For U.S., free-trade agreement could be backdoor to China

By Howard Schneider
Washington Post Staff Writer
Monday, November 8, 2010; 7:46 PM

SEOUL - U.S. and South Korean officials are aiming this week to conclude a free-trade agreement that leaders of both countries say would benefit their nations and deepen ties between two long-standing allies.

But for the United States, it is also a test of whether American businesses can make inroads into one of the major Asian economies - and, in doing so, offset some of China's tremendous momentum.

The trade negotiations are taking place on the sidelines of the Group of 20 summit in Seoul this week amid a difficult political environment. Both President Obama and South Korean leader Lee Myung-bak face opposition to an agreement that some unions and corporations argue would put jobs and earnings at risk. For Obama, any agreement here would have to be followed by a tough sell in Congress, where there are concerns about the effect of trade on U.S. unemployment.

South Korea's trade surplus with the United States is relatively modest and has been declining recently. The streets of Seoul are full of American chain-store marquees and shops with American-brand labels.

But South Korea indirectly contributes to the United States' yawning overall trade deficit by playing an important supporting role in China's export juggernaut.

By the boatload, South Korea ships half-finished flat-panel televisions and other gadgets to Korean-owned factories in China, where they are assembled by lower-paid Chinese workers and sent abroad to the United States and elsewhere. This pattern helps run up the U.S. trade deficit with China while taking international pressure off South Korea to revamp its trade practices.

Although South Korea is not the only Asian country playing a supporting role for the Chinese, it is one of the few that has been running a major trade surplus with China - $38 billion in 2008, before the world economic crisis. A large portion of Korean exports to China are semi-finished goods ultimately on their way to the United States and Europe.

"The significant assembly lines are in China. Marketing, research and design is in Korea," said Sang-Ha Yoon, an economist with the LG Economic Research Institute, a division of the corporation that has become a dominant source of modern consumer electronics.

More is at stake in the negotiations, however, than bilateral trade. A deal with the United States could make South Korea a more attractive business partner for other countries, too. An agreement "will send a very positive message to the rest of the world that we are committed to liberalization," Lee said in an interview over the weekend.

For the United States, an agreement could represent the most-promising chapter in a long effort to recalibrate the balance of trade between the Western developed world and the world's manufacturing center in Asia. This has been an elusive American goal ever since Taiwan, Japan and later South Korea began emerging as industrial powers in the 1960s and 1970s, reshaping the worldwide auto and textile industries among others.

Asia, with its expanding middle class, growing wealth and rich opportunities for investment, may be the future engine of world economic growth. But U.S. officials and business executives continue to cite a range of trade frustrations, from India's tight grip on its service sector and Japan's close control of agriculture to Indonesia's strict ownership rules and China's management of its currency.

South Korea has unique sensitivities. After centuries of war and invasion, it remains a society both resilient and insecure - successful in the global economy, but divided from communist North Korea and reliant on a major U.S. military presence.

As a result, there is a national fixation on food security, which has produced stiff tariffs on imported agricultural products and prominent labeling for goods that use Korean ingredients. Hotel chains, for instance, advertise dishes with Korean ingredients on their menus and the Dunkin' Donuts chain here gives its Korean wheat-based confections a special display tray.

The tariffs are supposed to come down under the free-trade agreement. But building market share for foreign imports will be a separate challenge.

The mad cow scare that led to a ban on U.S. beef, for example, still lingers. While most U.S. beef is now allowed in - Lee faced riots when he lifted the prohibition, and the issue remains sensitive - Australian beef importers have seized much of the market, their product branded with a green "Clean and Safe" sticker. At one of Costco's Seoul stores, Australian meat filled nearly three-quarters of the refrigerated cases for fresh beef; U.S. products were in less than one-quarter.

"Regular people still have their biases, and it is more fixed than I thought," said An Hyun Mo, who opened the Gui Gui restaurant - Grill Grill in English - two months ago and only serves U.S. beef alongside a selection of pork. Some customers walk out when they see the label, others stick to the pork dishes.

Auto dealers cite similar cultural obstacles. Imported vehicles represent a small percentage of the Korean market, and U.S. firms such as Ford complain that the cultural and political bias for hometown favorites Hyundai and Kia will make a free-trade agreement meaningless in practice.

Sales representatives, including those with Ford, tell a more subtle story of a market that is becoming more accustomed to foreign brands, though slowly. The luxury auto market, where import sales are growing fast, is dominated by European companies, while cars such as the Ford Lincoln suffer from a reputation of being old-fashioned and not as well-made.

Jae Seok Hong, a Cadillac dealer in downtown Seoul, said his sales roughly doubled this year to about 15 cars a month, and he credits a marketing campaign that featured the main character in a popular soap opera driving a DTS Platinum.

Still, he acknowledged, the deferential nature of Korean society means that even customers who can afford to drive any car they want get pushed toward Korean-made Hyundais. For many Koreans, it would be taboo to arrive at work or a social function in a car that seemed flashier than the one owned by a boss or family elder.

"If you show up in a big imported car, there'd be a sense that you were showing off," he said. "It's a lot better than it used to be, but people in business still want to avoid the risk. Once the free-trade agreement is done, maybe sentiment will change. People will feel more comfortable."

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