs of the FTA
• Shift the negative public opinion about the South Korea-Chile FTA
• Build domestic consensus among stakeholders
• Shift nationwide debate from whether to conclude the FTA to how to compensate farmers
• Gain support from the general public on the early conclusion of the South Korea-Chile FTA and create consensus among presidential candidates to ensure parliamentary ratification of the agreement after elections.

The key messages to be conveyed through the domestic strategy are the following:

• South Korea is one of few countries without regional trade agreements
• As a result, South Korea’s exports face increasing discrimination in world markets, harming the South Korean economy
• Economic openness and liberalization is key to renewed economic success after the 1997 economic crisis
• South Korea-Chile FTA would bring significant economic gains
• The potential harm on the South Korean agricultural sector is small
• Compensation for farmers and an economic plan for agricultural reform will be developed (openness will eventually enhance the competitiveness of the agricultural sector)

1. Public Campaign Strategy

Objective

• Shape general consensus among the South Korean public on the necessity of an FTA for the national economic strategy
• Educate the South Korean public on the potential benefits and costs of a South Korea-Chile FTA
• Stress the government efforts to address the agricultural sector
• Make consumer and labor groups more aware of benefits to them in terms of lower prices and the creation of jobs
• General consensus among the South Korean public in support of the South Korea-Chile FTA will prevent presidential candidates from using the negotiation as an election issue to pander for farm votes in December.

Recommendation

MOFAT should propose a task force on South Korea-Chile FTA during the next session of Inter-Ministerial trade policy coordination committee (ITPCC), stressing the importance of a dynamic public campaign to achieve the early conclusion of South Korea-Chile FTA. Also, MOFAT might suggest promoting the South Korea-Chile FTA as a South Korea-Chile Regional Trade Agreement (RTA) to reduce pubic anxiety over free trade. The government should mobilize business groups, which will mainly benefit from the deal, to help promote the deal.

The task force will be comprised of the following ministries: the Ministry of Foreign Affairs and Trade (MOFAT), the Ministry of Finance and Economy (MOFE), the Ministry of Commerce, Industry and Energy (MOCIE), the Ministry of Agriculture and Forestry (MAF), and the Government Information Agency (GIA).

Action Plan

1. If the proposal is approved, the task force will pursue the following media strategy:
   • Publish an education booklet on the benefits of the South Korea-Chile FTA (GIA)
   • Disseminate information through various government agency websites on such benefits of the FTA as job creation and economic growth
   • Run public TV ads and full-page newspaper ads (GIA, business groups)
   • Run the op-Ed in major news papers (MOFAT, MOCIE, MAF, MOFE)
   • Engage government officials in TV debates on the issue (MOFAT, MOCIE, MAF, MOFE)
2. The government should mobilize business groups of the South Korea-Chile FTA, such as the South Korea Trade Association and the Federation of South Korean Industries, to start their own media campaign. The business groups could run TV ads and full-page ads in major newspapers on free trade’s benefits to the South Korean economy. The government should also urge state-sponsored research institutes like KIEP to submit articles to major newspapers and engage in public discussion on the benefits of a FTA to the South Korean economy.
3. The government should hold public hearings and seminars on the South Korea-Chile FTA. It should disseminate information brochures to the public regarding the benefits of FTAs and invite all stakeholders, NGOs, agricultural groups, etc., to the meetings for an exchange of opinions.

2. Domestic Consensus Building Strategy on Agricultural Liberalization

Objective

• Bring agricultural groups into dialogue
• Determine compensation for local farmers affected by South Korea-Chile FTA
• Develop a long-term agricultural reform policy to enhance the competitiveness of South Korea’s agricultural sector and brace for WTO agricultural negotiations
• Build domestic consensus on agricultural market opening and gain support from the agricultural groups toward the South Korea-Chile FTA

Recommendation

At the next session of ITPCC, MOFAT should propose the creation of a tri-party commission of representatives from government, business and agricultural groups to build consensus on the agricultural issue in South Korea-Chile FTA.

• The task of the commission is to reach an agreement among three parties on the following points, among others:
  • The agricultural sector will not oppose the deal and will engage in the process in a constructive way
  • The government will negotiate a gradual reduction of tariffs on agricultural products and will compensate affected farmers from the FTA.
  • The business community will cooperate with the government to compensate the affected sector from the FTA.
  • The business community to benefit from the FTA may agree to raise the so-called “FTA fund” to compensate the agricultural sector, especially the fruit industry.
  • The commission will agree to specific compensation measures to enhance the competitiveness of the agricultural sector and accelerate agricultural reform.

Action Plan

• Propose the idea to other ministries involved in the FTA negotiations: MAF, MOFE, and MOCIE
• Each ministry will consult with its constituent groups, that is, MAF with agricultural groups, and MOE and MOCIE with business groups
• If agreed upon by government agencies, agriculture, and business groups, MOFAT will present the proposal to the inter-Ministerial committee on trade policy coordination

3. Legislative Strategy (Election Strategy)

Objective

• To raise awareness among potential presidential candidates of the importance of the FTA with Chile for South Korea’s national economic strategy
• To shift possible debate among candidates from whether to conclude the FTA to how to compensate South Korean farmers and how to reform the agricultural sector
• To pave the way for parliamentary ratification of a South Korea-Chile FTA regardless of the election outcome

Recommendation

If strategies 1) and 2) as stated above succeed, there will be less incentive for presidential candidates to attack the current FTA negotiation. Still, the government must ensure that presidential candidates do not make the trade pact an issue to win farmers’ votes in the upcoming December election. It is advised that the government adjust the pace of negotiation and postpone finalizing the deal until after the election.

Action Plan

• Convince President Kim Dae-jung that if South Korea fails to finalize the deal, it will tarnish South Korea’s national image and credibility in the international community
  • Suggest to the President that he dissuade ruling party candidates from publicly denouncing the FTA deal, and instead direct candidates to stress the government pledge to compensate farmers and develop an agricultural reform plan to enhance farmers’ welfare.
• Mobilize business groups to lobby both opposition and ruling party members to support the South Korea-Chile FTA, stressing the benefits of export markets in Chile and Lain America.
• Request a meeting between government officials and the staffs of presidential candidates to educate them on the necessity of a South Korea-Chile FTA deal for South Korea’s national economy.
  • Underscore that it is in the best interests of both candidates to address the agricultural sector constructively rather than promise farmers to thwart the FTA negotiation.
    

NEGOTIATION STRATEGY

Objective

• Mitigate domestic farmers’ concerns
• Narrow differences with Chile over the exclusion of agricultural products from the free trade agreement
• Finalize the agreement

Recommended Proposal on apples, pears, grapes
To assuage farmers, the government might agree to a less beneficial concession plan for the manufacturing sector to achieve more concessions on agricultural, especially for the fruit industry.

Regarding the agricultural concession schedule,

• South Korea will not insist on excluding apples, pears and grapes
• Instead, the following can be suggested:
  • South Korea will consider seasonal tariffs on Chilean imported grapes
  • South Korea will agree to consider an extra-long tariff phase-out period of 15 years for apples and pears
  • South Korea will request that the agreement include special safeguard measures to protect against import surges for import-sensitive agricultural products.

Basic Arguments

In negotiating with Chile on the recommended concession schedule, the government should base its positions on the following arguments:

• South Korea is not ready to accept Chile’s demand that tariffs be abolished for all products, especially for agricultural items.
• Items particularly sensitive to imports were excluded or given extra-long tariff elimination periods in Chile’s FTAs with countries like Canada and Mexico.
  • For example, in the Canada-Chile Agreement, Chile tariffs on milling wheat imported from Canada will be eliminated only after 17 years.
  • The Chile-Mexico FTA excluded 46 commodities imported to Chile from Mexico (such as barley, wheat, flower, and seed oil), and 59 commodities (such as fisheries, diary products, and tobacco) imported to Mexico from Chile.
• It is politically impossible for the South Korean government to get ratification from parliament without special consideration for South Korea’s agricultural sector. If our proposal is not met, South Korea has no choice but to stop the negotiation.
• Cancellation of negotiations for an FTA will bring about negative effects for both South Korea and Chile in terms of image and credibility within the international community.

REFERENCES

Chan-Hyun Sohn and Ji-na Yoon, 2001. “South Korea’s FTA Policy: Current Status and Future Prospects.” Discussion paper 01-0. Seoul: KIEP

Economic Research Service U.S. Department of Agriculture, “Briefing room: South South Korea: policy.” Available at www.ers.usda.gov

The Economist, “Country Briefings: South South Korea” Available at www.economist.com/countries/South South Korea

The Economist, “Country Briefings: Chile.” Available at www.economist.com/countries/Chile

In-bum Choi and Jeffrey J. Schott. 2001. “Free Trade between South Korea and the United States?” Washington: Institute for International Economics

In-kyo Cheong and Kyoung-hee Lee, 2000. “South Korea-Chile FTA: Background, economic Effects and Policy Implication (in South Korean)”. Seoul: South Korea Institute for International Economic Policy (KIEP)

In-kyo Cheong, 2000. “Changes in South Korea’s policy toward regional trade Agreements”. Seoul: The South Korea Economic Institute

In-kyo Cheong, 1999. “South Korea-Chile FTA: South Korea’s Position”. Available at www1.kcci.or.kr/trade/civil/FTA.htm

Korea Herald newspaper. Various articles are available at www.Koreaherald.com,

Kim, Mi-hue “South Korea-Chile FTAS not likely unless farmers change attitude: Chilean expert.” The Korea Herald, 6 Feb, 2002

“South Korea, Chile to resume talks on free trade.” The Korea Herald 19 January, 2002

“South Korea-Chile FTA talks on verge of collapse.” The Korea Herald 6 March, 2001

“South Korea lagging behind in global FTA trend: KIEP report.” The Korea Herald 28 January, 2002

“Lawmaker calls for scrapping South Korea-Chile FTA plan.” The Korea Herald 7 November, 2000

“Local firms support FTA with U.S., China.” The Korea Herald 13 October, 2001

“Think tank calls for mechanism to promote free trade agreements.” The Korea Herald 5 February, 2002

Yoo, Cheong-mo. “Free Trade accord with Chile likely shelved until 2005.” The Korea Herald, 22 Feb, 2002

Various articles from the Korea Times newspaper are available at www.hankooki.com/times/htm

“Drifting Korea-Chile FTA.” Editorial. The Korea Times 27 March, 2001

Kim, Byong-Kuk “Korea and Free Trade Area”. Editorial. The Korea Times 2 May, 2001

Nho, Jun-hun “ ROK-Chile Free Trade Agreement Being Hampered by Agricultural Issues.” Editorial. The Korea Times 25 Feb, 2001

Ministry of Agriculture and Fishery, www.maf.go.kr

Ministry of Foreign Affairs and Trade, “Current Status of South Korea-Chile FTA Negotiation”, www.mofat.go.kr

Myoun-keun A, Ji-hyun Choi and Yeon-kook Choi. 2000, “Competitive Advantage of Chilean Fruit Industry(in South Korean), Policy paper 27-3: 132-146. Seoul: The Agricultural Business.

Myoun-keun A, Ji-hyun Choi and Yeon-kook Choi. 1999, “South Korea-Chile FTA : A strategy for agricultural sector(in South Korean)”. Research Paper, Seoul: South Korea Agriculture Economic Institute

Se-young An, 2001. “South Korea’s FTA Policy and Domestic Environment”(in South Korean), presented at FTA seminar at KIEP

U.S. International Trade Commission (USITC). 2001. “The Economic Impact of Establishing a Free Trade Agreement Between the US and the Republic of South Korea.” Report to the Senate Committee on Finance. Publication 3452. Washington: USITC

U.S. Trade Representative.2002. “2002 Annual Report.” Washington: USTR

The World Trade Organization, www.wto.org

Online newspaper, “Chile Reference Information.” LatinFocus,
www. latin-focus.com/factsheets/chile/chlfact_sectors_fruit.htm

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