Free Trade Agreement with South Korea

This story gives us few details about what some of us will see as good news:

The United States and South Korea successfully concluded a free trade agreement after almost 10 months of contentious negotiations, a U.S. official said Monday. The deal, which requires legislative approval in both countries, is the biggest for the United States since the North American Free Trade Agreement signed in 1992 and ratified in 1993. It is the biggest ever for South Korea … Differences over trade in automobiles, agriculture, textiles and other issues, including the status of South Korean goods manufactured at a small enclave in North Korea, had thrown up obstacles … Shortly after midnight Monday, the White House released a letter from Bush to congressional leaders, dated April 1, stating his intention to enter into a free trade agreement with South Korea. He said the deal “will generate export opportunities for U.S. farmers, ranchers, manufacturers, and service suppliers, promote economic growth and the creation of better paying jobs in the United States.” But South Korean labor and farm groups have denounced the deal, saying an influx of U.S. imports will harm livelihoods. A protester set himself on fire Sunday shouting “Stop the Korea-U.S. FTA” outside the hotel where negotiators were meeting. He was being treated for third-degree burns, police said.

Former Angrybear and fellow free trade advocate Kash notes this bill will have both bipartisan support and bipartisan opposition:

There will probably be a fair amount of resistance in Washington (from some Republicans as well as Democrats, but not nearly as much as there would be if the deal was with a low-wage country such as Mexico. After all, according to the BLS average hourly labor costs in manufacturing in Korea were fully 57% of US labor costs in 2005, which is about the same as in Israel and New Zealand. By comparison, Mexico’s labor costs are about 11 percent of the US’s, Brazil comes in at 17 percent, Hungary and the Czech Republic are at 26 percent, and Portugal is at 31 percent of US labor costs. As usual, however, any controversy over this agreement will probably be blown considerably out of proportion. On the one hand, passage of the agreement would probably have no real measurable impact on the US labor market, since tariff rates are already low, wage differentials are relatively small, and Korea is so small (relative to the US economy). But on the other hand, passage of the agreement would probably also have almost no measurable benefit for consumers in the US, for exactly the same reasons.

Let me turn Ricardian for a moment and note that wage differentials are not exactly the same thing as differences in unit labor costs. But I suspect Kash is right about the premise that there will be little measurable impact on the U.S. macroeconomy. I’d rather look at the specifics in terms of what we export to Korea and import from Korea. In 2006, we exported almost $32.5 billion of goods. In terms of 5-digit end-user codes, the big ticket areas (defined as more than $1 billion in exports) were chemicals-organic, industrial machines-other, semiconductors, civilian aircraft, and military aircraft-complete In 2006, we imported almost $46 billion of goods. In terms of 5-digit end-user codes, the big ticket areas (defined as more than $1 billion in imports) were other petroleum products, iron and steel mill products-semifinished, computer accessories&peripherals&parts, passenger cars, other automotive parts&accessories, household&kitchen appliances, clocks&portable typewriters&other household goods, and television receivers. While I look forward to increased competition in the HDTV market so I can finally justify a new big screen TV, something tells me that Detroit does not look forward to increased competition in the automobile sector while the U.S. steel sector will also be looking at this deal very carefully.

Update: Kash comments and provides us with this handy time series of unit labor costs for certain nations including the U.S. and Korea. It would seem unit labor costs have been rising in Korea but declining in the U.S. for the past few years. As Kash states, the two economies had very similar unit labor costs in 2005. Query – is this because real wages have risen for Korean workers but not for American workers?

Errata: AB reader Spencer cautions Kash (and me too) that BLS is reporting index numbers not absolute comparison. So when Kash said Korea and the US had the same unit labor cost in 2005, what he meant to say was that the average change in unit labor cost for the 1992 to 2005 period was the same in the two nations.