What are the Objectives of
the U.S.- South Korea Free Trade Agreementfor Korean Wave Diplomacy?

A Research Paper
Presented to
Graduate School of Public Policy,
The University of Tokyo

51-138077
Yamanouchi Yuka
July 2014

Abstract
I investigate South Korean objectives of the U.S.-South Korea Free Trade
Agreement (KORUS FTA), which forced Korea to change their copyright law
and screen quota system.

KORUS FTA could be a turning point of theirinternational trade policy of popular culture: the Korean Wave diplomacy.
The basic model I employ is derived from a two-level game, and I analyze anegotiation process of the agreement from a Korean Wave perspectives. In
order to know the Korean precise objective of the FTA, I focus on domestic
preferences both in U.S. and in Korea, which cause domestic win-set size.
As a conclusion, I adopted a part of my hypothesis that Korean
government conceded U.S. in its negotiation process.

However, I found it

dubious that Korea lost an advantage of cultural trade by agreeing on the FTA.
The fact suggested that quota and copyright amendments were also beneficial
for Korean home country in the government understanding.

First, theadministration knew well that deregulation might not always hurt Korean
Wave phenomenon, but even boost it.

Second, Korean administration thought

TRIPS-Plus regime important to guard their culture by beating aggressively
illegal products.

Keywords; U.S.-South Korea Free Trade Agreement, Korean Wave, Intellectual
Property, Screen Quota, Two-Level Game

Preface
Since the late of 1990s, Korea has increased the amount of export under its
original trade strategy in order to recover domestic economy damaged from
Asian currency crisis.

Korean Wave, which is an international cultural

phenomenon and diplomacy, is one of the good examples which havesucceeded in worldwide.

Today Korean cultural contents spread globally thus

most people in the world know one or two titles of the contents including
broadcasting, movies and music.
However, I wonder that KORUS FTA is really beneficial for Korea,
especially regarding to Korean Wave.

It is because Korea has 2 big

disadvantages in the FTA: screen quota reduction and copyright law revision.
Korea made these concessions to U.S. in 2006 and 2011 just to conclude an FTA.
In my understanding, each Korean trade policy is so clever that industries cangain great profits in foreign countries now and future.

I believe that Korea is a

professional country to promote both FTAs and international cultural export, sothat question whether the Korean decision was really right.
My hypothesis is that U.S. took a coercion strategy while Korea took acooperation strategy in the negotiation process of KORUS FTA.

I consider that

Korea would lose an advantage of cultural trade after the FTA. Chapter 1 isabout the overview of KORUS FTA and Korean Wave. I also maintain therelation between them.
paper.

In Chapter 2, I introduce a basic model I use in this

In Chapter 3 and 4, I investigate the reason why Korea agreed the

KORUS FTA by analyzing the negotiation process.
domestic matters both in U.S. and Korea.

iii

I mainly focus on theI am deeply grateful to Prof. Nobuhiro Hiwatari for invaluable lecturesand suggestions for this paper. We received generous support from members
in seminar and all of my friends.

Of course, all remaining errors are theauthor’s responsibility.
July 22, 2014

iv

Contents
Abstract ...........................................................................................ii
Preface ........................................................................................... iii
1.

Overviews ................................................................................... 1

1.1. What is KORUS FTA? ..................................................................................... 1
1.2. Korean Wave Diplomacy.................................................................................. 3
2.

Methodology ............................................................................... 8

2.1. Models for International Negotiation ............................................................. 8
2.1.1.

Two-level Game Theory............................................................................. 8

2.1.2.

Coercion Strategy .................................................................................... 10

2.2. Research Framework ......................................................................................11
3.

U.S. Side .................................................................................. 123.1. Level II in U.S. ............................................................................................... 12
3.1.1.

Level II Preferences(1): Screen Quota.................................................... 13

3.1.2.

Level II Preferences(2): Copyright Law ................................................. 14

3.1.3.

Level II Preferences(3): Anti-Americanism............................................ 15

3.1.4.

Level II Institutions: Strong Power of Industries.................................. 17

3.2. Level I: Coercion Strategy ............................................................................. 17
4.

Korean Side .............................................................................. 19

4.1. Domestic Level ............................................................................................... 19
4.1.1.

Level II Preferences(1): Screen Quota.................................................... 20

4.1.2.

Level II Preferences(2): Copyright Law ................................................. 23

4.1.3.

Level II Preferences(3): Subsidy ............................................................. 24

4.1.4.

Level II Institutions: Strong Power of Administration.......................... 26

4.2. Level I in Korea.............................................................................................. 27
5.

Conclusion ................................................................................ 28

Appendix ........................................................................................ 32
References ...................................................................................... 34

v

vi

1.

Overviews
In this chapter, I introduce some concepts or background of KORUS FTA

and Korean Wave.
FTA.

In Section 1, I mention about a characteristic of KORUS

Then in Section 2, I turn to overview of Korean Wave diplomacy withusing some data.

Finally in Section 3, I argue the relation between the FTA

and the diplomacy, through discussing Korean 2 disadvantages resulted fromits negotiation.

1.1. What is KORUS FTA?
The U.S.-Korea free trade agreement, or KORUS FTA, is a trade
agreement between two large economies: the United States and South Korea.
The countries signed it on June 30, 2007, and completed their review of themeasures and brought the agreement into force on March 15, 2012.

The

treaty's provisions eliminate 95% of each nation's tariffs on goods within five
years, and also create new protections for multinational financial services andother firms. This is the U.S.'s first FTA with a major Asian economy, and thelargest trade amount since the North American Free Trade Agreement(NAFTA) in 1993. For Korea, this FTA is the second largest one following theEurope Union (EU)-Korea FTA which entered into force in 2011.
U.S. and Korea have had a strong relationship since the middle of 20th
century, which is mainly attributed in security ties.

Their economic

relationship became firmer in the 1980s and 1990s, and Korean exports to U.S.
surpassed 24 billion dollars by 1995.

However after the 9.11 terrorist attacks,

critics on U.S. troops stationed in Korea made the relation worse.
1

Bothgovernments were concerned about the decrease of trade between the twocountries, thereby both governments decided to take a look at the possibility ofnegotiating an FTA.
At the beginning of 21st century, their international trade policy wasfortunately same. U.S. considered that KORUS FTA was a great opportunity
to make a worldwide regime by a domino effect triggering other FTAs.

Until

1980s, U.S. had led the WHO/GATT system, which is initially based on the
Reciprocal Tariff Act enacted in 1934 between U.S. and separate countries
particularly in Latin American.

After the breakdown of the Seattle WTO

Ministerial Conference in 1999, U.S. began to focus on bilateral agreements.
U.S. had a strong object to conclude a bilateral FTA with a larger economy than
before.

Korea also aimed to conclude bilateral agreements as early as possible

because they wanted to beat their economic rivals; Japan and China. Throughexperiencing great depression after Asian financial crisis in 1997, Korea
changed their trade strategy from WHO/GATT system to multi-track FTAs.

It

was so successful that Korean government had sought to more FTAs with
developed countries.

Though it might be possible that the FTA strategy of U.S.

and Korea differs in the future, but at the beginning of 21st century, their object
was fortunately same.
Nevertheless compared to other FTAs, the KORUS FTA took a quite longtime with its negotiation.

Since the negotiation started, opinions in bothcountries had divided into whether the FTA could make their own economy
rich or not.

Some studies by think tanks and government agencies argued that

the KORUS FTA must be beneficial for both U.S. and Korea; others said that it2

would cause serious damage to domestic infant industries.

Before reaching anagreement, U.S. set tough conditions, while Korea made some concessions with
amendments of regulations including screen quota and copyright.

1.2. Korean Wave Diplomacy
Over the last decades, international trade of popular culture has attracted
great attention at global level. Korean Wave, or Hallyu in Korean language, isa recent cultural phenomenon of South Korea. This is used by the government
as a soft power tool to engage with the masses of young people all over theworld.

Since the mid-1990s, Korea has produced lines of fascinating popular

culture, which quickly spreads across countries around the world.

For

instance, “Gangnam Style,” which is a song released as a single of South Korean
musician Psy, became the first YouTube video to reach a billion views. Under
the influence of a success of such as “Gangnam Style,” the amount of Korean
cultural exports has increased drastically for these several years.
Such boom of culture as above is often due to industries, but Korean Wave
is not irrelevant to governmental policy. The Figure 1 shows a transition of
the amount of Korean cultural contents export. I pick up three typical Korean
contents; broadcasting, movie and music. I do not deal here with animation
because of some statistical reasons. It should be emphasized that throughsome minor fluctuations the export of three goods in 2012 was 489,093
thousand dollars, which is approximately 22.5 times as much as that in 1998.

3

Figure 1

Export of Korean Cultural Contents
Music	
 Movie	
 Broadcast	 600,000	 (thousand dollar)	
 500,000	
 400,000	 300,000	
 200,000	
 100,000	 0	
 Created based upon data from Ministry of Culture, Sports and Tourism (2007-2013)

We must notice that Korean Wave is not just a phenomenon but prudent
diplomacy. Figure 2 shows a transition of cultural budget in Korea from 1994
to 2012.

The percentage in figure is the budget of creative contents industry

and of media policy divided by total governmental budget.

=Budget	  of	  Creative	  Contents	
  Industry	
  &	
  𝑀𝑒𝑑𝑖𝑎	  𝑃𝑜𝑙𝑖𝑐𝑦Total	
  Governmental	
  Budget

×100

What is significant in this argument is that the cultural budget ratio increased
drastically in 1999 and reached 19% in 2012. We will see that the amount ofexport strongly correlates to cultural budget with one year lag.
number is in Appendix.

4

SpecificFigure 2

Percentage of Cultural Budget

20.0	
 
18.0	
 
16.0	
 

(%)	
 

14.0	
 
12.0	
 
10.0	
 
8.0	
 
6.0	
 
4.0	
 
2.0	
 
0.0	
 

Thus, the figures above mean that Korean administration has much to dowith Korean Wave phenomenon. The government has mainly targeted Asia
such as China, Japan or East Asia, but U.S. is also an important Korean Wave
market.

According to J.Yang(2012), North America is the second largest

continent that imports Korean goods, following to Asia.

Moreover, U.S.

audiences use the internet to watch Korean movies, dramas and music. Until
2011, k-pop videos on YouTube have been viewed 240 million times in the U.S.,
which are the second highest views.

Korean government must not disregard

U.S. market which consumes many Korean cultural contents.
In my understanding, however, Korea did not think much of the cultural
diplomacy in negotiation of KORUS FTA. From the standpoint of cultural
sectors, I would like to focus attention on two controversial issues. In KORUS
5

FTA, Korea has 2 disadvantages on export their cultural goods to the U.S..
First one is screen quota.

Korea agreed to make significant improvements

concerning treatment of broadcasting and audiovisual services by reducing
quotas on animation and locking in current content quotas in other areas.
Second point is copyright law.

The FTA strengthens protection for copyrights

of various cultural contents, including software, music, film, videos and text.
The following summary is taken from Office of the United States Trade
Representative (USTR) official website.

A more open broadcast market for U.S. audio-visual products!

Ensures improved market access for U.S. broadcasting and audiovisual
service providers, including through a commitment by Korea to allow
within three years 100 percent foreign ownership of program providers
for U.S. firms that establish a Korean subsidiary.

!

Agreement by Korea to decrease Korean TV content quotas for film andanimation and to increase the allowable content from a single country.

!

Locks in all other Korean content requirements at the least restrictive
level allowed under current law, including the motion picture screen
quota.

!

Contains a commitment by Korea to permit U.S. investment in IPTV
and to bind Korean content quotas in the platform.

Protection for Copyrighted Works in a Digital Economy
6!

Protects

music,

videos,software,

and

text

from

widespread

unauthorized sharing via the Internet by giving copyright owners theability to maintain rights over temporary copies of their works.
!

Provides extended terms of protection (e.g., life of the author plus
seventy

years)

forcopyrighted

works,

includingphonograms,

consistent with emerging international standards.
!

Establishes anti-circumvention provisions to prohibit tampering withtechnologies (such as embedded codes on discs) that are designed toprevent piracy and unauthorized distribution over the Internet.

!

Requires that government agencies use only legitimate computer
software, setting a positive example for private users.

!

Requires rules to prohibit the unauthorized receipt or distribution of
encrypted satellite signals to prevent piracy of satellite television
programming.

!

Provides rules for the liability of Internet Service Providers (ISPs) for
copyright infringement, reflecting the balance struck in the U.S. Digital
Millennium Copyright Act between legitimate ISP activity and theinfringement of copyright.

7

2.

Methodology
In Chapter 2, I introduce a research methodology which I use in thispaper: two-level game theory by Putnam (1988).

I also mention about coercion

strategy by Drezner (2003), which gives me a great implication to my paper.
In Section 3, I discuss about the research question and framework of thisresearch.

2.1. Models for International Negotiation
This section is about 2 models which are often used to analyze anegotiation process.

First one is two-level game theory.

In this paper, I use

the methodology to investigate Korean objectives of KORUS FTA.
is coercion strategy theory.

Second one

My hypothesis is based on this theory that U.S.

coerced Korea in the negotiation process.
2.1.1. Two-level Game Theory
I employ the following procedures named a two-level game in Chapter 3
and Chapter 4.

The two-level game is a basic model which explains

domestic-international interactions, cultivated by Putnam (1988). The politics ofmany international negotiations can usefully be conceived as a two-level game.
The point of the model is a focus on domestic matters.

His hypothesis is that it

is important to analyze the national level, because domestic groups pursue theirinterests by pressuring the government to adopt favorable policies, andpoliticians seek power by constructing coalitions among those groups.
Putnam states that at the international level, national governments seek to8

maximize their own ability to satisfy domestic pressures, while minimizing theadverse consequences of foreign developments.

In other words, thenegotiation of domestic administration is based not on egoism, but oncooperation with other national institutions.
Putnam defines the "win-set" for a given Level II constituency as the set of
all possible Level I agreements that would "win” when simply voted up or
down. The Level II win-sets are very important for understanding Level I
agreements.

The first reason is if domestic win-sets is larger, Level I

agreement becomes more likely, ceteris paribus.

By definition in Putnam’model, agreement is possible only when those win-sets overlap, and thus thelarger each win-set, the more likely they are to overlap. The second reason
why domestic win-set size is important is that the relative size of the respective
Level II win-sets will affect the distribution of the joint gains from theinternational negotiation.

The larger the perceived win-set of a negotiator, themore he can be "pushed around" by the other Level I negotiators.
It is clearly shown in Putnam’s investigation what determine the size of
the win-set.

He mentions that three sets of factors below are generally

important to understand.

In this paper, I analyze KORUS FTA negotiation

process by coordinating these three matters.
"

Level II preferences and coalitions"

Level II institutions"

Level I negotiators' strategies

The implications of win-set size are summarized in Figure 1, representing
9

a simple zero-sum game between Korea (K) and U.S. (U).

K and U represent
MM

the maximum outcomes for K and U, respectively, while K and U represent the11minimal outcomes. At this stage any agreement in the range between K and1

U is possible by both countries. If the win-set of U moves to U , the range of1

2

agreements would become smaller.

If U reduces its win-set still further to U ,3the two countries would suddenly find themselves deadlocked, for the win-sets
no longer overlap at all.

At that time, U.S. coerces Korea to make its domestic

win-set larger.

Figure 3

Effects of reducing win-set size

KM

UM
U1

U2

K1

U3

2.1.2. Coercion Strategy
Drezner (2003) investigate that successful instances of economic coercion
are much more likely to end at the threat stage than the imposition stage. The
model is very simple. The sender threatens to interrupt the status quo andblock a stream of economic exchange with the target unless the sanctioned
country acquiesces to a specific demand made by the sender. If the target
complies, sanctions are not imposed. If the target stands firm, the sender facesa choice between backing down or carrying out its threat and imposing
sanctions. Drezner examined his theory by an empirical test of sanctions usedor threatened in the pursuit of economic or regulatory aims.

Actually, amajority of these cases ended without sanctions being imposed. Thus I can

10

posit hypotheses as follows. U.S. used a threat strategy in order to fulfill theirpolitical objectives, saying that they did not conclude the KORUS FTA if Korea
did not change some of their laws. Korean politicians had economic objectives
to increase their amount of export with this FTA, so could not resist the U.S..

2.2. Research Framework
In this paper, I refer to the previous work by Putnam (1988) and get
implications for future international cultural trade policy in Korea throughanalyzing the negotiation process of KORUS FTA.

From the point of Korean

Wave, I consider the reason why Korean benefits from KORUS FTA were notlarge enough was that U.S. took a coercion strategy while Korea took acooperation strategy in the negotiation.

Under this hypothesis, I gather andorganize information on domestic and international negotiation process in eachcountry focusing on international cultural trade.

I suppose that domestic

win-set size in U.S. was small because Level II preference was to reject KORUS
FTA and because Level II core institution was weak, then U.S. government had
to coerce Korea to make their win-sets overlap.

On the other hand, domestic

win-set size in Korea should be large because Level II preference was to agree
on KORUS FTA and because Level II main institution was strong, then Korean
government could take concession and cooperation strategy.

11

3.

U.S. SideIn this chapter, I investigate U.S. objectives of KORUS FTA for

understanding why it coerced Korea.
preferences and institutions.

In Section 1, I analyze domestic

In U.S., industries including Hollywood film

desired that U.S. should fight with screen quota, copyright law, andAnti-Americanism in Korea. USTR was not strong enough to overcome claimsof industries, which concerned about only their own profits. Thus in U.S., thewin-set size was so small that they must coerce Korea to even revise some of
their regulations and rights.

3.1. Level II in U.S.
Since the beginning of 20th century, U.S. industries have tried to export
their cultural products worldwide.

The best example is motion pictureindustry in Hollywood, which has been the world's film capital.

In history, theexport of Hollywood was essential for the government not only to get profits
but also to spread the U.S. culture, moral or language. By the early 1920s, it issaid that Hollywood received 80 percent of the revenue from films shown inabroad.

In 21st century, it is more aggressive to aim at foreign market,

suffered from increased deficit in its domestic market due to the change inindustry structure.

W. D. Wallsa & Jordi McKenzieb(2012) examined the

dynamics of about 2,000 films over the period 1997 to 2007.

They note that, for

Hollywood, “International revenues have grown from roughly equal todomestic in 2000 to double the level of domestic revenue in 2009.”
12

Meanwhile, Hollywood has been targeted for what conservative critics asan anti-American agenda.

Both developed and developing countries haveoften attacked that Hollywood causes “cultural hegemony,” and tried to guard
their own cultural products.

Some of them establish a quota system as

non-tariff barrier. In addition, Hollywood today suffers from heavy losses bycounterfeiting, piracy or illegal downloading.

Therefore, so as to gain proper

profits, the Hollywood industry demands that U.S. government should fightwith three enemies in Korea before concluding FTA: traditional screen quota lax
copyrights, and growing anti-Americanism.

In negotiation process of KORUS

FTA, Hollywood industry used a strong influence to overcome suchdisadvantages in Korean market for themselves.

The office of USTR, which is

responsible for overseeing negotiations with other countries, exerted relatively
small influence.

3.1.1. Level II Preferences(1): Screen Quota
The first domestic preference of KORUS FTA was to limit screen quota in
Korean market.

Today, several countries enforce screen quotas owing toguard their original movies from foreign ones, especially Hollywood films in
U.S.. Europe countries are good examples including United Kingdom, whichis the first country to enforce screen quota in 1927.

It introduced arequirement for British cinemas to show a quota of British films, for duration of
10 years. In Spain minimum number of screening days of domestic films is
between 73 and 91 days, and in France 40 percent of the TV broadcasting must
be exclusively of French origin and additional 20 percent must be of EU origin.

13

U.S. regards these quotas as “non-tariff barriers,” and has forced toremove them for a long time. Regarding Korean quotas, the story alreadyhappened from South Korea-America BIT (Bilateral Investment Treaty) in 1997.
As a solution to Asian exchange crisis, President Kim Dae-jung suggested BITthat Korea should increase credibility of its economy and boost foreign
investment.

Instead of agreeing to enforce BIT, U.S. requested several

requirements in opening Korean market, including the limiting of screen quotas.
Though decreasing the duration of screening days to a certain extent in 1997,
Hollywood was not satisfied with the level. The U.S. continued to claim that
Korea should reduce its quotas to 1/5 of screening days each year.

3.1.2. Level II Preferences(2): Copyright Law
Second, I point out that the U.S. domestic opinion was to fight withcopyrights in Asia and in Korea. U.S. thought that the KORUS FTA should beseen as a model for future U.S. trade agreements on copyrights.

As oureconomies are becoming more digital-based, industrialized countries caused thewide spread of counterfeiting and piracy in developing countries.

Accordingto figures from the OECD project on counterfeiting and piracy, the amount ofinternational trade of counterfeit and pirated goods is growing and could haveamounted to 250 billion dollar in 2007. In recent years, EU and U.S. effort tostrengthen the protection levels of copyright beyond those established under
TRIPS, creating the TRIPS-plus phenomenon.
U.S. industries specifically complain about piracy rates in China.

The

International Intellectual Property Alliance (IIPA) estimated that business14

software piracy in China alone cost U.S. firms $3.4 billion in lost trade in 2009.
For protecting their own culture from counterfeiting and piracy, and for making
profit otherwise they lose, U.S. began to foster a greater awareness and a deeper
appreciation of copyright and other intellectual properties.

U.S. film

companies wanted to make an example copyright standard in other Asian
countries through KORUS FTA.
For U.S. industries, the most crucial problem in Korea is the massive
amount of illegal downloading of copyrighted works. In 2009 Korea was thesecond largest country of online music piracy in the world after China.

The

Korea Times argue that the survey by Hong Kong-based Music Matters was notreliable because it was based on a simple questionnaire just asking "Have you
downloaded music from the internet without payment?", but actually, theannual loss by illegal digital downloading was more than $1.7 billion in 2008 in
Korea, one of the most wired countries in the world. Thus, U.S. companies
eager to lock-in beneficial copyrights with the leading Asian economy.

3.1.3. Level II Preferences(3): Anti-Americanism
In addition, U.S. object of KORUS FTA was to improve their presence in
Korea. The events of 9.11 and the subsequent revision in military strategy led
U.S. to insist that they remain troops so that they could be rapidly deployedoutside the country to deal with crisis. These decisions triggered a debate in
Korea, which brought to the concerns that the U.S. was “abandoning” Korea.
The debate grew more heated after the Yangju highway incident occurred in
2002.

Now the U.S. government mentions that the troops will exit Korea in15

2014 or 2015, but the hard-left critics are still surviving in Korea.
The anti-Americanism itself in Korea was a most crucial point for U.S.
government that led them to conclude KORUS FTA.

Hollywood industry

wanted to cope with anti-Americanism because their amount of cultural export
tends to be affected by political positions or activities.

For instance, theamount of movie export from U.S. to Korea was 63,656 million Korean won in
2009, highest for these 7 years.

It was the year that anti-Americanism in Korea

was temporally calm down as both President Barack Obama and Lee sought for
better U.S.-Korea relationship.

Therefore, the U.S. government tried to

improve the relationship with Korea, by making Korea’s obscure regulatory
regime much clearer, eliminating many technical barriers to trade andabolishing Korea-specific rules and standards that do not conform tointernational norms.

Figure 4

Amount of Export from U.S. to South Korea

200,000	 180,000	 160,000	 140,000	 120,000	
 100,000	
 80,000	
 60,000	 40,000	 20,000	
 
0	
 
2006	
 

2007	
 

2008	
 

Music	
 2009	
 Movie	
 

16

2010	
 

Broadcast	
 

2011	
 

2012	
 

Created based upon data from Ministry of Culture, Sports and Tourism (2007-2013)

3.1.4. Level II Institutions: Strong Power of Industries
In the previous subsections, I find that U.S. industries including
Hollywood have three preferences in KORUS FTA, which bothered the U.S.
government in its negotiation process. Finally, I note the institution in U.S.
domestic level. According to Osawa (2008), U.S. had only a small win-set on
the TRIPS-Plus issue in KORUS FTA because of the weakness of a corenegotiator.

In U.S., office of the USTR is mainly concerned in FTAs, while

Congress, industries, and NGOs also have strong influence.

For instanceduring the negotiation of KORUS FTA, automobile or agricultural industries
also have affected to the administration.

In the matter of international cultural

trade, U.S. must not neglect assertions by Hollywood film industry.

Hence,USTR took into account the three strong requests by film industry which I
mentioned in subsections above.

3.2. Level I: Coercion Strategy
In international level, U.S. government made a coercion strategy for
KORUS FTA in so as to battle with screen quota, copyrights, andanti-Americanism in Korea. As a matter of fact, the USTR did not believe that
KORUS FTA brought them great benefits, for Korean export was greatlycompetitive while its import market was not so large.

When considering

about BIT negotiation in 1997 or Korean suggestion of FTA in 2004, USTR was
apparently negative on concluding them. On the other hand, industries suchas Hollywood were aggressive to negotiate with Korea in order to maximize
17their profits. USTR must consider arguments from each industry, thus had nochoice but to coerce Korean government.

18

4.

Korean SideIn this chapter, I investigate Korean domestic or international factors on

trade of culture in order to understand why Korea cooperated with U.S..
Section 1, I analyze domestic preferences and institutions.

In

In Korea, thegovernment was positive both on screen quota and copyright law, though there
were strong opponent by industries and consumers.

Contrary to U.S., Korean

governmental system on FTAs was so fast and flexible that suppressed those
opponents. Thus in Korea, the win-set size was large enough to cooperatewith U.S..

4.1. Domestic Level
Before considering on the KORUS FTA negotiation, I would like to makecertain of Asian currency and economic crisis which suddenly hit this country
in 1997. Until the late 1990s, Korea had made much of multi-lateral tradenegotiations under the WTO/GATT system, and was not affirmative bilateral
FTAs or regional trade agreements.

It went so far as to criticize regionalism inEurope and U.S., who had promoted EU in 1993 and NAFTA in 1994.
However, Korean government completely changed their principles since thefinancial crisis. Although the emergency financial assistance by International
Monetary Fund (IMF), Korea could not avoid the great depression, and Korean
economy ran into temporal confusion.

In 1998, they recorded -6.7% of growthrate of GDP and 7% of unemployment rate.
In order to get rid of the desperate situation, Korea strived to improve19

their export by opening foreign markets.

While the breakdown of the Seattle

WTO Ministerial Conference in 1999, it has accelerated to conclude bilateral or
multilateral FTAs with many other countries, which is sometimes called as
multi-track FTA strategy.

Most of the FTAs have been successful, and thegrowth rate of export has exceeded the growth rate of GDP every year since
2003.

Korean economy recovered by relying on not a domestic but a foreign

demand to complete the economic recovery.

Most people in Korea began tonotice the importance of promoting export.
Korean Wave has occurred as the background. Through their experience,
Korean government learned that cultural export also brought them wealth,before “soft power” was booming among developed countries.

Koreancultural industries came to cultivate foreign frontier because their domestic
cultural market was relatively small. Actually, the size of music market in
Korea was approximately 1/30 that of in Japan.

Korean government andindustries cooperated to go on abroad, and then Korean Wave became
extremely popular in the world.

The success of Korean Wave under amulti-track FTA strategy could make a domestic win-set much larger, thus took
a cooperative strategy in the negotiation on international trade of culture of
KORUS FTA.

4.1.1. Level II Preferences(1): Screen Quota
One of the controversial issues of KORUS FTA for Korean Wave wasscreen quota. In Korea, screen quota system has been enforced since 1967,
based on the idea that the Korean film market had lacked the ability to raise20

capital funds for films. Through some amendments, the system was morethan 2/5 of screening days each year and reciprocal screening of Korean andforeign films in cities of more than 300,000 of population until 1990s. In 1997,
Korea decreased the duration of screening days owing to U.S. pressure. Thisdecision caused Korean film industry’s strong objection that Hollywood would
destroy Korean domestic films.

Therefore, despite U.S.’s constant request, theno change had been made in screen quota for 5 years.
Interestingly, however, the ratio of Korean domestic films increased after
the reduction of quota.
film industry.

The following figure shows the transition of Korean

From 1998 to 2006, the percentage of domestic films soared atmore than twice.

Incidentally in 1998, the Korean government also loosened

strict import regulations of Japanese culture for making their cultural contents
more competitive in the long run.

The reform was more successful than

expected, thus in few years later Korean popular culture conquered Japanese
one in the world.

Through the limiting quotas, Korean government learned

that deregulation might not always hurt Korean Wave phenomenon, but evenboost it, and then accepted the U.S. proposal to change their traditional screen
quota.

21

Table 1

Film Industry in Korea

Number of domestic

Number of foreign

Percentage offilms produced

films imported

domestic films

1997

59

380

13.4

1998

43

290

12.9

1999

49

297

14.2

2000

59

359

14.1

2001

65

355

15.5

2002

78

266

22.7

2003

80

271

22.8

2004

82

285

22.3

2005

87

253

25.6

2006

110

289

27.6

Figure 5

Percentage of Domestic Films in Korea

30.0	
 
25.0	
 
20.0	
 
15.0	
 
10.0	
 
5.0	
 
1997	
  1998	
  1999	  2000	  2001	
  2002	  2003	  2004	  2005	  2006	 22

4.1.2.

Level II Preferences(2): Copyright Law

Some Korean people regarded copyright revision in 2011 as a worst
unequal treaty resulted from KORUS FTA, because most of the provisions are
based on TRIPS-Plus regime proceeded by the U.S., and because Korean
government seemed to accept the regime without even questioning it.

Koreanconsumers indicated as well that root of TRIPS-Plus is Common law, not on
Civil law which Korea had applied since 19th century.

Common law

recognized and enforced by the judgments and decrees of the courts, so people
need to read between the lines. Thus they argued that it was too complicating
to understand what was illegal or not.

Korean consumers as well worried

about the new regime, saying that they might be arrested even by downloadinga song on the internet.
On contrary, after careful consideration, Korean government decided toapply TRIPS-Plus because thought it important to guard their culture bybeating aggressively illegal products and getting proper profits.

Thecounterfeiting and piracy in their domestic market also bothered Korea.
Before the revision in 2011, it had threatened to cut pirates' connections,blocked pirate websites, or forced youthful downloaders into education
program, but all of them did not have clear effect. KORUS FTA was very
timely for Korean government to reform the copyrights from Civil law which
focuses on artists’ personal rights into Common law which includes industries’
economic rights.
We must also notice that the copyright amendment in 2011 have a minor
exceptional provision; the duration of broadcasting copyright protection23

sustained the life of the author plus 50 years. It is because they thought thatthe copyrights in U.S. are not still strict enough for ensuring the benefits ofbroadcasting industry.

Korea was not positive that U.S. does not permit

broadcasting rights individually based on a principle of reciprocity.

Thus

Korea made up their mind to wait for the WIPO’s decision, since WIPO’s
Standing Committee on Copyright and Related Rights, which is responsible forthe broadcasting negotiations, agreed on a new draft treaty around that time.
In any case, we can find that both the revision and the exclusion above were forprotecting domestic culture.

4.1.3. Level II Preferences(3): Subsidy
One of the main policies of Korean Wave is various subsidies on culturalindustries.

For a decade, Korean government has increased budget of

subsidies supported to make the industries competitive in the worldwide.

For

example, it gives money for post-production, which means to edit or translate
digital contents after the actual end of shooting the completed work.

Anadministrative agency supports promising cultural products which can be
spread into the world with minor improvements, and defrays from 70% to 90%
of its cost.

It also supports BCWW (Broadcast Worldwide), an international

trade fare of broadcasting business in Korea which is held every year since 2001.
The administrative institute supports its operation, giving a lecture by an expert.
Besides them, some Korean governmental institutions have given funding foroverseas showcases or exhibitions, tapping new market, or international
co-production. Table 3 shows the amount of budget for each subsidy.
24

Table 2

Budget for Subsidies in Korea(100 million Korean Won)

2001
Support for

2002

8

2003

2004

2005

2006

2007

2008

8

7.7

9.74

10

12.6

9.64

5

5

7

8

12.3

10.5

0.8

2

2

2

2

2

2.16

29.5

29.7

post-production of
television programs
Support for BCWW

1310Support for
showcases
Support for tapping
new markets
Support forinternational
co-production

Created based upon data from Ministry of Culture, Sports and Tourism (2002-2009)

In FTA other negotiations, countries often discuss that they should
alleviate domestic subsidies because they may reduce the amount of importfrom abroad.

Fortunately, when negotiating KORUS FTA, U.S. did notcriticize these cultural subsidies in Korea.

The first reason why U.S.

government missed the important issue is that it was more negative on
agriculture subsidy, which was quite high in comparison with other industries.
USTR assigned more priority to agriculture subsidy than to cultural one. The
next reason is that U.S. cultural industries including Hollywood did not worry
25

about the Korean cultural subsidies.

Hollywood is such a rich industry owing

to their long history that sometimes produces 1 film with 1 billion U.S. dollar,
and considers that the small subsidies in foreign countries are not painful forthem.

Since both U.S. government and industries look at Korean cultural

subsidies lightly, after the FTA negotiation Korea was able to sustain or evenincrease their subsidies for cultural industries which were most vital for Korean
Wave diplomacy.

4.1.4. Level II Institutions: Strong Power of Administration
Switching our attention to core negotiator, we find that the system of
Korean administration was effective. In 1998, Kim Dae-jung government took
concrete actions for FTAs along with the organizational reform.

The name of

Ministry of Foreign Affairs was changed to Ministry of Foreign Affairs andTrade (MOFAT), and it was given jurisdiction over external trade.

The

ministry played an important role to conclude FTAs with foreign small
economies at high speed.

This system is also flexible.

Under the negotiation

with large economies such as KORUS FTA, the authority was divided into
domestic and international sectors.

In addition, the KORUS FTA Support

Agency was established directly under the president.

This organized

governmental system could integrate domestic claims and achieved a large
domestic win-set.
The government knew well that there was still strong opposition to the
KORUS FTA.

Some opponents argued that Korea was not yet strong enoughto enter into the FTA with U.S., and that it would turn Korea “into a colony of26

U.S.” For this reason, governmental institutions appealed the benefits of the
FTA again and again on mass media, which achieved a great success until theagreement.

To take an example of a quota reduction, Ministry of Culture andTourism’s stance suddenly changed in 2004 due to a pressure from government.
Until then, the ministry was pro screen quotas. However, the government
constantly argued that screen quota was paralyzing other important policies,
thus the ministry altered its belief.

4.2.

Level I in Korea
In international level, Korean government had to make a cooperative

strategy because it considered that screen quota reduction and copyrights
revision would be beneficial for Korea too. In addition, U.S. did not argue
subsidies for Korean industries, which is one of the core policies for Korean
Wave.

Furthermore, the efficient system of the Korean government was also

helpful to integrate domestic assertions.

The KORUS FTA Support Agency

made possible to suppress to strong opponents.

Therefore, South Korea had alarge domestic win-set on KORUS FTA. Because of the large domestic win-set,
Korea took a cooperative attitude for negotiation with U.S., agreeing onchanging some rules.

27

5.

Conclusion
In this research paper, I analyzed what were the Korean objectives of

KORUS FTA, by focusing on their international trade strategy of popular
cultural contents: Korean Wave diplomacy.

The question I considered waswhether the FTA was really beneficial for the Korean Wave.

My hypothesis

was that Korean government conceded U.S. in its negotiation process, and that
it lost an advantage of cultural trade.
In Chapter 1, I introduced the concept of KORUS FTA, through discussing
its relation with Korean Wave phenomenon.

The administration has hadmuch to do with it since the late of 1990s, but in the FTA, made two concessions
which seemed to weaken the phenomenon.

First, they deregulated the screen

quota, which had supported their domestic film production since 1967.
Second, they amended the copyrights more adapted to TRIPS-Plus provisions,which U.S. had promoted just for protecting U.S. own culture in foreigncountries.
In Chapter 2, I introduced some of the previous papers and the basicmodel that I applied to, and explained my analytical method. To find thereason why Korea agreed on the KORUS FTA through revising of their vital
rules, I used a two-level game model by Putnam(1988) and an economic
coercion theory by Drezner(2003), both of which are helpful to analyze
international negotiation process.
In Chapter 3 and 4, the core of this paper, I collected information about
negotiation process in each country, and then organized them to get
28

implications for international cultural trade.
domestic preferences and institutions.

In particular, I focused on

As a result, I found the reason why U.S.

took a coercion strategy and Korea took a cooperative strategy.

U.S. industries,

which demanded to combat with screen quota, copyright law andAnti-Americanism, affected more on the FTA.
so small that USTR must coerce Korea.

U.S. domestic win-set size was

By contrast, Korean administration,

which was positive on quota reduction and copyright revision undersustainable subsidies, had strong power.

Korean domestic win-set size was solarge that the government conceded U.S..
So far, I adopted a part of my hypothesis that Korean government
conceded U.S. in its negotiation process.

However, I found it dubious that

Korea lost an advantage of cultural trade by agreeing on the FTA.

The fact in

Chapter 4 suggested that quota and copyright amendments were also beneficial
for their home country in the government understanding.

First, theadministration knew well that deregulation might not always hurt Korean
Wave phenomenon, but even boost it.

For instance, the ratio of Korean

domestic films soared up after the reduction of quota in 1998. In the same year,
the Korean government also loosened strict import regulations of Japaneseculture, and a few years later Korean popular culture conquered Japanese one
in the world.

Second, Korean administration thought TRIPS-Plus regime

important to guard their culture by beating aggressively illegal products.
Before the revision in 2011, Korea had already threatened pirates, counterfeitingor illegal downloading, but all of them did not have clear effect.
suggestion was timely for Korea to get proper profit in its domestic market.
29

U.S.

As a conclusion, I would want to go further and claim that alternative
Korean cultural strategies lay behind KORUS FTA: expanding import of U.S.
cultural contents, and conserving Korean domestic products.

Their firstalternative strategy was to increase the import from the U.S. for improving
quality of cultural contents in Korea and their relationship with U.S..
Korea was trying to repeat their history with Japan since 1998.

Namely,As I mentioned

before, it loosened import regulations of Japanese culture in the year, expectingthat the foreign high quality culture made their domestic products morecompetitive.

The reform was more successful than expected.

Thus theKorean government hoped that U.S. cultural contents inspired Korean ones.
In addition, the Korean second future cultural policy was to guard theirproducts by beating illegal products and getting proper profits.

Beforeconcluding KORUS FTA, Korea aimed to only get profit in foreign countries.
On the other hand, it reformed the copyrights from Civil law which focuses on
artists’ personal rights into Anglo-American law which includes industries’
economic rights. It also had a minor exceptional provision; the duration ofbroadcasting copyright protection sustained the life of the author plus 50 years.
Both the revision and the exclusion above were for protecting domestic
industries in domestic market.
In this research, there still exist to a number of shortcomings. As thisresearch is limited to purely cultural trade, I do not consider the possibility that
Korea now turned their policy to the other industries.

In 2013, President Park

Gun-hye has made the development of a “creative economy” the core of her
administration’s economic agenda. The agenda reflects consensus that Korea’s
30

future growth and prosperity depends on its ability to become a global leader indeveloping innovative new products, services, and business models. However,the new government seems to focus on science or technology like ICT as“creative” industries. Articles of the agenda were made by the Ministry of
Science, ICT and Future Planning and the Ministry of Trade, Industry andEnergy, not by the former pillar, the Ministry of Culture, Sports, and Tourism.
Under the new plan, Korea might start the second part of the creative economy
series. We need to pay attention on how the Park administration will deal
with broadcasting, music and film industries over the coming years.
that this paper has laid a foundation for such further research.

31

I believe

Appendix
Table 3Cultural Budget in Korea(billion Korean won)Total Budget(A) Budget of

Bufget of

Budget of

Ministry ofCreative

Media

Culture, Sports

Contents

Policy(C)and Tourism

Industry(B)1994

47,626.2

301.2

5.4

1995

56,727.3

383.8

15.2

1996

62,962.6

459.1

18.9

1997

71,400.6

653.1

13.2

1998

80,762.9

757.4

16.8

1999

88,485.0

856.3

100

2000

94,919.9

1,170.70

178.7

2001

106,096.3

1,243.10

147.4

2002

116,119.8

1,398.50

195.8

2003

115,132.3

1,486.40

189

2004

120,139.4

1,567.50

172.5

2005

135,215.6

1,585.60

191.1

2006

146,962.5

1,738.50

136.3

89

2007

156,517.7

1,425.00

128.4

69.3

2008

174,985.2

1,513.60

150.8

55.8

2009

196,871.2

1,735.00

242.2

56.2

32

2010

201,283.4

1,876.20

256.1

83.6

2011

209,930.2

1,960.30

249.1

113.6

2012

223,138.3

2,093.30

279.8

118.8

Figure 6

Correlation between Budget and Export

5000000	 (thousand dollar)	
 4500000	
 4000000	 y	 =	 13.709x	
 -	
 2E+06	
 R²	
 =	 0.91272	
 3500000	
 3000000	
 2500000	 2000000	
 1500000	
 1000000	
 500000	 0	
 0	  50000	
 100000	
 150000	
 200000	
 250000	
 300000	
 350000	
 400000	
 450000	 (million won)	
 Created based upon data from Ministry of Culture, Sports and Tourism (2013)33

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