At Large

Playing Geoeconomics in Asia

President Bush will soon lose his fast track authority on free trade. Here's his last chance to do something good with it.

By 1.17.07

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International trade liberalization has stalled. The World Trade Organization deadlocked over farm subsidies. The lame duck Republican Congress failed to approve permanent normal trade relations with Vietnam before President George W. Bush visited that nation, instead dropping it into a last minute omnibus bill destined to pass because of its tax provisions.

Future trade prospects are even less bright. Renewed WTO talks are problematic. Worse, the president's expedited trade negotiating authority expires in mid-2007 and is unlikely to be renewed by the Democratic Congress. Moreover, any accord faces heightened scrutiny by the new, more protectionist membership.

Yet America's interest in global free trade remains undiminished. Washington's trade priority today should be Asia, which is becoming the center of the global economy. An agreement encompassing the 21 members of the Asia-Pacific Economic Cooperation forum deserves "serious consideration," as President Bush put it.

The Republic of Korea (ROK) should be at the top of the administration's bilateral list. The U.S. and South Korea are in the midst of drafting a Free Trade Agreement (FTA). Negotiators met for the fifth and what was supposed to be the final time in early December in Big Sky, Montana, but the talks did not go well. Disagreement on several issues remain deep and little progress was achieved.

NEGOTIATORS HAVE RECONVENED in Seoul this week. However, time is running out. The two governments should speedily finalize the proposed accord, readying it for consideration before the president's fast track authority expires. Although the FTA may be a tough sell on economics alone, the Bush administration should point to the accord's concurrent geopolitical benefits.

The ROK is a significant economic player, and increased trade would benefit both nations. The South's GDP was almost $800 billion in 2005, ranking its economy 12th in the world.

Two-way trade with the U.S. ran more than $72 billion in 2005. Americans are the biggest investors in the ROK.

The FTA's economic potential is enhanced by the fact that the South has not always welcomed international competition. Korean business professor Moon Hwy-chang admits: "Korea has not been a very open economy." Thus, President Roh Moo-hyun deserves credit for having put his credibility on the line in favor of a trade accord; if Washington does not respond accordingly, the ROK may not be so receptive in the future.

Among Washington's top priorities are reducing agricultural barriers, improving intellectual property protection, reducing regulatory barriers to pharmaceutical sales, ensuring that telecommunication standards don't discriminate against U.S. producers, cutting high auto tariffs, and reducing business subsidies. (Seoul obviously has its own issues, some controversial, with Washington.)

By some estimates an agreement would increase the ROK's GDP by between .5 and two percent and add an extra 100,000 jobs. The relative boost for America's much larger economy would be smaller, perhaps .2 percent of GDP, but on an $11 trillion economy that isn't just loose change. The International Trade Commission figures that a FTA could hike U.S. exports to South Korea by 50 percent.

The longer-term gain could be even greater. After reunification of the Korean peninsula, which is likely some day, Korea will be an even more important economic market for U.S. concerns. Washington should lock in its position before it faces the manifold uncertainties of that process.

A Korean FTA is particularly important since America's dominant position in Asia is eroding. China now trades more with the ROK than does the United States. Chinese investment lags behind that from Americans, but as the PRC's economy grows there will be more Chinese investment capital, and more of it will end up in South Korea.

The Rand Corporation reports: "The effect of China's economic rise on the Korean economy has been significant. China is now Korea's largest trading partner and the largest destination for Korea's foreign direct investment." With Beijing and Seoul discussing a FTA, economic ties between the two countries are bound to increase.

Nor is the ROK waiting for the U.S. South Korea already has implemented FTAs with nine ASEAN (Southeast Asian) states, four European nations, and Chile. It hopes to add another three dozen countries to the list next year, negotiating FTAs with the European Union and MERCOSUR (a Latin America association), as well as Canada, India, Japan, Mexico, and Russia.

THE ISSUE IS MORE THAN ECONOMIC. For more than a half century the dominant U.S.-Korean relationship was military. Today, however, the alliance, which has lost its raison d'etre -- a South Korea unable to defend itself from a North Korea backed by Beijing and Moscow -- is fraying. Washington already has begun a force drawdown and a full withdrawal is becoming ever more likely.

At the same time, the People's Republic of China is asserting itself throughout Asia. Although some analysts worry about growing Chinese military strength, Beijing's primary challenge to America in the near- to mid-term, at least, is economic. Warned the U.S.-China Economic and Security Review Commission two years ago: "In the past two years, China has become even more central to regional and global trade, investment, and production patterns." Moreover, added the Commission, "China has linked its growing economic power with strong diplomatic initiatives throughout Asia."

To meet this challenge Washington needs to employ American "soft power" -- access to the world's most important, advanced, and productive economy. It will be years before China's economy surpasses that of the U.S., and decades before that nation's per capita GDP, the best measure of disposable wealth, matches that of America. Still, Chinese influence will inevitably grow throughout East Asia. But the U.S. can respond by using its strengths to engage friendly nations.

Free trade is good economics. It benefits consumers and enlarges business opportunities. It creates a larger market within which poorer nations can prosper. It allows U.S. firms and workers, which remain the most productive on earth, to reach new peoples and countries.

Free trade also is good politics. Especially in Asia, where Washington can no longer take its position for granted. The time to respond is now, before the U.S. finds itself confronting a new geopolitical equal.

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About the Author
Doug Bandow is a senior fellow at the Cato Institute. A former Special Assistant to President Ronald Reagan, he is the author and editor of several books, including The Politics of Plunder: Misgovernment in Washington (Transaction).