The U.S./Korea Free Trade Agreement (FTA) announced on Monday is not a perfect deal, but it is highly significant nonetheless because of its implications for broader U.S./Korean relations, for the future of the world trading system, and for the U.S. role in East Asia, where burgeoning regional economic growth is matched by the waxing power and influence of the People’s Republic of China.

Of the fourteen FTAs in force or signed since the Bush administration launched its “competitive liberalization” drive in 2001, Korea is far and away the most important from an economic perspective. It is a $1 trillion economy, and the eleventh largest in the world. It is the United States’ seventh biggest goods trading partner; in turn the U.S. is Korea’s second largest trading partner. Total bilateral trade between the two countries exceeded $80 billion in 2006, more than three times the total trade with Australia, the next largest recent U.S. FTA trade partner (only NAFTA exceeds Korea among U.S. FTA partners).

There are a number of commendable trade liberalizing elements in the FTA. First, 95 percent of all merchandise goods traded between the two countries become duty-free within three years. Most of the remaining items will have zero tariffs within ten years. On the contentious issue of automobiles, both sides agreed to phase out tariffs immediately (8 percent for the Koreans and 2.5 percent for the U.S.). Of equal import as a precedent, the U.S. for the first time agreed to phase out an egregious 25 percent duty on trucks over a 10-year period (This duty was residue of a long-forgotten trade war between the U.S. and EU, and a classic example of the doggedness of protectionist interests, once entrenched). Wheat, soybeans, feed corn, hides, and cotton will become duty-free immediately, as will a number of processed food products, such as almonds, orange and grape juice, cherries, wine, and pet food, among others. Within five years, this list will be expanded to include sweet corn, breads, pastry, grapefruit, lemons, and avocados. Through other means, market access has been expanded for U.S. beef, pork, pears, apples, and oranges. Korea agreed to liberalize key service sectors, including financial, legal, accounting, legal, audiovisual, and express delivery services. In audiovisual, financial and telecommunications services, U.S. companies gained the right to own 100 percent of Korean companies. The right to branch banking and adequate insurance outlets was also established. A new investment agreement was forged that provides a more comprehensive legal framework for foreign investors in Korea, including a transparent and binding international arbitration mechanism for disputes. Finally, there were a number of other breakthroughs in areas such as government procurement, pharmaceuticals, intellectual property, and regulatory due process. On U.S. beef exports and health and safety concerns over Mad Cow disease, the Korean government implicitly agreed to reopen the market in May after a world animal health organization gives a clean bill of health to U.S. beef.

On the down side, Korea insisted that rice be kept off the negotiating table. For the United States, most of the so-called “WTO-plus” template for FTAs is trade-liberalizing. The exceptions—which the U.S. has refused to compromise on in this and other agreements—include rules of origin (rules to stop trans-shipment of goods from third countries into FTA partners’ economies) that are arcane and deeply protectionist; anti-dumping regulations that arbitrarily discriminate against imports; large subsidies for agricultural crops that the U.S. insists must be handled in the WTO; and questionable discriminatory rules against short-term capital controls. Labor and environmental issues, so controversial in other pending U.S. FTAs, did not loom large in these negotiations as Korea has strong (indeed, too strong) labor rights’ laws and increasingly strict environmental regulations.

It is too soon to get an accurate or complete reading of the political landscape regarding the agreement and the odds for ratification by the respective legislative branches of the two nations—however, it is certain to be a hard fought contest in both countries. In Korea, even before the agreement was signed, labor unions, farmers, and left-wing student groups had demonstrated against the negotiations (and the day after the agreement was signed, one opponent immolated himself in Seoul). President Roh’s own Uri Party is deeply divided over the agreement; and the reality is that for the agreement to pass the legislature, the opposition Grand National Party will have to give strong support (it is generally more pro-U.S., pro-trade than the president’s party but has been deeply antagonistic to the current administration and is also looking ahead to the presidential election in December).

The U.S., in the end, allowed rice to remain off the negotiating table, acknowledging that the dogged opposition of the Korean negotiators signaled a deep belief that rice would kill the FTA in the legislature.

In the United States, the initial responses were divided. In opposition, the AFL-CIO, which has opposed all FTA negotiations, immediately promised to organize a strong movement to force Congress to scrap the agreement. In addition, automobile companies and their trade associations (led by the Ford Motor Company), groused about the auto sections of the agreement (what they had really wanted was a guaranteed market share, a terrible policy that the U.S. had unsuccessfully attempted to foist on the Japanese in the 1990s). The Democrats are likely to be split. As expected, both Representative Sander Levin (D-Michigan) and Senator Deborah Stabenow (D-Michigan) denounced the agreement. Representative Levin holds the key chairmanship of the trade subcommittee of the House Ways and Means Committee. Significantly, however, thus far the chairman of House Ways and Means, Representative Charles Rangel (D-New York) has held his fire; and while Senator Max Baucus (D-Montana), chairman of the Senate Finance Committee, criticized the agreement, it was largely to warn the Korean government that if it did not open the Korean market to U.S. beef after the May decision by the international animal health body, he would lead the fight against passage of the resolution to accept the agreement.

Republicans are certain to overwhelmingly support the president. In addition, all of the major business associations (outside of autos) immediately declared their support for the FTA, including the U.S. Chamber of Commerce, the National Association of Manufacturers, and the Business Roundtable.

Stepping back, what are the most important longer term implications of the U.S./Korea FTA? First, it demonstrated that the United States is capable of summoning the flexibility and practical common sense to bend the hitherto rigid terms of the WTO-Plus (“gold standard”) FTA template. Unlike previous Bush administration FTA partners (with the exception of Australia), Korea is a mid-sized, economically important economy—and a nation both proud and prickly about its national heritage and its national interest. It was not going to be dictated to in the manner of Guatemala or the Dominican Republic.

Thus, whatever the economic downside, the U.S., in the end, allowed rice to remain off the negotiating table, acknowledging that the dogged opposition of the Korean negotiators signaled a deep belief that rice would kill the FTA in the legislature. And it finessed the difficult issue of the Kaesong (North-South Korea border free trade zone), but agreed to come back to the matter in future negotiations.

With the Doha Round hanging in the balance and possibly dead, the U.S.-Korea agreement may well provide a jolt to the stalled negotiations. Though economists will argue correctly that multilateral negotiations provide the biggest bang for the buck, this week’s news signals that the U.S. is prepared to follow a different path if necessary.

Finally, and most importantly for the future U.S. role in East Asia, the U.S.-Korea FTA sends a strong signal that the United States, after years of drift and seeming retreat, is prepared to retake a leadership position in the region—and can match its ambition with results. It is no coincidence that the day after the agreement was signed, Japanese Prime Minister Shinzo Abe and Foreign Minister Taro Aso both expressed a desire to restart stalled FTA negotiations with Korea. And Abe, who is coming to Washington in a few weeks, added that a possible U.S./Japan FTA was something Japan “needs to consider as a future topic.”

Some international trade economists have long predicted a “domino effect” in East Asia. Once any two of the largest economies in the region—the U.S., Japan, Korea, or the PRC—negotiated an FTA, they reasoned, the others would have to fall in line because of the large impact of trade and investment diversion. It will be interesting to see whether this prediction plays out—ironically, for a number of political, security (and economic) reasons, the PRC could be the odd man out—but that’s the subject of a whole other essay.

Claude Barfield is a Resident Scholar at the American Enterprise Institute.

Image credit: "Korea Trade Center, Seoul" by Flickr user ddol-mang