The United States-South Korea Free Trade Agreement

An Economic and Political Analysis

Full Document Available in PDF

A specter is haunting organized labor—the specter of free trade. Never mind its benefi ts, labor unions throughout America have entered into a holy alliance to exorcise this specter. And they may be on their way to succeeding.

Since the United States-South Korea Free Trade Agreement (KORUS-FTA) was negotiated, from the spring of 2006 through March 2007, it has met fi erce resistance in both countries, with labor unions and environmental groups as its loudest opponents. These groups contend that the agreement should be accompanied by enforceable environmental provisions and labor standards based on the International Labor Organization’s (ILO) core principles.

The Democratic takeover of Congress in November 2006 has resulted in a less trade-friendly atmosphere in Washington. Afraid that the new Democratic majority would scrap the KORUS-FTA, the Bush Administration renegotiated the agreement with the South Korean government, which, afraid of losing the entire deal, conceded to put in the more stringent, enforceable labor and environmental standards.

Yet the best way to improve environmental and labor conditions in developing countries is not through uniform environmental and labor standards, but by increasing productivity and economic growth, which in turn are best spurred by trade. If developing nations are forced to set higher standards than what the current level of productivity allows, their workers will eventually be penalized in the world market. The price of labor in those countries will be higher than what that labor is worth, which will drive out foreign investors, leading to increased unemployment.

When countries increase their productivity, they can afford better standards. Hourly labor productivity in South Korea increased by 157.5 percent between 1985 and 2005, which is why the country was able to increase its real GDP per capita from $7,420 to $22,584 during the same period. Meanwhile, America increased its labor productivity per hour by 42.3 percent, and its per capita GDP from $29,196 to $43,009.

Furthermore, the unions’ argument that free trade has detrimental effects on American workers does not hold true. Lower wages do not compensate for the lower productivity prevalent in other countries. In 2006, hourly Korean labor productivity remained—despite the country’s remarkable economic journey—$29.49 lower than America’s. The same year, hourly compensation costs for manufacturing workers in Korea were merely $10.09 lower than in the U.S. Due to the positive correlation between productivity and wages, trade agreements have little effect on rich countries’ labor markets.

Yet organized labor was not satisfi ed with the enforceable standards enshrined in the FTA. Labor unions are still calling for Congress to reject the agreement—which betrays their call for enforceable standards as a mere diversionary tactic. Apparently, the unions will not give up until businesses in South Korea have the exact same standards as those in the U.S.

Besides hurting South Korea, such standards may also harm America’s foreign policy interests, since it would undermine our commitment to democracy. South Korea has been a vibrant democracy for over two decades, and it is up to the Korean people, acting through their elected representatives, to decide what standards should be adopted at which stage of their country’s development. Furthermore, South Korea has been a strong U.S. ally for over 50 years, and to patronize that nation by intruding in its domestic politics could worsen America’s standing in East Asia.

The labor and environmental provisions are a serious fl aw in the KORUS-FTA. The enforceable standards are problematic with respect to U.S. national sovereignty. Exactly what the provisions actually allow is ambiguous, which could lead to a slippery-slope situation in which international laws may trump domestic laws.

Despite its flaws, the KORUS-FTA is still worth pursuing, due to the enormous economic and political benefi ts it would generate in both America and Korea. Rejecting the agreement would lead to severe consequences for the U.S. The Korean government negotiated and renegotiated the FTA in good will, and to dismiss it now may lead South Korea and its neighbors to search for alternative trading partners, including possibly a fast-growing and increasingly assertive China.