On Tuesday, October 11, 2011, the House is scheduled to consider H.R. 3080, the United States-Korea Free Trade Agreement Implementation Act, under a rule.  The rule provides for 90 minutes of debate with 60 minutes equally divided and controlled by the chair and ranking minority member of the Committee on Ways and Means, and 30 minutes controlled by Rep. Michael Michaud (D-ME) or his designee.  H.R. 3080 was introduced by Rep. Eric Cantor (R-VA), by request, on October 3, 2011 and was referred to the Committee on Ways and Means.  The committee held a mark-up session on October 5, 2011 and ordered the bill favorably reported without amendment by a vote of 31-5.

H.R. 3080 would implement the agreement establishing a free trade area between the United States and Korea.  The following is a sectoral breakdown of the changes that the agreement would provide, as outlined in H. Rept. 112-239 from the Committee on Ways and Means:

Agriculture: U.S. agriculture exports to Korea currently face an average tariff of 54 percent, whereas Korean agricultural exports to the United States face average tariffs of just 9 percent. The Agreement would remedy this by making more than half of current U.S. farm exports to Korea by value duty-free immediately upon implementation, including U.S. exports of wheat, corn for feed, soybeans for crushing, whey for feed use, hides and skins, cotton, cherries, pistachios, almonds, grape juice, and wine. The

Agreement would also address key non-tariff barriers. For example, Korea would recognize the equivalence of the U.S. food safety system for meat, poultry, and processed foods.

Manufacturing: The Agreement would significantly lower both tariff and nontariff barriers to U.S. exports of manufactured goods. Upon implementation, over 80 percent of U.S. exports of consumer and industrial products to Korea would immediately become duty-free, with virtually all tariffs phased out over ten years. Key U.S. export sectors that would receive immediate duty-free treatment include aircraft, electrical equipment, and medical and scientific equipment. As a result, the International Trade Commission (ITC) estimates significant gains in U.S. exports in key sectors and products. For example, the ITC estimates that exports of passenger vehicles would increase by 54 percent as a result of tariff cuts alone.

Exports of motor vehicles and parts would increase an additional 41-56 percent as a result of the removal of non-tariff barriers. Similarly, exports of machinery and equipment would increase by more than 30 percent. Per the Agreement, Korea has also reaffirmed its commitment to fulfill its obligations under the WTO Information Technology Agreement (ITA) and made commitments to further open Korea’s market to U.S. high-tech exports by immediately eliminating tariffs on information and communications technologies not covered by the ITA. The Agreement would provide U.S. firms with lower tariff barriers than major competitors from countries that do not have trade agreements with Korea in effect.

Services: Korea is the eighth largest importer of services, with a domestic market worth $580 billion, making improved market access for U.S. services critical. The Agreement would provide U.S. service firms with market access, national treatment, and regulatory transparency exceeding that afforded by the WTO General Agreement on Services. Through the removal of existing barriers, the Agreement would facilitate entry for U.S. firms into Korea’s financial, insurance, telecom, audiovisual, express delivery, and professional services markets, among others. For example, the agreement would end many current Korean restrictions that allow only Korean nationals to provide professional services. Similarly, the ITC estimates, based on tariff equivalents, that the Agreement would reduce barriers in the banking sector by 62 percent. U.S. service providers that establish a local presence in Korea would benefit from strong investor protections included in the Agreement. In addition, the Agreement would provide improved access for international delivery services and establish a set course for future reform of Korea’s postal system with respect to delivery services.

Government Procurement: The protections found in the Agreement go above and beyond Korea’s commitments as a member of the WTO Government Procurement Agreement and would expand market access for U.S. companies. The procurement provisions would grant U.S. entities greater access and protection than they currently have to Korea’s $100 billion government procurement market. The Agreement would expand coverage to include nine additional key central government agencies. It would also reduce the threshold of coverage from $200,000 to $100,000 for procurement of goods and services.

Intellectual Property Rights: Under the Agreement, Korea would adopt higher and extended standards for the protection of intellectual property rights, such as copyrights, patents, trademarks, and trade secrets. The Agreement also provides enhanced means for enforcing those rights. Under the Agreement, each partner country would be required to grant national treatment to nationals of the other, and all laws, regulations, procedures and final judicial decisions would need to be in writing and published or made publicly available. The Agreement would lengthen terms for copyright protection, cover electronic and digital media, and increase enforcement to go beyond the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights.  Both parties would be obliged to provide appropriate civil and criminal remedies for willful violators of intellectual property rights.

Motor Vehicles and Parts: Under the Agreement, Korea will reduce its tariffs on

U.S. motor vehicles and parts and eliminate non-tariff barriers. Korea will immediately cut its tariff on U.S. autos in half and fully eliminate those tariffs after five years. Korea will also immediately cut its tariffs on U.S. electric cars in half and phase out those tariffs over five years. The exchange of letters on February 10, 2011 specifically addresses safety and environmental standards and other non-tariff barriers to U.S. exports. Korea has committed to strengthen transparency commitments, which will help to prevent the emergence of new non-tariff barriers and discriminatory taxes. The exchange of letters also strengthens other enforcement mechanisms and creates a special motor vehicle safeguard. The ITC estimates that removal of non-tariff barriers will add an additional$48-66 million in new exports. This opportunity is in addition to the $194 million in expected new exports from lower Korean tariffs on U.S. autos.

Textile and Apparel: Many U.S. textiles and apparel products meeting the Agreement’s rules of origin would immediately become duty-free and quota-free when exported to Korea. The Agreement’s rules of origin are generally based on the “yarn forward” standard. A “de minimis” provision would allow limited amounts of specified third-country content to go into U.S. and Korean apparel, giving producers in both countries needed flexibility. The Agreement would allow the use of “short supply” fabrics (that is, fabrics not made in Korea or the United States that have been determined not to be commercially available in either country) as inputs. The Parties agreed to a list of short supply fabrics, and the Agreement includes a process for adding more.  Customs cooperation commitments between the United States and Korea would allow for verification of claims of origin or preferential treatment, and denial of preferential treatment or entry if claims cannot be verified. A special textile safeguard would provide for temporary tariff relief if imports under the Agreement prove to cause or threaten serious damage to U.S. producers.

Investment: The Agreement would ensure a stable legal framework for U.S. investors operating in Korea. All forms of investment would be protected under the Agreement, including enterprises, debt, concessions and similar contracts, and intellectual property. With very few exceptions, U.S. investors would be treated as well as Korean investors in the establishment, acquisition, and operation of investments in Korea.

The Agreement draws from U.S. legal principles and practices to provide U.S. investors in Korea with a basic set of substantive and procedural protections that Korean investors currently enjoy under the U.S. legal system. These include due process protections and the right to receive fair market value for property in the event of an expropriation. The Agreement includes recourse to an investor-state dispute settlement mechanism for certain types of claims.

In the preamble, the Parties agree that “foreign investors are not hereby accorded greater substantive rights with respect to investment protections than domestic investors under domestic law where, as in the United States, protections of investor rights under domestic law equal or exceed those set forth in this Agreement.” This provision reflects one of the negotiating objectives of TPA to ensure “that foreign investors in the United States are not accorded greater substantive rights with respect to investment protections than United States investors in the United States.”

Labor: The labor chapter of the Agreement includes the obligation that the Parties adopt and effectively enforce the five core international labor rights as stated in the 1998 International Labor Organization Declaration on Fundamental Principles and Rights at Work. The Agreement would also require each country to enforce its own existing laws concerning acceptable conditions of work with respect to minimum wages, hours of work, and occupational safety and health. The obligations under the labor chapter are subject to the same dispute settlement mechanisms and enforcement mechanisms as obligations in other chapters of the Agreement. Neither Party would be permitted to waive or otherwise derogate from its laws that implement this obligation in a manner affecting trade or investment between the Parties. Procedural guarantees in the Agreement would ensure that workers and employers have fair, equitable, and transparent access to labor tribunals or courts. The Committee notes that Korea has shown a strong commitment to the protection of labor rights for Korean workers.

Environment: The Agreement would commit the Parties to effectively enforce their own domestic environmental laws and adopt, maintain, and implement laws and all other measures to fulfill obligations under covered multilateral environmental agreements. The Agreement also includes a fully enforceable, binding commitment that would prohibit the Parties from lowering environmental standards in the future in a manner affecting trade or investment. The Agreement would promote a comprehensive approach to environmental protection by encouraging voluntary, market-based mechanisms to protect the environment and by providing procedural guarantees that ensure fair, equitable, and transparent proceedings for the administration and enforcement of environmental laws. The Agreement would call for a public submissions process with an independent secretariat for environmental matters to ensure that views of civil society are appropriately considered. All obligations in the environment chapter would be subject to the same dispute settlement procedures and enforcement mechanisms as obligations in other chapters of the Agreement.

Other Matters

For budgetary offset purposes, Section V of the bill would also make revisions to certain tax and customs fee statutes.  The revenue effects of these provisions are discussed in more detail in the CBO analysis linked below.

The United States-Korea Free Trade Agreement was signed on June 30, 2007.  The Agreement covers all agricultural and industrial sectors, provides for greatly expanded market access for U.S. services, contains robust protections for U.S. intellectual property rights holders, and includes strong labor and environment provisions.  

U.S. industrial goods currently face an average tariff of 6.2 percent in Korea, paying over $1.3 billion a year.  Conversely, Korean exports enter the United States at an average tariff of only 2.8 percent – less than half the Korean rate.  The Agreement will significantly open up the Korean market, helping U.S. exporters gain greater access.  The International Trade Commission (“ITC”) estimates that U.S. exports to Korea would increase by $9.7-10.9 billion as a result of tariff reductions alone.

Trade Act of 2002 procedures:

H.R. 3080 is being considered by Congress under the procedures of the Bipartisan Trade Promotion Authority Act of 2002, included in the Trade Act of 2002. Pursuant to these requirements, the President is required to provide written notice to Congress of the President’s intention to enter into the negotiations. Throughout the negotiating process, and prior to entering into an agreement, the President is required to consult with Congress regarding the ongoing negotiations. 

The President must notify Congress of his intent to enter into a trade agreement at least 90 calendar days before the agreement is signed. Within 60 days after entering in the Agreement, the President must submit to Congress a description of those changes to existing laws that the President considers would be required to bring the United States into compliance with the Agreement. After entering into the Agreement, the President must also submit to Congress the formal legal text of the agreement, draft implementing legislation, a statement of administrative action proposed to implement the Agreement, and other related supporting information as required under section 2105(a) of the Trade Act of 2002.

Following submission of these documents, the implementing bill is introduced, by request, by the Majority Leader and the Minority Leader in each chamber. The House then has up to 60 legislative days to consider implementing legislation for the Agreement, and the Senate has up to an additional 30 legislative days. No amendments to the legislation are allowed under TPA requirements.

According to estimates by the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT), enacting H.R. 3080 would reduce revenues by $31 million in 2012 and by about $7.0 billion over the 2012-2021 period.  CBO estimates that enacting H.R. 3080 would increase direct spending by $53 million in 2012 but would decrease direct spending by about $7.0 billion over the 2012-2021 period. The net impact of those effects is an estimated reduction in deficits of $16 million over the 2012-2021 period. Pay-as-you-go procedures apply because enacting the legislation would affect direct spending and revenues.

Further, CBO estimates that implementing the legislation would cost $7 million over the 2012-2016 period, assuming the availability of appropriated funds.  CBO has determined that the non-tax provisions of H.R. 3080 contain no intergovernmental mandates as defined in the Unfunded Mandates Reform Act (UMRA), and would impose no costs on state, local, or tribal governments.

CBO has determined that the non-tax provisions of the bill contain private-sector mandates with costs that would exceed the annual threshold established in UMRA for private-sector mandates ($142 million in 2011, adjusted annually for inflation).

JCT has determined that the tax provisions of H.R. 3080 contain no intergovernmental or private-sector mandates as defined in UMRA.

More information on the CBO/JCT score can be found here.