Could US-Korea trade agreement deter enhanced regulation of financial services?

Original Reporting | By Mike Alberti |
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President Barack Obama speaking with South Korean President Lee Myung-bak at the G-20 Summit in Seoul in Nov. 2010.

February 1, 2011 — Over the last 20 years, proponents of free trade have rested their arguments on two fundamental assumptions: first, that more liberalized trade will bring concrete benefits to most, if not all, Americans; and, second, that, because the further integration of national markets is inevitable, the U.S. essentially has no leverage to wield in influencing the direction of that process.

President Obama hasn’t explicitly been sounding the second theme, but his policy framework is built firmly on the premise that a fully globalized world economy of liberalized trade rules is the only road available to travel. Indeed, in his State of the Union Address, Obama trumpeted the idea that “the future is ours to win,” and then suggested that further liberalizing the country’s trade relationships was a vital part of keeping the U.S. competitive in the global economy.

“The world has changed,” he said, building urgency for his argument, previewed a few days earlier in a Jan. 22 radio address, that opening global markets to American goods was “one of the most important things” his Administration could do to promote American jobs and businesses.

Trade agreements are crucial to his strategy: “[L]ast month, we finalized a trade agreement with South Korea,” Obama said, boasting that the agreement “will support at least 70,000 American jobs,” an assessment that is vigorously disputed by treaty opponents. Obama was referring to the proposed Korea-U.S. Free Trade Agreement, or KORUS FTA, which he signed late last year, and for which he is now seeking Congressional approval.

Strikingly, even though the original proposal was modified through a side agreement in the second half of 2010, no changes were made to reflect an lessons from the financial crisis.

He described the agreement as one that “keep[s] faith with American workers and promote[s] American jobs,” and promised more of the same “as we pursue agreements with Panama and Colombia and continue our Asia Pacific and global trade talks.”

But there are important questions about the agreement that are independent of the jobs dispute, most notably the under-explored question of whether the FTA’s chapter on the financial services sector will operate, both on a legal level and on an political level, to deter a host of potential market-regulating mechanisms — like limiting the size of financial institutions — in the U.S. and South Korea. (The implications may be broader still, since the Administration views the KORUS FTA as a model for other agreements.)

Strikingly, even though the original proposal was modified through a side agreement in the second half of 2010, it appears that no changes were made to reflect any lessons from the U.S. financial meltdown of 2008 and 2009 — this despite the fact that the U.S. possessed substantial leverage in the negotiations with South Korea.

Left off the table was the opportunity to use the FTA to shape an operational framework within which the financial services sector would be obliged — at least in respect to Korean and U.S. companies — to operate in a manner to reduce systemic risk domestically, bilaterally, and internationally.


U.S. Leverage

Negotiations of the KORUS FTA began in 2006, and, in 2007, an agreement was signed by President Bush and then-President of South Korea Roh Moo-hyun. It then stalled in Congress for three years due to heavy opposition by some Democratic lawmakers, as well as united opposition from organized labor.

In June of 2010, President Obama and the new South Korean President Lee Myung-bak expressed a desire to reopen the negotiations and resolve any obstacles by November, when a G-20 summit meeting was scheduled in Seoul. The summit did not produce significant results, but in early December, the two presidents announced that they had negotiated a side agreement to the original FTA.

“The South Korean government has acknowledged the very dominant political and military role the U.S. has in the Korean peninsula, and that has definitely weakened its ability to negotiate.” — Martin Hart-Landsberg, Lewis and Clark College

According to Christine Ahn of the Korea Policy Institute, the period between the G-20 summit and the successful negotiation of the agreement was pivotal, and shows that the Obama Administration had substantial leverage when re-negotiating with South Korea.

“It’s very interesting to see how Obama came back from the G-20 summit — no deal,” she said. “And then there was the escalation of the military crisis, and within a few days, we have a situation where South Korea conceded to a lot of the demands and then you have a signed deal.”

The military crisis Ahn referred to is the North Korean shelling of a South Korean island on Nov. 23. The U.S. immediately condemned the attack.

“From my perspective,” said Ahn, “it seems like South Korea got what it wanted, [which] was for the U.S. to go along with its more aggressive stance towards North Korea. [President Lee Myung-bak] came into power promising that he would take a hard-line approach to North Korea, and he needed the backing of the United States to actually see that through. He got the U.S. to side with South Korea in pursuing a more hostile, aggressive stance. And the U.S. got what it wanted, which was this trade deal.”

According to Martin Hart-Landsberg, director of the Political Economy Program at Lewis and Clark College, the dominant position of the U.S. is evidenced by that fact that, even prior to opening trade negotiations, the U.S. set several demands and pre-conditions, including a requirement that South Korea open up its media market to U.S. films.

“The fact that the Koreans capitulated on all these terms, essentially giving up a lot of things in order to even start negotiations, shows the relative strength of the governments,” said Hart-Landsberg. “The South Korean government has acknowledged the very dominant political and military role the U.S. has in the Korean peninsula, and that has definitely weakened its ability to negotiate.”

So, with leverage to exert, the U.S. had to decide where, how, and on whose behalf to exercise that leverage.

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