Speeches and Transcripts

KORUS FTA and Korea’s Foreign Investment Climate

Alexander Vershbow
U.S. Ambassador to the Republic of Korea

KOTRA/Invest Korea “Get to Know Korea” Series

Seoul - September 20, 2007

Thank you, Charles Duerden, of the KOTRA Invest Promotion Team, for your kind and generous introduction. And thank you to KOTRA/Invest Korea for inviting me to speak to you this evening. I am pleased to have the opportunity to speak as part of the “Get to Know Korea” series. Before beginning my remarks, I would like to recognize KOTRA Vice President Han Joon-woo, KOTRA Foreign Investment Ombudsman Ahn Choong-yong, ChungCheong Nam-Do Governor Lee Wan-koo, and ChungCheong Nam-Do Vice-Governor of Economic Affairs Chae Hoon, who are here with us tonight.

Before I begin, I would like to quickly express my most sincere condolences to the families of those who have lost their lives to the typhoons that hit Jeju Island and southwestern parts of the peninsula this week. Our sympathies are also with those who have been left homeless in the typhoons’ destructive wake.

This evening I would like to discuss the U.S.-Korea investment relationship. In particular, I would like to share how the KORUS FTA will help Korea attract not only more American investment, but more foreign investment in general. I will also touch on the broader benefits of the KORUS FTA, as well as the bigger picture of Korea’s climate toward foreign investment overall.

I understand my remarks will be followed by a brief presentation on ChungCheong Nam-Do province. I have very pleasant memories of my visit to Daejon in April of last year; I had a wonderful discussion with students at Chungnam University’s Institute of North American Studies and also spoke to students at KAIST. It is certainly a very lovely province, ripe with both natural beauty and, as you will hear tonight, investment potential.

I know that, at this time of year, everyone is looking forward to the Chuseok holiday, which signals the beginning of autumn. Autumn is certainly one of my favorite times of year in this country. Generally the weather is fair, the temperatures mild, and the hwangsa has blown out to sea. “The heavens are high and the horse is fat,” as the saying goes. And harvest time in the Year of the Golden Pig must be especially auspicious.

Accordingly, we are looking forward to an abundant harvest this year in U.S.-Korean relations. We hope to reap the fruit of our very hard shared labor in nurturing two particularly important projects we have sown together, the Six-Party Talks and the KORUS FTA. Not that I necessarily expect the harvest to be completed this fall. These are both initiatives that will define the next epoch of our alliance, and they will require a lot more careful cultivation. But taking Chuseok as an opportunity to pause and think back to the state of U.S.-ROK relations when I arrived in Korea two years ago, I am thrilled at the progress we have made together. Even more satisfying is the promise of an era in which the United States and Korea can enjoy the benefits of the KORUS FTA.

Because of the nature of this evening’s program, I will focus tonight on investment-related issues, and mainly on the KORUS FTA. I believe that discussion will benefit, however, from a brief look at the state of the U.S.-ROK alliance in general. So let me quickly take stock of some of the highlights of the recent progress we have made in key areas of our bilateral relationship:

This summer, the U.S. Congress passed into law the Homeland Security bill, moving us closer to the day when the Republic of Korea will enter the Visa Waiver Program. By facilitating visa-free travel to the United States for short-term business and pleasure trips, the Visa Waiver Program will allow hundreds of thousands of Koreans to visit relatives, make business connections, and enjoy the United States’ natural wonders, cities, and tourist attractions. There is still work to be done – on both sides – before Korea can join the VWP, but I know that it will greatly strengthen the extraordinarily close personal bonds that exist between Koreans and Americans.

The bonds between our two peoples were forged in blood during the Korean War. The military alliance that was established in the wake of that conflict is one of the most successful security partnerships in history. That partnership, however, has been changing with the times, becoming a more balanced and more sustainable partnership for the 21st century. Two recent examples are the ongoing realignment of U.S. forces on the Korean Peninsula and our joint decision to transfer wartime operational control (OPCON) to the ROK between now and April 2012. The consolidation of U.S. forces to two regional hubs will free up a significant portion of valuable real estate in central Seoul for the benefit of the Korean people, greatly enhance efficiencies in operations, and add stability and continuity by allowing the United States to extend military members’ tours in Korea with their families. The transfer of wartime OPCON will lead to a new command structure – a ROK strategic command and a U.S. supporting command – but it will not alter our fundamental commitment to defend the Republic of Korea with the full weight of U.S. military power, on and off the peninsula. Indeed, by making the transition over a five year-period, we will ensure that both parties’ forces are properly equipped and trained to ensure that deterrence will be just as effective under the new command structure as it is today.

A key aspect of our security alliance is our joint efforts to solve the North Korean nuclear issue. In recent months, our countries have worked closely together to make significant progress in the Six-Party Talks. We successfully concluded the first phase of the February 13 agreement, and we are on track to complete the second phase by the end of 2007. North Korea has shut down its Yongbyon facilities. The recent visit by a team of technical experts from the United States, Russia and China to survey the work needed to disable the DPRK’s nuclear facilities went smoothly. We look forward to continuing the impressive progress of the Six-Party Talks, and we hope our Chinese counterparts can soon set a date for the next round of discussions.  President Bush would like to achieve a comprehensive solution to the North Korean nuclear issue before he leaves office. This includes normalization of diplomatic relations with North Korea and establishment of a peace regime that would formally end the Korean War. But these ambitious goals are only achievable if Kim Jong-il gives up all his nuclear weapons and nuclear programs.

The Six Party Talks have an economic as well as security dimension. By helping to secure a more stable, peaceful future through a denuclearized Korean peninsula and by ending North Korea’s isolation from the international community, the Six-Party Talks offer the potential for greater prosperity and a boost to the investment climate in South Korea. Progress in the talks was one factor in the recent upgrade in Korea’s sovereign credit rating. Which brings me back to the KORUS FTA.

The Expected Benefits of the KORUS FTA

By adding a vital new pillar to our alliance, the Korea-U.S. Free Trade Agreement has great strategic significance beyond its economic benefits. But as I promised, I’ll keep tonight’s discussion focused on the gains in trade and investment Korea will enjoy under the KORUS FTA.

The projected benefits of the KORUS FTA to the Korean economy are so widely known that I will only cite two figures: a six percentage-point boost to GDP over ten years, and a net gain of 340,000 jobs. On the U.S. side, we await the imminent release – expected within a few hours in Washington – of the U.S. International Trade Commission’s (ITC) comprehensive report on the KORUS FTA’s projected impact on the U.S. economy. All the previous studies have projected substantial benefits for the United States and even greater gains for Korea.

Having completed the negotiations and signed the FTA, our two countries’ remaining challenge at this point is seeing it ratified in both national legislatures and implemented as early as possible so that the citizens of both Korea and the U.S. can begin enjoying its benefits. These benefits include lower prices and greater choice for consumers; enhanced export opportunities for businesses, not just the big corporations but also small and medium-sized businesses; and a more predictable, business- and investment-friendly regulatory environment for both Korean and U.S. companies. All these benefits and more are in the signed agreement, awaiting only ratification to take effect.

The Debate in the U.S. is Only Starting

In the United States, we are only now beginning to see the signs of a more vigorous, two-sided debate on the KORUS FTA. As is always the case with a trade agreement, the opponents of this FTA – those sectors that believe they will be adversely affected by the agreement – were the first to make their views known, and objected in strong and vocal terms. That caught the attention of the press, some of the U.S. Congressional leadership, and some other prominent U.S. politicians.

But now FTA supporters, particularly those businesses that stand to gain from the FTA once it is implemented, are starting to speak out. The think tanks are starting to get objective data out to U.S. lawmakers and the general public to fill the information gap about the FTA; the ITC report will be very important in this regard. Major newspapers across the U.S., from Seattle to New York – even Detroit’s major newspaper – are carrying pro-FTA editorials warning against allowing FTA opponents to monopolize the debate and pointing out that narrow political interests must not impede ratification of an agreement with such major economic and foreign policy implications for the United States.

I foresee the U.S. debate on the merits of the KORUS FTA will soon shift in favor of the FTA supporters – assuming that we can reach agreement on fully reopening the Korean beef market in the near term. It will be very helpful to the U.S. debate if the Korean National Assembly can take up the agreement expeditiously and proceed smoothly toward passage – since, according to the polls, a two-thirds majority of the Korean public supports the agreement.

I will be working hard, both in Korea and the United States, to make sure the KORUS FTA is ratified. I’ll continue to share the merits of the KORUS FTA with U.S. legislators and business representatives in Washington D.C. Sunshine is indeed the best means for clearing up misconceptions about the FTA; when presented with all the information, I believe the American public will come out enthusiastically in favor of the KORUS FTA.

KORUS FTA and Foreign Investment in Korea

Before looking at the anticipated effect of the KORUS FTA on investment, let’s look at the current state of U.S. foreign direct investment (FDI) in Korea. Before looking at the expected effect on investment of the KORUS FTA, let’s look at the current state of U.S. foreign direct investment (FDI) in Korea. The U.S. statistics for 2006 came out a few weeks ago, and showed a $4 billion increase in FDI from 2005, to $22 billion. In other words, U.S. investors boosted their FDI in Korea by almost one-quarter, in spite of the strong Korean won. (Incidentally, Korea measures FDI on a slightly different basis, and calculates the current stock of U.S. FDI in Korea at $37 billion.)

These statistics provide a useful baseline against which to measure the projected impact of the KORUS FTA on FDI. The eleven economic institutes that estimated the impact on GDP and employment I cited earlier also estimated the total impact on FDI. They projected that the KORUS FTA, once implemented, will boost Korea’s inward FDI by two to three billion dollars per year, or between $23 billion and $32 billion over a ten-year period. These sums are equal to or greater than the entire current stock of U.S. FDI in Korea.

If all this increase in FDI were expected to come from the United States, then the KORUS FTA would double the stock of U.S. direct investment in Korea over just ten years. However, many features of the KORUS FTA will improve the Korean investment climate for all investors, not just American investors. Some of this increase in FDI may come from other countries. Already we see a major non-U.S. bank, HSBC, seeking to enter the Korean market to take advantage of the opportunities that will be provided by financial sector regulatory reform, including the Capital Markets Integration Act, and looking forward to further reforms linked to KORUS FTA implementation. HSBC’s interest in entering multiple sectors of the Korean economy is, in my opinion, just a hint of the enthusiasm that a ratified KORUS FTA will generate. This interest, when allowed to translate into investment, will mean an increase in Korean GDP and more jobs for Koreans.

Regulatory Reform the Key to a Better Investment Climate

In the financial sector as in other sectors, regulatory reform is ultimately the key that will unlock Korea’s potential to attract more FDI. From 2004 to 2006, 35 global companies – including Google, Texas Instruments and other U.S. firms – opened R&D centers in Korea. Prudential and e-Bay have announced plans to relocate their Asian headquarters to Seoul. These firms are investing in Korea because they recognize the advantages in one of the most dynamic and wired economies on the planet, located at the crossroads of northeast Asia. They also recognize the steps toward reform that Korea has taken over the last ten years in a number of areas, including financial market and telecommunications regulation, IPR protection, corporate governance, and administrative procedures.

At the same time, the environment for foreign investment in Korea, including American investment, remains challenging. While the highest levels of the Korean government are committed to creating a welcoming environment for foreign investors, unfortunately, not all in the Korean public, the Korean media, or even some lower levels of the Korean government exhibit a similar welcoming attitude. Some observers have perceived an ambivalence in some circles toward foreign investment, and suggested it may be rooted in broader dissatisfaction with the current rate of economic growth and uncertainty about future employment prospects.

The Korean government, in its attempt to make Korea a regional hub in a number of areas, has pursued a regulatory reform agenda that has led to many improvements for foreign investors. But to a knowledgeable audience like this one, I must also note that, even with the improvements that have been undertaken to date, the Korean regulatory environment continues to pose a significant challenge to both foreign and domestic investors. Greater transparency and predictability remain reform goals that would benefit all investors and truly enhance Korea’s business environment. In addition, in other areas such as IPR protection and corporate governance where there has admittedly been progress, there is nonetheless still room for improvement.

Now, I feel free to speak frankly because I believe all of us in this room share the commitment to the kinds of reform that I have mentioned. I believe my Korean friends present this evening are presumably also keenly interested in ending the so-called “Korea Discount” that keeps Korean companies trading at smaller multiples of earnings than their foreign counterparts. The Chairman of the Korean Free Trade Commission said in 2005 that the main factors behind the Korea Discount include “opaque accounting techniques, less respect for minority shareholders, and insufficient openness.” Recent cases have shown that corporate governance remains an issue of concern.

Going forward, Korea needs to establish a clear record of even-handedness in its treatment of alleged infractions by foreign and domestic investors of all classes and sizes. Everyone should obey the law; everyone should play by the rules and be held to the same standard. The impression of a double standard between treatment of foreign and domestic investors, or between the rules for the largest companies and all other companies, works against Korea’s ambition to become a financial hub in this region.

The key point I would like to make about the FTA in this context is that it presents an opportunity to expand all of our existing business-to-business relationships and create new ones by addressing many of the issues in the Korean business environment that I just discussed. The United States and Korea signed a high-level, comprehensive FTA that goes well beyond a lowering of tariffs to include the elimination of the real barriers to trade and investment between our countries, including the non-tariff barriers.  The negotiators dug deeply into the details of our respective regulatory regimes in a number of sectors, to see where we could agree to cut red tape and open up investment, and they succeeded in finding a number of innovative opportunities to break down bureaucratic impediments and build up institutional resources for foreign investors.

Conclusion

In conclusion, the United States and Korea already have a very strong investment relationship. As Korea has opened to foreign investment over the past ten years, American investors have sought out opportunities in this market, resulting in $22 billion in U.S. foreign direct investment in Korea, according to our most recent data. In addition to its many other economic and foreign policy benefits, the KORUS FTA offers the possibility of nearly doubling the U.S. direct stake in the Korean economy. The FTA may face some challenges on the road to ratification, but I believe the arguments in favor of ratification are much more persuasive than those against.

Steps like the KORUS FTA and the Capital Markets Integration Act are major steps toward a more welcoming climate for foreign investors. They are needed and encouraging steps to help bring Korea’s investment climate into line with global best practices. I urge the Korean government to continue its improvements in regulatory procedures, corporate governance, and equal application of the law toward all market participants to make this an even more hospitable environment for foreign companies and foreign investment.

I wish you all a pleasant Chuseok season. I hope we can all appreciate that, at this time when the heavens are high and the horse is fat, the winds that blow the yellow dust out to sea and leave the clear skies that so typify Korea in autumn also may bring deeper change. Let us make this Chuseok season one that, with the illuminating effects of its autumn sunshine, signals a turning of the tide in Korean and American attitudes toward ratification of the KORUS FTA. If we can commit to that goal, this Chuseok will be remembered as one that ushered in an era of sustained abundance and was the cause for real thanksgiving by us all.