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KORUS Free Trade Agreement Potential Impacts and Outlook Ferdinando “Nando” Guerra International Economist The Kyser Center for Economic Research, LAEDC March 15, 2012


What do Economists agree on? • Well not much – However, they do agree on one thing more than anything else • And that is Free Trade

• More than 90% of Economists agree that Free Trade is beneficial for the Economy


Overview of Presentation • South Korean and L.A. County Economies • Some Background on the FTA • Trade and the U.S. Economy • Importance of KORUS FTA • Current trade between the U.S./LACD and South Korea • Expected Local Benefits of the FTA • Brief Review of NAFTA Benefits • Conclusions


South Korea Real GDP Growth Percentage change 20.0 15.0 10.0 5.0 0.0 -5.0

1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

-10.0

Sources: World Bank and International Monetary Fund (IMF)


South Korean Economy: • GDP – $1.16 Trillion • 15th Largest Economy in the World • Very Large Middle Class (53% of population) • GDP per capita – roughly $25,000 Sources: International Monetary Fund (IMF) and Asian Development Bank (ADB)


Los Angeles County Economy: • GDP – Roughly $544 Billion (about half the size of the South Korean economy) • 19th Largest Economy in the World • GDP per capita – Roughly $50,000 • International Trade Capital of America Source: BEA


KORUS FTA:

A Little History • The KORUS FTA was originally signed in 2007 • The auto & beef industries were against the FTA • However, in December 2010 the key opposition – the UAW—came on board • Current Congress insisted it be tied to 2 other pending FTA’s (Panama and Colombia) • Trade Adjustment Assistance (TAA) Program


Trade and the U.S. Economy • Nearly 60 Million American jobs are directly supported by international trade • Exports represent roughly 11% of U.S. GDP and the objective is to grow this figure – Exports have been the second largest contributor to economic growth since the Great Recession ended • Importance of Exports to the future of U.S. economic growth • 95% of the world’s consumers live outside the U.S. Source: Department of Commerce, International Trade Administration (ITA)


KORUS FTA Achieves the Following • Creates New Jobs and Economic Growth in the U.S.

• Levels the Playing Field for U.S. Companies • Promotes Global U.S. Competitiveness • Strengthens the Critical Ties between South Korea and the U.S.


Why this FTA is so Critical? • Nearly 95% of all consumer and industrial goods will become duty-free within 5 years and almost all others within 10 years • Tariffs on U.S. Exports to South Korea were on average 11.2% • Tariffs on U.S. Exports of Industrial Goods were on average 6.2% • Tariffs on U.S. Exports of Agricultural Goods were on average 52% • Also opens South Korea’s $580 billion services market to American companies Sources: Department of Commerce, ITA and the Congressional Research Service (CRS)


U.S. & South Korea Trade Ties 2011 • U.S.’s #7 trading partner • Total 2-way trade -- $100.1 Billion (2.7% of U.S. total trade)

• U.S. imports from South Korea -- $56.6 Billion (2.6% of U.S. total imports) • U.S. exports to South Korea -- $43.5 Billion (2.9% of U.S. total exports)

• South Korea’s #3 trading partner in the world (behind China and Japan) Source: Department of Commerce, USA Trade Online


LACD & South Korea Trade Ties 2011 • LACD’s #3 trading partner • Total 2-way trade -- $27.7 Billion (28% of U.S. total)

• LACD imports from South Korea -- $16.7 Billion (29% of U.S. total) • LACD exports to South Korea -- $11.0 Billion (25% of U.S. total)

• South Korea’s #1 trading partner among U.S. customs districts Source: Department of Commerce, USA Trade Online


LACD 2-Way Trade with South Korea* 2000-2011 30

Billions of $

27.7 23.5 24.5

25 20 15

20.7 18.7 19.7

19.2 15.7 15.5

24.3

22.2

17.7

10 5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 *Includes General Imports Source: Department of Commerce, USA Trade Online


What Comes to the U.S.?

LACD Top 5 Imports from South Korea • Computers, Peripherals, Appliances & Machinery

• Electrical Equipment & Electronic Components • Vehicles & Parts • Rubber & Rubber Products • Plastic Products Source: Department of Commerce, USA Trade Online


What Goes to South Korea?

LACD Top 5 Exports to South Korea • Computers, Peripherals, Appliances & Machinery • Electrical Equipment & Electronic Components • Chemicals • Meat & Meat Products

• Iron & Steel Products • Optical & Medical Instruments Source: Department of Commerce, USA Trade Online


What Goes to South Korea?

Other LACD Top Exports to South Korea • Aircraft, Engines, and Parts • Plastics & Plastic Products • Organic Chemical Products • Autos & Auto Parts • Misc. Chemical Products

• Cotton • Leather & Leather Goods Source: Department of Commerce, USA Trade Online


LACD Top 5 Exports to South Korea Let’s take a Closer Look • Machines used to Manufacture Semiconductors • Machines for Voice & Image Data/Electric Apparatus For Telephones • Frozen Beef • Iron Waste & Scrap Metal

• Liquid Crystal Devices, Lasers and Lenses

Source: Department of Commerce, USA Trade Online


Through Which Ports? 4.9% 13.5%

Share of 2011 2-Way Trade Value

POLA POLB LAX

23.3%

58.4%

Source: Department of Commerce, USA Trade Online

Other


Which Industries will Benefit?

Key LACD Exports with the Most to Gain • Computers, Peripherals, Appliances & Machinery ▫ IT Machinery  Semiconductor Manufacturing Equipment

• Electrical Equipment & Electronic Components • Chemicals ▫ Inorganic, Organic, and Pharmaceutical

• Agriculture ▫ Beef


Which Industries will Benefit?

Key LACD Exports with the Most to Gain • Optical & Medical Instruments ▫ Optical Equipment

• Aircraft & Parts ▫ Aerospace  Engines & Parts of Airplanes and Helicopters

• Autos and Auto Parts • Agriculture ▫ Cotton


Which Other Key Industries will Benefit?

Let’s not forget about Services • Logistics Anyone? ▫ Processing Centers ▫ Distribution Centers ▫ Logistical Hub

• Some Key Industries ▫ Apparel ▫ Food


Which Other Key Industries will Benefit?

Let’s not forget about Services Entertainment Industry • Greater Intellectual Property Protections ▫ Film ▫ Software ▫ Music ▫ Videos


Which Other Key Industries will Benefit?

Let’s not forget about Services • Financial and Accounting • Legal

• Education • Health Care • IT and Electronic Commerce • Environmental • Engineering


Some Local Companies that will Benefit • • • • • • • • • •

Sunkist Growers (Fruit Products) Dole Food (Fruit Products) Nestle USA (Food Products) AECOM (Construction & Engineering) Jacobs (Construction & Engineering) Forever 21 (Apparel) Papaya Clothing (Apparel) Braun Exports (Animal Hides) Allan Company (Recycling Products) OPM International (Fruits & Nuts)


What’s at Stake for our Key Exports? Product Semiconductor Manufacturing Equipment Electrical Equipment

Chemicals Agriculture (Beef) Medical Equipment Aerospace

Previous Tariff

KORUS FTA Tariff Elimination Schedule

0-8%

Immediately

0-13%

96% immediately, remainder over 3 years

0-50%

Over 50% immediately, remainder over 3 to 10 years

0-40%

66% immediately, remainder over 10 years

0-50%

43% immediately, remainder over 3 years

0-8%

Over 92% immediately, remainder over 3 years

Source: Department of Commerce, ITA and US Korea Partnership


The European Union had a Significant Competitive Advantage since July 1, 2011 Product

Electrical Equipment

Chemicals Medical Equipment Aerospace

Previous Average U.S. Tariff

EU Average Tariff (Started July 1)

7.4%

0.2%, more than a 7% advantage

6.1%

0.7%, more than a 5% advantage

5.4%

1.0%, more than a 4% advantage

3.5%

0.3%, more than a 3% advantage

Source: Department of Commerce, International Trade Administration (ITA)


U.S. Exports to Canada & Mexico Five Years After NAFTA: Goods up 53% and Services up 28% 600

$Billions Services

Goods

500 400 300 200 100

1986

1990

1994

Source: U.S. Bureau of Economic Analysis

1998

2002

2006

2010


Let’s not forget about Foreign Direct Investment (FDI) • Increased trade between South Korea and the LACD will lead to more FDI • Economic history has demonstrated that as nations develop and trade grows so does outward investment

• We saw it with Japan, we have seen it with South Korea, and we will see more from South Korea as a result of this FTA


Now what? • Now we must all provide the support needed by local and South Korean companies to take advantage of the FTA • The Korea-U.S. FTA went into effect today ▫ We are no longer at a competitive disadvantage with the EU ▫ And we now have a competitive advantage over other nations such as Japan and China ▫ Increases the prospects for the Trans Pacific Partnership Agreement (TPP)


Conclusions • KORUS FTA is the most significant FTA since NAFTA • U.S., California, and the especially the LACD have a lot at stake • U.S. merchandise exports are expected to increase by as much as $11 billion – LACD share could represent roughly 30% or more of that total based on historical proportions


Special Thank You to KOTRA and Congratulations! LAEDC and KOTRA MOU Together promoting economic development for both L.A. County and South Korea Growing Together

Happy 50th Anniversary!


[2] The Effects of KORUS FTA _ LAEDC