Running Out of Time

When South Korea reopened its lucrative beef market to the United States in late October, ending a nearly three-year ban stemming from the outbreak of mad-cow disease, American beef exporters were upbeat. After all, beef sells for three times more in Korea than it does in the United States. Their joy was brief. Korean quarantine inspectors sent back the first three shipments on the grounds that they were in violation of an agreement restricting imports only to U.S. beef that is free of bones. After a painstaking search of the 22,000-kilogram shipment, the inspectors unearthed 11 pieces of bone, each smaller than a bean.

Beef producers aren't the only U.S. businesses that have found the Korean market difficult to crack. South Korea, the world's 11th largest trading nation, is largely closed to foreign products. The country's agricultural and services industries are insulated from outside competition, and even the markets that are open in theory—for cars, drugs and other manufactured goods—are loaded with visible and invisible barriers.

The United States wants to change that. It's been negotiating what could be an important Free Trade Agreement (FTA) with South Korea—but despite six months of talks, Washington and Seoul are still not close to signing an accord. And time is getting short: President George W. Bush's authority to negotiate a deal runs out effectively at the end of March. After that, a deal will have to pass muster with the U.S. Congress, where many new Democratic members lean toward protectionism. "There are fundamental differences between Seoul and Washington," says Heo Yoon, an economist at Seoul's Sogang University. "The U.S. wants to include more items in the negotiations, while Korea wants to exclude more items from the talks."

The stalemate is all the more frustrating because both countries stand to benefit from a deal. South Korea estimates that a trade accord with America would raise its GDP by 2 percentage points--a huge potential payoff for a country dependent on trade for 70 percent of its GDP. A deal might also counter Korea's declining share of American trade, which has slipped from 3.3 percent to 2.6 percent in the past decade, while China's share has risen from 6.1 percent to 14.6 percent. For Washington, a trade deal with South Korea would be the biggest trade-liberalization breakthrough since the North American Free Trade Agreement in 1994.

The biggest obstacle is Korea's stubborn refusal to open its farm and services markets—particularly rice, auto, telecommunications, banking, medical, education, legal and other service sectors. It's easy to see why South Korea's government remains skittish about free trade. Even though polls show Koreans split on the issue, the protectionists are more passionate. In the past few months, hundreds of thousands of Korean farmers, union leaders and civic activists have staged sometimes violent anti-U.S. and anti-FTA demonstrations. "Koreans are too paranoid about the U.S.," says Song Young Gil, a lawmaker in the ruling Uri Party who leads its FTA task force. "They think Korean companies would be wiped out by American companies if we sign the FTA."

The Bush administration has its own concerns. It hopes to regulate Korean textile imports, which have risen dramatically (as have textile imports from other nations) in recent years. And Washington does not want to give preferential treatment to goods made in North Korea's Kaesung Industrial Complex, where South Korean companies produce goods using cheap northern labor.

The two sides plan to meet at least twice over the next three months—and some experts think a minimalist accord might be reached. If so, it would likely sidestep all the nettlesome issues and, hence, do little to promote more trade. "Avoiding sticky issues is not how you negotiate a free trade deal," says Sogang University's Heo. True, but given Seoul's jitters, it may be the only way for both sides to save face.