A N D I T S P O S S I B L E E F F E C T O N

I N V E S T M E N T A N D O P E R A T I O N A L D E C I S I O N S O F A M E R I C A N M A N U F A C T U R I N G

O P E R A T I O N S I N C H I N A

The U.S. – South Korea Free Trade Agreement

Johan L. Claasen II

Agenda

Introduction

Methodology

Literature Review

Survey

Discussion of Results

Conclusion

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?

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

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

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

Agenda

Introduction

Methodology

Literature Review

Survey

Discussion of Results

Conclusion

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

Agenda

Introduction

Methodology

Literature Review

Survey Results

Discussion of Results

Conclusion

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 .

Effects of Other Free Trade Agreements

NAFTA

Expansion of the maquiladora industry

Mexico became a full-package manufacturer

North American apparel employment by country

82.6% 79.5%75.6%

60.3%49.3%

10.8% 15.9%

18.0% 33.3%

43.4%

6.6%4.6%

6.5%6.4%

7.3%

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200

400

600

800

1,000

1,200

1,400

1,600

1985 1991 1994 1997 2000

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plo

ym

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Canada

Mexico

United States

Bair, J., & Gereffi, G. (2003). Upgrading, uneven development, and jobs in North American apparel industry. Global Networks.

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.

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.

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.

Agenda

Introduction

Methodology

Literature Review

Survey

Discussion of Results

Conclusion

Survey Methodology

Designed a questionnaire – maximum relevant info

Range of cpys

Industries:

Textile

Bio-tech

Technology

Life Sciences

Public

Agenda

Introduction

Methodology

Literature Review

Survey

Discussion of Results

Conclusion

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

Discussion of Results - 2

Answers is industry driven

Many cpys unaware of details of KORUS

Making LT decisions; play „follow the leader‟

Agenda

Introduction

Methodology

Literature Review

Survey

Discussion of Results

Conclusion

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

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

Questions?