THE US-KOREA FREE TRADE AGREEMENT - AND ITS POSSIBLE EFFECT ON INVESTMENT AND OPERATIONAL DECISIONS OF AMERICAN MANUFACTURING IN CHINA

1. The U.S. – South Korea
Free Trade Agreement
AND ITS POSSIBLE EFFECT ON
INVESTMENT AND OPERATIONAL DECISIONS
OF AMERICAN MANUFACTURING
OPERATIONS IN CHINA
Johan L. Claasen II

2. Agenda
 Introduction
 Methodology
 Literature Review
 Survey
 Discussion of Results
 Conclusion

3. Introduction
 First free trade agreement in East Asia for the U.S.
 Most significant FTA since NAFTA
 How will the existence of this FTA affect American
companies as they decide where to locate operations
in East Asia?

4. The Chinese Economy
 GDP Growth Rates Exceeding 10% annually
 Quality issues
 Multiple Recalls
 Weak IP Protection
 Piracy
 Rising Costs
 Currency appreciation
 Reducing tax rebate
 Raising Wages

5. The Korean Economy
 11th Largest Economy
 One of the world‟s most high-tech markets
 Exports include:
 Semi-conductors
 Cars
 Computers
 Wireless Communication
 Largest companies
 Samsung
 LG
 Hyundai

6. The U.S. – South Korea FTA
 Eliminates tariffs on 95% of all products
 Opening to foreign investment
 Expedited custom procedures
 Strengthened IP protection
 Dispute settlement mechanisms

7. Agenda
 Introduction
 Methodology
 Literature Review
 Survey
 Discussion of Results
 Conclusion

8. Methodology
 Literature Review of Academic Journal Articles
 Case Studies of previous FTAs on non-participating
countries
 Interviews with San Diego Chamber of Commerce
and San Diego World Trade Center
 Interviews with companies

9. Agenda
 Introduction
 Methodology
 Literature Review
 Survey Results
 Discussion of Results
 Conclusion

10. Terminology
 Trade Creation
“the goods produced locally in each country are replaced by
goods that are more efficiently produced in the partner country
to the agreement”
 Trade Diversion
“the increased trade between countries forming the
preferential trading agreement comes at the expense of trade
formerly with third countries.”
Viner, J. (1950). The Customs Union Issue. Carnegie Endowment for International Peace .

11. Effects of Other Free Trade Agreements
 NAFTA
 Expansion of the maquiladora industry
 Mexico became a full-package manufacturer
 North American apparel employment by country
1,600
Total Employment (in 000's)
1,400 4.6%
6.6% 6.4%
1,200 15.9% 6.5% 7.3%
10.8%
18.0% 33.3%
1,000
43.4% Canada
800
Mexico
600 82.6% 79.5% United States
75.6%
400 60.3%
49.3%
200
0
1985 1991 1994 1997 2000
Bair, J., & Gereffi, G. (2003). Upgrading, uneven development, and jobs in North American apparel industry. Global Networks.

12. Effects of Other Free Trade Agreements
 NAFTA
 U.S. exports to Mexico
 1990 = 7.1%
 1994 = 10.4%
 Mexican exports to U.S.
 1990 = 78.8%
 1997 = 85.4%
 Canadian exports to U.S.
 1990 = 75.0%
 1997 = 82.4%
 European market share in Mexico
 1990 = 17.4%
 1997 = 9.0%
Krueger, A. O. (1999). Are Preferential Trading Arrangements Trade-Liberalizing or Protectionist? Journal of Economic Perspectives , 13 (4), 105-124.

13. Effects of Other Free Trade Agreements
 European Union (EU15)
 Exports destined for one of the other member countries
 1963 = 56.3%
 1997 = 60.8%
 Imports from one of the other member countries
 1963 = 51.8%
 1997 = 67.6%
Krueger, A. O. (1999). Are Preferential Trading Arrangements Trade-Liberalizing or Protectionist? Journal of Economic Perspectives , 13 (4), 105-124.

14. Effects of Other Free Trade Agreements
 Mercosur (Argentina, Brazil, Paraguay, Uruguay)
 Exports destined for one of the other member countries
 1990 = 8.9%
 1997 = 24.4%
 Imports from one of the other member countries
 1990 = 14.5%
 1997 = 20.5%
Krueger, A. O. (1999). Are Preferential Trading Arrangements Trade-Liberalizing or Protectionist? Journal of Economic Perspectives , 13 (4), 105-124.

15. Agenda
 Introduction
 Methodology
 Literature Review
 Survey
 Discussion of Results
 Conclusion

16. Survey Methodology
 Designed a questionnaire – maximum relevant info
 Range of cpys
 Industries:
 Textile
 Bio-tech
 Technology
 Life Sciences
 Public

17. Agenda
 Introduction
 Methodology
 Literature Review
 Survey
 Discussion of Results
 Conclusion

18. Discussion of Results
 Manufacturing operations = Strategic decision
 Investment in terms of production output
 Korean productivity < Chinese cheap labor
 IP highest priority
 Other considerable factors:
 Cost < Productivity
 Market Research
 Global client network
 Client quality
 Supply Chain
 Target Market

19. Discussion of Results - 2
 Answers is industry driven
 Many cpys unaware of details of KORUS
 Making LT decisions; play „follow the leader‟

20. Agenda
 Introduction
 Methodology
 Literature Review
 Survey
 Discussion of Results
 Conclusion

21. Conclusion
 Literature review :
 Creating trade between US and Korea
 Divert trade away from China
 Survey results:
 Not immediate reaction for trade diversion from China
 Not decisive decision factor for FDI

22. Conclusion - 2
 Recommendation:
 High-tech products focus on Korea for Key Component
manufacturing
 Pharmaceutical
 Technology
 Low-tech product portions remain in China
 KORUS makes Korea another viable option for the
Global Supply Chain

23. Questions?