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

Sources: World Bank and International Monetary Fund (IMF)

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

196

1 19

63

19

65

19

67

19

69

19

71

197

3

197

5

197

7

197

9

198

1 19

83

19

85

19

87

19

89

19

91

199

3

199

5

199

7

199

9

20

01

20

03

2

00

5

20

07

2

00

9

20

11

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

19.2

15.7 15.5

18.7 19.7 20.7

23.5 24.5 22.2

17.7

24.3

27.7

0

5

10

15

20

25

30

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Billions of $

*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?

58.4%

23.3%

13.5% 4.9%

POLA

POLB

LAX

Other

Share of 2011 2-Way Trade Value

Source: Department of Commerce, USA Trade Online

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 Previous Tariff

KORUS FTA Tariff Elimination Schedule

Semiconductor Manufacturing Equipment

0-8% Immediately

Electrical Equipment 0-13%

96% immediately, remainder over 3 years

Chemicals 0-50%

Over 50% immediately, remainder over 3 to 10 years

Agriculture (Beef) 0-40%

66% immediately, remainder over 10 years

Medical Equipment 0-50%

43% immediately, remainder over 3 years

Aerospace 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 Previous Average U.S.

Tariff

EU Average Tariff (Started July 1)

Electrical Equipment 7.4%

0.2%, more than a 7% advantage

Chemicals 6.1%

0.7%, more than a 5% advantage

Medical Equipment 5.4%

1.0%, more than a 4% advantage

Aerospace 3.5%

0.3%, more than a 3% advantage

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

Source: U.S. Bureau of Economic Analysis

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

$Billions

100

200

300

400

500

600

1986 1990 1994 1998 2002 2006 2010

Services Goods

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!