September 13, 2015

By Guy Taylor  

U.S. and South Korean officials signed a “memorandum of understanding” on antitrust issues in Washington, casting a spotlight on the inner workings of an increasingly complex trade relationship between the two nations that critics say has benefited Koreans far more than Americans since the Obama administration pushed through a much-touted free trade deal three years ago.

While U.S. officials cast the memorandum in a positive light, its signing last week came just two weeks after Seoul made headlines by imposing strict conditions on Microsoft’s operations in South Korea as the price for approving – after a two-year delay – the U.S. software giant’s acquisition of Nokia’s device business.

Sources familiar with the quid pro quo say the South Korean Free Trade Commission (KFTC) finally agreed to allow Microsoft to draw revenue from Nokia products in Korea only after Microsoft accepted specific market controls to protect Samsung, the giant Korean “chaebol” whose business represents roughly 28 percent of the nation’s GDP.

Despite the free trade accord, one source described the controls demanded by the KFTC as “comparable to what Microsoft agreed to in China” in order to do business there as well.

Microsoft declined to comment for this story. But news of its troubles in Korea comes against a backdrop of harsh criticism from Democrats in Washington, who last year accused the Obama administration of turning a blind eye to problems in the U.S.-Korea Free Trade Agreement.

Democratic Reps. Louise McIntosh Slaughter of New York, Rosa L. DeLauro of Connecticut and then-Rep. George Miller of California complained in a joint statement in April 2014 that there has been an overall drop – not increase – in total U.S. exports to South Korea since the 2012 free trade deal went into effect, despite promises the agreement would open previously closed market sectors to U.S. exporters.

“The U.S.-South Korea trade deficit reached a historic high of $20.673 billion [in 2014], an increase of $8.6 billion (47 percent) from 2011 – the year before the U.S.-Korea Free Trade Agreement (KORUS) took effect,” they said at the time. “In addition, exports are down $2 billion since 2011 and down $700 million since 2012. The result has been the loss of 40,000 U.S. jobs.”

The three lawmakers, who’ve led the charge against President Obama’s push for an even bigger, multination free trade deal known as the Trans-Pacific Partnership, made the statement after U.S. Trade Representative Michael Froman had testified before Congress on the benefits of agreements like the one that’s been in place between the U.S. and South Korea for the past three years.

Mr. Froman declined to comment for this story, and a member of his staff downplayed the possibility that U.S. trade officials are concerned that South Korea may be abusing the free trade pace to preserve protectionist policies for companies like Samsung.

However, Mr. Froman himself issued a statement in March, on the third anniversary of the trade deal, claiming progress but also conceding that Seoul still has a ways to go to stamp out past protectionist practices.

“There is, of course, much more room for growth, given how closed Korea’s market was before this agreement,” he said at the time. “The numbers are encouraging, but this story is about more than numbers.”

A lengthy fact sheet on South Korea’s investment and regulatory climate by the U.S. government’s praised the country’s financial and legal systems, but acknowledged continuing problems over market access. There are restrictions on foreign ownership and investment on 27 business sectors, including total bans on nuclear power generation and radio and television broadcasting, although Seoul officials say the number of restrictions is below the average of most developed economies.

Regulatory hurdles

The regulatory environment still lags behind, according to the analysis.

“The Korean regulatory environment can pose challenges for all firms, both foreign and domestic,” according to the website. “Laws and regulations are often framed in general terms and are subject to differing interpretations by government officials, who rotate frequently. Regulations are sometimes promulgated with only minimal consultation with industry and with only the minimally required comment period.”

While avoiding any mention of the growing bilateral trade deficit, a carefully crafted White House “fact sheet” noted that total export of U.S. goods to Korea actually reached “a record level of $44.5 billion” in 2014.

“Year-on-year goods exports to Korea for 2014 were up 6.8 percent compared to 2013,” the fact sheet said, adding that total exports are 8.7 percent above what they had been prior to the implementation of the U.S.-Korea Free Trade Agreement – with growth “strong across high-technology manufacturing, autos, heavy industry, and consumer goods.”

But there has also been some notable friction between U.S. and Korean companies over the past three years,

The most notable example involves washing machines, roughly $1 billion worth of which Korea is estimated to export into the U.S. annually.

During the years leading up to the signing of the U.S.-Korea Free Trade Agreement, the American home appliances giant Whirlpool filed complaints with the U.S. International Trade Commission alleging that South Korean-made washing machines were being “dumped” – priced below fair market value – in the U.S. market.

The trade commission ruled in favor of Whirlpool, prompting South Korean trade officials to respond with their own countercomplaint to the World Trade Organization – a dispute that is expected to be resolved by the end of this year.

An entirely separate set of potentially contentious issues surrounds the high-tech and mobile device sector and centers on cases like that involving Microsoft’s and Nokia’s device business, a formerly Finnish-owned operation that has manufacturing assets in South Korea.

Two sources, who spoke anonymously with The Times, said concerns are high among U.S. business leaders over the conduct in such cases as South Korea’s free trade agency, the KFTC.

“The concern is that people in the KFTC are not giving proper consideration to due process in the investigations they are carrying out against foreign companies, as well as against some domestic companies inside Korea,” said one of the sources. “The sense is that these officials are taking an aggressive approach in the spirit of trying to establish a level playing field for small and midsize domestic companies, and sometimes that approach traps bigger Korean companies as well as foreign tech companies.”

But, the source added, “this is complicated and nuanced stuff, and I don’t think it would be accurate to say the trade agreement is somehow being violated as these issues play out.”

An official at the Korean Embassy in Washington defended the KFTC’s handling of the Microsoft-Nokia case.

“Both sides, Microsoft on one hand and the [KFTC] on the other, reached an agreement,” said the official, who asked not to be named. “This case is under the realm of competition law in Korea, and I don’t think it has anything to do with the free trade agreement. The U.S. has the same kind of competition law of its own, the Sherman Act.”

The official also said that there was nothing out of the ordinary about KFTC Chairman Jeong Jae-chan’s trip to Washington last week – a visit highlighted by Tuesday’s signing of the antitrust memorandum of understanding.

Obama administration officials said in a statement that the goal of the memorandum, signed by Mr. Jeong along with Assistant U.S. Attorney General Bill Baer and U.S. Federal Trade Commission Chairwoman Edith Ramirez, is “to promote increased cooperation and communication among the competition agencies in both countries.”

The statement quoted Mr. Baer as saying, “enforcement cooperation – including candid and constructive dialogue – is critical to maintaining competitive markets in the U.S., Korea, and around the world.”