Politics & Policy

How the U.S. Unfroze a Trade Deal with South Korea


(Corrects sixth paragraph so $68 billion refers to annual amount of trade with, not just U.S. exports to, South Korea.)

It wasn't exactly Bretton Woods, the bucolic New Hampshire location where nations met in 1944 to establish a new financial world order. This time the scene was a Sheraton hotel in Columbia, Md., and a manmade lake. Such was the backdrop for the U.S.-South Korea trade deal, whose final details came together on Dec. 2 after the top two negotiators took an hour-long stroll in frigid temperatures alongside the nearby lake.

The day before, President Barack Obama, on the eve of a secret trip to visit the troops in Afghanistan, was in frequent touch with negotiators, say White House aides who spoke on background so they could talk candidly about negotiations with foreign leaders. Obama had been hearing all year that a testy relationship with business was preventing him from realizing his goal of doubling American exports in five years to create jobs and spur economic growth. A reworked free-trade agreement with Korea, initially negotiated by President George W. Bush, could be the first step toward healing that rift.

Ford (F) Chief Executive Officer Alan R. Mulally, representing the U.S. auto industry and the auto company with the most at stake, was consulted nearly every step of the way, Administration officials say. As the talks hit a roadblock, he was asked to attend a Dec. 1 meeting in Treasury Secretary Timothy R. Geithner's office. The White House wanted his support, along with that of Bob King, the United Automobile Workers president, and the top Democrat and Republican on the House Ways and Means Committee, Sander M. Levin and David Camp, both from Michigan.

The backing of executives, union leaders, and lawmakers raises the odds of winning passage of the deal in Congress next year. And Obama wants the Korea pact to serve as a new model for trade talks, says Michael Froman, the Deputy National Security Adviser and one of the lead Columbia negotiators. Obama sought "to forge a new coalition of support for trade and then sold it personally" to South Korean President Lee Myung Bak, says Froman. "The Korea deal is important," U.S. Trade Representative Ron Kirk says, "but the importance of concluding it goes beyond Korea."

The Administration is now working on reducing nontariff trade barriers, such as arbitrary license plate size requirements, with other trade partners. It's also discussing reducing similar nontariff barriers, such as onerous safety standards, with Mexico and the European Union. Trade talks with Panama and Colombia are pending, and there may be new ones with Vietnam and Malaysia. Obama hopes a widely supported trade deal with South Korea will soften opposition to future deals, the officials say.

The pact, which the White House says will increase trade with Korea, now $68 billion a year, by some $11 billion, almost died when Obama and Lee failed to agree at the November Group of 20 summit in Seoul, mostly over differences on auto tariffs. "It was a courageous move in Seoul to walk away," says Ziad Ojakli, a Ford lobbyist. "A bad Korea auto template would have been there for the Indians, the Chinese, and others."

South Korean and American negotiators, sequestered for two days at the Sheraton Columbia Town Center Hotel in suburban Maryland, about an hour's drive from the White House, were again at an impasse on Dec. 1. The hang-up: how quickly to phase out a 2.5 percent tariff on imported Korean autos. The tariffs make Korean cars more expensive in the U.S., giving Ford a leg up with price-conscious consumers. The U.S. tariffs, however, are far lower than the 8 percent levy Korea imposes on American cars. Ford initially wanted the tariffs for 10 more years and had already come down to seven years. Seoul wanted three or four.

Mulally joined Geithner and National Economic Council Director Lawrence Summers at Treasury. Froman, on a speakerphone from Columbia, reported that the talks were foundering. The officials asked Mulally if he could abide a five-year tariff phaseout. He said he'd have to discuss it with the UAW and Michigan lawmakers. That evening, Obama summoned Froman and Kirk to the White House for consultation. They brought some good news: Mulally, the UAW, and Michigan lawmakers had signed off on the five-year deal.

At 10:30 that night, Obama called Lee with a framework for an agreement, including the five-year language. In an hour-long conversation, their second since a North Korea artillery barrage killed four South Koreans on Nov. 23, Obama stressed the importance of a trade pact to the two countries' strategic relationship. Lee was noncommittal, though he wanted the Maryland negotiations to continue.

On the morning of Dec. 2, with the talks still stalled, Froman suggested a walk with his counterpart, Trade Minister Kim Jong Hoon, who had been ducking outside to smoke. Froman and Kim strolled alongside the nearby lake, which was in the process of being dredged. Froman warned that failure would be a missed opportunity for Seoul to improve ties with Washington, the officials say. Kim relented, as long as Korea could prolong tariffs on U.S. exports of pork products to his country from 2014 to 2016. He also wanted a more generous allocation of temporary work visas. After midnight, Froman e-mailed Air Force One, en route to Afghanistan, that they had a deal.

The accord allows the U.S. to end its 2.5 percent auto tariff in five years. South Korea will cut its 8 percent tariff on U.S. automobile imports to 4 percent immediately instead of eliminating it, a White House fact sheet says. Ford and other U.S. automakers can send 25,000 cars that meet U.S. safety standards annually to South Korea, even if they do not meet Korean standards.

Not everyone is pleased. Senate Finance Committee Chairman Max Baucus, a Montana Democrat who had demanded that South Korea drop restrictions on U.S. beef imports from cattle older than 30 months, said he was unhappy with the agreement. American beef producers will gain an advantage over Australia under a 15-year phaseout of a 40 percent tariff.

The South Korea deal has brought Obama some rare praise from the U.S. Chamber of Commerce, which fought the President's agenda on health care and financial regulation. "The Administration has done its part," U.S. Chamber of Commerce President Thomas Donohue said in a statement. Now, he said, the Chamber will help round up votes.

The bottom line: Obama hopes a South Korean trade deal will improve ties with American business and pave the way for more accords with other nations.

Nichols is a reporter for Bloomberg News in Washington.
Drajem is a reporter for Bloomberg News in Washington.

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