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36–060PDF 2007

THE UNITED STATES–SOUTH KOREA FTA:

THE FOREIGN POLICY IMPLICATIONS

HEARING

BEFORE THE

SUBCOMMITTEE ON TERRORISM, 

NONPROLIFERATION, AND TRADE

OF THE

COMMITTEE ON FOREIGN AFFAIRS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

JUNE 13, 2007

Serial No. 110–89

Printed for the use of the Committee on Foreign Affairs

(

Available via the World Wide Web: http://www.foreignaffairs.house.gov/
(II)

COMMITTEE ON FOREIGN AFFAIRS 

TOM LANTOS, California, Chairman 

HOWARD L. BERMAN, California 

GARY L. ACKERMAN, New York 

ENI F.H. FALEOMAVAEGA, American 

Samoa 

DONALD M. PAYNE, New Jersey 

BRAD SHERMAN, California 

ROBERT WEXLER, Florida 

ELIOT L. ENGEL, New York 

BILL DELAHUNT, Massachusetts 

GREGORY W. MEEKS, New York 

DIANE E. WATSON, California 

ADAM SMITH, Washington 

RUSS CARNAHAN, Missouri 

JOHN S. TANNER, Tennessee 

GENE GREEN, Texas 

LYNN C. WOOLSEY, California 

SHEILA JACKSON LEE, Texas 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

DAVID WU, Oregon 

BRAD MILLER, North Carolina 

LINDA T. SA ́ NCHEZ, California 

DAVID SCOTT, Georgia 

JIM COSTA, California 

ALBIO SIRES, New Jersey 

GABRIELLE GIFFORDS, Arizona 

RON KLEIN, Florida 

ILEANA ROS-LEHTINEN, Florida 

CHRISTOPHER H. SMITH, New Jersey 

DAN BURTON, Indiana 

ELTON GALLEGLY, California 

DANA ROHRABACHER, California 

DONALD A. MANZULLO, Illinois 

EDWARD R. ROYCE, California 

STEVE CHABOT, Ohio 

THOMAS G. TANCREDO, Colorado 

RON PAUL, Texas 

JEFF FLAKE, Arizona 

JO ANN DAVIS, Virginia 

MIKE PENCE, Indiana 

JOE WILSON, South Carolina 

JOHN BOOZMAN, Arkansas 

J. GRESHAM BARRETT, South Carolina 

CONNIE MACK, Florida 

JEFF FORTENBERRY, Nebraska 

MICHAEL T. MCCAUL, Texas 

TED POE, Texas 

BOB INGLIS, South Carolina 

LUIS G. FORTUN ̃ O, Puerto Rico 

GUS BILIRAKIS, Florida 

ROBERT R. KING, Staff Director 

YLEEM POBLETE, Republican Staff Director 

SUBCOMMITTEE ON TERRORISM, NONPROLIFERATION, AND TRADE

BRAD SHERMAN, California, Chairman 

DAVID WU, Oregon 

DAVID SCOTT, Georgia 

RON KLEIN, Florida 

GENE GREEN, Texas 

JOSEPH CROWLEY, New York 

EDWARD R. ROYCE, California 

JOHN BOOZMAN, Arkansas 

TED POE, Texas 

DONALD A. MANZULLO, Illinois 

THOMAS G. TANCREDO, Colorado 

DON MACDONALD, Subcommittee Staff Director 

JOHN BRODTKE, Subcommittee Professional Staff Member 

TOM SHEEHY, Republican Professional Staff Member 

KINSEY KIRIAKOS, Staff Associate 
(III)

C O N T E N T S 

Page

WITNESSES 

The Honorable Karan K. Bhatia, Deputy Representative, Office of the United 

States Trade Representative ............................................................................... 13

The Honorable Christopher R. Hill, Assistant Secretary, Bureau of East Asian 

and Pacific Affairs, U.S. Department of State ................................................... 18

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

The Honorable Brad Sherman, a Representative in Congress from the State 

of California, and Chairman, Subcommittee on Terrorism, Nonproliferation, 

and Trade: Prepared statement .......................................................................... 3

The Honorable Edward R. Royce, a Representative in Congress from the 

State of California: Prepared statement ............................................................ 6

The Honorable Karan K. Bhatia: Prepared statement ......................................... 15

The Honorable Christopher R. Hill: Prepared statement .................................... 20

Letter to the Honorable Edward R. Royce, a Representative in Congress 

from the State of California, from Ms. Susan C. Schwab, U.S. Trade Representative, Executive Office of the President ................................................... 34

(1)

THE UNITED STATES–SOUTH KOREA FTA: 

THE FOREIGN POLICY IMPLICATIONS 

WEDNESDAY, JUNE 13, 2007

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON TERRORISM, NONPROLIFERATION,

AND TRADE,

COMMITTEE ON FOREIGN AFFAIRS, 

Washington, DC. 

The subcommittee met, pursuant to call, at 10:05 a.m., in Room 

2237, Rayburn House Office Building, Hon. Brad Sherman (chairman of the subcommittee) presiding. 

Mr. SHERMAN. Everyone, if folks could please take their seats. I 

will ask staff to close the door to get as much quiet as possible. I 

want to thank Ambassador Bhatia and Secretary Hill for joining us 

today as we look at the United States-South Korea Free Trade 

Agreement. 

Almost 200 years ago today, the 12th Congress rather than the 

110th Congress was here in Washington. They passed a foreign policy vote, and as a result, 2 months later Detroit was burned to the 

ground. Today the 110th Congress will also have a chance to pass 

a foreign policy provision that will accomplish the same result as 

what happened to the city of Detroit, namely the passage of the 

South Korea Free Trade Agreement. 

Now, as in the past, administration officials have come before us 

and at least told us that a particular free trade agreement would 

reduce the U.S. trade deficit, that it would not just create jobs and 

wealth in America, but it would create more jobs and wealth in 

America than it lost. Today things are different because now every 

published study shows that this agreement will cost us more jobs 

than it will create; cost us more wealth than it will create. 

According to a report issued in April of this year by the Korean 

Institute for Industrial Economics and Trade, an entity that I know 

Ambassador Bhatia quotes in his report, if this deal moves forward, 

the United States trade deficit with South Korea will increase by 

about $750 million per year for each of the next 10 years. Using 

numbers put forward by the Peterson Institute on International Economics, we see a similar picture. While they do not project out for 

as many years, they project an increase in the U.S. trade deficit of 

$880 million. 

I think Ambassador Bhatia said it very clearly when he was 

speaking in Korea and said, ‘‘From Chile to Singapore, the history 

of our free trade agreements is that the bilateral trade surpluses 

of our trading partners go up.’’ So there is no published report that 
2

indicates anything other than while this agreement will create 

some jobs and wealth in America that it will cost us more. 

But my focus here today in these hearings is not only that this 

agreement will have a devastating effect on America’s working 

families, not only that it will add to the United States trade deficit 

but that it will transfer to the executive branch the power to decide 

whether goods manufactured in North Korea, and particularly in 

the processing zones of North Korea, enter the United States with 

this agreement providing additional benefits to those imports. 

Now let me stipulate that the administration is made up of patriotic Americans dedicated to our nonproliferation policy, none more 

dedicated than Ambassador Hill. But each time the administration 

asks Congress to turn itself into a mere advisory body, they assure 

that that is a good result because after all, if the administration 

is exercising the power, they will do so in the patriotic interests of 

the United States. 

Now exactly how will this agreement provide the administration 

with the power to provide benefits to North Korean exports? The 

key is these new trade zones or processing zones. The first of these 

trade zones alone is expected to ultimately employ over 1 million 

workers and house up to 3 million people. 

In the words of the South Korean trade minister, this agreement 

leaves the possibility that any region in North Korea can be designated as a zone where products made there can be considered 

South Korean-made and eligible for the benefits of this agreement. 

So the South Korean people are being told that this agreement will 

help products created in those special zones. We in the United 

States are told the opposite. Where does the truth lie? 

The truth lies in the text of the agreement, which states that any 

product that is produced in any part of Korea over which the South 

Koreans exercise sovereignty gets all of the benefits of this agreement. Where does the South Korean Government exercise sovereignty? According to its Constitution, the entire Korean Peninsula. 

Moreover, North and South Korea can enter into agreements at 

any time to give some slight elements of sovereignty to the South 

over any of these processing zones. We can only look at Guantanamo or Ramstadt Air Force Base or Embassies here in Washington or illegally parked diplomatic cars down the street to know 

that different territory is subject to different kinds of sovereignty. 

Under this agreement, the slightest scintilla of sovereignty 

granted by North Korea or acknowledged by North Korea over any 

portion of these processing zones will give the goods made there 

carte blanche entry into the United States. 

We are about to consider a free trade agreement which is a highly unusual statute. You see, usually we in Congress write the laws. 

This time it is Ambassador Bhatia and his organization that will 

write the law, and they have a chance to write a clear one or to 

make it fuzzy and ask us to trust them. 

I have put forward over here and sent to both of our witnesses 

yesterday, I wish I had done it a little earlier in the afternoon, and 

I do not expect you to have fully reviewed it, language that can be 

included in that statute to make it clear that only Congress can 
3

allow goods produced in these zones to enter the United States 

with the benefits of this agreement. 

I will know when you submit your draft to this Congress whether 

you intend to have clear language to accomplish that goal—this is 

clear language; I am sure you can draft even better language—or 

whether your reaction would be, we will leave it vague, but trust 

us. As an old lawyer, let me tell you the one time I want it in writing is when somebody tells me it does not need to be in writing. 

So I look forward to seeing a clear agreement, not a statement 

that we should simply trust the administration to make the patriotic decision but rather a clear statement in the draft legislation 

that you submit to us that we cannot amend, which clearly states 

that this agreement is not as construed by the South Korean official that I quoted earlier. 

With that, let me yield to the distinguished gentleman from Orange County, California, the ranking member of the subcommittee. 

[The prepared statement of Mr. Sherman follows:]

PREPARED STATEMENT OF THE HONORABLE BRAD SHERMAN, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF CALIFORNIA, AND CHAIRMAN, SUBCOMMITTEE ON

TERRORISM, NONPROLIFERATION, AND TRADE

I want to thank Ambassador Bhatia and Secretary Hill for joining us today as 

we look at specific aspects of the proposed U.S.—South Korea FTA. 

As we look at this agreement, I am reminded of a certain lesson of history. On 

June 18, 1812, the United States declared war on Great Britain, and we made—

what proved to be—a catastrophic foreign policy decision: We invaded Canada. 

Our leaders mistakenly believed that the war would be an easy victory. They were 

wrong, and two months later we saw the fall of Detroit. 

Today, we are not considering an invasion, but a trade agreement with one of our 

most important allies: South Korea. However, before we go forward with a proposal 

that the Bush Administration tells us will benefit both sides, we should be certain 

that we are not setting into motion a plan that will once again lead to the demise 

of Detroit. 

Fundamental to answering these concerns is to ask how the U.S.—South Korea 

FTA will affect our trade deficit, which last year reached $836 billion. Our imports 

world-wide for 2006 ($1.8 trillion) were double the entire gross domestic product of 

South Korea. Unsurprisingly, we have a trade deficit with South Korea as we do 

with the vast majority of countries around the world. 

As one of our witnesses, Ambassador Bhatia, recently pointed out, these types of 

agreements tend to grow our trade deficit. He is not alone in this assessment. According to a report issued in April of this year by the Korea Institute for Industrial 

Economics and Trade, if this deal moves forward our trade deficit with South Korea 

will grow by as much as $750 million annually. 

Using the numbers from a study done by the Peterson Institute on International 

Economics we see a similar picture in which our trade deficit with South Korea will 

grow by another $880 million annually. 

A full eighty percent of this trade imbalance comes from the auto industry, which 

brings us strait back to Detroit. Last year, South Korea exported 700,000 cars to 

the United States, more than 100 times what U.S. carmakers sold there. 

We are told that there are some improvements to the barriers that U.S. automakers face, but they are not enough. Ford, Chrysler, and the United Auto Workers 

are all opposing this agreement because—in the words of a Ford Motor Vice President, ‘‘No manufacturer from any county can make significant gains in the Korean 

market.’’

But I am not going to criticize our friends in South Korea. They are doing what 

most countries do: they are looking out for their own best interests and the interests 

of their own workers. However, our own trade officials should be doing the same, 

which clearly they are not. 

The auto provisions are not the only issue that needs to be addressed. There is 

a Trojan Horse in this deal, which I believe will leave both sides unpleasantly surprised. 
4

Unable or unwilling to make the tough decisions regarding outward processing 

zones in North Korea—like the one at Kaesong—the negotiators have sent us a deal 

that leaves too many unanswered questions. 

This is not acceptable given the serious implications to our efforts to counter the 

North Korean nuclear weapons program. In October of last year, the North Korean 

regime tested a nuclear device. The response of the U.S. Trade Representative was 

to allow the inclusion of language in the US-South Korea FTA that paves the way 

for special treatment of goods produced in North Korea. 

We are told not to worry because the name of the only currently existing outward 

processing zone, the Kaesong Industrial Complex in North Korea, doesn’t actually 

appear in the text of the agreement. That rational is ridiculous. 

This agreement establishes a committee whose composition and real powers are 

still unclear, but nevertheless has the authority to negotiate the terms of outward 

processing zones in North Korea. 

These special zones will allow goods to be made in North Korea and be treated 

the exact same way as South Korean goods. We are not talking about a small exception. In the words of the South Korean trade minister this agreement leaves, ‘‘the 

possibility that any region in North Korea can be designated as a zone where products made there can be considered as South Korean-made.’’

How far-reaching could this be? The first of these trade zones alone is expected 

to ultimately employee upwards of one million workers and house up to three million people. 

Additionally the text of the agreement leaves open another possibility: differing 

interpretations of the borders of South Korea. The FTA defines South Korea as the 

land, maritime, and air space over which the Republic of Korea exercises sovereignty. While I certainly welcome the day that North and South Korea are peacefully reunited into a single, free democratic country, I must question the peculiar 

way in which this was put together. How and by whom will the sovereign authority 

of South Korea be determined? South Korea’s constitution says it extends to the 

Chinese border. 

We have been told that all of these concerns will be addressed eventually. We are 

told that Congress will retain the authority to authorize the special treatment of 

goods in North Korea. We have received assurances from the Bush Administration 

that additional fixes can still be added to this FTA even though South Korean officials have publicly stated that Seoul is unwilling to reopen the agreement. 

In order to codify these assurances I would suggest a clarification that we could 

have in the agreement or implementing legislation. 

I want to be absolutely certain that no special trade privileges are extended to 

North Korea without Congress making the final determination. 

I hope that the Administration witnesses will agree to the following: 

‘‘No good or service produced in whole, or in part, in the portion of the Korean 

Peninsula located north of the Korean War Armistice Line shall be eligible for the 

benefit of this agreement, unless such benefit is recommended by the Committee 

stipulated in Annex 22-c and thereafter authorized by a specific statute passed by 

the Congress.’’

Either this Free Trade Agreement does or does not allow special treatment for 

goods produced in North Korea. 

There can be no maybe and no middle line. 

The U.S. Congress must have the final word.

Mr. ROYCE. Thank you, Chairman. Thank you for yielding. I 

think I have a little bit of good news here because under this 

agreement, only Congress could allow inclusion of Kaesong goods 

in the United States. The concept here is a joint panel, a panel in 

which the United States and South Korea has representation. And 

if the United States disagrees with the inclusion of the importation 

of Kaesong industrial goods, which we are not going to do, it is not 

going to happen. 

Mr. SHERMAN. Will the gentleman yield? 

Mr. ROYCE. I am happy to yield to the gentleman. I am happy 

to yield on this moot point, but I will yield to the gentleman. 

Mr. SHERMAN. Okay. I want to clarify remarks as to one thing. 

I know the agreement includes Annex 22–C, which contains a process which involves turning things over to Congress for ratification. 
5

My opening statement was based on the assumption that while 

22–C was probably negotiated in good faith, ultimately the administration will regard it as a convenient red herring. It will not use 

the 22–C process and rather will simply agree that Kaesong and 

other areas are areas in which the South Korean Government exercises sovereignty, and under the agreement in chief, the products 

can come into the United States. So I was not unmindful of the last 

sentence of Annex 22–C. 

Mr. ROYCE. Well, reclaiming my time, Mr. Chairman, I think the 

red herring argument here more likely is the one that asserts that 

there is some way that the United States would allow goods from 

Kaesong, the industrial park, into the United States, into this 

country, because under this agreement as it is drafted now, you 

and I would have a vote on that. 

Let us say for a minute what would never happen did happen 

and the administration decided to switch its position. At that point, 

you and I and everyone else—and I have written the administration twice on this point—would be heard from. There is no constituency in the United States for what you are suggesting. I just think 

that that point needs to be made. 

What was agreed to here is a panel established to make recommendations on the possible inclusion of Kaesong goods. Any recommendation from this panel would require congressional approval. I do not think anyone seriously thinks the United States 

would accept goods coming in from North Korea. 

Now this proposed free trade agreement with South Korea is the 

world’s largest agreement of its kind. Given our significant trade 

with South Korea and even more importantly given our significant 

security relationship, this agreement deserves close attention. 

Starting in 2000 and every year since, I have co-chaired the 

United States-Republic of Korea Interparliamentary Exchange. The 

exchange has always included a panel on trade whether we are in 

South Korea or here negotiating. And I have sat through many sessions in which we pressed national assembly members to open Korean markets. This FTA has achieved much of what we pushed for. 

There is some dissatisfaction with the agreement’s treatment of 

autos. South Korea has not lived up to previous agreements to end 

its discriminatory treatment of American-made cars, which has 

choked off United States sales in South Korea. The administration 

has now negotiated the elimination of most Korean tariffs on 

United States autos. It has also attached Seoul’s non-tariff barriers, including with a new dispute mechanism backed by a punitive snap-back of United States tariffs on the 750,000 green cars 

sold in the United States should Seoul be found to be breaking the 

rules. 

While sympathetic to those wanting more, calls to tie U.S. tariff 

rates to the sale of X number of United States cars to South Korean consumers would undermine trade. There is a fundamental 

difference between demanding fair access and demanding market 

share, which we have never done. 

This agreement gives the United States beef industry an opportunity to retake the dominant position it held in South Korea in 

its import market in 2003 before mad cow disease. South Koreans 

I believe understand the need to apply science-based safety stand-
6

ards to United States imports. The beef issue, though, seems to 

take a new turn every day. 

It is unfortunate that the United States could not dent South Korea’s protection of its rice farmers. The main losers, though, are 

Korean consumers who continue paying four times the world market price for rice, just as American consumers lose out to our agricultural subsidies. 

I was pleased that the Kaesong Industrial Complex made goods 

were excluded from this agreement’s tariff benefits. As I mentioned, I have written the administration a number of times during 

the negotiations warning against their inclusion. It would have 

been indefensible to include goods produced under the wretched 

conditions of North Korea, directly benefiting its reckless and dangerous regime. 

The State Department should go one step further, dissuading 

South Korea from expanding Kaesong. We should not bolster 

Pyongyang, including facilitating the release of its ill-gotten gains 

parked in Banco Delta Asia. 

So, in summary, Mr. Chairman, I think although South Korea 

has agreed to a number of the points that we have been pushing, 

one of the questions for us is: Why did South Korea agree to this? 

I think South Korea entered the agreement to get more competitive. Having built its impressive prosperity through trade, South 

Korea now faces increasing competition from its neighbors, including some of the world’s most economically vibrant economies. 

Seoul has been liberalizing its economy at a quick pace essentially since its 1997 meltdown, but it knows it has to do more, gaining better access to the United States market but also freely accessing U.S. goods and services. This agreement does that, benefiting us, including many in my home state of California. 

It is worth noting that Korean tariffs will be lowered far more 

than United States tariffs, which are already low. I think all of us 

should reflect on that point. The United States and South Korea 

have an important strategic relationship. United States troops are 

stationed on the Korean Peninsula for our mutual security. If we 

are honest, though, in some ways, this relationship has been off 

track. While this agreement appears popular in South Korea now, 

anti-Americanism has been rising for years, and I do not rule out 

the possibility of this FTA further stoking it as IMF-imposed reforms brought resentments against up back in 1998. There have 

been South Korean labor strikes against this agreement. The State 

Department should prepare outreach efforts to counter this opposition. 

I look forward to hearing how this agreement will advance our 

economic and strategic interests from our witnesses here today, 

and I thank you very much, Mr. Chairman, for holding this hearing. 

[The prepared statement of Mr. Royce follows:]

PREPARED STATEMENT OF THE HONORABLE EDWARD R. ROYCE, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF CALIFORNIA

The proposed free trade agreement with South Korea is the world’s largest of its 

kind. Given our significant trade with South Korea, and even more significant security relationship, this agreement deserves close attention. 
7

Starting in 2000, and every year since, I have co-chaired the U.S.-Republic of 

Korea Inter-parliamentary Exchange. The Exchange has always included a panel on 

trade. I’ve sat through many sessions in which we pressed National Assembly members to open Korean markets. This FTA has achieved much of what we’ve pushed 

for. 

There is some dissatisfaction with this agreement’s treatment of autos. South 

Korea hasn’t lived-up to previous agreements to end its discriminatory treatment of 

American-made cars, which has choked off U.S. sales in South Korea. The Administration has now negotiated the elimination of most Korean tariffs on U.S. autos. It 

has also attacked Seoul’s non-tariff barriers, including with a new dispute mechanism, backed by a punitive ‘‘snap-back’’ of U.S. tariffs on the 750,000 Korean cars 

sold in the U.S. should Seoul be found to be breaking the rules. While sympathetic 

to those wanting more, calls to tie U.S. tariff rates to the sale of X number of U.S. 

cars to South Korean consumers would undermine trade. There’s a fundamental difference between demanding fair access and demanding market share, which we 

have never done. 

This agreement gives the U.S. beef industry an opportunity to retake the dominant position it held in the South Korean import market in 2003, before mad cow 

disease. South Koreans, I believe, understand the need to apply science-based safety 

standards to U.S. beef imports. The beef issue though seems to take a new turn 

every day. 

It is unfortunate that the U.S. couldn’t dent South Korea’s protection of its rice 

farmers. The main losers though are Korean consumers, who’ll continue paying four 

times the world market price for rice, just as American consumers lose out to our 

agricultural subsidies. 

I was pleased that the Kaesong Industrial Complex-made goods were excluded 

from this agreement’s tariff benefits. I wrote the Administration a couple of times 

during the negotiations, warning against their inclusion. It would have been indefensible to include goods produced under the wretched conditions of North Korea, 

directly benefiting its reckless and dangerous regime. The State Department should 

go one step further: dissuading South Korea from expanding Kaesong. We shouldn’t 

bolster Pyongyang, including facilitating the release of its ill-gotten gains parked in 

Banco Delta Asia. 

South Korea has entered this agreement to get more competitive. Having built its 

impressive prosperity through trade, South Korea now faces increasing competition 

from its neighbors, some of the world’s most economically vibrant economies. Seoul 

has been liberalizing its economy at a quick pace, especially since its 1997 meltdown, but it knows it has to do more, gaining better access to the U.S. market, but 

also more freely accessing U.S. goods and services. This agreement does that, benefiting us, including many in my home state of California. It’s worth noting that Korean tariffs will be lowered far more than U.S. tariffs, which are already low. 

The U.S. and South Korea have an important strategic relationship. U.S. troops 

are stationed on the Korean Peninsula for our mutual security. If we are honest 

though, in some ways this relationship has been off track. While this agreement appears popular in South Korea now, anti-Americanism has been rising for years, and 

I don’t rule out the possibility of this FTA further stoking it, as IMF-imposed reforms brought resentment against us in 1998. There have been South Korean labor 

strikes against the agreement. The State Department should prepare outreach efforts to counter this opposition. I look forward to hearing how this agreement will 

advance our economic and strategic interests.

Mr. SHERMAN. Thank you. Let me now yield to the vice chair of 

this subcommittee, Mr. Scott. 

Mr. SCOTT. Thank you very much, Mr. Chairman, and it is indeed a pleasure to join you in this very important hearing. Free 

trade is very important to the continued progress of the American 

and world economy, but I must state out front that I truly believe 

that this agreement is what I would refer to as a bad deal for the 

United States. 

You know, many American industries have been negatively impacted by our failure to win concessions on labor standards in trade 

agreements, from steel to information technology services and even 

some textiles like Levi’s jeans. No greater American name is there 

than Levi jeans. And to think that now we do not even have one 

plant in this country manufacturing and producing Levi jeans. In-
8

dustry after industry after industry has fled, literally fled this nation with whom we have open trade policies but who themselves 

have lax wage and labor standards. 

Let me just pause for a moment because there is a reason why 

we are looked upon as the greatest country in the world. It is because we have a great and dynamic free economy, and the cornerstone of that economy has been our standard of living. And our 

standard of living in this cornerstone has been our wage and labor 

standards. 

That is one of the reasons why people are willing to flock here, 

risk their lives to get here. Our immigration lines are just staggering with people wanting to get in this country because of our 

high standard of living, and our high standard of living is based 

upon very, very significant and important wage and labor standards. 

The negative consequences of our one-sided trade agreements are 

no more evident than in my own congressional district in the state 

of Georgia where American automobile manufacturers such as Ford 

and General Motors have completely closed shop, completely closed 

shop. 

And what makes matters worse and very intriguing and very revealing in this hearing is not only have Ford and General Motors 

closed their auto shops in Georgia, these factories have been replaced with Korean auto companies, Kia, but only after the state 

of Georgia bent over backwards to offer millions of dollars in tax 

breaks to locate there. That probably more than anything else 

points to the problem with this bill, with this trade agreement. We 

are certainly happy to have Kia in our state, but would not it be 

wonderful if we could have Kia in the state and Ford and General 

Motors? 

I am concerned that if the United States-Korea free trade agreement is ratified as written, this scenario will be repeated over and 

over again in communities all across this country. Now this is not 

to say that the United States and Korea free trade agreement is 

completely all bad news. It is not. But as I said, it is a bad deal. 

It would be a boon to Georgia’s agriculture sector because our agribusiness is Georgia’s economic engine, and I hope that this free 

trade agreement is amended so that perhaps I can at least think 

about voting for it and aid the expansion of this industry. 

However, this agreement is a long way from being acceptable to 

me and I hope to many others, not only because of the auto industry’s concerns mentioned above but because of the issues surrounding the outward economic zones and the Kaesong Industrial 

Complex. I fear that treating goods produced in the Kaesong Industrial Complex as though they come from South Korea will funnel 

hard currency to a government that is rapidly pursuing nuclear 

weapons technology. 

In addition, this treatment could lead to the creation of other 

outward economic zones in the North and lead to further exploitation of the North labor force, which is not protected by strict 

labor rights. Thank you, Mr. Chairman. 

Mr. SHERMAN. Thank you. Now let me yield to the former chair 

of the Small Business Committee, a man who I hope has similar 

views on the concept of fast-track as he does on the concept of this 
9

free trade agreement, a gentleman who understands these trade 

issues. Mr. Manzullo. 

Mr. MANZULLO. Thank you very much, Mr. Chairman, for calling 

this important hearing on the United States-Korea free trade 

agreement. I look forward to hearing about the details of the agreement, but at 11:00, I have to leave because we are engaged in negotiations with the Chinese on the Interparliamentary Exchange on 

opening markets there. 

As the senior Republican of the Foreign Affairs Committee, Asia 

Pacific Subcommittee, I know that South Korea has proven itself 

over the years as a consistent friend and ally of America. The Korean Ambassador, Mr. Lee, graciously visited the congressional district I am proud to represent less than a month ago, toured key industries, and he also thanked our Korean War veterans for serving 

to protect his country almost five decades ago. He thanked them 

for making his country free. 

As a strong supporter of free trade and fair trade, I have voted 

for every free trade agreement since being elected in 1992. I believe 

that the free trade agreement is a win-win for all countries involved. Advancing free trade agreements is better than the alternative, doing nothing or erecting barriers to imports. We should remember the lessons of the Great Depression. Higher tariffs do not 

protect jobs. 

In fact higher trade barriers make the economy worse. Ninetysix percent of the world’s consumers live outside the United States. 

We must embark on an aggressive trade agenda to tear down the 

remaining barriers to our exports to where the customers are located. That is why I was encouraged that the United States 

launched and successfully concluded a historic market opening 

agreement with South Korea, our seventh largest trading partner, 

the eleventh largest economy in the world. In 2006, United States 

exports to Korea reached a record $32.5 billion, an increase of 17 

percent. Illinois exports to Korea totaled $631 million in 2006. Electronic products and machinery, products that are made in the 16th 

congressional district, were the top Illinois exports to South Korea. 

The United States-Korea FTA would have a significant economic 

impact on both economies. There are many positive benefits in the 

agreement in the area of services, in particular, banking, insurance 

and express delivery, but there is a problem, a big problem, hopefully not a fatal problem. I do not think the agreement goes as far 

as I would like. 

I am very disappointed that our negotiators did not leverage the 

FTA to prod more changes to the Korean auto market that have 

been subject to nationalistic pressure for years. I have heard many 

say that Koreans just do not like the vehicles that foreign manufacturers produce, that the United States in particular does not make 

vehicles that Koreans want. 

I do not buy that argument. I know of at least one auto manufacturer in the U.S. that has done an excellent job of adapting to 

international market forces in the design of their vehicles. That 

company is Chrysler, located in my congressional district, and just 

spent $.5 billion to upgrade to be a state-of-the-art auto manufacturing facility. It is located in Belvidere, Illinois. It is geared toward exporting. It was retooled with exports in mind. 
10

The Chrysler plant is one of the precious few automotive manufacturers in the U.S. that produces right-hand drive vehicles for 

sale outside of North America. In 2005, roughly 18 percent of the 

vehicles produced at this plant were exported. In 2006, the Chrysler Belvidere plant began production of three of Chrysler’s best-selling vehicles: The Caliber, the Dodge Caliber, Jeep Compass, and 

the Jeep Patriot, wonderful automobiles. The Koreans just love to 

drive them. They are just great cars. We would love to make more 

and sell them to Koreans. 

Now the Belvidere plant exports over one-third of its production 

outside of the U.S., in my opinion, Chrysler did an excellent job responding to international market demand when they began production and sales of these best-selling vehicles. 

Let me give you a concrete example of my frustration with this 

Korean free trade agreement particular to automobiles. In 2006, 

the Belvidere plant exported 222 of these top-selling vehicles to 

New Zealand where they drive on the left side of the road and only 

102 to Korea. I have said 102 to Korea. This is astounding when 

taking into account that Korea’s auto market is 10 times the size 

of New Zealand’s. 

In 2006, Korean auto manufacturers exported over 750,000 vehicles to the United States alone, 750,000. At the same time, the 

total of all foreign cars exported to Korea is only 37,000, less than 

4 percent of the total Korean auto market. This is an issue not just 

affecting constituents I represent but every non-Korean automaker 

in the world. 

While some of the barriers to U.S. automakers have been addressed in this FTA, many of the non-tariff barriers have been inadequately addressed or not addressed at all, specifically the inequality in tariff savings, engine displacement tax, environmental 

standards, self-certification of safety standards, insurance discrimination for foreign autos and the methodology for determining the 

rules of origin. I think we have got a problem here, folks, a big 

problem. Non-tariff barriers are nonsense. They are imposed for 

the very distinct purpose of keeping United States automobiles out 

of Korea, and they must go. And they were not addressed in this 

agreement. And I am one of the most ardent free traders in Congress. When I have problems with this, then you have really got 

a problem. 

Because Korea has a well-documented history of imposing nontariff barriers, the agreement contains the auto tariff snap-back 

provision. Unfortunately the 25 percent tariff on Korean trucks is 

not included in this provision and somewhat to the leverage that 

the United States has to ensure that Korea honors its auto agreement is gone. Additionally, the snap-back provision sunsets in 10 

years. So even the limited leverage the U.S. retains to fight nontariff barriers will be gone. 

In light of these concerns, Ambassador Bhatia, I was extremely 

disappointed, very disappointed, overwhelmingly disappointed by 

your quote in the National Journal where you said, ‘‘I do not think 

there is more that needs to be done in reference to autos.’’ Why do 

not you talk to me? Why do not you come to Congress or those of 

us that represent the auto industry that has been devastated by 

the loss of tens of thousands of jobs in the past 2 years? 
11

I do not know who you are talking to, but you are certainly not 

talking to the representatives whose constituents are impacted by 

the fact that you have done nothing to penetrate the seal that 

Korea has placed around its country to not allow United States 

automobiles to come in. 

Apparently the Koreans are thinking the same thing. This just 

came out last night and we hear it at 3 in the morning. South 

Korea will not accept United States auto revisions. It will break 

the deal. Senior South Korean officials said Wednesday that Seoul 

will not accept any potential United States proposals to significantly revise auto trade provisions in the two nations’ pending bilateral free trade agreement. The Yonhap News Agency reported, 

‘‘Renegotiation of auto provisions will not happen.’’

Lee Hye-min, South Korea’s deputy chief negotiator in free trade 

talks with the United States, was quoted, telling SPS Radio, ‘‘The 

renegotiation would only clarify some language in the labor and environment provisions.’’ And listen to this. This is great timing. This 

is wonderful diplomacy. ‘‘If the U.S. requests South Korea to revise 

auto provisions, it would break the balance of current negotiation 

results,’’ Lee said. 

Well, in that sense, where is the fulcrum, and where is the balance tipped? At this point, I have never seen a free trade agreement come under so much scrutiny not only from people who do 

not vote for free trade agreements traditionally but from among us 

free traders. These comments do not reflect the political reality 

here on Capitol Hill, and I fear they could be very unhelpful in seeing this agreement ratified. 

The problem is this. Over the years, we have tried to mark down 

these non-market or these market barriers. We have been unsuccessful. Now if the Koreans were smart and they wanted this free 

trade agreement, they would have been showing due diligence and 

good faith over the past several years. But stubbornness and recalcitrance has replaced good common sense on the part of these good 

Korean people. And unfortunately our negotiators have not pushed 

far enough and deep enough in order to help out the U.S. automobile industry. 

I can talk about beef cattle and the emphasis on Kaesong and 

other things in there, but I am just telling you, Ambassador 

Bhatia, this has got very, very serious problems, and you are going 

to get it from me continuously, because my congressional district 

in 1980 led the nation in unemployment at 25 percent as we were 

devastated. We lost 10,000 highly trained workers and hundreds of 

families. 

We are just crawling back. We are just at the point now where 

we have invested hundreds of millions of dollars into that congressional district, with over 2,500 factories that are involved not only 

in automobile production but aerospace and other types of manufacturing. 

I want the people in the congressional district that I represent 

to be proud of this agreement. I do not want to have them secondguess me that I did something to endanger especially the auto provisions of it. Hopefully you can work out the beef issue as I have 

300,000 beef cattle in my congressional district also, including my 

very own small herd. So I look forward to the testimony. I look for-
12

ward, Ambassador Bhatia, to your going back and renegotiating 

this. I think we have got big problems. Ambassador Hill, thank you 

for being here. I know that you are in charge of that area of the 

world, though you did not do the negotiations, but you did a great 

job, a tremendous job. 

Mr. SHERMAN. Thank you. 

Mr. MANZULLO. [Inaudible.] 

Mr. SHERMAN. Thank you. I did allow the gentleman from Illinois 

to go a bit beyond our usual time limit, but his district is so dramatically affected by this agreement that I thought it a good use 

of discretion. 

Now the gentleman from Florida. 

Mr. KLEIN. Thank you, Mr. Chairman, and thank you for having 

this hearing today. I certainly agree and acknowledge a number of 

the issues. I happen to represent Florida now, but I grew up in 

Ohio and certainly have a lot of understanding of some of the 

issues that have been brought forward. [Inaudible] South Korea’s 

involvement in the Iranian energy sector. 

Specifically, according to the Department of Energy, in September 2002, Iran signed a $1.6 billion contract with South Korea’s 

LG Construction to develop phases 9 and 10 of the South Pars gas 

fields. Multiple South Korean companies have planned deliveries of 

new oil tankers to the National Iranian Oil Company in 2008 and 

2009, including Samsung H.I., which is producing three ships, 

Hyundai H.I., producing three ships, Hyundai Samho, producing 

eight ships, and Daewoo S.B., producing and delivering three ships. 

These are all oil tankers directly relating to Iranian energy sector. 

I just believe it is very important in terms of the foreign policy 

of the United States and what we believe is in our best interest as 

well as many other countries around the world to deal with Iran 

in a very forceful way, and that is the purpose of the Iran 

Counterproliferation Act. 

And we would hope that our friends and allies around the world, 

particularly ones who we are considering serious trade implications 

with, that these foreign policy implications are taken seriously, 

that these relationships with the energy sector in Iran are considered and managed in this trade policy and that we do not let South 

Korea undermine our national priorities. Iran is a dangerous regime, and its energy sector is fueling a nuclear program that could 

further destabilize the Middle East and have repercussions and 

consequences throughout the world. 

So please, Mr. Ambassador, I appreciate you being here today, 

both of you, and I hope that as we go forward that these issues are 

not only considered but are part of any free trade discussions. 

Thank you, Mr. Chairman. 

Mr. SHERMAN. I believe that is our last opening statement and 

was an excellent opening statement, and I hope those issues are 

addressed. I would now move to our first witness, knowing that the 

gentleman from Texas has indicated that he does not have an 

opening statement. 

Ambassador Bhatia has served as Deputy U.S. Trade Representative since November 2005. In his current position, he is responsible for overseeing United States trade relations with East Asia 

and Southeast Asia. He also oversees U.S. Trade Representatives’ 
13

management of environmental and labor issues. I hope very much 

that you have an opportunity to tell us not just the process that 

this agreement lays out but the likely economic results, and not 

just the benefit in the terms of exports and jobs created but also 

netted against imports and jobs lost. Ambassador. 

STATEMENT OF THE HONORABLE KARAN K. BHATIA, DEPUTY 

REPRESENTATIVE, OFFICE OF THE UNITED STATES TRADE 

REPRESENTATIVE 

Ambassador BHATIA. Thank you very much, Mr. Chairman. 

Chairman Sherman, Ranking Member Royce, and distinguished 

committee members, I am delighted to be able to join the subcommittee today, together with my colleague, Ambassador Hill, to 

discuss the United States-Korea Free Trade Agreement, or KORUS 

FTA. I would like to offer my complete statement for the record. 

Mr. SHERMAN. Without objection, both witnesses’ statements will 

be entered in full in the record. 

Ambassador BHATIA. Thank you. This is the most commercially 

significant free trade agreement the United States has implemented in nearly 15 years. The comprehensive trade agreement 

would eliminate tariffs and other barriers to trading goods and 

services, open South Korea’s agricultural market, promote economic growth in both countries and strengthen ties between the 

United States and South Korea. Just as importantly, it would bolster one of the United States’ most vital strategic relationships in 

an increasingly significant region of the world. 

I will defer to Ambassador Hill to describe the geopolitical implications of the KORUS FTA and how the deal will serve to fortify 

the now 50-year-old alliance between the United States and South 

Korea, and I will focus my remarks on the economic and trade benefits of this historic agreement. 

From an economic perspective, Mr. Chairman, the KORUS FTA 

offers us an opportunity to grow our already significant bilateral 

trade and investment relationship with one of the world’s most diversified and most vibrant economies. It has been said that choosing an FTA partner is like choosing a business partner. And with 

its fast-growing, dynamic economy and industries and its creative 

people, South Korea is precisely the kind of business partner the 

United States needs. 

Boasting an average annual growth rate of 4.6 percent over the 

past 6 years, South Korea is today the world’s eleventh largest national economy, with a nominal GDP of nearly $1 trillion. With approximately 49 million people, its per capita GDP last year was 

close to $20,000. South Korea is today the world’s thirteenth largest goods import market, our seventh largest goods trading partner 

and our seventh largest goods export market. 

And it is also one of our fastest growing major trading partners, 

with the growth of United States goods exports to South Korea in 

2006 at 17 percent and United States goods imports from South 

Korea growing, albeit at a substantially lower rate of 4.6 percent. 

Now just to place that relationship in perspective, the $78 billion 

in bilateral goods trade that we currently enjoy with South Korea 

is more than 70 percent of the total bilateral trade that we enjoy 

with all 10 trading partners with whom we have implemented 
14

FTAs since 2000, approximately $110 billion. And this is the case 

even though South Korea’s current average tariff for industrial 

goods is 7 percent—ours is approximately 3.5 percent—and for agricultural products is 52 percent. Ours is approximately 12 percent. 

And those Korean numbers of course will decrease substantially 

under the FTA. 

So now with this background in mind, allow me if you would to 

touch just a minute on a few of the many benefits that I think U.S. 

companies, U.S. farmers, U.S. service providers and above all U.S. 

workers will stand to gain from the KORUS FTA. 

First, it would grant unprecedented access to the South Korean 

market. Under the agreement, nearly 95 percent of bilateral trade 

in consumer and industrial products becomes duty-free within 3 

years of the agreement’s entry into force, including key U.S. exports such as electronic machinery and parts, auto parts, power 

generation equipment, most chemicals and medical and scientific 

equipment. 

U.S. farmers and ranchers, and, Congressman Scott, you obviously referenced the enormous benefit that Georgia will obtain in 

the agricultural sector from this FTA, but it is not limited to Georgia. It is nationwide. Our farmers and ranchers would benefit from 

the fact that more than half of current United States farm exports 

to South Korea, exports that currently face an average duty of 52 

percent, will become duty-free immediately. 

It contains an unprecedented package of provisions designed to 

ensure that United States automakers can compete in South Korea 

on a level playing field. Again, we can address this at greater 

length in the Q&A session, but the agreement would have the effect of immediately eliminating tariffs on United States automobiles, addressing the tariff barriers and requiring South Korea 

to address the non-tariff barriers that have precluded to date 

United States companies from gaining a greater share of the Korean market, including requiring Korea to overhaul its system for 

taxing cars based on engine displacement, addressing emissions 

standards. 

And all of this would be backed up by an innovative and unprecedented dispute settlement process that will serve as a powerful deterrent to any violation of the FTA’s auto-related provisions. 

Moving on, it provides substantial benefits for U.S. investors by 

establishing a stable legal framework that will protect all forms of 

investment. U.S. service suppliers, as the ranking member has 

mentioned and Congressman Manzullo has mentioned, stand to 

gain significantly from this agreement. 

Mr. SHERMAN. You are about a minute over. If you could just 

wrap up. 

Ambassador BHATIA. Okay. In the area of intellectual property 

rights, Mr. Chairman, the agreement provides significantly enhanced standards for protection. So there are substantial gains 

throughout the FTA for American stakeholders. 

You asked, Mr. Chairman, that I address the subject of benefits. 

I will point you to studies that have been done widely by everyone 

from the University of Michigan, the Institute of International Economics, many others, suggesting that the potential income gains to 

the U.S. economy from the KORUS FTA range from $17 billion to 
15

$43 billion. It is of course no surprise that it has obtained the substantial support from a diverse set of stakeholders. Again, I point 

you to my written testimony. 

Let me lastly in the time remaining then, Mr. Chairman, make 

reference to the importance of this agreement to our trade strategy 

in East Asia. I am happy to deal with this in questions, but I think 

it would be remiss for me not to point out that without the approval of this agreement, we will be substantially disadvantaged, 

Mr. Chairman, in our dealings with our trading partners throughout Asia, including strategically with many important competitors, 

China and others. Thank you. 

[The prepared statement of Ambassador Bhatia follows:]

PREPARED STATEMENT OF THE HONORABLE KARAN K. BHATIA, DEPUTY

REPRESENTATIVE, OFFICE OF THE UNITED STATES TRADE REPRESENTATIVE

INTRODUCTION

Chairman Sherman, Ranking Member Royce, and distinguished committee members, I am delighted to be able to join the Subcommittee today, together with my 

colleague Ambassador Hill, to discuss the United States-Korea Free Trade Agreement (or KORUS FTA). 

On April 1, the United States and South Korea successfully concluded negotiations on the KORUS FTA, an agreement that if approved by Congress, would represent the most commercially significant FTA the U.S. has implemented in nearly15 

years. This comprehensive trade agreement would eliminate tariffs and other barriers to trade in goods and services, open South Korea’s agriculture market, promote 

economic growth in both countries, and strengthen economic ties between the 

United States and South Korea. Just as importantly, the KORUS FTA would bolster 

one of the United States’ most vital strategic relationships in an increasingly significant region of the world. 

BENEFITS OF KORUS FTA

I will defer to Ambassador Hill to describe the geopolitical implications for the 

KORUS FTA and how the deal will serve to fortify the 50-year alliance between the 

United States and South Korea. I will focus my remarks today on the economic and 

trade benefits of this historic Agreement. 

From an economic perspective, the KORUS FTA offers us an opportunity to grow 

our already significant bilateral trade and investment relationship with one of the 

world’s most diversified and vibrant economies. It has been said that choosing an 

FTA partner is like choosing a business partner. With its fast-growing, dynamic 

economy and industries and its creative people, South Korea is precisely the kind 

of business partner America needs. 

Boasting an average growth rate of 4.6 percent over the past six years, South 

Korea is the world’s 11th largest national economy, with a nominal GDP of nearly 

$1 trillion. With a population of approximately 49 million people, South Korea’s per 

capita GDP last year was close to $20,000. South Korea is today the world’s 13th 

largest goods import market, the United States’ seventh largest goods trading partner, and our seventh largest goods export market. Korea is also one of our faster 

growing major trading partners, with growth of U.S. goods exports to South Korea 

in 2006 at 17 percent and U.S. goods imports from South Korea at almost 4.6 percent. 

Just to place that relationship in perspective, the $78 billion in bilateral goods 

trade we currently have with South Korea is more than 70 percent of the total bilateral trade that we enjoy with all 10 trading partners with whom we have implemented FTAs since 2000 ($110 billion). And, this is the case even though South Korea’s current average tariff for industrial goods is seven percent and for agricultural 

products is 52 percent, numbers that will decrease substantially under the FTA. 

With this background in mind, allow me to touch for a minute on just a few of 

the many benefits U.S. companies, workers, farmers, and service providers stand to 

gain from the KORUS FTA:

• The KORUS FTA would grant unprecedented access to the South Korean 

market. Under the Agreement, nearly 95% of bilateral trade in consumer and 

industrial products becomes duty-free within three years of the Agreement’s 

entry into force, including key U.S. exports such as electronic machinery and 
16

parts, auto parts, power generation equipment, most chemicals, and medical 

and scientific equipment.

• U.S. farmers and ranchers would benefit from the fact that more than half 

(or $1.6 billion based on 2003–2005 numbers) of current U.S. farm exports to 

South Korea will become duty-free immediately, including high value agricultural products such as almonds, pistachios, wine, and cherries. For many 

other key agricultural goods, such as pork and citrus products, the KORUS 

FTA will provide unparalleled access to the South Korean market and its 

prosperous consumer base.

• The KORUS FTA contains an unprecedented package of provisions designed 

to ensure that U.S. automakers can compete in South Korea on a level playing field. Besides immediately eliminating tariffs on most U.S. priority automobiles, the Agreement would require South Korea to overhaul its system for 

taxing cars based on ‘‘engine displacement’’ by reducing existing tax rates and 

eliminating the discriminatory aspects of key taxes. In addition, the FTA addresses current emissions and automotive safety standards that U.S. industry 

has identified as priorities to ensure that technical standards do not preclude 

U.S. automotive manufacturers from accessing the South Korean market. Perhaps most significantly, U.S. automakers would be protected by an innovative 

and unprecedented dispute settlement process that will serve as a powerful 

deterrent against any violations of the FTA’s auto-related provisions. This enhanced dispute settlement process will cut in half the time for disputes to be 

addressed and includes a ‘‘snap-back’’ provision that will allow us to suspend 

our tariff concessions on South Korean imports of passenger cars if Korea is 

found to have violated, nullified, or impaired an auto-related FTA commitment.

• For U.S. investors operating in South Korea, the KORUS FTA establishes a 

stable legal framework that will protect all forms of investment. Under nearly 

all circumstances, U.S. investors will enjoy the right to establish, acquire, and 

operate investments in South Korea on equal footing with local investors, and 

investor protections will be backed by a transparent, binding international arbitration mechanism. In short, I believe it is fair to say that the investment 

protections in this Agreement are as strong as those in any U.S. FTA to date.

• U.S. services suppliers also stand to gain significantly from this Agreement. 

Korea has vastly improved upon its WTO commitments in this FTA, providing meaningful market access commitments across virtually all major services sectors. In particular, Korea provided greater and more secure access to 

international delivery services and charted a course for future reform of domestic delivery services. South Korea also made particular strides on legal 

services, opening up for the first time to foreign legal consulting.

• In the area of telecommunications services, U.S. suppliers will benefit from 

South Korea’s agreement to permit U.S.-controlled companies to own 100 percent of South Korean telecommunications operators within two years.

• The KORUS FTA goes further than any prior U.S. FTA in securing benefits 

for U.S. financial services providers in areas such as market access, transparency, and due process. In addition, South Korea has agreed under the FTA 

to begin the process to ensure that the same rules and regulations apply to 

Korea Post as apply to private insurers.

• In the area of intellectual property rights, the Agreement provides significantly enhanced standards for protection and enforcement of a broad range 

of intellectual property rights, including trademark-, copyright-, and patentrelated provisions and will provide effective -protection and enforcement for 

emerging technologies.

Indeed, these are but a few of the many sectors in which benefits were secured 

for U.S. stakeholders in the course of the KORUS FTA negotiations. Substantial 

gains were also netted in areas including pharmaceuticals, electronic commerce, 

government procurement, standards, and competition. In addition, the Agreement 

will provide for important improvements in transparency and due process in South 

Korea, including through the most advanced transparency obligations in any U.S. 

FTA to date, which will benefit U.S. companies trading with South Korea across the 

board. 

These benefits, and the many that I have not had time to provide details on here, 

will generate significantly improved market access for U.S. companies. Consequently, U.S. exports can be expected to grow appreciably as a result of the Agreement. And, studies published by the University of Michigan, the Institute of International Economics and the U.S. International Trade Commission, among others, 
17

have estimated that the potential income gains to the U.S. economy from a KORUS 

FTA range from $17 billion to $43 billion. 

With this in mind, it is important to note that the outcome of KORUS FTA negotiations has been roundly lauded by many business groups. Statements of support 

for this deal have come from a diverse set of stakeholders, from the National Association of Manufacturers to the Recording Industry Association of America, from the 

American Council of Life Insurers to the National Pork Producers Council, from the 

Coalition of Services Industries to the Electronics Industry Alliance—all of which 

embrace the enormous commercial potential of this Agreement and recognize its significance to American businesses, farmers, ranchers, and workers. 

THE IMPORTANCE OF THE KORUS FTA TO THE U.S. COMMERCIAL POSITION IN EAST ASIA

Not only will U.S. stakeholders benefit from increased market access provided by 

the FTA, the Agreement is important to our trade position and strategy in East Asia 

as a whole. The FTA will offer American companies a preferential advantage visa`-vis competitors in the South Korean market, at a time when many of our global 

competitors are actively seeking to ‘‘lock-up’’ East Asia’s fast growing economies into 

trading relationships that would exclude the United States. It is worth reflecting on 

this trend. 

Today, there are some 19 free trade agreements in force among members of the 

Asia Pacific Economic Cooperation (APEC) forum, and many more either under negotiation or consideration across Asia.

• China already has an FTA with Association of Southeast Asian Nations (or 

ASEAN) that covers goods, and a comprehensive services FTA between the 

two parties will enter into force in July. In addition, the Chinese are actively 

negotiating or have proposed FTA discussions with South Korea, Japan, 

India, Australia, New Zealand, the GCC, Pakistan, and the South African 

Customs Union, among others.

• Japan has concluded FTAs with Singapore, Malaysia, and the Philippines, 

and is considering engagement with the major players within Asia, including 

South Korea.

• India has implemented FTAs with Thailand, Singapore, and Sri Lanka, and 

is actively entertaining discussions with the region’s larger economies.

• Demonstrating that the interest in establishing trade deals in Asia is not limited to the region itself, the EU launched FTA negotiations with South Korea 

on May 6, 2007 and is actively courting partners that include China, India, 

and ASEAN.

• We are witnessing efforts to construct an exclusive Asian regional free trade 

bloc—so-called ASEAN +3 or +6 arrangements.

A number of these FTAs unfortunately do not constitute high standard, comprehensive agreements of the type that the United States has negotiated. However, 

they do afford preferential trading positions to the companies of these countries and 

have the effect of placing U.S. businesses, workers, and farmers at a relative disadvantage in accessing fast-growing East Asian markets. This web of agreements 

also has the potential to encourage U.S. companies seeking to compete in these markets to relocate production to those countries. 

Against this backdrop, the KORUS FTA takes on added significance. To date, the 

United States has concluded two FTAs in this critical region—with Singapore and 

Australia, important but smaller economies. A successful FTA with South Korea 

could provide an important boost to U.S. efforts to remain an active economic presence in a strategically vital region that last year accounted for over 37 percent of 

total world GDP, 26 percent of global trade flows, and 29 percent of U.S. exports. 

A KORUS FTA would establish a model that we believe could be replicated with 

other Asian economies and could help us expand trade liberalization throughout the 

region. 

By contrast, any lessening of focus that results in our inability to complete agreements with major emerging-market economies like South Korea could have unfortunate consequences. It would likely result in a shift of the region’s attention away 

from strengthening their relationships with the United States to doing deals with 

other major trading partners. 

CONCLUSION

Members of the Committee, I submit to you that we have reached an agreement 

with South Korea of great economic and political significance to our country. In the 
18

next few weeks we plan to finalize and execute the Agreement, and in due course, 

submit it to Congress. 

From an economic standpoint, the potential benefits of the KORUS FTA to America’s workers, farmers, manufacturers, and service suppliers are undeniable. The 

KORUS FTA will certainly add to the track record of significant growth in U.S. exports and gains in U.S. export share produced by the United States’ recent FTAs. 

Politically, successful implementation is further evidence that a U.S.-South Korea 

bilateral relationship once centered solely on defense has evolved into one of the 

most dynamic economic partnerships on the globe. The KORUS FTA is the next step 

in broadening and modernizing a strategic alliance with a critical ally that is a vital 

force for stability at a time of change and challenge on the Korean peninsula and 

in the broader Northeast Asia region. 

Thank you.

Mr. SHERMAN. Secretary Hill, we will hear from you for 5 minutes. We will not count the Ambassador’s 21⁄2 minutes over against 

your time. 

Ambassador BHATIA. Thank you. 

STATEMENT OF THE HONORABLE CHRISTOPHER R. HILL, ASSISTANT SECRETARY, BUREAU OF EAST ASIAN AND PACIFIC 

AFFAIRS, U.S. DEPARTMENT OF STATE 

Mr. HILL. Thank you very much, Mr. Chairman. It is a great 

pleasure to address this committee and to deal with some of the 

foreign policy implications of this United States-Korea Foreign 

Trade Agreement. 

The United States’s relationship with the Republic of Korea is 

changing and it is growing into a very mature, healthy and balanced partnership, and we believe one of the greatest examples of 

the strength of this relationship is precisely this recently concluded 

United States-Korea Free Trade Agreement. 

While the agreement achieves many of our economic goals, it is 

important to note that the impact of this FTA will go far beyond 

bilateral commercial benefits. It is an agreement that will be a 

powerful symbol of our partnership with the Republic of Korea. It 

will augment our longstanding bilateral security alliance and the 

robust ties between our two peoples. It will create a new dynamic, 

reflecting both the growing sophistication of our relationship with 

the Republic of Korea’s increasingly positive global role. 

It will strengthen our relationship with one of our most important and reliable allies, serving as a pillar for our alliance in the 

21st century as our mutual defense treaty did during the last half 

of the century. It will decisively anchor the U.S. presence in this 

most dynamic and rapidly growing economic region in the world. 

I will let my colleague, Ambassador Bhatia, who oversaw the negotiation of this agreement, including through several sleepless 

nights in Seoul leading up to the April 1 conclusion, explain the 

benefits of the FTA for United States commercial interests and for 

our global trade liberalization strategy, and they are significant. 

I will focus my remarks on the agreement’s foreign policy implications. But, Mr. Chairman, before I do that, I have heard from a 

number of your colleagues a concern about United States autos, 

and I want to say that when I was serving in Korea as Ambassador 

and in fact in October 2004, a Chrysler representative came to me 

and asked if I would host a Chrysler auto show on the front lawn 

of the residence. And I made sure that other U.S. manufacturers 
19

understood that if they wanted to do that, I would do the same for 

them. 

And so I had several Chrysler models in front of the residence 

on the lawn. And we invited a lot of Korean press, a lot of prospective Korean buyers there. And in talking to them, the big problem 

they had with our cars were precisely problems created by their 

own government, taxes and tariffs, because they liked these Chrysler models. We had the 300M there. We had the Chrysler CrossFire, a couple of other models, unfortunately not the ones that Congressman Manzullo mentioned from his district. And there was a 

lot of interest in them. The problem was taxes and tariffs, and that 

is precisely the problem that this FTA will be able to deal with. 

Let me get back to some of these foreign policy issues. First of 

all, this FTA will strengthen this partnership, and it will ensure 

that while we have long been very much focused on defense ties, 

we are going to maintain or make sure that this partnership continues in the future and is going to do it at a time of change and 

challenge on the Korean Peninsula and the broader Northeast 

Asian region, the concrete proof to Korea that we are committed to 

broadening and modernizing our alliance. 

Over the years, our relationship with Korea has been tested in 

many ways, but I have always been optimistic about it because I 

have always seen the real benefits of a strong relationship between 

the U.S. and the ROK. The two countries are bound by shared interests, shared values, underpinning the long-term commitment of 

both our peoples to making this relationship work. 

Korea is not just a regional power anymore. It is growing in global importance. Korean people are active all over the world. They 

are great travelers. They are students. They are tourists. They are 

diplomats, missionaries. Korean companies are major investors in 

many economies all over the world. And more and more our relationship with Korea is characterized as a multifaceted, cooperative 

partnership in the world. 

Korea is the third largest contributor of troops to the forces in 

Iraq. It has played an important role in Afghanistan as well. And 

when Secretary Rice meets with her Korean counterpart, Foreign 

Minister Song Min-Soon, they talk not only about the issues on the 

Korean Peninsula but also about the Middle East, climate change, 

spread of democracy and other global interests. 

We worked hard to modernize our security relationship in Korea. 

We have realigned our troops to make sure they are placed and 

equipped most intelligently to deter any thought of aggression, and 

I think we are doing that pretty effectively. We have worked very 

closely with the ROK in the Six-Party Talks to deal with the North 

Korea nuclear problem. If you have any questions about that, I 

would be happy to deal with that during this hearing. 

I will say that this relationship, this core US-Korean FTA, 

strengthens our ties to a good friend. I had the privilege of serving 

in Korea in 1987 when the democracy movement sprang up. It is 

very heartening indeed to see what has happened to democracy in 

the Republic of Korea. It is really one of the strongest democracies 

in the region, and we want to stay very close. 

It has a great story to tell in terms of its economy, and very importantly its economy has been spread to a very strong middle 
20

class, good income distribution. So it is precisely the kind of economy that our goods and services I think can do very well in. So 

thank you very much, Mr. Chairman. I look forward to answering 

your questions and those of your colleagues. 

[The prepared statement of Mr. Hill follows:]

PREPARED STATEMENT OF THE HONORABLE CHRISTOPHER R. HILL, ASSISTANT SECRETARY, BUREAU OF EAST ASIAN AND PACIFIC AFFAIRS, U.S. DEPARTMENT OF

STATE

INTRODUCTION

The United States’ relationship with South Korea is changing and growing. It is 

transforming into a mature, healthy and balanced partnership. One of the greatest 

examples of the dynamism in our bilateral relationship is the recently concluded 

United States-South Korea Free Trade Agreement (or KORUS FTA). 

While the agreement achieves many of our economic goals, it is important to note 

that the impact of this FTA will go far beyond bilateral commercial benefits. The 

KORUS FTA is a powerful symbol of the U.S.-South Korea partnership, augmenting 

our longstanding bilateral security alliance and the robust ties between the South 

Korean and American people. It will create a new dynamic, reflecting both the growing sophistication of our relationship, and the Republic of Korea’s (ROK) increasingly positive global role. It will strengthen our relations with one of our most important and reliable allies, serving as a pillar for the alliance in the 21st century 

as the mutual defense treaty did during the last half century. And it will decisively 

anchor the U.S. presence in the most dynamic and rapidly-growing economic region 

on the globe. 

BENEFITS OF KORUS FTA

I’ll let my colleague Karan Bhatia, who oversaw the negotiation of this historic 

agreement, including through several sleepless nights in Seoul leading up to our 

April 1 conclusion of the deal, explain the benefits of the KORUS FTA for U.S. commercial interests and our global trade liberalization strategy—which are significant. 

His familiarity with the details of the agreement far exceeds my own. Instead, I will 

focus my remarks on the agreement’s foreign policy implications. 

First, the KORUS FTA will strengthen the U.S.-South Korea partnership. It will 

help ensure that the U.S. partnership with South Korea, long centered on defense 

ties, remains a vital force for stability at a time of change and challenge on the Korean peninsula and in the broader Northeast Asian region. It will be concrete proof 

to South Korea that we are committed to broadening and modernizing our alliance. 

Over the years, the U.S. relationship with South Korea has been tested in many 

ways. But I’ve always been optimistic about it, because I always have seen the real 

benefits of a strong relationship between the U.S. and the ROK. Our two countries 

are bound by shared interests and shared values, underpinning the long-term commitment of both Americans and Koreans to making the relationship work. 

South Korea is a country that is not just a regional power, but it’s growing in 

global importance. Korean people are active all over the world as students, diplomats and missionaries, and South Korean companies are major investors in many 

economies. More and more, our relationship with South Korea is growing to be a 

multi-faceted, cooperative partnership for a more closely knit world. 

South Korea is the third-largest contributor of troops to the coalition forces in 

Iraq and has played an important role in Afghanistan as well. Nowadays when Secretary Rice meets with her ROK counterparts, they talk not just about the situation 

on the Peninsula, but also about the Middle East, climate change, the spread of democracy and other global issues of shared concern. 

We’ve been working hard lately on modernizing our security relationship with 

South Korea. We are realigning our troops to make sure that they are placed and 

equipped most intelligently to deter any thought of aggression by North Korea. I 

think we’re doing that very effectively. 

We’ve also been working very closely with our friends from the ROK in the SixParty Talks to deal with the issue of North Korea’s nuclear program. Ultimately, 

as we move forward in the six-party process, it’s very important that we move beyond denuclearization in North Korea to try to create stronger multilateral mechanisms for problem-solving in the region and for developing a greater sense of community in the region. I think in this regard, South Korean and U.S. interests are 

very much aligned. 
21

Second, the KORUS FTA strengthens our ties to a good friend that has done good 

things. I had the privilege of serving in South Korea in 1987 and witnessed the flowering of democracy there. I then went back as Ambassador in 2004 to see what had 

happened since. It is really quite an inspiration for all of us who believe that democracy is the wave of the future. South Korea has shown the way and become an example for political reform in many parts of the world, especially in Asia. 

The FTA will also provide a boost to the steady progress that South Korea has 

made on economic reform in the last decade. South Korea is one of the world’s great 

success stories in terms of achieving broad prosperity through commitment to a 

market economy and openness to global trade. By liberating the vitality of its citizens and exposing them to international competition, South Korea has gone from 

being one of the world’s poorest countries at the end of the Korean War to a vibrant 

democracy, a member of the OECD with a per-capita GDP approaching $20,000. 

South Korea also has strong labor laws and environmental protections. All this 

makes South Korea an excellent trading partner for the United States. 

Along with our expanding trade ties, I should also point out the very substantial 

people-to-people ties between our two countries. There are now over two million 

Americans of Korean descent living in the United States. They have had a huge 

positive impact on our country and continue to provide a vital and unique link between the two nations. U.S.–ROK academic ties have also blossomed; in 2006, more 

than 58,000 South Korean students studied in the U.S., and South Korean students 

are now the third largest group of foreign students in the U.S. The FTA has the 

potential to join our two countries together even more closely. 

Third, the KORUS FTA will anchor our strategic economic position in East Asia.

East Asia and the Pacific region are undergoing a wave of economic integration, 

with countries binding themselves closer together through steady progress in liberalization of trade and investment. Several plurilateral free trade agreements are in 

play, and some 19 free trade agreements have gone into force between Asia-Pacific 

Economic Cooperation (APEC) economies, with at least an equal number of future 

agreements under negotiation or exploration. The United States has participated as 

a leader via our gold-standard FTAs with Australia and Singapore. Ratification of 

the KORUS FTA will further cement U.S. leadership in the dynamic Asian region 

and debunk critics who falsely complain that we’ve neglected this part of the world. 

South Korea, like the United States, has taken an aggressive approach toward 

binding trade liberalization. It has completed FTAs with Chile and the European 

Free Trade Area (EFTA) and is working on a second phase of negotiations with five 

of the ten ASEAN countries (having already completed a framework and trade in 

goods agreement). South Korea is also in the final stages of FTA negotiations with 

Canada, negotiating an agreement with India, just starting negotiations with the 

EU, and is studying the feasibility of launching an FTA with China. Negotiations 

with Japan have been on hold the last two years, but it is possible they could be 

revived. Thus, by ratifying the KORUS FTA, our firms will enjoy a competitive advantage in South Korea—Asia’s third-largest economy—ahead of others. On the 

other hand, if we fail to ratify, we will not just stand still, we will move backwards. 

Fourth, and finally, the KORUS FTA will give impetus to global trade liberalization: By demonstrating that two large, advanced economies can conclude a highquality agreement eliminating both tariff and non-tariff barriers to trade and investment, the KORUS FTA could help spur further trade liberalization both within the 

Asia-Pacific region and globally. It will send a signal to our other trading partners, 

encouraging them to open their economies and creating a competitive dynamic that 

would spur more rapid progress on the multilateral trade liberalization front. 

CONCLUSION

The impact of this FTA will go far beyond bilateral commercial benefits. It is a 

powerful symbol of the U.S.-South Korea partnership, augmenting our longstanding 

bilateral security alliance and the robust ties between the South Korean and American people. It will create a new dynamic, reflecting both the growing sophistication 

of our bilateral relationship and the Republic of Korea’s increasingly positive role 

in the world. 

Thank you for the opportunity to appear before the Subcommittee. I am happy 

to answer your questions.

Mr. SHERMAN. Ambassador, your presentation was enlightening 

in one respect you may not have intended. I have often said that 

our State Department and even its very brightest and most capable 

people are less attuned to trade issues than the foreign ministries 
22

of other governments. Perhaps you did not realize that that CrossFire that you displayed was over 90 percent European-made. 

Clearly it is to the benefit of the Daimler-Chrysler company that 

they sell such cars in Europe, but I assure that no European ambassador would have had a 90 percent American-made car on the 

front lawn of their Embassy. I hope that our State Department becomes more attuned to the trade balance. 

And, Mr. Bhatia, or Ambassador Bhatia, is there a single published study that says that the free trade agreement with South 

Korea will lead to a diminution in the net United States-South 

Korea trade deficit? That was a yes or no question. 

Ambassador BHATIA. Mr. Chairman, it is impossible, it is impossible to prior to an FTA going into effect make any assessment as 

to whether deficits will increase or decrease. 

Mr. SHERMAN. The Korean ministry that you cite in your testimony has undertaken to do exactly that. 

Ambassador BHATIA. No, Mr. Chairman. 

Mr. SHERMAN. They did not predict a roughly $750 million increase in the trade deficit over the next 10 years? 

Ambassador BHATIA. Mr. Chairman, I am not going to make assessments as to who has said what. What I am telling you is that 

what the theory of the FTA is as you well know is to lower barriers, tariff and non-tariff barriers, on both sides. That is what this 

agreement does. It does it by addressing that Korean tariffs happen 

to be much higher than ours. 

Mr. SHERMAN. Sir, I am going to reclaim my time. I simply asked 

you whether there were any published studies. You told me that 

there are none, and you have tried to say that there could be none. 

I would say, especially all of us in Congress say, that we ought 

to run government more like a business. I cannot imagine coming 

into a business boardroom and saying this is the deal. We do not 

know whether it is going to cost us money or make us money. Let 

us sign on the dotted line because it is a good process. 

But let us focus now on how the agreement has the loophole to 

allow this Trojan horse of North Korean-made goods come into the 

United States. You are very familiar with this agreement. So there 

is the Annex 22–C process. But assume long before the committee 

even meets, long before 22–C becomes operative in any way the 

North Korean Government grants a few scintillas of sovereignty 

over the Kaesong acreage to the South Korean Government. 

At that point, if the administration in its own wisdom without 

consulting Congress of course decides that that constitutes South 

Korean sovereignty over that acreage, are those goods entitled to 

entry into the United States under this agreement? 

Ambassador BHATIA. Mr. Chairman, the issue is very simple. 

There is no coverage of North Korean goods in this agreement. 

Mr. SHERMAN. Does not the agreement clearly state that whatever part of Korea where the South Korean Government exercises 

sovereignty, those goods can come into the United States, or are 

you denying that those words are in the agreement? 

Ambassador BHATIA. I am making clear that what the agreement 

provides under the rules of origin, which is Chapter 6, which is 

consistent with all of the other FTAs that we have done, is 

that——
23

Mr. SHERMAN. Excuse me, sir. But this FTA is with a country 

that claims constitutionally to exercise control over the entire Korean Peninsula. None of our other FTA partners claim constitutional authority over territory ruled by an axis of evil power. 

Ambassador BHATIA. Perhaps, Mr. Chairman, it would help if I 

could point you to Footnote 2 in Chapter 6 of the FTA, which 

makes quite clear that ‘‘a natural person who is domiciled in the 

area north of the military demarcation line on the Korean Peninsula shall not be entitled to benefits under this agreement.’’

Mr. SHERMAN. Okay. So it has to be made by a South Korean 

company. Now you said a person, the person doing the exporting 

is the corporation, and that is a South Korean corporation operating. The person is the exporter, not the worker. 

Ambassador BHATIA. This is what I am trying to get to, and perhaps I could just finish the explanation. The good needs to comply 

with standards’ rule of origin, which means that it is produced in 

the territory of South Korea, in South Korea. 

Mr. SHERMAN. The territory of South Korea? 

Ambassador BHATIA. It is clearly established. It clearly understood under international the territory of South Korea is what we 

currently consider the territory of South Korea. It is not Kaesong. 

It is not north of it. And indeed, Mr. Chairman, I would suggest 

that the remarks that you have quoted from the trade ministers 

recognize, explicitly recognize, that the products have to be made 

in South Korea. That is standard international practice, standard 

trade law. I really would submit to you, Mr. Chairman, there is not 

an issue here. 

Mr. SHERMAN. Could you address how the definition of what is 

South Korea would be altered by slight changes in who exercises 

authority in various elements of sovereignty over the acreage in 

Kaesong? You have simply assumed that the armistice line is the 

upper limit or the northern limit of what could ever be South Korean sovereignty. In doing so, you have twisted the agreement and 

ignored the South Korean Constitution. 

Ambassador BHATIA. I would respectfully submit not, Mr. Chairman. You are hypothesizing a situation in which basically territorial boundaries as we currently understand them disappear or 

move somehow, and that is not what is contemplated by the parties. It is clearly not what a dispute settlement panel would contemplate. 

Believe me, Mr. Chairman, we are as sensitive to this issue as 

anybody for the reasons that Ranking Member Royce mentioned. It 

is not our intention, as clearly laid out in this agreement, to benefit 

them. There is not a loophole here, I am quite confident. 

Mr. SHERMAN. Let me just end by saying you have drafted an 

agreement with a loophole that you could drive a Trojan horse 

through. This is the loophole plug. You can take your hand at 

drafting another one. When you draft the statute, you either have 

a plug for this loophole or you will say, oh, it is unnecessary. And 

when someone asserts that they do not have to put something in 

writing, clearly and absolutely that is when it needs to be in writing. 

With that, let me yield to Mr. Royce. 
24

Mr. ROYCE. Thank you, Mr. Chairman. Again, it seems to me 

that Congress would have to approve any panel recommendation. 

And again, I think it is worth noting that Korean tariffs will be 

lowered far more than United States tariffs, which are already low. 

We need to keep that in mind. 

I was going to ask Deputy Trade Representative Bhatia some 

have called for the renegotiation of parts of this agreement. Last 

week the South Korean Foreign Minister said that renegotiation 

was impossible. 

Ambassador BHATIA. Thank you, Ranking Member, and I certainly concur with both of your initial points. Under Annex 22–C, 

clearly any inclusion of outward processing zones or goods will require reapproaching Congress, coming back in the event that that 

would ultimately occur. And I very much agree that balance of the 

benefits here in terms of tariff reduction favors the United States 

simply given where Korea’s tariffs are versus where ours are. 

With respect to the issue of renegotiation, the comments that 

were being made that you were pointing to I think refer largely to 

changes to labor and environmental provisions in the agreement. 

Again, to put this in broader context, there was, as you know, Congressman Royce, a bilateral, a bipartisan, excuse me, agreement 

reached between House Democrats, House Republicans and members of the Senate that really crafts a new way forward for trade 

agreements, including the Korea trade agreement. 

And so we have approached our Korean counterparts, explaining 

to them that with this new bipartisan agreement, there is the opportunity to capture great bipartisan support we believe for the 

Korea FTA. The Korean Government has indicated that they are 

not looking to reopen, by which we mean change substantive balance of benefits terms, market access terms. 

We do believe that in due course, when we are able to present 

them text of labor/environmental provisions, they will appreciate 

that there is not a change in the balance of the benefits here and 

that we will be able to secure those provisions. 

Mr. ROYCE. There is going to be an International Trade Commission study on this issue of economic advantages. 

Ambassador BHATIA. Absolutely. Absolutely. 

Mr. ROYCE. Let me shift off of this question of the free trade 

agreement onto another subject that has nothing to do with the 

free trade agreement. I will go over to Assistant Secretary Hill. You 

and I differ for one on facilitating the return to North Korea of the 

$25 million in Banco Delta Asia. I want to focus on North Korea’s 

so-called legitimate activities that has a lot to do with the Kaesong 

Industrial Complex, which I do not think is impacted by this agreement at all. 

But Kaesong and [inaudible] and these other projects, these 

other [inaudible] which we know is one of the most repressed Mt. 

Kumgang one that appears to many to be determined to advance 

its nuclear weapons program despite your efforts. As you know, the 

North Korean Government derives hard currency from that project, 

leases and fees, surcharges, levies on North Korean wages which 

are paid. The North Korean Government is repaid basically in hard 

currency. 
25

So the government is the beneficiary of a large part of the payments. Kaesong is a hard currency generator for the North Korean 

regime. I was going to ask you if you view that as a concern or not. 

Mr. HILL. Well, certainly the purpose of Kaesong from the South 

Korean or the Republic of Korea perspective is to try to introduce 

some modern concepts into North Korea, get some North Korean 

factory workers used to dealing in a modern international style factory. To be sure, the workers are paid at a level that is far less 

than workers in South Korea working in South Korean factories. 

Mr. ROYCE. I understand the Korean perspective on this. 

Mr. HILL. Yes. 

Mr. ROYCE. But these facilities are going to be vastly expanded 

if certain factions of South Korea have their way. And from our 

perspective, from our perspective, given the fact that the hard currency goes into a regime which makes its foremost purpose its military preparations, buildup, at least from the factors that I know, 

should not that be a concern from our perspective? 

Mr. HILL. I think we need to monitor overall what the accrual 

of money is to the North Koreans. So far it has been pretty small. 

I mean, we are talking about essentially a pilot program. And increasingly the South Koreans have negotiated where the money is 

paid directly to the workers, which has been another concern of 

ours. 

Certainly we have to monitor how the expansion of it could contribute to North Korea’s military strength, but for now, I think 

what the project is really doing is introducing some very much 

needed reforms and an element of new thinking into the country. 

Bear in mind, it is in one small place. It is essentially an industrial 

park right now. 

Mr. ROYCE. It is. It is. But the goal is to make it huge. And it 

is not in this trade agreement, but the reason it is in trade agreements with Singapore and so forth, South Korea is negotiating, is 

to try to build that thing up, that complex up. What I am sharing 

with you is that this is one of the few ways in which that regime 

has the currency to continue its armament buildup of missiles, of 

R&D for missiles, of nuclear weapons. And should our other efforts 

fail to constrain that, this source of revenue is what I am most concerned about, the revenue that the regime uses for ends which are 

definitely not going to be in our interest. 

Mr. HILL. I understand, and I think we need to continue to monitor that. Absolutely. 

Mr. ROYCE. Thank you. That is all. 

Mr. SHERMAN. I yield to the vice chair of the subcommittee, Mr. 

Scott. 

Mr. SCOTT. Thank you very much. I guess my line of questioning 

is probably on two tracks. First of all, Ambassador, I guess what 

concerns me is the fact that last year South Korea exported 

700,000 automobiles into the United States, and last year United 

States auto companies exported just 5,000 into South Korea. What 

do you say about that? 

Ambassador BHATIA. Congressman, it is because that is the challenge that our auto companies face. With or without this FTA, 

South Korea is going to export not 700,000 but 800,000 or more 

cars into the United States. Right now we have a 21⁄2 percent tariff 
26

on cars. It is not slowing down Korean exports into the United 

States or anywhere else. 

What our auto companies want to do and I believe desire to do 

and should do is break into foreign markets, and that is what FTAs 

generally should allow it to do, and that is in particular what this 

FTA allows it to do. 

By breaking down the tariff, by taking the tariff from 8 percent 

down to zero, and by eliminating each of the non-tariff barriers 

that our auto companies have identified for us, be it discriminatory 

taxes, be it emissions standards that differ from our own, be it a 

process’s lack of transparency in the Korean process, and this FTA, 

and we at USTR have been working these issues for many years, 

have systematically gone through, identified what those barriers 

are and have addressed them in this FTA. 

And if Korea does not live up to its obligations, we have the right 

to come back with this snap-back tariff after an expedited dispute 

settlement process is 6 months, put back into place the 21⁄2 percent 

tariff, which last year would have amounted to $250 million without a cure period, which is a very, very powerful disincentive. 

So the question is when you asked me what do I say about that, 

I say we have got to get our 5,000 cars up. We want to see GM 

factories and plants in your district and everywhere else, but we 

have got to do that by breaking down the barriers in the foreign 

market because we are not closing off our market. We are not 

doing it right now. We are not going to. 

Mr. SCOTT. You think that the tariffs is a way to do that. Let 

us review these tariffs for a moment. Under this plan, the United 

States will immediately eliminate its 2.5 tariffs on the vast majority of Korean-produced vehicles and auto parts, correct? 

Ambassador BHATIA. Yes, it would. If you effectively look at it, 

there are three categories of cars based on liter size. Two of the 

three categories——

Mr. SCOTT. I regret that my 5 minutes, Mr. Chairman [inaudible]. 

Ambassador BHATIA. Sorry. Okay. Effectively it would eliminate 

within 3 years. 

Mr. SCOTT. The 2.5 tariff on autos over 3,000 cc’s would be 

phased out over 3 years? 

Ambassador BHATIA. Exactly. 

Mr. SCOTT. And the 25 percent U.S. tariff on light trucks will be 

phased out over 10 years? 

Ambassador BHATIA. That is correct. 

Mr. SCOTT. And Korea will immediately eliminate its 8 percent 

tariff on autos and its 10 percent on trucks? 

Ambassador BHATIA. That is correct, sir. Yes. 

Mr. SCOTT. Well, here is the rub in all of this. The reductions in 

the United States tariffs will trigger a surge in automotive imports 

from Korea. You understand that? 

Ambassador BHATIA. Congressman Scott, I actually think most 

analysts project that given the way Korean auto production is looking going forward, in reality, over the course of the next year or 

2, you will see a substantial probably diminution in the balance of 

their sales here that come from imports. They are moving production to Georgia and to Alabama. 
27

Mr. SCOTT. The tariff arrangement makes it relatively easy for 

Korean automakers to ramp up production for exports to the 

United States? 

Ambassador BHATIA. No. With due respect, Congressman Scott, 

the Korean production plan is clearly to produce substantially more 

here in the United States. So they have opened the factory——

Mr. SCOTT. But answer this question for me then. 

Ambassador BHATIA. Yes. 

Mr. SCOTT. Why did the Government of Korea state that it ex- pects this proposed free trade agreement to generate over $1 billion 

in annual increase in its auto trade surplus with the United 

States? 

Ambassador BHATIA. Because there will be tariff savings, Congressman, based on the cars right now coming in to, I do not know 

the reason, but I would speculate that it may be because there are 

tariff savings that are derived from the reduction of the 2.5 percent 

tariff. 

Mr. SCOTT. Given all this lopsidedness, given the 700,000 versus the 5,000, which accounted for over 87 percent of the overall $13.4 

billion United States trade deficit with Korea was our automobiles? 

Ambassador BHATIA. Yes. 

Mr. SCOTT. Given all of this, given this imbalance, why does this 

free trade agreement not contain any guarantees or mechanisms 

for the United States to gain substantially greater access to the Korean auto market? I mean, there is one glaring need, and it is not 

even here. 

Ambassador BHATIA. Again, with all due respect, Congressman 

Scott, I have to disagree. I think this agreement as I have described contains mechanism after mechanism that addresses nontariff barriers as well as the tariff issues that will break down. So 

you have got the 700,000 versus 5,000 number. That is exactly 

right. The way to change that balance is by breaking down those 

non-tariff barriers, which is precisely what this agreement does, 

and have a unique mechanism to make sure that those commitments are lived up to. 

Mr. SCOTT. There is nothing in this agreement that requires 

Korea to open its markets to United States-built automobile [inaudible] before it could receive the benefit of reductions in our U.S. 

automotive tariffs. There is nothing here, and that is the rub. 

I know my time is up, but I want to go to my other point, the 

Kaesong area, Mr. Hill. And I have a great concern that this pilot 

program would benefit North Korea’s economy, in turn benefit the 

North Korean [inaudible]. Their whole major possibility of exports 

evolves around their nuclear capacity. [Inaudible], especially in relationship to Iran and that relationship. Now is not it a fact that 

this Kaesong project employs 11,000 North Koreans? 

Mr. SHERMAN. That will have to be the last question. 

Mr. HILL. Yes, it does. It is actually about 13,000 average wages, 

with overtime around $67. The government takes upwards of 30 

percent of that for various social benefits. 

Mr. SCOTT. Thank you. 

Mr. SHERMAN. I would point out that the choice is not just between continuing our unequal tariff relationship now or this free 

trade agreement. We also have the prospect if we do not enter this 
28

free trade agreement of using the prospects of higher U.S. tariffs 

to negotiate a real fair trade agreement. 

With that, I would like to call on the gentleman from Illinois, Mr. 

Manzullo. 

Mr. MANZULLO. Thank you very much. First of all, I want to publicly commend Korea for sending Ambassador Lee to the United 

States. I had the opportunity to be with him two or three times. 

He does an outstanding job representing the people of Korea. He 

is open and is willing to be transparent. I cannot think of a finer 

diplomat to represent Korea than Ambassador Lee, and the least 

I can do is to publicly thank him. He is listening, and he knows 

that I am not blaming these problems on him. He realizes that 

there are difficulties. He has always had an open door. 

Ambassador Bhatia, I just want to share with you the closed door 

that your office has had with mine. We have e-mailed you on several occasions. We have asked you to come in. Your staff has 

stonewalled us. 

And I just cannot think of anything worse that your office can 

do than to have zero relations with the United States Congress, especially knowing that Chrysler plant is located in my district. You 

might want to take a look at the members of your staff that 

stonewalled a United States Congressman who requested your 

presence [inaudible] with you. This is extremely serious. I just 

want you to be aware of it. 

The third thing is the question is Koreans continue to come up 

with non-tariff barriers. I just want to throw this out because it is 

typical of what you did not address. The Korean Insurance Commission just decided to stop providing insurance for two-seater 

sports cars. Of course, Koreans do not make such cars. This was 

done for the specific purpose of hurting imports. 

I mean, that is stupid to get rid of something like that, and that 

is why the level of frustration is at code red here today. I mean, 

do not you believe that all of Korea’s non-tariff barriers can be 

eliminated to allow for fair and open trade in autos when Korea 

has ignored two previous auto MOUs with the United States? 

Ambassador BHATIA. Congressman, first of all, if I could address 

the point of visiting with your office. I apologize that apparently requests have not been responded to. I can assure you first of all that 

I did not know of any requests, and I am more than happy to come 

up and visit with you, whatever your convenience is. 

I would say that we have done extensive outreach to Members 

of Congress with an interest in the automotive sector as well as 

other areas. I can mention that I have met with Congressman 

Levin, Congressman Camp, Congressman Walberg, Congressman 

Knollenberg, Congressman Ryan, Senator Stabenow, throughout 

this process. I continue to engage in conversations with members 

as well as other stakeholders of interest. I do apologize that we 

have not been in to visit with you, but I look forward to rectifying 

that in the very, very near future. 

If I can, Congressman, address the issue of non-tariff barriers 

generally. USTR, as you know, has been at the forefront of trying 

to break down both tariff and non-tariff barriers into the Korean 

market now for 20 years. Those non-tariff barriers, and the indus-
29

try has identified these to us, fall principally into three or four categories. 

Leaving aside tariffs, which are high in and of themselves, the 

non-tariff barriers include taxes based on engine displacement size. 

Where our larger tariffs are subject to progressively higher taxes, 

domestic taxes, in Korea, this FTA equalizes that. This FTA puts 

us on a level playing field with over 90 percent of the cars that are 

sold in Korea. So that is addressed. 

Secondly, it deals with standards, principally emissions standards. 

Mr. MANZULLO. This says sports cars. [Inaudible] exactly? 

Ambassador BHATIA. No. Congressman, I am not familiar with 

the sports car issue. The insurance rate issue I have some familiarity with. Two points on that. One is to the extent private companies are setting insurance rates, obviously that is neither the government’s business here nor in Korea. To the extent there is government involvement, to the extent there is governmental involvement here, without this FTA, we have no ability to address those 

problems in Korea. With this FTA, we have the ability to stop them 

from doing it. 

Mr. MANZULLO. The problem I have with it, you come in with the 

promises that say just give us this agreement and we have a resolution dispute panel. Well, the time to resolve this is before we sign 

the FTA. 

Ambassador BHATIA. I absolutely agree, Congressman, that the 

time to resolve this is from now on. But my point is with this dispute settlement system, which is unique, which we have never 

done before, which creates a hammer out there of two—if you look 

at last year’s tariffs paid, $250 million that if Korea does not honor 

its commitments, its tariff, non-tariff, any auto-related commitments in this FTA, we have an expedited dispute settlement process if we win that tariff snap-back into place. 

Mr. MANZULLO. If they have not honored anything in the past 20 

years, what makes you think they are going to change their mind 

now? 

Ambassador BHATIA. Because we have a binding legal agreement. 

Mr. MANZULLO. That has nothing to do with it. You enter into 

these free trade agreements on good faith. Just because you have 

something that is binding, can United States insurance companies 

do business, auto insurance do business in Korea? Have you allowed that? 

Ambassador BHATIA. Absolutely. The insurance area and the 

services area perhaps is one of the biggest breakthroughs in this 

FTA where U.S. companies are going to have substantially more 

penetration. 

But if I could perhaps give one message to the Congressman, I 

mean, I am just quoting from an objective report that has been 

filed by one of our leading auto companies with us and in turn 

made public. I will just quote one sentence: ‘‘General Motors believes’’——

Mr. WU. Apparently you have no significant issues with engaging 

in hand-to-hand combat with folks up here on the dais, and I am 

going to permit the chairman to continue that combat in a moment. 
30

You know, one of the concerns I have with the overall thematic 

foreign policy, laying aside whether this administration has adequately consulted Congress or any other branch of government on 

significant issues in the last 6 years or not, laying that issue aside, 

when you have a certain belief system about what the facts on the 

ground are and do insufficient investigation of what the facts indeed are, if you guess right, things are okay. But if you let ideology 

override the facts on the ground, you do not just get the administration into trouble. You get the whole country into a mess. And 

that has been in my view a problem. 

What I see in the language on the chart over here is from my 

perspective reasonable language which takes care of a problem 

which the chairman has identified. You can correct my view of history if you wish in your further conversations with the chairman, 

but it is my recollection that there are still some shall we say conflicting claims with respect to the Korean Peninsula, and the chairman has put a finger on that. I am otherwise sympathetic, perhaps 

more sympathetic to this agreement than others, because we are 

dealing with a democracy, a relatively prosperous democracy with 

respect for the rule of law. But I find it extremely puzzling. I find 

your resistance to accepting reasonable language extremely puzzling, and I hope that it is not a continuation of the pattern of the 

triumph of ideology over facts on the ground that I have seen in 

other arenas the last 6 years. 

With that, I yield the balance of my time to the chairman. 

Mr. SHERMAN. I thank the gentleman from Oregon for his generosity. Mr. Bhatia, where in the agreement is there anything that 

prohibits or limits South Korean investment or loans to Iran? Is 

there any such provision in the agreement? 

Ambassador BHATIA. Prohibitions on what foreign governments 

may or may not do like that do not fall into the scope of our FTAs. 

Mr. SHERMAN. The answer is it is not there. I just referenced Mr. 

Klein’s opening statement. I think it was an excellent statement. 

Congress is moving toward what should be a better foreign policy 

for the United States, which is that our free trade agreements include such prohibitions. And it is at least of concern that no effort 

was made or at least no successful effort was made to deal with 

the Iran issue in this FTA. 

Moving to the Kaesong issue, as I have said, I think that by redefining sovereignty, that is the chief way in which the administration should it choose this will allow North Korean goods to come 

into the United States. My friend, Mr. Royce, says that the sole 

way that Kaesong and other processing zone goods would come into 

the United States is through Annex 22–C, which lays out a process. 

So let us look at that process. 

Section 5 thereof says that after the committee acts, each government will seek legislative approval. Does this mean that if goods 

are going to come in pursuant to 22–C that you would need Congress to pass a statute authorizing it, or does it mean instead that 

you could simply notify Congress of your intention to take action 

and see whether Congress passes a statute prohibiting it? 

Ambassador BHATIA. No. 

Mr. SHERMAN. To the former, latter or something else? 
31

Ambassador BHATIA. Effectively the latter. I mean, it contemplates—excuse me, the former. I think it is the former based on 

my memory what you are describing. It would contemplate that 

changes in rules of origin that would be needed to effectively allow 

goods from Kaesong or any other outward processing zone would 

require us to come back and seek legislation from the Hill. 

Mr. SHERMAN. So you would need legislation and you would not 

simply give notice to Congress and ask us to disapprove? 

Ambassador BHATIA. No, that is not what we contemplate. 

Mr. SHERMAN. Needless to say, the drafting here would allow 

some successor of yours to take a different position, which is why 

I at least had to get you on the record here. 

Mr. ROYCE. Mr. Chairman, if you would yield for a minute? 

Mr. SHERMAN. I yield for a minute. 

Mr. ROYCE. You understand I feel this is a moot point, but if you 

would like, the two of us could write a letter to that effect for legislative intent and we can get this issue off the table. 

Mr. WU. Reclaiming my time, I would be much more impressed 

if the administration were to put it in writing. 

Mr. SHERMAN. Yes. Well, we would like a letter from the USTR 

and the Secretary of State addressing this issue, defining what the 

words ‘‘seeking legislative approval’’ mean in Section 5 of Annex 

22–C and also commenting upon whether such legislative approval 

is an absolute necessary precursor for whether any goods can come 

in under the 22–C process, because I could see the administration 

taking the position that says, well, we are responsible for seeking 

legislative approval, we will go seek it. In the meantime, we will 

let the goods in. So we will need something on timing and something on whether it requires an act of Congress. 

So I now turn to the gentleman. I believe the next on the list is 

the gentleman from Texas. 

Mr. POE. Thank you, Mr. Chairman. 

Ambassador BHATIA. Thank you. 

Mr. POE. I represent probably the largest refinery area in the 

southeast, southeast Texas. What land we do not have refineries on 

we grow rice. This portion of Texas used to have 600,000 acres of 

rice, long-grain rice. That was 25 years ago. Now our rice fields are 

down to 200,000. The number one problem is markets. I am a free 

trader. I believe in it. But as things would happen, long-grain rice 

from Texas, the number one market used to be Cuba and then Iran 

and then Iraq. 

[Laughter.] 

Mr. POE. We all know what has happened. We do not really 

trade with those people anymore, and then when we were selling 

rice, getting rice for Iraq, the government for some reason was buying it from Vietnam. So rice farmers, they would just like some 

markets. And this free trade agreement, we deal with avocados and 

sunflower seeds and lemons, but we do not deal with rice, and that 

concerns me because it is not free trade for rice. 

Rice is an exception because it is better for South Korea to have 

a quota than it is for the United States to be able to go into that 

market and compete on the world scale, and I want to know why. 

What do I tell the rice farmers who are going broke down there in 

Texas? What would I tell them in this free trade agreement that 
32

is supposed to help free trade, benefit the United States, why we 

agreed to an agreement that has a quota on rice? 

Ambassador BHATIA. No. No, Congressman, you know, I will be 

perfectly frank with you. I mean, we pushed extremely hard to gain 

additional market access in rice from the very beginning to the 

very end of these negotiations. In the final hours of the negotiations, Korea made clear that it would walk away from the deal. It 

would be unable to do the deal. Politically it would be unable to 

do the deal rather than include rice, additional market access in 

rice. 

So the choice that we faced on behalf of the country was to take 

the very, very good deal that was on the table that would afford 

substantial market access not only for all of the other agricultural 

commodities you mentioned but also for services industries, including refinery services and many other industries, versus a perfect 

deal, which would have included additional market access on rice, 

which we could not get. So that was the choice that we faced. 

I would prefer—I wish it were the case that we had obtained additional market access, either tariff reductions or additional TRQs 

for rice, but they are not in the agreement. But what I would point 

out to you, Congressman, are a couple of things. 

First of all, there is a parallel process to this FTA that has been 

ongoing in the multilateral sphere to obtain additional market access to the Korean rice market. And in 2004, we and Korea along 

with other partners multilaterally achieved a substantial amount 

of additional market access for American rice farmers, including 

those in your district. 

And under that agreement, it comes close to totally doubling the 

total amount of rice that Korea is obligated to import over the next 

10 years. It provides guaranteed market access for us of a little 

over 50,000 metric tons of United States rice each year. And it 

makes a portion of that imported rice available directly to Korean 

consumers. 

And under that agreement, I am happy to point out, United 

States rice exports to Korea have continued to grow. So in 2006, 

they purchased 63,000 tons, metric tons, of United States medium 

grain rice, which is about a quarter of Korea’s total rice imports. 

So there is a parallel process underway which I can assure you we 

are going to continue to push on. I guess——

Mr. POE. Excuse me. 

Ambassador BHATIA. Yes. 

Mr. POE. But if we sign this agreement, the deal is done. 

Ambassador BHATIA. On the bilateral. 

Mr. POE. So no rice is a part of this agreement. Why do not we 

just stand firm and say if you do not include rice, we are not signing? Why do not we just do that? It is called hardball. 

Ambassador BHATIA. Well, I believe, Congressman, we have 

played——

Mr. POE. I will never be a diplomat, by the way. 

[Laughter.] 

Ambassador BHATIA. We pushed very, very hard on a lot of 

issues that required enormous political changes in Korea and will 

require enormous political changes in Korea. This was one that the 

trading partner made very clear this just simply was going to re-
33

sult in the end of the agreement. And the choice was the enormous 

balance of benefits there that we stood to obtain. I will say that we 

have a strong commitment, Congressman, and you have this from 

us at USTR, from the administration. There is a strong commitment to continue to push for rice market access through the multilateral and other processes. 

And finally I would simply point out that breaking down the barriers, protectionist barriers, in a market like Korea where there are 

a lot of agricultural sensitivities I believe will run down to the benefit of rice exporters and others because it will show that you can 

break down these barriers, you can allow in agricultural commodities, and it does not result in the end of their domestic production. 

It does not result in farmers being put out of business. And I look 

forward to the day in the not too distant future where that sensitivity level is lowered and where we can extend trade still further. 

Mr. POE. Well, the farmers are going out of business. They are 

tilling their land under and just leaving it because the land is so 

bad it will not grow anything but rice. So that is a concern for me 

in this free trade agreement that we do not include rice. 

Ambassador BHATIA. I understand. 

Mr. POE. I just want you to be on notice. 

Ambassador BHATIA. Thank you. 

Mr. POE. Thank you, Mr. Chairman. 

Mr. ROYCE. Mr. Chairman? 

Mr. SHERMAN. I will yield to the ranking member for a unanimous consent request. 

Mr. ROYCE. Thank you, Mr. Chairman. Mr. Wu, our colleague, 

had raised a point, and I have a letter from our USTR, Susan 

Schwab, in response to a letter I had written her earlier. She says 

in the letter as a result, ‘‘The Korean Industrial Complex is not explicitly mentioned or covered anywhere in the FTA. The goods 

made in the KIC are not eligible for FTA trade preferences.’’ And 

she says, ‘‘Goods from the Korean Industrial Complex would not 

obtain preferences under the agreement without additional legislative action by both the United States and Korea.’’

And so, without objection, I would like to ask that this letter——

[The information referred to follows:]
34
35

Mr. SHERMAN. It will be made part of the record, but I will comment that the Secretary there did not address the issue of what 

would be the case if South Korea began to exercise certain small 

elements of sovereignty over the acreage in these facilities. It is obvious that this letter is true as things stand today. But with a little 

bit of window dressing, you can reach an entirely different conclusion unless those words are in the statute that Ambassador 

Bhatia’s department is going to present to Congress. 

So we will decide whether we are going to just take a letter, Ambassador, which can be changed just by changing a few of the elements of sovereignty or whether we are going to have that language in the agreement. With that, let me yield to the gentleman 

from Arkansas—or okay. I will call first on the gentleman from 

Colorado. 

Mr. TANCREDO. Thank you, Mr. Chairman. Mr. Ambassador, as 

a general rule of thumb, I am for the elimination of artificial barriers to the free flow of goods. Unfortunately I have found myself 

in the position recently of having to vote against several trade 

agreements because of the cross-border trade in services provision 

[inaudible] in those agreements. And the standard language I am 

talking about reads, ‘‘Cross-border trade in services or cross-border 

supply of services means supply of a service from the territory of 

one party into the territory of another party.’’

The provision also stipulates that each party to the agreement 

ensures that local and national ‘‘measures relating to qualification 

requirements and procedures, technical standards and licensing requirements do not constitute unnecessary barriers to trade in services’’ to guarantee that our domestic laws are ‘‘not themselves a restriction on the supply of services.’’

A concern is that these such provisions, including, for instance, 

the reformed Chile Free Trade Agreement, could empower our 

trade partners and challenge the validity of our immigration limits, 

our visa requirements or even licensing requirements and zoning 

rules as a ‘‘unnecessary barrier to trade’’ and act as a restriction 

to the supply of services. The Congress could petition that we be 

forced to change our immigration laws by this trade section. 

I have assurances from the administration, by the way, that 

these provisions have nothing to do with immigration. Last year I 

remember when former chairman of the House Ways and Means 

Committee, Bill Thomas, stated that we are currently in this—by 

the way, we are having a debate on this very topic, on the amendment that I offered. He said that we were currently in delicate negotiations in the World Trade Organization on market access, and 

one of the provisions was the question of temporary movement of 

illegal aliens. 

So what I would like to know is whether the administration intends to make immigration a component of U.S. trade policy, and 

will the United States-Korea Trade FTA sustain the provision and/

or the cross-border trade in services provision? 

Ambassador BHATIA. Congressman, I appreciate your question, 

and I know of your longstanding interest in this issue of whether 

our FTAs somehow contain provisions dealing with immigration 

and allowing through trade in services provisions commitments to 

it, whether they contain commitments. I can assure you that is not 
36

the case in this FTA, and I will just read to you one sentence from 

a relevant chapter:

‘‘Nothing in this chapter or any other provision of this agreement shall be construed to impose any obligation on a party regarding its immigration measures, including admission or conditions of admission for temporary entry.’’

So I think hopefully that should provide you the reassurance is 

there. It is not intended to affect immigration. 

Mr. TANCREDO. Thank you for that. And then if I could, I see I 

have a little bit of time left. I just would like to get into a different 

area. One of Korea’s primary competitors in several different economic sectors happens to be, for instance, Taiwan. And as you 

know, President Chen’s top priority is the bilateral trade agreement with the United States. 

I fear that we are driving Taipei into the arms of Beijing by failing to more aggressively push for an FTA with Taiwan, and it is 

one of our most important economic and security concerns in the 

region. I know that we are focused here on Korea, but I would like 

your take on why we have not been able to get an FTA with Taiwan. 

Ambassador BHATIA. Congressman, we or the U.S. Trade Representatives’ Office, but generally the administration, are obviously 

very focused and committed to deepening and strengthening our 

trade relationships with Taiwan. It is a major trading partner for 

us. I actually went to Taiwan last year, to Taipei, to lead our Trade 

and Investment Framework Agreement discussions. It is not quite 

an FTA, but it is a comprehensive effort to address trade and investment barriers that might preclude or otherwise prevent the integration of the economic relationship. And I am delighted to tell 

you that I think it is going very well, and indeed we will have another TIFA meeting this summer here in Washington. 

We are working concretely to address barriers sector by sector 

with Taiwan, be it in the investment area, be it in trade and agricultural goods, be it in trade and services, and it is proving to be 

quite successful. As far as future FTAs go, that is always something that we undertake in consultations with Congress. It would 

of course require us to get an extension of trade promotion authority for any contemplation of any FTA with any partner, but we are 

happy to remain in contact and consultation with you on that. 

Mr. TANCREDO. Thank you, Mr. Ambassador. Thank you, Mr. 

Chairman. 

Mr. SHERMAN. Thank you. Let me point out for the record that 

the average inflation adjusted wage for American workers has gone 

up by a full 5 cents in the 20 years plus since we first had fasttrack. We have an $800 billion trade deficit, and it is of course attributable to the fact that when we negotiate these deals, we start 

with our own tiny tariffs, never threaten to increase them, and 

then come back with the best deal we can having never played 

hardball or sought free trade. With that, let me yield to the gentleman from Arkansas. 

Mr. BOOZMAN. Thank you, Mr. Chairman. Coming from Arkansas 

and also being a major rice producer, maybe the largest, I would 

associate myself with Mr. Poe’s remarks in the sense again of 
37

someone that has been very supportive of trade agreements. Certainly we support fair trade. 

Ambassador BHATIA. Yes. 

Mr. BOOZMAN. One of the concerns I have about the rice thing 

being on that is we start picking out these areas that are sensitive. 

Does that make it that much more difficult as we do agreements 

in the future? 

Ambassador BHATIA. You know, Congressman, we have been 

asked and I have been quite clear, we have been quite clear, Ambassador Schwab and others, that we do not see this as a precedent. We have made quite clear to our trading partners that we do 

not see an exclusion of rice to be a precedent in future FTAs. 

Mr. BOOZMAN. Well, not so much rice, but, I mean, when you 

start targeting these things in general, it is rice this time. Again, 

you know, when you start doing that, does not that make it more 

difficult as you go along? 

Ambassador BHATIA. It very much remains our policy, our goal 

and our desire to have FTAs be as comprehensive as possible because, frankly, the benefits to be derived not only by us but by our 

trading partners are through having a comprehensive FTA. Where 

one of our exports is excluded, their consumers, the trading partner’s consumers, are deprived the benefit of competitive American 

products. So I can assure you it remains our goal and our desire 

to have comprehensive FTAs. 

Mr. BOOZMAN. If we strike a deal, if we do the FTA, how will 

that affect our trade with the other partners in the area, people 

like China and Japan? 

Ambassador BHATIA. Well, Ambassador Hill can probably talk 

about the broader geopolitical significance of the FTA within the 

region. I can tell you from a trade negotiator’s—I beg your pardon? 

Mr. BOOZMAN. I do not mean to interrupt. In addition to that, because of this FTA, would that lead to more FTAs with partners 

that we are trading with there? 

Ambassador BHATIA. I can tell you that our trading partners in 

the region have sat up and taken notice of this FTA. I hear it from 

all of our major trading partners. And indeed I think they see 

whether or not this FTA gets through as being a major litmus test 

of our commitment to the region, our commitment to opening markets, and I think it could have a very, very beneficial effect on further trade liberalization in the area. 

Mr. BOOZMAN. Thank you, Mr. Chairman. 

Mr. SHERMAN. Thank you. We will now begin a second round, 

and it will at least try to have some questions for Ambassador Hill 

or Secretary Hill, who has shown incredible patience here, but I 

still have more questions for Ambassador Bhatia. First what is the 

revenue cost of this agreement in lost tariff revenue to the Treasury? Do you know or not? 

Ambassador BHATIA. I am sorry. The revenue cost I do not have 

the precise number, Mr. Chairman. 

Mr. SHERMAN. Is it over or under $1 billion a year? 

Ambassador BHATIA. I will not hazard a guess. We can find out 

and let you know. 

Mr. SHERMAN. What is the cost of the trade assistance package 

where we are going to help workers in Don Manzullo’s district 
38

when they are displaced, et cetera? What is that cost going to be? 

Do we have that? 

Ambassador BHATIA. We have, as you know, Mr. Chairman, 

working with the Congress, have passed a trade adjustment assistance package that is——

Mr. SHERMAN. How much is it going to cost? 

Ambassador BHATIA. There is no country-specific. It is a program 

that exists for all of our trade agreements. 

Mr. SHERMAN. It is the more you do the more you spend. What 

is the incremental cost of this agreement, or have we not bothered 

to figure that out? 

Ambassador BHATIA. No. But again, you are asking us to project 

transition costs here. I would submit that the agreement will have 

a very beneficial effect in terms of stimulating more jobs here in 

the United States, though. 

Mr. SHERMAN. Clearly there are going to be winners and losers. 

All of the published reports say more losers than winners. But putting that aside, we both agree that there are going to be winners 

and losers, that the Treasury of the United States is going to be 

called upon to help the losers, and you do not know how much that 

will be. 

But we do know the Treasury is going to lose money from tariffs. 

It is going to lose money to provide assistance from the inevitable 

losers. And all that money is going to come from the money available to provide for education in states like mine. Where are we 

going to get the money from those two sources without cutting domestic expenditures in districts unaffected by trade? 

Ambassador BHATIA. You know, Congressman, obviously your 

issues go well beyond the Korea FTA to trade liberalization generally. I mean, I would submit to you that the record of trade liberalization as an engine of economic growth, as a force for improving 

standards of living of Americans for the past 50 years——

Mr. SHERMAN. A whole nickel. 

Ambassador BHATIA. No, Congressman. 

Mr. SHERMAN. A whole nickel of increased wages. I agree you can 

point to income statistics, because if 1 million people lose money 

and one billionaire is created, the economists will say, well, national income went up. The fact is American workers have seen 

their incomes go up by a full nickel over the last 20 years since 

fast-track was adopted. 

But getting away from the economic effects and looking at the 

fiscal effects, we work for the Federal Government. We supposedly 

care about the U.S. fiscal deficit. This thing is going to cost us 

money, as I identified, in two different ways. You have asked us 

to introduce agreement without even an attempt to make a cost estimate. 

Are you claiming that the reduction in Federal revenues on the 

tariff side and the expenditure of Federal funds on helping those 

people who you say are not so many, but however many there are 

who are hurt by this agreement, have an undisclosed cost, but 

somehow are you suggesting the Federal Reserve Board simply 

print more greenbacks to cover those costs? 

Ambassador BHATIA. Congressman, Mr. Chairman, I think, and 

I mentioned these in my opening remarks, I mean, the estimates 
39

of the benefits to the U.S. economy from this are between $17 billion and $43 billion. The forecasts, I mean, let me just give you an 

example on——

Mr. SHERMAN. What do you mean by benefit? How can you have 

an agreement which will increase the U.S. trade deficit according 

to every published report and uncontradicted by anything you have 

said and then say it is going to increase our income? What it is 

going to do is provide some additional exports and a somewhat 

greater amount of additional imports. And we have an $800 billion 

trade deficit, and you suggest that we do more of the same and 

make it up in volume. 

Ambassador BHATIA. No, I do not, Mr. Chairman. First of all, I 

think that the—again, I do not know that these estimates are deficits that you are coming up with. Let us assume, though, let us assume——

Mr. SHERMAN. Would not you bother to read the only published 

economic analyses of what effect this is going to have on our trade 

deficit? 

Ambassador BHATIA. Mr. Chairman, if you assume for a moment 

even hypothetically, which I disagree with, that there were to be 

an increase in trade deficit, the substantial amount of additional 

exports that would be provided by this, the substantial amount of 

additional exports that would be provided, would in my mind create substantial new job opportunities here in the United States. 

That has been the record of all of our trade liberalization. And I 

think the supposition that somehow this is going to be the exception to that rule just clearly is not borne out by what has happened 

in the past. 

Mr. SHERMAN. Your position is if we lose 1 million jobs and we 

gain 900,000 jobs, that is a $900,000 job gain? 

Ambassador BHATIA. No, I think it is the other way around, Mr. 

Chairman. If you look, for instance, last year, a loss of 13 million 

jobs for which the estimate for trade’s role in that 13 million job 

loss has been 3 percent, less than 3 percent, but the creation of 15 

million new jobs, often higher-paying jobs, often more rewarding 

jobs because of its relationship to international trade I think makes 

a compelling case that trade is the avenue for growth for the American economy. 

I mean, that is the record of the last 50 years of America’s international economic engagement. And Korea stands to benefit us 

more than most of the other FTAs because it is such a rich, fastgrowing, dynamic economy to have as a trading partner. 

Mr. SHERMAN. Reclaiming my time, you cannot have an increase 

in the trade deficit and say you are increasing on a net basis the 

number of jobs and that those jobs that you are creating are greater pay than those that you are losing. It is simple math. If you are 

exporting a little bit more, then importing a lot more, you are losing jobs. 

Now the only way you could be gaining jobs is if those exports 

involve low-paying jobs and those imports involve high-paying jobs. 

But you cannot have an increase in the trade deficit and at the 

same time say that you are making America richer. 

With that, let me move to Ambassador Hill. We have two objectives. One is a commercial objective, and the other is a foreign pol-
40

icy objective. As Ambassador Bhatia has said, this is a great deal 

for South Korea commercially. To what extent have you and the 

State Department been involved in making sure that in order to 

get these benefits, South Korea reduces its subsidies, investments, 

processing zones, et cetera, with North Korea until that regime 

changes and develops? 

Mr. HILL. Well, first of all, with respect to the FTA, of course we 

worked very closely with USTR to ensure that some of the problems that existed prior to the negotiation of the FTA were addressed. We were dealing with issues of barriers to our pharmaceutical industry. For example, our Embassy in Seoul has been 

very much involved in that sort of thing. The State Department 

here has been very much involved in trying to deal with some of 

these problems so that we could get to the point where we felt 

there would be a successful FTA. 

Secondly, with respect to the South Korean policies toward North 

Korea, in particular Kaesong, I think we do need to understand 

that as South Korea looks at North Korea, they see a somewhat 

different picture than from what we see in Washington. First of all, 

they see a peninsula that was divided, a divided peninsula through 

no fault of the Korean people. I mean, this is something that happened in the depths of the 20th century, a great tragedy I think 

that every Korean feels. 

For example, I have mentioned this before. When they are able 

to arrange these family unification visits, probably these are not 

really noticed very much in Washington, but when the Red Cross 

is able to bring family members from North Korea together with 

family members from South Korea, it is enormous news in South 

Korea. So I think we have to understand that because they are so 

much closer to North Korea, they very much feel the effects of this 

division. 

With respect to Kaesong, this has been a pilot project designed 

to try to engage North Korea in the hopes that by having South 

Korean factories in North Korea, this can have an effect on beginning what I think everyone understands will be a very long road 

toward some sort of reform and then eventual transformation in 

North Korea. 

Our concern has been to make sure that as South Korea conducts 

this policy—it was known in their previous administration as Sunshine Policy, now it is discussed more as an engagement policy—

we want to make sure that as they approach North Korea, we are 

not at cross-purposes for the Six-Party process, because at the end 

of the day, we need North Korea to denuclearize. There is very little that we can do with North Korea, frankly, that anyone can do 

with North Korea as long as it is pursuing nuclear weapons. 

So we need to make sure these policies, that is, the South Korean 

approach to North Korea and the Six-Party process approach to 

North Korea, are somehow coordinated. And I am very pleased to 

say we have done that. In the recent months as we have gone 

through this very difficult stage, South Korea has not been providing food aid to North Korea. They have been trying to coordinate with us in the Six-Party process to ensure that there are no 

mixed messages. And I think we have done a good job in addressing that. 
41

But, Mr. Chairman, I want to stress that getting North Korea to 

give up weapons that they have been developing for several decades is a tough job, and we have no choice but to stick with it. And 

if we are going to be successful, it is going to be because we worked 

with other friends and allies in the region, and I would say our 

work with South Korea is very important in this regard. 

Mr. SHERMAN. Thank you for your efforts on trying to bring 

CND, that is to say complete nuclear disarmament, to the North 

Korean regime. As you have explained, it is understandable why 

South Korea would view things just a bit differently than we 

would. We obviously think our approach is better, though we understand their approach. 

My question was, have we used the leverage of negotiating this 

free trade agreement to get South Korea to move off of its policies 

that we understand closer to the policies that we prefer, the ones 

that are a little tougher on North Korea until it abandons its nuclear program? In particular, you have said that no one can really 

do business with North Korea until they give up their nuclear program, but South Korea is going forward with these processing 

zones, which as I said in my opening statement, the addition of up 

to 1 million workers is just one of the issues of the zones. 

So let me ask you this. As far as the agreement negotiations, 

were we able, or did we even try, to get South Korea to move closer 

to our position of putting tough economic pressure on the North 

Koreans until we see some changes? 

Mr. HILL. Well, Mr. Chairman, after the North Koreans conducted missile tests last July, in fact July 4, the South Koreans 

suspended any expansion of this Kaesong facility, so it remains 

really a pilot project. Now they will expand it as there is progress 

in the nuclear talks. So I think that we have a linkage there which 

I think is important to us. 

With respect to the connection or the linkage to the FTA, I want 

to emphasize that we have negotiated an FTA on the basis of what 

we believe are objectives for us, that is, it is in our interests to 

have this FTA. Now obviously when you negotiate, you negotiate 

with a partner who needs to have it in his interests as well, so 

there has been a balance of interests in the FTA. 

But I think clearly as we have moved ahead with this FTA, it 

has helped bring the United States and the South Korean positions 

closer together on North Korea because we are in very, very close 

consultations these days as never before, and I think we have the 

FTA negotiations to thank for that. 

Mr. SHERMAN. My concern is that South Korea reacts only temporarily to the provocations from the North. For example, the 

North tests a nuclear weapon. Then they test a rocket. Now you 

point out when they test the rocket, South Korea suspends 

Kaesong. What did South Korea do in response to the nuclear test? 

Have they done anything economically? 

Mr. HILL. Actually since that time, they have continued not only 

the suspension of Kaesong but also the suspension of bilateral assistance to North Korea. So it has been held far below what it was 

the previous year, and that is because of these two tests, first the 

missile test and secondly the nuclear test which took place 3 

months later in October. 
42

Mr. SHERMAN. Did they take these actions in response to the 

first provocation or the second? 

Mr. HILL. The first, this is the missile test, was they took the action to halt the expansion of Kaesong, which they were going to review, but in the process, North Korea had this nuclear test. And 

after the nuclear test, they resolved to maintain that restriction. 

Mr. SHERMAN. So the second provocation simply caused a continuation of adverse actions, sanctions, whatever you want? 

Mr. HILL. That is correct, yes. 

Mr. SHERMAN. Would you expect that this same tough line would 

be continued by South Korea if we can go another 12 months or 

24 months with no additional provocations but no additional concessions from North Korea? 

Mr. HILL. Actually I do. And I think the mood in South Korea 

as a result of the North Korean nuclear test has shifted than what 

it was 2 years ago. I also like to think that our willingness to engage diplomatically with China and with the other partners and 

even directly within the Six-Party process with North Korea has 

also helped improve or helped bring the United States and South 

Korea closer together in policy terms. So I think we can count on 

South Korea as a very reliable ally as we go forward in this process. 

Mr. SHERMAN. Yongbyon continues to operate right now, and 

North Korea will have more nuclear material at the end of the day 

than they had at the beginning of the day? 

Mr. HILL. Yongbyon has been up and down due to maintenance 

concerns. It is our hope, though, that as we move to implement our 

February agreement, and I expect you will see some developments 

very soon in that regard, that we will have Yongbyon shut down, 

and then we will go to the next phase, the elements of which have 

already been agreed, which is to disable Yongbyon. 

It does not solve our problem because we have 50 kilos already 

of fissile material. Those kilos must be abandoned according to our 

September 2005 agreement. We also have to run to ground the 

issue of highly enriched uranium purchases that they made. So to 

shut down Yongbyon is a first step in a long process. 

Mr. SHERMAN. Well, I thank you for your work on this issue. I 

am not quite as optimistic as you are. I am not characterizing your 

comments as optimistic. 

Mr. HILL. Thank you. 

Mr. SHERMAN. Just characterizing myself as even a little bit 

more gloomy. And I want to thank the two witnesses for coming 

before this subcommittee and spending over 2 hours with us. 

Thank you very much. 

Ambassador BHATIA. Thank you. 

Mr. HILL. Thank you. 

Mr. SHERMAN. All right. You did a great job. 

[Whereupon, at 12:05 p.m, the subcommittee was adjourned.]

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