Internal Negotiation of KORUS FTA: Korean Perspective
Hong Ryul Lee1
Abstract
The main objective of this study is to analyze internal negotiations of KORUS FTA in Korean
perspective using Putnam’s two-level game theory and Lohmann and O’Halloran”s model.
In the KORUS FTA, the nature of negotiation issue is heterogeneous; the reaction of domestic
interest groups is asymmetric; and the negotiation issue is politicized in Korea. President’s
leadership variable is flexible. Presidents tend to consider the national interests than his or
her political interests. The political leadership of the presidents had contributed significantly
to the conclusion of the FTAs.
The empirical results in the case of Korea show that except for inflation, other independent
variables do not have statistical significance. The impact of inflation on the tariff rate shows
negative. Regarding the effect of the President’s party, coefficients indicate that Republican
presidents in Korea tend to decrease the tariffs. This effect, however, is not statistically
significant at the 0 to 10 percent level. The result of the divided government shows that a shift
from a unified to divided government increases the tariff rate. However, this impact is not
clear, since it does not have statistical significance at the conventional level (0-10%).
Key words: internal negotiation, free trade agreement, two-level game, president’s party,
and divided government
1. Introduction
Korea needs to set up an FTA-based network with major economies to complement
the WTO’s multilateral trading system. Accordingly, pursuing FTAs on a multi-track
1
Senior Researcher of Institute of International and Area Studies, Sogang University
1
basis is a major pillar of its trade policy 2 . Korea enforces FTAs with Chile,
Singapore, EFTA, and ASEAN and is awaiting ratification of the concluded FTA
with the United States, EU, and India and is actively driving forward FTAs with
Canada, Mexico, GCC, Australia, New-Zealand, Peru, and Columbia. However,
Korea’s FTA shows slow progress due to the delay especially in its ratification. In
fact, Korea has faced many difficulties in the process of FTA negotiations, especially
in the phase of ratifications. Korea’s first FTA with Chile took four and a half years
from the initiative to the implementation. Meanwhile, both Korea and the U.S.
government reached an agreement on April 2, 2007, and signed the agreement on
June 30, 2007, but it is unclear when the agreement will be ratified due to the
domestic politics in both countries.
The United States has long been the most important trading partner for the Republic
of Korea. In 2006, the United States was Korea’s third-largest trading partner after
China and Japan, its second-largest export market, and its largest supplier of foreign
direct investment. In turn, Korea is one of the most important trading partners of the
United States. The volume of trade between Korea and the U.S. increased steadily
through the 1990s until 2000, when it saw a slight downturn due to a depression in
the economy. By 2006, however, exports from Korea had reached $43.2 trillion,
while imports from the U.S. had reached $33.7 trillion. The proportion of U.S.
exports to Korea out of its total goods exported was 3.1% in 2006, indicating that
Korea is the seventh largest exporter to the U.S. and the seventh largest importer.
Over the past five years, Korea-U.S. two-way trade has increased by almost 25%,
recovering from its sharp decline during the period from 2001-2002.
KORUS FTA is the United State’s largest FTA since the completion of the NAFTA
2
Korea’s trade policy is based on a multi-track strategy. The primary objective of Korea’s trade policy is
to build an advanced, free and open economy. To accomplish this, Korea is actively participating in
international cooperative efforts to establish a freer and more open world economic system. Also, Korea is
stepping up regional and bilateral cooperation efforts to respond to the new challenges of the global age.
2
and is the Korea’s largest FTA after enforcement of FTAs with Chile, Singapore,
EFTA, and ASEAN simultaneously. To come into effect, the U.S. Congress and the
Korean National Assembly must ratify the KORUS FTA. The FTA ratification
processes are likely to become politically active over FTA issues. In Korea, issues
such as agricultures, livestock, pharmaceuticals, intellectual property rights, and
screen quotas are difficult to be solved.
The objective of this study centers upon the following questions:
First, what is the nature of the domestic political problems in internal negotiations of
FTAs? Where do the domestic conflicts come from? What did interest groups do to
affect the outcome of the FTA and what were the reactions of the governments? To
answer these questions, we analyzed KORUS FTA and compared the determinants
of the outcomes of FTAs using the Putnam’s two-level game theory.
Second, what is the role of political factors, especially the president and the divided
government, on the level of protection? To do so, we employed the model of Lohmann
and O’Halloran (1994) to test the hypotheses. The study analyzes the impacts of
presidential party and divided government on the outcomes of trade policy in the
context of endogenous tariff formation.
2. Theoretical Framework
Schelling (1960) first pointed out the importance of domestic politics in international
negotiation. He introduced an intuitive idea, called “Schelling’s Conjecture,” that a
negotiator can take an advantageous position in international negotiations due to
domestic constraints. This “paradox of weakness” suggests that a negotiator is often
more successful than its unconstrained counterpart. In other words, a country can
take advantage of its divided government at the international negotiation table.
3
Studies of two-level games, initiated by Robert Putnam’s seminal 1988 study,
attempted to confirm Schelling’s conjecture that the constraints imposed by domestic
institutions could prove to be a bargaining asset in international negotiations. Putnam
(1988) raised the possibility that international negotiators might be able to use
domestic constraints to their advantage at the international negotiating table.
2. 1. The Nature of the Negotiation
Trading issues in international negotiations can create winners and losers at home.
Some constituents may enjoy the benefits from agreement, while others may face
high costs. As a result, the former will support the implementation of the agreement,
whereas the latter will strongly oppose it. Internal negotiation will therefore depend
on the relative size of the group of winners (supporters) and losers (opponents).
The success of FTA negotiation and ratification depends heavily on domestic
politics. Unresolved conflicts among domestic interest groups may be unproductive
and may prevent nations from cooperating for mutual benefit. This would appear to
be the case in agricultural negotiations: The potential gains from reducing tradedistorting subsidies and barriers are enormous, but strong agricultural interest groups
generally prevent the realization of these gains.
In sum, the nature of the negotiation issue can be either heterogeneous or
homogeneous. When the interests of constituencies are relatively homogeneous, it is
not so difficult for government to conduct a level II game. However, if the interests
of constituencies are heterogeneous—a typical example is FTA negotiation—
domestic politics (level II game) become complicated and difficult (Ahn, 2007).
4
2. 2. The Reaction of Domestic Interest Groups
Domestic interest groups often refer to Congress, government agencies, the business
community, labor, farmers, and civil societies. They pursue their interests by
pressuring the government to adopt favorable policies, and politicians can create
political power by constructing coalitions among those groups. The reactions of
domestic interest groups in FTA negotiations are different because they are affected
differently by the agreement. Thus, the reactions of interest groups may take various
forms to address their concerns in the negotiation of FTAs3.
Government is the main body of FTA negotiation and implementation. It means
that government has the treaty-making power while the Congress has the consent
power to the treaty. Therefore, the government has generally open and liberal
characteristics, while the Congress has more protectionist policy. For businesses,
there will be severe oppositions by import-competing industries that bear the
adjustment cost of FTA agreements, whereas the export-oriented industries will
generally support the conclusion of FTAs since they can increase their export
volume to FTA partners. The biggest concern of labors is employment. On the
positive side, more jobs can be created if FTAs can bring about new investment
and businesses. On the other hand, there can be significant job loss if FTAs
resulted in relocation of industries and/or closure of businesses. Despite the
welfare gains for countries as a whole by FTAs, trade negotiations have always
been tensioned in the agricultural sector. Generally, the agricultural sector is not
economically important but politically important. Because, even the agricultural
output accounts for a small portion in a country’s total GDP, a large number of
farmers in rural areas can have a strong impact on voting in the Congress.
3
For studies on the domestic politics of trade policy, see models of endogenous trade policy formation
(e.g., Baldwin, 1985; Trefler, 1993; Mayer, 1984; and Heo and Chung, 2008).
5
Therefore, the size of ‘win-set’ depends on the distribution of power, preferences
and possible coalitions among national constituents, as well as national political
institutions. Asymmetric and unpredictable reactions of domestic constituencies
raise transaction costs greatly (Cooper, 1995).
2. 3. Politicization of the FTA issue
Politicization means that people become politically active over FTA issues. It often
activates politicians and groups who are less concerned about the costs of
negotiation issues (Wilson, 1975). Marginal groups like consumer groups and NGOs
not belonging to either the winners or losers are persuaded to exercise political
influence by allying with losing groups, consequently aggravating the level II game.
Internal pressure has occurred from the increasing impact of citizen input and
bureaucratic politicking on the negotiation process (Winham, 1977). As a result, the
trade policy process is more likely to be subjected to political pressure from nontrade factors such as Congress, organized labor unions, consumer groups, and
environmental groups.
According to Putnam, side-payments are one of the two primary tactics of domestic
bargaining used by chief negotiators to facilitate ratification on international agreement
(Putnam, 1988). Side payment can be defined in a broader concept to include such
practices as compromise, concessions, vote trading, reciprocity, bribes, and issue
linkage (Milner, 1997).
The existence of side-payment opportunities may help to make win-set size larger
however once a FTA issue is politicized; the cost of compensation may outweigh the
anticipated benefit from the opening market.
6
2. 4. Political leadership
In FTA negotiations, political leadership refers to how a president exerts his or her
political leadership against the political reaction of the losers and the legislature in
the process of domestic ratification (Ahn, 2007).
In a democratic country, the executive holds more liberal attitude towards trade
policy than the Congress. Generally, President’s political leadership is subject to
restriction by the Congress under the divided government. A divided government
describes a situation in which one party controls the Presidency and the other party
controls Congress. Regarding the relation of the President and Congress, O’Halloran
(1990) shows that Congress delegates less authority to the president of an opposing
party, with the consequence that divided government is associated with higher levels
of protection.
Political leadership plays a pivotal role in FTAs negotiation and ratification
processes. presidential leadership can build up the national consensus on the trade
policy by resolving conflicts among interest groups. In other word, strong political
leadership makes the domestic politics easier.
2.5. Conclusion
Domestic politics affect the behavior of nations when they negotiate trade
agreements with other countries. This chapter focuses on the determinants of internal
negotiation and its interactions for implementing FTAs.
Studies of two-level games initiated by Putnam (1988) attempted to confirm
Schelling’s conjecture (1960). Putnam introduced four variables for analyzing the
internal negotiation: the nature of negotiation, the reaction of domestic interest
groups, politicization of the FTA issue, and the president’s political leadership. It is
7
difficult to establish national consensus on FTA issues when the nature is
heterogeneous, the reaction is asymmetric, the issue is politicized, and the
president’s leadership is low.
3. Analysis of the Internal Negotiation of the KORUS FTA
Robert Putnam highlights the importance of internal negotiation in his theory of twolevel games. Putnam (1988) observed that democratic governments trying to reach
international agreements are obliged to negotiate with their domestic political and
interest group leaders as well as with their foreign counterparts. The more open and
pluralistic a political system, the greater the need for the government to legitimize
agreements, and thus more energy must be devoted to this phase. In this session, the
study analyzed KORUS FTA and compared the determinants of the outcomes of
FTAs using the Putnam’s two-level game theory.
3.1 The Nature of the KORUS FTA
The nature of the negotiation issue is either homogeneous or heterogeneous as noted
by Putnam (1988). On the one hand, when the interests of constituencies are
relatively homogeneous, it is not so difficult for governments to conduct domestic
politics (Level II game). On the other hand, if the interests of constituencies are
heterogeneous, then domestic politics (Level II game) become very complicated and
difficult. ‘Heterogeneous’ means some domestic groups are winning in certain
negotiation issues, whereas other groups are losing.
Previous studies have noted that a KORUS FTA would mean economic benefits for
8
both countries, with substantial gains for Korea but modest gains for the U. S.
(USITC, 2001; Choi and Schott, 2001). Under a bilateral FTA, the GDP and welfare
of both countries is expected to improve, favoring U.S. agricultural exports and
Korean clothing and textile exports. Accordingly, USITC (2001) identifies these
areas as most likely to be sensitive issues during negotiations, as Korean clothing
and textiles exports would increase by $70 billion, while U.S. agricultural exports
(including processed goods) would increase by $140 billion. Expected winners and
losers are the Table 1 as below.
Table 1. KORUS FTA: Expected winners and losers
Study
USITC (2007)
Winners
Losers
Textiles, motor vehicles
Machinery and equipment,
and parts, electronic
chemicals, rubber and plastics,
equipment, and wearing
agricultural sector, pharmaceuticals,
apparel
and beef and other meat products
Lee and Lee
Textiles and apparel, motor
Electronics and machinery
(2006)
vehicles and parts,
equipment, processed food, other
chemical products
transport equipments
Although estimates vary across research, the KORUS FTA is anticipated to provide
significant economic advantages to both countries. Korea’s automobile, textiles and
apparel, and electronic appliances sectors would benefit while agricultural,
machinery and equipment, and pharmaceutical sectors would face great challenges.
In both countries, the sectors that will lose are those that tend to fare poorly in a
more competitive environment; therefore, those sectors will lobby their governments
or protest for restrictions or exemptions due to their nature as “sensitive industries.”
In the case of the KORUS FTA, the main elements of a support coalition are
9
government leaders who are negotiating the agreement, influential legislators who
favor it and economic interests that see themselves as gaining from it. Therefore,
those supportive were mainly Chaebols, research institutes, the MOFAT, and the
Blue House. However, those opposed were mainly labor unions, anti-globalization
groups such as the National Farmer’s Association, Korea Health and Medical
Workers Union, and the Korea Alliance Against KORUS FTA, who see themselves
as losers from the deal.
This split suggests that the FTA issue is very heterogeneous. In other words, winners
are easily distinguished from the losers. Specifically, opponents of the KORUS FTA
are concerned with a massive inflow of products from the U.S., especially
agricultural products. Conversely, proponents claim that free trade will spur
competition, which will in turn enhance national competitiveness, ultimately
contributing to enhanced national income and welfare.
Firstly, business groups from both sides champion the KORUS FTA, including the
Korea-U.S. Business Meeting and the American Chamber of Commerce in Korea
(AMCHAM Korea). Contrary to the Korea-Chile FTA, the business groups were
already prepared and guided as to how to exercise their political powers before the
negotiation process. Alexander Vershbow, U.S. Ambassador to the Republic of
Korea, addressed this issue by at the 2006 New Year’s Networking Dinner:
“Business community support should come in the form of detailed input, since
we need to understand your concerns and priorities and ideas for addressing
market impediments. But the support should come in other forms as well,
including outreach to legislators, the media, and the public. This support also
needs to start now, and last throughout the process, up to and including when it
comes time for ratification of the FTA by the U.S. Congress and the Korean
National Assembly”.
10
Although it appears that a majority of Korea’s business groups support the pact,
opposition has been intense at times, particularly among farmers, labor unions, and
rural residents. In general, opposition to a prospective KORUS FTA is expected to
come from Korean import-competing groups, particularly the agriculture sector,
which has benefited from high trade barriers. To be sure, as soon as the two
governments announced the beginning of the KORUS FTA negotiation, agricultural
interest groups made an aggressive move to advance their demands. Table 2 shows
the interest groups in KORUS FTA.
Table 2. Interest groups in KORUS FTA
Positions
Strongly support
Interest groups
Research Institutes: KIEP, KITA
Ministry of Foreign Affairs and Trade
The Blue House (The President)
Positive
Chaebols
The Federation of Korean Industries
Ministry of Finance and Economy
Ministry of Commerce, Industry, and Energy
The Korea Chamber of Commerce and Industry
The Korea Federation of Small and Medium Businesses
Grand National Party; Uri Party
Ministry of Agriculture and Fishery
Negative
Citizen groups, Labor unions
Strongly oppose
National Farmer’s Association
Korea Health and Medical Workers Union
The Korean Alliance Against KORUS FTA
11
Some of the opponents to the KORUS FTA are against economic liberalization
altogether. They argue that potential damage to some industries caused by opening
the market should be taken into greater consideration and that any market opening
should be delayed until more uncompetitive industries are fully ready. Such urgings
hark back to the 1997 financial crisis and the ensuing liberalization of the financial
services market as a cautionary example. Some militant FTA opponents go so far as
to oppose globalization itself, viewing any liberalization as a prelude to further
income disparity in Korean society.
3.2 Reaction of Domestic Constituencies
The reactions between the winners and losers of the KORUS FTA are asymmetric.
Given its paramount importance, the prospective KORUS FTA has drawn great
attentions and concerns from groups that are both for and against it. At the very
beginning of the FTA’s announcement, opposing groups voiced their concerns
regarding the trade pact and threatened to disrupt the FTA.
On March 28 of 2006, 270 civic organizations representing millions of workers,
farmers, intellectuals, artists, and citizens formed the Korean Alliance Against the
KORUS FTA, and shortly thereafter on April 16, thousands of trade unionists,
farmers, students, and major celebrities marched in Seoul to demand that the
government both abandon talks and allow the public to view the earlier negotiation
process (Kim, 2007). Therefore, under the umbrella of the Korean Alliance Against
the KORUS FTA and Korean Confederation of Trade Unions, hundreds of
demonstrations have taken place with tens of thousands of participants at various
places such as the Central Government Complex, City Hall, National Assembly, and
negotiation places (e.g., Shilla Hotel, Washington D.C.). They utilized various forms
of protest, including mass demonstrations, handing out flyers, gathering signatures
12
(the target was to obtain 12 million signatures), launching cyber attacks by sending
thousands of e-mails to the White House, and burning flags.
Unlike in the case of Korea-Chile FTA, winners from KORUS FTA are very active
to express their political support for the trade pact. Korean business communities
that are under the umbrella of the Korea-U.S. Business Council, Korea Chamber of
Commerce and Industry (KCCI), Korea International Trade Association (KITA),
Federation of Korean Industries, and Korea Federation of Small and Medium
Business, have all urged the government and political factions to conclude and ratify
the trade deal. Their lobbying activities have included holding lectures, seminars,
and press conferences; staging demonstrations; placing advertisements in the media;
handing out flyers; and meeting with congressmen. This difference reflects that the
stake of the trade pact is too big for them to ignore or be silent. “A KORUS FTA
will expand bilateral trade and benefit both nations by increasing investment,
strengthening technological cooperation, and promoting personal exchanges,” said
the Korea-U.S. Business Council’s Chairman Cho Suck-rae. He added, “To facilitate
the FTA, the two sides need to persuade those opposing it in each nation.”4
The trade pact also divided politicians across factions. In the main opposition Grand
National Party, 46 lawmakers including Chairman Kang Jae-sup supported signing
the FTA, whereas 12 lawmakers from rural constituencies opposed it. Some 36 were
undecided. Uri Party lawmakers were evenly divided into supporters, opponents, and
undecided. The Party Chairman Chung Se-kyun supported the trade deal on the
condition that the agricultural industry would be protected. But Uri Party floor leader
Chang Young-dal was against signing. In the group of Uri Party defectors, one was
in favor of signing this year, six were against and seven undecided. In the
Democratic Labor Party, all nine lawmakers opposed concluding the trade deal.
4
Korean, U.S. Business Leaders Vow to Support FTA, Chosun Ilbo, June 21 2006.
13
The survey results also consolidated these reactions. In a survey conducted by the
Chosun Ilbo and Gallup Korea, 58.5 percent said they think the KORUS FTA is
good for Korea, whereas some 30.6 percent regard the FTA as bad for Korea.
However, it varies according to occupations. Most of those who are self-employed
business owners and wage earners gave a positive response at 63.6 percent and 57.3
percent, respectively, but farmers and fishermen responded negatively at 61.6
percent5. In particular, leading business people and journalists alike are to be in
favor of the proposed KORUS FTA, citing the competitive edge such a deal will
bring to Korea.
The Korean government began to implement the TAA6 system in May 2007 to
financially support firms whose sales, production, and profits decrease and workers
who are completely or partially laid off or threatened with job loss due to increased
imports. This TAA program is not simply to compensate for their losses due to the
intensified import competition, but to help them adjust to a more liberalized trade
environment. According to the Korean Ministry of Commerce, Industry and Energy,
Korea is planning to allocate 92% of the budget (US $2.85 billion) to firms and less
than 8% to workers during the next 10 years.
A study on import competition and job displacement using a regression model for
the period of 1993-2003 shows that import competition raises the job displacement
rate in the Korean manufacturing sector, but the elasticity is negligible in its
magnitude. Workers’ characteristics, such as gender, age, job tenure, and education
level proved to be significant in determining the displacement rate (Heo, 2008).
However, the TAA program is essential for the Korean government to smoothly
implement the KORUS FTA as well as other already concluded or prospective FTAs
5
Three in Five Koreans Support FTA: Poll, Chosun Ilbo, April 04, 2007.
Trade Adjustment Assistance (TAA) is a government compensatory and assistance program that aims
to help reimburse domestic firms and workers for their material loss or expected loss as a result of
policies implemented toward a freer trade regime.
6
14
by facilitating the internal negotiations.
The Korean TAA system can be characterized as an industrial policy aimed at
strengthening the manufacturing and related industries, expanding support to small
and medium firms, and minimizing the roles of the Ministry of Labor. Therefore, the
government is obliged to prove its efficiency based on operational results. It is
reasonable to curtail or abolish the detailed programs that could create possible
problems of ‘moral hazard’ or ‘adverse selection.’ If the newly introduced system
adequately accomplishes the promotion of restructuring and operates successfully as
an effective means for internal negotiations, the system will create a new “TAA
model of Korea.” On the other hand, if the system fails to serve its objectives and
simply succeeds in retaining “marginal firms in comparative disadvantage,” the
system’s poor performance will threaten the system’s own existence. Even if the
TAA system continues to exist, it will inevitably be converted into a workercentered program instead of a firm-oriented program (Heo, 2008).
3.3 Politicization of the KORUS FTA
Given the general unwillingness of the Roh Administration to allow and facilitate an
open discussion of the proposed FTA, and the failure of the National Assembly to
take the lead in a public conversation about the merits and weaknesses of a proposed
FTA, it should come as no surprise that important sectors have organized and
emerged in opposition to both the negotiations and the FTA itself (Kim, 2007).
Declaring themselves as losers, some 270 civic groups including the Korean
Confederation of Trade Unions (KCTU)7, the Federation of Korean Trade Unions
7
The Korean Confederation of Trade Unions (KCTU) is a national trade union center officially
established in 1995. With 682,418 members in 2007, the KCTU accounted for 40.6% of trade union
15
(FKTU) 8 , and the Korean Federation for Environmental Movement formed a
coalition against the trade pact with the U. S. right after the announcement of
KORUS FTA negotiation schedules9. Protest participants against a planned FTA
with the U.S. increased from 8,000 in early April to 25,000 in early July, with most
of those being farmers and firm industry people 10 . But many generally antiAmerican organizations that also led violent protests against a new U.S. Forces
Korea headquarters in Pyeongtaek have joined them, leading to charges that the
protests have turned into an anti-American movement. Protestors even used cyber
attacks by sending a flood of 30,000 e-mails to the Web sites of the U.S. Department
of Defense, the White House and President George Bush with a minimum of 10,000
participants11.
Moreover, hunger sit-ins staged by three ruling-camp lawmakers, Chung Dong-young,
Kim Geun-tae, and Chun Jung-bae, made the issues become very politicized. They all
served as cabinet members in the Roh Moo-hyun administration, played key roles in
the formation of the Uri Party, and are presidential contenders12. Their opposition is
based on political calculations. They want to take full advantage of this opportunity to
manipulate voters. They want to stay aloof from the unpopular President Roh Moohyun, a champion of the FTA, and to seize the initiative in reorganizing the ruling
camp.
Popular opposition to the FTA has developed quickly, and a general concern over
members in Korea. The KCTU has more than 1,200 affiliated enterprise-level trade unions and it is the
second-largest trade union in Korea, following the Federation of Korean Trade Unions (FKTU).
8 The Federation of Korean Trade Unions (FKTU) was formed in 1961 after a military revolution and the
dissolution of the General Federation of Korean Trade Unions and its affiliates. The FKTU was placed
under the guidance of the military authorities. The FKTU was the sole legal trade union center in Korea
until the Korean Confederation of Trade Unions (KCTU) was finally recognized in November 1999. The
FKTU is affiliated with the International Trade Union Confederation, and in 2007 had 740,308 members.
9 Government Faces Revolt Over Free-Trade Deal With U.S., Chosun Ilbo, April 10, 2006.
10 Massive Anti-FTA Protests Paralyze Seoul, Chosun Ilbo, July 12, 2006; Thousands March Against
FTA With U.S., Chosun Ilbo, April 16, 2006.
11 Anti-FTA Faction to Launch Cyber Attack on U.S., Chosun Ilbo, April 10, 2006.
12 Anti-FTA Hunger Strikes Disrupt Parliament, Chosun Ilbo, March 28, 2007.
16
the potential negative consequences of a free trade agreement is now openly
expressed in Korean civil society. As the Figure 1, the disapproval rate of the FTA
increased from 29.2 percent on June 7, 2006 to 42.6 percent on July 6 and broke the
50 percent barrier on July 2213. More people are paying attention to the opposing
voice after the launch of Pan-national Movement Headquarters to Frustrate the
KORUS FTA, and some TV programs focusing on the lives of poor Mexicans after
the implementation of NAFTA.
Figure 1. Poll: Do you support KORUS FTA?
80
58.1
%
60
Yes
45.4
50.0
46.3
40
42.6
29.2
No
20
0
June 7
July 6
July 22
Source: Park, 2006
Moreover, most U.S. and Korean polls conducted in recent years have shown that
Korean perceptions and attitudes toward the U.S. reveal the greatest degree of
13
Park, Song-wu, Half of Koreans Oppose US FTA, Korea Times, July 31, 2006
17
polarization across generations. Younger Koreans in particular are very critical of
the U.S. For the much older Koreans who remember the cruelty of Japanese colonial
rule and the devastation of the Korean War, the U.S. is viewed gratefully as a
“savior.” As the perception of the North Korean threat diminished, however, Korean
youths increasingly began to view the U.S. military forces in Korea as infringing on
Korea’s national sovereignty rather than as a deterrent against the North (Lee, 2004).
The FTA enjoys strong, high-level support within President Roh Moo-hyun’s
Administration. Despite the government’s support, however, nearly a quarter of
National Assembly members opposes the agreement and will seek to block its
passage14 . This is because lawmakers are afraid of angering massive opposing
groups ahead of elections in December and April. Thus, over 70 lawmakers have
already indicated that they will submit a request for the National Assembly to
examine the agreement’s negotiation process and its potential effects on Korea’s
future trade policy. A number of prominent politicians, including two former
chairmen of Roh’s Uri Party who are running for president, publicly stated their
opposition to the KORUS FTA. To pass the trade pact, the agreement must receive a
simple majority, with at least half of the National Assembly’s members present
during the vote. Prior to a full vote, the agreement must undergo consideration by the
Unification, Foreign Affairs, and Trade Committees.
3.4 Political Leadership
Political leadership reflects the President’s ability to persuade opposing groups and
lawmakers on the process of FTA negotiation and domestic ratification through direct
dialogue with them. The Korean president is considered as the most influential factor
in Korea’s FTA policymaking. With the launch of the Participatory Government in
14
Kim Sue-young, “Han Calls for FTA Ratification.” The Korea Times, September 7, 2007.
18
2003, President Roh Moo-hyun has taken a very active role in expanding FTA partners.
In the case of the proposed KORUS FTA, President Roh has identified this FTA as
one of his priorities for the remainder of his term. Therefore, President Roh has
showed his strong political leadership on the ongoing KORUS FTA. He has appeared
regularly on the press and made every effort to convince the public by repeatedly
emphasizing how Korean people would gain from the prospective KORUS FTA.
Actually, the agreement holds the potential of changing the Korean economy from
top to bottom. In an extreme sense, it can be likened to a deal that forges the two
nations together economically as one country. But it also entails the risk of
subjecting the economy to that of the U.S. if Korea fails to adequately adapt itself to
the new economic environment15. That's why it was a difficult job for any leader to
initiate. In this regard, President Roh’s leadership deserves praise for the
achievement.
During his 2006 New Year’s address on January 18, President Roh first took up
the KORUS FTA, saying: “We should conclude an FTA with the United States for
the future of our economy.” His intension was to show the public that an FTA with
the U.S. is not a short-term vision. President Roh emphasized the long-term
perspective of the FTA’s role, which can make the Korean economy stronger. He
believed that an open-door policy is the only means to bring further development
and prosperity to the country.
He also met and talked directly with opposing groups in order to persuade them or
accommodate anti- KORUS FTA groups. As a result, rice is excluded from the
concession lists; Korea will maintain current tariffs on oranges, beans, powdered
milk, and other imported agricultural products, as well as maintain safeguard
measures and a tariff rate quota (TRQ) on such goods as pork, beef, and other
15
Roh’s Determination Leads to Successful FTA, Korea Times, April 4, 2007.
19
agricultural products. He told them that “we can't become an advanced nation
without challenge,” which did earned a great deal of support from many people.
President Roh straightforwardly denounced anti-FTA protestors whose “groundless,
exaggerated” arguments had “misled the public.”16 He also urged them to frame
reasonable arguments in the future:
Every time I meet someone opposed to it, I ask them what areas other than
agriculture and pharmaceuticals are going to be in difficult times and see
unemployment, but no one has been able to give me a clear answer. So it’s
frustrating to have people just go on with vague talk about how socioeconomic
disparity is going to get worse without showing me any evidential basis for
that.17
In order to address the concerns and persuade domestic interest groups, President
Roh also vowed to compensate farmers, fishermen, and other adversely affected
sectors that are expected to be the losers from the deal, if they see their income
dwindle or are driven out of business due to a surge in imports of their products.
About US$ 131 billion will be provided to farmers and fishermen who are negatively
affected by the KORUS FTA through 2013. In early November of this year, it will
be determined that an addition fund of U$ 20.4 billion will be spent from 2014 to
2017 to bolster agricultural competitiveness and expand the market for local farm
products as more imports are expected to enter the country.
However, President Roh turned his political leadership after the conclusion of
KORUS FTA. It makes the ratification of the agreement difficult. In fact, the
KORUS FTA should have been ratified within the closing days of the Roh
administration. Instead, President Roh intentionally shifted his responsibility for the
16
17
Korea must face FTA Challenge: Roh, Chosun Ilbo, April 3, 2007.
Roh needs to talk to those opposed to FTA, The Hankyoreh, April 9, 2007.
20
ratification to the next government. To be sure, this maneuver was grounded on a
political calculation aiming at the next presidential election and the general election
of national assembly members. He concentrated his effort on the extension of his
political power code, not on the future of the country. Moreover, on his website,
Democracy 2.0, President Roh, who had pushed for the FTA talks and concluded
them, emphasized the preparation of renegotiation instead of ratifying the agreement.
His unpredictable behavior is one of obstacles to the ratification of the KORUS FTA.
3.5. Conclusion
In KORUS FTA, the nature of negotiation issue is highly heterogeneous; the
reaction of domestic interest groups is highly asymmetric; and the negotiation issue
is politicized in Korea. The United States and Korea are both in a similar situation in
this context only except for president leadership. However, the President’s
leadership variable is flexible.
Presidents tend to consider the national interests
than his or her political interests. Due to the high domestic constraints in both
countries, it will be difficult to ratify the KORUS FTA both in the U.S. and in Korea
in the near future.
In short, the role of the political leadership in the success of an FTA should not be
ignored. The political leadership of the presidents had contributed significantly to the
conclusion of the FTAs. Therefore, in this globalizing world, Korea’s political
leadership should be advanced in order to ratify the KORUS FTA earlier and to
competitively pursue many FTAs.
4. Analysis on the Role of President and Divided Government
This section employs the model of Lohmann and O’Halloran (1994) to test the role
of the president in trade policy and the Schelling’s Conjecture. The study analyzes
21
the impacts of presidential party and divided government on the outcomes of trade
policy in the context of endogenous tariff formation.
4.1. Data Description and Sources
In this section, the factors that may affect the level of protection (represented by the
tariff rate) will be analyzed18. In an effort to identify the underlying factors that
account for the variation of tariffs across countries, data on unemployment, inflation,
the president, and divided governments19 are collected. Higher unemployment often
stimulates interest groups in affected industries to intensify their efforts for
protection, while voters might object less to the negative effects of the protection on
equity grounds. Concerning to inflation, it may have two alternative impacts on the
level of protection. Either higher inflation will lead to more imports and thus to
pressure for more protection or higher inflation will lead to consumers as voters
demanding less protection in order to lessen inflation (Bohara and Kaempher 1991).
In terms of divided government, the hypothesis is that trade policy tends to be more
protectionist under divided than under unified governments. This is because of the
expectation that the members of the majority party in congress would never choose
to constrain their president under a unified government. However, the members of
the majority party may take measures to constrain fully or partially under a divided
government. Therefore, in a given year, if Congress and the president are controlled
by opposing parties, this variable takes on the value of zero. The dummy variable
PRESIDENT takes on the value of unity if the President is a Republican and zero if
the President is a Democrat. Table 3 describes how to derive these variables.
18
Another approach to determine the level of protection endogenously is based on the characteristics
of industries such as establishments, industrial growth, employments, import penetration, and export
intensity (see Heo and Chung, 2008; Trefler, 1993 for detail).
19 A divided government describes a situation in which one party controls the Presidency and the other
party controls Congress. On the other hand, a unified government means that the Presidency and
Congress are controlled by the same party.
22
Table 3: Description of Data Set
Variable
Description
TARIFF
Tariff Revenue/Imports x 100 (%)
UNEMPLOY
Unemployment Rate
INFLATION
Rate of change in the Urban Consumer’s Price Index: (CPIt – CPI t1) / CPI t-1 x 100 (%)
PRESIDENT
Dummy variable equals 1 if Republicans control the Presidency; 0
if Democrats control it
DIVIDED
Dummy variable equals 1 if Congress and the Presidency are
controlled by the same party; 0 if Congress and the Presidency are
controlled by opposing parties.
Note: *) The majority is calculated by summing up the number of same party members in the House
and the Senate for the U.S.A. and Chile. Korea has the unicameral system, while the U.S.A. and Chile
have a bicameral system, respectively.
Data for this study was drawn from the ranges of 1974 to 2006 depending on the
available data for Korea. The time series approach adopted here is similar to the
approach employed in previous studies (see Takacs, 1981; Gardner and Kimbrough,
1989; Magee, Brock and Young, 1989; Lohmann and O’Halloran, 1994; and Clark,
1998). The dependent variable is the level of protection, as measured by the value of
duties collected as a percentage of the value of total imports (TARIFF). Tariff rates
are often a good proxy of how protectionist trade policy is at a given time, so their
trend gives us some idea of the changes in the stance of trade policy. Obviously, this
measurement is limited in the sense that non-tariff barriers (NTBs) are not taken into
account. This is because NTBs are difficult to measure and collect. The aggregate
economic conditions are measured by the inflation (INFLATION) and the
unemployment rate (UNEMPLOY). These variables are proxies for protectionist
demands. These measures are similar to those used by Magee, Brock, and Young
(1989), Bohara and Kaempher (1991), and Lohmann and O’Halloran (1994). To
23
achieve such a long time series, the tariffs from various sources were collected.
Data on tariffs during the 1975 to 1990 period of Korea was extracted from Urata
(1994), while its data during 1991 to 2006 was extracted from OECD Revenue
Statistics (2008). Data on unemployment is obtained from the Korean Statistical
Information Service. And inflation data is from the Economic Statistics System of
the Bank of Korea. Table 4 summarizes for the statistics for these variables.
Table 4: Descriptive Statistics of Korea, 1975-2006
Variable
Obs.
Mean
Std. Dev.
Min
Max
TARIFF
32
6.13
2.74
2.32
11.44
UNEMPLOY
32
3.59
1.12
2.00
7.00
INFLATION
32
7.70
7.03
0.80
28.70
PRESIDENT
32
0.72
0.46
0.00
1.00
DIVIDED
32
0.88
0.34
0.00
1.00
4.2. Regression Model
Following the Lohmann and O’Halloran (1994) empirical study 20 , the basic
econometric model is defined as the below:
Lohmann and O’Halloran’s (1994) tested the level of protection using macro economic variables
like inflation and unemployment, President’s party (Republican or Democrat), and Government form
(Unified or Divided) for the case of the U.S.A. during 1949 to 1990.
20
24
Subsequent models extend the basic model by adding one or more differenced
political variables to the right-hand side of this equation.

TA
TA
Clark (1998) added ΔTARIFFt-1 to the right-hand side of the equation with the
purpose of controlling the autocorrelation problem that is likely to occur. The final
econometric model is thus processed as follows:
4.3. Estimation results and Discussions
The result for Korea is presented in the Table 5. The empirical results in the case of
Korea show that except for INFLATE, other independent variables do not have
statistical significance. What can be the cause for these results? First, the negative
impact of inflation on the tariff rate means that when inflation goes up, the tariff rate
tends to decrease. Facing consistent high inflation rates during the 1970s and early
1980s, the Korean government had used the tariff rate as one of the major tools to
curb inflation. The nominal average tariff rate was reduced from 23.7 percent in
1983 to 12.7 percent in 1989. Simultaneously, the percentage of freely importable
items out of all imported commodities had been increased from 67.5 percent in 1979,
to 93.6 percent in 1987 (World Bank, 1987; Kim, 2008).
25
Table 5. Regression Results for Korea
Independent variable
Constant
Regression Results
-0.11
(-0.53)
0.24
(1.40)
-0.08*
(-1.76)
-0.39
(-1.18)
-0.80
(-0.45)
0.62
(0.81)
32
0.15
2.21
TARIFFt-1
INFLATE
UNEMPLOY
PRESIDENT
DIVIDED
No. of observations
Adjusted R2
Durbin-Watson
Notes: 1. Dependent variable TARIFF
2. ** and * represent the statistical significance at 5 percent and 10 percent level, respectively.
3. Numbers in parentheses are t-statistics
Regarding the effect of the President’s party, coefficients indicate that Republican
presidents in Korea tend to decrease the tariffs. A shift from Democrats to
Republicans leads to the average tariff decreasing by 0.8 percent. This effect,
however, is not statistically significant at the 0 to 10 percent level. Again, the notion
that not all Democrats act like Democrats, and not all Republicans act like
Republicans, is well suited in explaining this result. President Roh Moo Hyun, for
example, is a Democrat, but he initiated numerous FTA negotiations, including FTA
negotiations with Singapore, ASEAN, Mexico, MERCOSUR, and the United States.
The result of the divided government shows that a shift from a unified to divided
government, on average, increases the tariff rate to 0.62 percent. However, this
26
impact is not clear, since it does not have statistical significance at the conventional
level (0-10%). This result implies that the impact of a divided government is not
robust and divergent enough to determine the differences between Democrats and
Republicans.
To be sure, despite considerable empirical studies exist regarding the impact of a
divided government on the setting of trade policy, empirical results have been
divergent. On the one hand, Lohmann and O’Halloran (1994) find that a divided
government should lead to higher levels of protection. On the other hand, Sherman
(2002) argues that divided government should lead to lower levels of protection, at
least in the post-War United States, while Karol (2002) argues it should have no
consistent effect. Ehrlich (2007) demonstrates how the access point theory can be
used to investigate the role of a divided government and finds that a divided
government has no significant effect. In addition, Tsebelis's results indicate that the
more divided the government is in a foreign country, the less likely cooperation
would be. Using Tarar (2001) theory, this negative impact of divided government on
tariff level demonstrates that a country’s domestic constraint is weaker than its
counterpart’s.
5. Conclusion
The main objective of this study is to analyze internal negotiations of free trade
agreement of KORUS FTA in Korean perspective using Putnam’s two-level game
theory and the model of Lohmann and O’Halloran. The study provides evidences to
support the Putnam’s two-level game theory on how domestic negotiations take
place, what channels interest groups influence a government’s trade policy and
negotiation strategies, and how domestic politics can be linked to the international
negotiation. The study also analyzes the impacts of presidential party and divided
27
government on the outcomes of trade policy in the context of endogenous tariff
formation. Major findings are summarized as follows.
In sum, in the KORUS FTA, the nature of negotiation issue is highly heterogeneous;
the reaction of domestic interest groups is highly asymmetric; and the negotiation
issue is politicized in Korea. The president’s leadership variable is flexible.
Presidents tend to consider the national interests rather than his or her political
interests. In short, the role of the political leadership in the success of an FTA should
not be ignored. The political leadership of the presidents had contributed
significantly to the conclusion of the FTAs.
The empirical results in the case of Korea show that except for inflation, other
independent variables do not have statistical significance. The impact of inflation on
the tariff rate shows negative. That is, when inflation goes up, the tariff rate tend to
decrease.
Regarding the effect of the President’s party, coefficients indicate that Republican
presidents in Korea tend to decrease the tariffs. This effect, however, is not
statistically significant at the 0 to 10 percent level. Again, the notion that not all
Democrats act like Democrats, and not all Republicans act like Republicans, is well
suited in explaining this result.
The result of the divided government shows that a shift from a unified to divided
government increases the tariff rate. However, this impact is not clear, since it does
not have statistical significance at the conventional level (0-10%). This result implies
that the impact of a divided government is not robust and divergent enough to
determine the differences between Democrats and Republicans.
28
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32
Appendices
Appendix 1: Korean FTA Partners: Current and Future
FTA Countries
2005 GDP*
Korean merchandise trade, 2005 (million $)
(billion $) Exports to
Imports
Two-way
from
Trade
Balance
1678.98***
37080
35479
72559
1601
ASEAN-Korea FTA
886.67
27432
26064
53496
1368
Chile-Korea FTA
111.34
1151
2279
3430
-1128
Singapore-Korea FTA
116.78
7407
5318
12725
2089
EFTA-Korea FTA
680.97
1090
1818
2908
-728
33395.31
120862
111461
232323
9401
India-Korea CEP
808.88
4598
2112
6710
2486
Japan-Korea FTA
4559.02
24027
48403
72430
-24376
Canada-Korea FTA
1131.76
3446
2604
6050
842
13671.41
43659
27296
70955
16363
768.44
3789
460
4249
3329
United States-Korea FTA
12,455.80
41343
30586
71929
10757
FTA Under Consideration
4650.10**
164476
149147
313623
15329
Australia-Korea FTA
709.45
3812
9859
13671
-6047
Thailand-Korea FTA
176.6
3381
2689
6070
692
MERCOSUR-Korea FTA
1003.21
2828
2903
5731
-75
South Africa-Korea FTA
242.05
1320
1094
2414
226
Malaysia-Korea FTA
130.77
4608
6012
10620
-1404
New Zealand-Korea CEP
109.61
670
891
1561
-221
China-Korea FTA
2278.42
61915
38648
100563
23267
CJK FTA
6837.44
85942
87051
172993
-1109
39724.40
322418
296087
618505
26331
Current FTA Partners
Under negotiation
EU-Korea FTA
Mexico-Korea FTA
Total
Note: *) only GDP of partner countries; **) exclude Japan and China’s GDP; ***) exclude Singapore’s
GDP, Source: United Nations; KITA, 2007
33
PRES
Appendix 2: Regression Data for Korea
YEAR GOVE
TARF1)
UNEP2)
J.H. Park (R)
1975
Unified
6.18
4.1
25.3
1976
Unified
8.62
3.9
15.3
1977
Unified
9.68
3.8
10.1
1978
Unified
11.44
3.2
14.5
1979
Unified
9.99
3.8
18.3
K.H. Choi (R)
1980
Unified
8.18
5.2
28.7
D.H. Chun (R)
1981
Unified
7.15
4.5
21.4
1982
Unified
7.95
4.4
7.2
1983
Unified
9.41
4.1
3.4
1984
Unified
8.28
3.8
2.3
1985
Unified
7.61
4.0
2.5
1986
Unified
8.91
3.8
2.8
1987
Unified
10.03
3.1
3.1
1988
Divided
8.83
2.5
7.2
1989
Divided
7.09
2.6
5.7
1990
Divided
7.87
2.4
8.6
1991
Divided
5.82
2.4
9.4
1992
Divided
4.94
2.5
6.2
1993
Divided
4.29
2.9
4.8
1994
Divided
4.19
2.5
6.3
1995
Divided
4.45
2.1
4.5
1996
Divided
4.39
2.0
4.9
T.W. Noh (R)
Y.S. Kim (R)
34
INFL3)
D.J. Kim (D)
M.H. Noh (D)
1997
Divided
4.21
2.6
4.4
1998
Unified
2.93
7.0
7.5
1999
Unified
3.29
6.3
0.8
2000
Unified
3.2
4.1
2.3
2001
Unified
3.25
3.8
4.1
2002
Unified
3.47
3.1
2.8
2003
Divided
3.21
3.6
3.5
2004
Divided
2.64
3.7
3.6
2005
Divided
2.36
3.7
2.8
2006
Divided
2.32
3.5
2.2
Sources: 1) Tariff Rate: 1975-1990; Urata (1994) and 1991-2006; OECD Revenue Statistics (2008), 2)
Unemployment Rate: Korean Statistical Information Service (www.bok.or.kr), 3) Inflation Rate:
Economic Statistics System of Bank of Korea (www.bok.or.kr).
35